HighPeak Energy, Inc. 2023 Q3 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 in the Midland Basin of West Texas, primarily in Howard and Borden Counties. The filing covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. At quarter-end, the company held approximately 126,988 gross acres, operated approximately 98% of its net acreage and was using two drilling rigs and one frac crew.
Financial and operating metrics
| Metric | Three months ended September 30, 2023 | Three months ended September 30, 2022 | Nine months ended September 30, 2023 | Nine months ended September 30, 2022 |
|---|---|---|---|---|
| Total operating revenues | $345.6 million | $204.1 million | $810.1 million | $497.8 million |
| Income from operations | $146.1 million | $118.3 million | $319.7 million | $295.7 million |
| Net income | $38.8 million | $107.9 million | $120.9 million | $169.0 million |
| Diluted EPS | $0.28 | $0.85 | $0.90 | $1.40 |
| EBITDAX | $266.2 million | $169.7 million | $625.1 million | $356.2 million |
- Revenue increased 69% year over year in the third quarter and 63% for the nine-month period, primarily from higher production volumes.
- Approximate operating margin declined to 42% from 58% in the third quarter and to 39% from 59% for the nine-month period, reflecting higher DD&A, operating costs, interest expense and derivative losses.
- Net margin declined to approximately 11% from 53% in the third quarter and to 15% from 34% for the nine-month period.
- Average daily sales volumes increased 101% to 52,708 Boe/d in the third quarter and 119% to 44,102 Boe/d for the nine-month period. Liquids represented approximately 93% of nine-month production.
- Third-quarter realized prices excluding derivatives declined to $82.87 per crude oil barrel, $20.08 per NGL barrel and $1.89 per Mcf of natural gas. Total realized price declined 16% to $71.27 per Boe.
- For the nine months, net cash provided by operating activities was $521.7 million, compared with $302.8 million in 2022. Capital additions to oil and gas properties were $840.7 million, and net cash used in investing activities was $937.2 million.
- Cash and cash equivalents were $151.8 million at September 30, 2023, compared with $30.5 million at December 31, 2022.
- Total debt was $1.148 billion, including $1.2 billion of principal under the new term loan, net of discounts and issuance costs. Current maturities were $90.0 million.
- Net derivative liabilities were $27.2 million at quarter-end. The company recorded a $30.9 million net derivative loss for the nine months.
Material changes versus the prior comparable period
- Production growth from the horizontal drilling program more than doubled third-quarter volumes, but lower commodity prices reduced realized revenue per Boe.
- DD&A increased 175% to $117.4 million in the third quarter and 208% to $291.6 million for the nine months. DD&A per Boe increased 37% to $24.21 in the third quarter and 41% to $24.22 for the nine months, driven by higher capital costs and bolt-on acquisitions.
- Interest expense increased 153% to $37.0 million in the third quarter and 254% to $103.3 million for the nine months, reflecting higher debt balances, floating-rate costs and amortization of discounts and debt issuance costs.
- The company recorded a $27.3 million loss on extinguishment of debt related to the September refinancing, including unamortized discounts, issuance costs and a $4.5 million make-whole premium.
- General and administrative expense increased 269% in the third quarter, primarily due to accrued bonuses, higher staffing and professional fees. Stock-based compensation increased 32% in the quarter but declined 24% for the nine months.
- The company issued 14.835 million shares in a July public offering at $10.50 per share, generating approximately $151.2 million of net proceeds. Shares outstanding increased to 128.2 million from 113.2 million at December 31, 2022.
Guidance, outlook, risks and unusual items
- Management expects 2023 capital expenditures of approximately $900 million to $975 million for drilling, completion, facilities and equipping, plus $50 million to $60 million for field infrastructure and other costs. Nine-month capital expenditures excluding acquisitions were approximately $840 million.
- The company expects to operate an average of two to three drilling rigs and one to two frac crews during the remainder of 2023, with activity evaluated monthly based on economics.
- Temporary gas takeaway constraints at Flat Top and a planned six- to eight-week repair outage at a Signal Peak processing plant are expected to affect fourth-quarter volumes. Management expects takeaway constraints to improve during the fourth quarter.
- In September 2023, the company refinanced its prior credit agreement and senior notes with a $1.2 billion term loan due September 30, 2026. The term loan bears interest at Adjusted Term SOFR plus 7.50%, is secured by substantially all assets and requires quarterly principal installments of $30 million beginning March 31, 2024, subject to additional mandatory prepayments.
- On November 1, 2023, the company entered into a senior revolving facility with $100 million of borrowing capacity and $75 million of elected commitments, also due September 30, 2026.
- The term loan requires an asset coverage ratio of at least 1.50 to 1.00 and a total net leverage ratio no greater than 2.00 to 1.00. Covenant breaches could accelerate debt and restrict access to liquidity.
- A 1% increase in interest rates on the term loan would increase annual interest expense by approximately $12 million. Commodity prices remain the principal operating risk; the company uses swaps, puts and collars but does not eliminate price exposure.
- Major customer concentration is substantial: Delek represented approximately 73% and Energy Transfer Crude Marketing approximately 23% of nine-month 2023 revenue.
- The company recorded a $6.5 million payment to terminate a water-treatment contract with a former outside director and approximately $1.5 million of other expense, primarily related to repairs following a production-facility fire.
- The company continues to evaluate strategic alternatives, including a potential sale, but the process remained exploratory with no timetable or transaction commitment.
- Management stated that the refinancing eliminated substantial doubt about going concern and extended near-term maturities to 2026.
Most important facts to verify
- Verify the term-loan economics, mandatory amortization, hedging requirements and compliance with the 1.50x asset coverage and 2.00x leverage covenants.
- Assess whether projected operating cash flow can fund the capital program, scheduled debt amortization, interest expense and contractual commitments.
- Monitor production recovery from Flat Top takeaway constraints and the Signal Peak plant outage.
- Reconcile volume growth with declining realized prices, higher DD&A per Boe and derivative losses.
- Review customer concentration and counterparty exposure, particularly to Delek and Energy Transfer Crude Marketing.
- Track the strategic alternatives review, including whether it advances beyond the exploratory stage.
- Verify remaining contractual commitments, including approximately $10.9 million of crude oil delivery exposure, $14.5 million of potential sand commitments and $526,000 of natural gas connection-fee exposure.