HighPeak Energy, Inc. — Q2 2022 Form 10-Q Summary
Business Context and Reporting Period
HighPeak Energy is an independent exploration and production company focused on crude oil, NGL and natural gas assets in the Midland Basin of West Texas, primarily in Howard and Borden Counties. The filing covers the quarter and six months ended June 30, 2022; financial statements are unaudited.
- At June 30, 2022, the Company held approximately 114,940 gross and 97,129 net acres, with an average working interest of 85%.
- Approximately 94% of six-month production volumes were liquids on a Boe basis.
- The Company operated approximately 98% of its net acreage and was running six drilling rigs and three frac fleets at quarter-end.
- During the six months, the Company completed acquisitions totaling approximately $515.4 million, adding approximately 34,500 net acres, producing wells, infrastructure and more than 200 gross horizontal drilling locations.
Financial and Operating Metrics
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
|---|
| Operating revenues | $201.4 million | $48.3 million | $293.7 million | $74.0 million |
| Income from operations | $122.8 million | $21.0 million | $177.4 million | $27.0 million |
| Net income | $77.6 million | $5.7 million | $61.1 million | $10.5 million |
| Basic/diluted EPS | $0.69/$0.64 | $0.06/$0.06 | $0.56/$0.52 | $0.11/$0.10 |
| Operating margin | 61.0% | 43.6% | 60.4% | 36.4% |
| Net margin | 38.5% | 11.9% | 20.8% | 14.2% |
| EBITDAX | $135.4 million | $38.4 million | $186.5 million | $58.4 million |
| Net cash from operating activities | $98.2 million | $35.9 million | $148.2 million | $47.3 million |
- Second-quarter average sales volumes were 21,995 Boe per day, up 150% year over year. Six-month volumes averaged 17,051 Boe per day, up 142%.
- Second-quarter realized prices, excluding derivatives, were $111.26 per crude oil barrel, $47.29 per NGL barrel and $6.99 per Mcf of natural gas, compared with $64.93, $26.77 and $2.81, respectively, in the prior-year quarter.
- Second-quarter production costs increased to $8.29 per Boe from $5.87, primarily because of temporary production curtailments and increased well count. DD&A declined to $17.43 per Boe from $21.09.
- Stock-based compensation increased to $14.6 million in the second quarter and $18.6 million for the six months, compared with $1.0 million and $2.0 million, respectively, in the prior periods.
- The Company recognized a six-month net derivative loss of $78.3 million, including $61.9 million of cash settlements and a $16.4 million mark-to-market loss. Open derivatives were a net liability of $31.9 million at June 30.
Balance Sheet, Debt and Liquidity
| Metric | June 30, 2022 | December 31, 2021 |
|---|
| Cash and cash equivalents | $22.4 million | $34.9 million |
| Total assets | $1.749 billion | $818.96 million |
| Long-term debt, net | $488.5 million | $97.9 million |
| Stockholders’ equity | $900.4 million | $553.1 million |
- Debt consisted of $285.0 million outstanding under the revolving credit facility and $225.0 million of 10.00% senior unsecured notes due February 2024, net of issuance costs and discounts.
- The revolving facility’s borrowing base and elected commitments were increased to $400.0 million in June 2022; approximately $111.1 million remained available at quarter-end.
- The facility includes a 3.00-to-1.00 maximum total debt-to-EBITDAX covenant and a minimum 1.00-to-1.00 current ratio covenant. It has a springing maturity of October 1, 2023 if the senior notes remain outstanding, versus the stated June 2024 maturity.
- Six-month investing cash outflow was $549.1 million, including $403.2 million of property additions and $250.4 million of cash acquisition costs. Financing activities provided $388.5 million.
- The Company paid quarterly dividends of $0.025 per share in February and May 2022.
Material Changes Versus the Prior Comparable Period
- Revenue increased 317% in the second quarter and 297% for the six months, driven by substantially higher production and commodity prices.
- Net income increased from $5.7 million to $77.6 million in the second quarter, while six-month net income increased from $10.5 million to $61.1 million.
- Production growth reflected the horizontal drilling program and bolt-on acquisitions; the Company drilled 54 gross horizontal wells and completed 42 gross horizontal wells during the six months.
- Property assets more than doubled, reflecting acquisitions and development activity. Common shares outstanding increased to approximately 109.2 million from 96.8 million at year-end 2021, primarily from acquisition-related stock issuance and equity award and warrant exercises.
- Interest expense rose to $14.5 million for the six months from $0.2 million, due to the senior notes, higher revolver borrowings and debt issuance cost and discount amortization.
Guidance, Outlook, Commentary and Risks
- Management expected 2022 capital expenditures of approximately $790 million to $860 million for drilling, completions, facilities and equipping, plus $35 million to $40 million for field infrastructure and other costs. Acquisitions are excluded.
- The plan assumed six drilling rigs and an average of approximately three frac fleets for the remainder of 2022. Management stated that activity would be evaluated monthly and could be adjusted based on economic conditions.
- Some production was temporarily curtailed because of offset frac operations. Management expected wells to return online and production to increase in the third quarter, with operating costs per Boe also expected to improve.
- Outstanding swaps covered approximately 1.99 million barrels of WTI production in the remainder of 2022 at a weighted average price of $87.53 per barrel and 641,200 barrels in 2023 at $66.04 per barrel. Natural gas swaps covered 920,000 MMBtu in the remainder of 2022 and 450,000 MMBtu in the first quarter of 2023, generally at $9.00 per MMBtu.
- Key risks include commodity-price volatility, derivative settlement exposure, drilling and completion execution, supply-chain constraints, inflation, interest rates, acquisition integration, financing availability, covenant compliance, weather, regulatory changes, cyberattacks, the Russia-Ukraine war and COVID-19 effects.
- One purchaser accounted for approximately 88% of six-month sales revenue. The Company also had a crude oil minimum-volume commitment with an estimated remaining monetary obligation of approximately $22.2 million if no additional volumes were delivered, plus sand, power, water-treatment and other contractual commitments.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing states that pending legal matters are not expected to have a material adverse effect.
Most Important Facts for Investors to Verify
- Whether production growth and the expected third-quarter rebound offset higher operating costs, capital spending and debt service.
- Whether the $790 million to $860 million drilling and completion budget can be funded through operating cash flow and available revolver capacity without additional equity or debt issuance.
- The Company’s compliance with the debt covenants and the ability to refinance or repay the senior notes before the revolver’s potential October 1, 2023 springing maturity.
- The economic impact of the $78.3 million six-month derivative loss and the extent to which hedges limit upside in a high-price environment.
- Integration results and production contributions from the Alamo and Hannathon acquisitions, including acquired reserves and operating costs.
- Potential dilution from approximately 8.3 million outstanding warrants, 10.2 million CVRs and more than 10.8 million outstanding stock options, in addition to future equity issued for acquisitions or compensation.
- Exposure to major-customer concentration and the Company’s minimum-volume, sand, power and water-treatment commitments.
