HighPeak Energy, Inc. Form 8-K Summary
Reporting event: Filed August 27, 2020, reporting the August 21, 2020 closing of HighPeak Energy’s business combination with Pure Acquisition Corp. The transaction converted Pure into a subsidiary of HighPeak Energy and combined HighPeak Energy with the oil and gas assets of HighPeak I, HighPeak II and HighPeak III. HighPeak Energy common stock and warrants began trading on Nasdaq under HPK and HPKEW.
Business context and reporting period
- The company’s assets are concentrated primarily in Howard County, Texas, in the Midland Basin.
- As of June 30, 2020, the Target Assets included approximately 61,302 gross and 51,393 net acres, with an average operated working interest of 84%. Approximately 97% of operated acreage supported horizontal wells with lateral lengths of at least 10,000 feet.
- As of December 31, 2019, the assets included approximately 97 gross producing wells, including 4 gross horizontal wells, and December 2019 production of approximately 949 Boe/d.
- Historical financial information primarily represents HPK LP and HighPeak I predecessor periods and is not directly comparable with future consolidated HighPeak Energy results.
Transaction and capitalization
| Item | Amount or terms |
|---|---|
| Common stock outstanding at closing | 91,592,354 shares |
| Warrants outstanding at closing | 10,538,188 |
| CVRs outstanding at closing | 10,209,300 |
| Forward purchase proceeds | Approximately $89.8 million |
| Shares issued to HPK Contributors | 76,383,054 shares, valued at $10.00 per share |
| Pure Class A shares redeemed | 3,780,204 shares for approximately $40.2 million |
| Cash paid to eligible Pure Class A holders | $0.62 per share, totaling approximately $767,902 |
The CVRs may provide qualifying holders with additional shares or other consideration if the stock price does not provide a 10% preferred simple annual return based on $10.00 per share, subject to a $4.00 per-share downside floor. The CVR maturity may occur between August 21, 2022 and February 21, 2023, or earlier upon specified change-of-control events. Up to 2.125 shares may be issuable per CVR, supported by 21,694,763 escrowed shares subject to forfeiture and cancellation.
Historical financial performance
The following figures relate to predecessor operations and are stated in thousands unless otherwise noted.
| Metric | Six months ended June 30, 2020 | Six months ended June 30, 2019 | Change |
|---|---|---|---|
| Total operating revenue | $5.567 million | $2.814 million | Up 98% |
| Total operating expenses | $14.042 million | $7.638 million | Up 76% |
| Loss from operations | $(8.475) million | $(4.824) million | Higher loss |
| Deal termination and other expense | $(76.503) million | None reported | New item |
| Net loss | $(84.978) million | $(4.824) million | Higher loss |
| Total production | 199 MBoe | 60 MBoe | Up 306% |
| Average realized price | $27.99/Boe | $47.16/Boe | Down 22% |
- For the three months ended June 30, 2020, revenue was $944,000, down 31% from $1.377 million in the comparable 2019 period. Production increased 146% to 69 MBoe, but the average realized price declined 72% to $13.68/Boe.
- Six-month oil sales were $5.462 million, while natural gas and NGL sales were $105,000. Oil represented the substantial majority of revenue.
- Six-month lease operating expense was $4.203 million, or $21.12/Boe, broadly consistent with $20.97/Boe in the prior-year period. General and administrative expense increased 154% to $4.273 million.
- The $76.5 million deal termination expense comprised a $61.5 million nonrefundable deposit and a $15.0 million extension payment related to the terminated Grenadier acquisition.
Liquidity, cash flow and debt
| Cash flow metric | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|
| Operating cash flow | $(4.812) million | $1.528 million |
| Investing cash flow | $(65.619) million | $(13.559) million |
| Financing cash flow | $54.000 million | $13.447 million |
- HPK LP had no debt facility in place as of December 31, 2019 and no off-balance-sheet arrangements as of June 30, 2020.
- The company intended to fund 2020 needs through transaction proceeds, cash on hand, operating cash flow and potentially a revolving credit facility.
- A proposed three-and-one-half-year revolving credit facility was uncommitted and in syndication. The proposed facility would be secured by substantially all assets and would include a maximum total debt-to-EBITDAX ratio of 3.0x and a minimum current ratio of 1.0x.
- Contractual obligations as of December 31, 2019 totaled $3.508 million, including $1.296 million of drilling commitments and $2.212 million of asset retirement obligations.
Material changes, outlook and risks
- COVID-19, the oil-price collapse and excess global supply caused the company to halt drilling and curtail substantial production in April 2020. Management began returning wells to production in mid-July as prices improved.
- The company reduced general and administrative costs, laid off approximately 25% of its workforce and reduced remaining employee salaries by approximately 10% to 40%, depending on salary level.
- Management retained flexibility to defer capital expenditures and adjust development activity. No formal revenue or earnings guidance was provided.
- The company had no historical commodity hedges but intended to evaluate hedging to protect capital spending and a potential debt-facility borrowing base.
- Key risks include volatile oil and gas prices, COVID-19 and broader economic conditions, limited storage and transportation capacity, access to capital, reserve-estimation uncertainty, execution of the development plan, transaction costs and the ability to realize anticipated combination benefits.
- HighPeak Energy is a controlled company because affiliates of Pure’s Sponsor held more than 50% of voting power after closing. The company may therefore rely on exemptions from certain Nasdaq governance requirements.
- The Principal Stockholder Group received board nomination rights based on ownership thresholds and agreed to a generally applicable 180-day transfer restriction, subject to customary exceptions.
Most important facts for investors to verify
- Review the unaudited pro forma combined financial statements and predecessor financial statements filed as Exhibits 99.1 through 99.9.
- Confirm the final terms, borrowing base and closing status of the proposed revolving credit facility, which was not committed at the filing date.
- Assess the potential dilution from 10.538 million warrants, 10.209 million CVRs, the CVR escrow mechanism and the 11.907 million-share incentive plan reserve.
- Evaluate the effect of the terminated Grenadier transaction and the $76.5 million charge on liquidity and future capital allocation.
- Monitor production restoration, drilling activity, capital spending and realized commodity prices following the April 2020 curtailments.
- Review ownership concentration and related governance implications, including Jack Hightower’s reported beneficial ownership of approximately 90.2% and the controlled-company status.
- The filing text does not provide a clear post-closing cash balance, consolidated debt balance or consolidated operating cash flow for HighPeak Energy itself; these amounts should be verified in subsequent periodic filings.