HighPeak Energy, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2022; filed May 16, 2022. HighPeak Energy is an independent exploration and production company focused on crude oil, NGL and natural gas in the Midland Basin of West Texas, primarily Howard and Borden Counties. At quarter-end, it had approximately 98,131 gross acres, 72,820 net acres, five drilling rigs and two frac fleets.
Financial and Operating Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total operating revenue | $92.2 million | $25.7 million | +258% |
| Income from operations | $54.6 million | $5.9 million | +822% |
| Operating margin | 59.2% | 23.0% | Improved |
| Net income (loss) | $(16.5) million | $4.7 million | Declined $21.2 million |
| Net margin | (17.9)% | 18.4% | Declined |
| Cash flow from operations | $49.9 million | $11.4 million | +339% |
| EBITDAX | $51.1 million | $20.1 million | +155% |
| Average production | 12,052 Boe/d | 5,290 Boe/d | +128% |
| Capital expenditures, excluding acquisitions | $165.1 million | $44.9 million | Higher |
Revenue growth reflected a 128% increase in sales volumes and a 31% increase in average realized commodity prices per Boe, excluding derivatives. Average realized prices were $96.15 per crude oil barrel, $41.33 per NGL barrel and $4.16 per Mcf of natural gas. Approximately 93% of production was liquids on a Boe basis.
The reported net loss was driven primarily by a $66.4 million net derivative loss, comprising a $41.6 million noncash mark-to-market loss and $24.8 million of cash settlement payments. Interest expense increased to $5.3 million from $54,000, largely because of the February 2022 senior notes issuance and related debt costs. Production costs rose to $9.4 million, while DD&A increased to $17.0 million; DD&A per Boe declined 42% to $15.69.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $35.9 million at March 31, 2022, compared with $34.9 million at December 31, 2021.
- Total assets were $1.14 billion; crude oil and natural gas properties, net, were $1.04 billion.
- Long-term debt, net, was $203.2 million, compared with $97.9 million at year-end 2021.
- In February 2022, the Company issued $225.0 million of 10.00% senior unsecured notes due February 2024 and received approximately $210.2 million of net proceeds. Proceeds were used primarily to repay the revolving facility and fund development.
- The revolving credit facility had a $138.8 million borrowing base and no borrowings outstanding at quarter-end. Approximately $136.8 million was available, subject to borrowing-base and covenant requirements.
- The credit facility requires total debt to EBITDAX of no more than 3.00 to 1.00 and a minimum adjusted current ratio of 1.00 to 1.00. It matures June 17, 2024.
Material Changes and Transactions
- HighPeak acquired approximately 10,200 net acres and associated producing properties and infrastructure near Flat Top for total acquisition costs of approximately $162.9 million, including 6.96 million newly issued shares valued at $156.6 million.
- Common shares outstanding increased to 103.8 million at March 31, 2022 from 96.8 million at December 31, 2021, primarily due to acquisition-related issuance.
- The Company declared and paid a quarterly dividend of $0.025 per share, totaling approximately $2.4 million, plus $214,000 of dividend equivalents.
- Production was temporarily curtailed during the quarter due to offset fracture operations. Management reported average production of approximately 20,500 Boe/d in April 2022 and expected a significant second-quarter increase as wells returned online.
Guidance, Outlook, Risks and Unusual Items
- Following the announced Hannathon transaction, management expected 2022 capital spending of approximately $790 million to $860 million for drilling, completion, facilities and equipping, plus $35 million to $40 million for field infrastructure. This excludes acquisitions and certain corporate and geological costs.
- In April 2022, the Company announced a proposed acquisition of approximately 18,600 net acres for $255.0 million in cash and approximately 3.8 million shares. Closing was expected in early the third quarter of 2022, subject to customary conditions, with cash funding anticipated from expanded revolving-credit commitments.
- Management planned to increase activity to six drilling rigs and two to three frac fleets after the expected Hannathon closing, while retaining flexibility to adjust activity monthly based on economics.
- Open crude oil swaps totaled 1,983.6 MBbls for the remainder of 2022 at a weighted average price of $72.25 per barrel and 641.2 MBbls for 2023 at a weighted average price of $66.04 per barrel. Rising crude prices produced a substantial derivative loss in the quarter and may limit upside from future price increases.
- Material exposures include commodity-price volatility, drilling and completion execution, supply-chain and inflation pressures, interest rates, credit and liquidity requirements, COVID-19 effects, geopolitical conditions including the Russia-Ukraine war, and regulatory or environmental obligations.
- Contractual commitments include crude oil minimum-volume obligations, sand purchases, salt-water disposal volumes, leases, power infrastructure and a $1.9 million letter of credit related to the electric-grid project.
- One purchaser accounted for approximately 93% of Q1 2022 revenue, creating customer concentration risk, although management stated that alternative purchasers are available.
- Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the Hannathon acquisition closed on the expected terms and how it affected debt, shares outstanding, production and borrowing capacity.
- The Company’s ability to fund the substantial 2022 capital program while meeting the 10.00% senior-notes obligations and revolving-credit covenants.
- Actual realized prices after derivative settlements and the remaining fair value and settlement exposure of the crude oil swaps.
- Whether post-quarter production increases were sustained and whether operating costs per Boe declined as management expected.
- The impact of acquisition-related share issuance, warrants, stock options and CVRs on future dilution.
- Performance under crude oil delivery, sand, water-disposal and other minimum-volume commitments.