HighPeak Energy, Inc. — 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 County. The filing covers the three and nine months ended September 30, 2021. Comparisons with 2020 are affected by the August 21, 2020 business combination and therefore present Successor and Predecessor periods that are not fully comparable.
- Approximately 79,218 gross and 62,019 net acres as of September 30, 2021; approximately 46% was held by production and average working interest was 78%.
- Approximately 95% of nine-month production was liquids on a Boe basis.
- September 2021 sales volumes averaged 10,355 Boe/d; the company had two drilling rigs, four wells drilling and six wells in completion.
Financial and operating metrics
| Metric | Three months ended September 30, 2021 | Nine months ended September 30, 2021 |
|---|---|---|
| Operating revenues | $47.5 million | $121.5 million |
| Income from operations | $22.0 million | $48.9 million |
| Net income | $8.0 million | $18.5 million |
| Diluted EPS | $0.08 | $0.18 |
| EBITDAX | $33.3 million | $91.8 million |
| Net cash provided by operating activities | $40.5 million | $87.7 million |
- Operating margin was approximately 46% for the quarter and 40% for the nine-month period; net margin was approximately 17% and 15%, respectively.
- Average daily sales volumes were 8,168 Boe/d for the quarter and 7,424 Boe/d for the nine months.
- Nine-month realized prices, before derivative effects, averaged $65.13 per crude oil barrel, $31.16 per NGL barrel and $3.09 per Mcf of natural gas, or $59.93 per Boe.
- At September 30, 2021, cash and cash equivalents were $12.0 million, current assets were $42.4 million and current liabilities were $77.0 million.
- Long-term debt, net, was $93.1 million, representing $95.0 million drawn under the revolving credit facility less net debt issuance costs.
- Borrowing capacity and elected commitments were $125.0 million at quarter-end, leaving approximately $28.1 million available. The October 1, 2021 amendment increased both to $195.0 million, leaving approximately $98.1 million available at that date.
- Capital expenditures for drilling, completion, facilities and infrastructure were $154.6 million during the nine months; total costs including acquisitions and lease-related spending were $207.9 million.
Material changes versus the prior comparable period
- Third-quarter revenue increased by approximately $40.0 million versus the combined 2020 comparison, driven by a 277% increase in average daily sales volumes and a 68% increase in average realized prices per Boe, excluding derivatives.
- Net income improved from a combined 2020 loss of approximately $11.6 million to $8.0 million. The improvement was partly offset by a $10.8 million derivative loss, higher DD&A, production costs, taxes, interest expense and income taxes.
- Third-quarter DD&A increased to $13.9 million, while stock-based compensation declined to $0.9 million from $14.5 million in the 2020 Successor period.
- Nine-month net income was $18.5 million compared with a $76.5 million combined Predecessor loss in the comparable 2020 presentation, which included a $76.5 million charge related to the terminated Grenadier acquisition.
- During the nine months, the company acquired approximately 10,600 net acres and interests in producing and drilling wells for $53.3 million.
- The company declared quarterly and special dividends totaling $0.125 per share during the third quarter and accrued a further $0.025 per-share quarterly dividend payable in October 2021.
Guidance, outlook, commentary and risks
- The 2021 capital budget was approximately $245 million to $270 million, excluding acquisitions. Management planned to operate three drilling rigs and an average of one frac fleet during the remainder of 2021, subject to monthly economic evaluation.
- Management expected funding sources to support planned 2021 capital expenditures, but cautioned that future funding may not be adequate if operating conditions or commodity prices deteriorate.
- The company entered into WTI crude oil swaps covering 1,020.9 MBbls for the remainder of 2021 and 2022, plus 398.2 MBbls in the first half of 2023, at weighted average prices generally ranging from $57.22 to $62.16 per barrel as of September 30.
- Derivative liabilities totaled $19.4 million at quarter-end, and the company recognized a $24.4 million derivative loss for the nine months, including $5.0 million of cash settlement payments.
- A crude oil marketing and gathering contract includes minimum volume commitments beginning in October 2021. The remaining monetary commitment was approximately $25.4 million if no additional volumes were delivered, although management expected to meet the commitments.
- Key risks include crude oil, NGL and natural gas price volatility; COVID-19-related demand and supply-chain disruptions; drilling and reserve-estimation risk; availability and cost of capital, equipment and services; regulatory and environmental matters; customer and derivative-counterparty concentration; and compliance with credit facility covenants.
- The credit facility requires a total-debt-to-EBITDAX ratio no greater than 3.00 to 1.00 and a minimum current ratio of 1.00 to 1.00, subject to adjustments. A covenant default could restrict access to a significant source of liquidity.
- Lion accounted for approximately 94% of nine-month 2021 revenue, creating significant customer concentration despite management’s view that alternative purchasers are available.
- On October 25, 2021, the company completed a 2.53 million-share public offering and received approximately $23.0 million of net proceeds for general corporate purposes, including potential drilling and acquisitions.
Important facts for investors to verify
- Reconcile the Successor and Predecessor periods before interpreting year-over-year growth, margins or earnings trends.
- Verify the company’s ability to fund the $245 million to $270 million 2021 capital budget while carrying $95.0 million of revolving debt and substantial derivative liabilities.
- Monitor compliance with the credit facility’s leverage and current-ratio covenants after the October borrowing-base increase.
- Assess the effect of crude oil swaps, including cash settlements and the opportunity cost of hedging during higher commodity prices.
- Evaluate whether production growth and drilling results support the crude oil minimum-volume commitments and the company’s planned third-rig activity.
- Review customer concentration, reserve estimates, impairment sensitivity, environmental obligations and the $25.4 million potential crude oil contract commitment.