HighPeak Energy, Inc. — Q2 2023 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 three and six months ended June 30, 2023. At quarter-end, the Company held approximately 127,267 gross and 114,164 net acres, operated approximately 98% of its net acreage and was developing its properties with two drilling rigs and two frac crews. Management expected to average two rigs and one frac crew for the remainder of 2023.
Financial and operating metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total operating revenues | $240.8 million, versus $201.4 million | $464.6 million, versus $293.7 million |
| Income from operations | $85.0 million, versus $122.8 million | $173.5 million, versus $177.4 million |
| Net income | $31.8 million, or $0.25 diluted EPS, versus $77.6 million | $82.1 million, or $0.64 diluted EPS, versus $61.1 million |
| Operating margin | Approximately 35.3%, versus 60.9% | Approximately 37.4%, versus 60.4% |
| Net margin | Approximately 13.2%, versus 38.5% | Approximately 17.7%, versus 20.8% |
| Net cash provided by operating activities | $173.7 million, versus $98.2 million | $363.7 million, versus $148.2 million |
| Net cash used in investing activities | Not separately provided in the filing text | $612.5 million, principally development spending |
| Net cash provided by financing activities | Not separately provided in the filing text | $248.6 million |
| Average sales volumes | 42,207 Boe/d, up 92% | 39,728 Boe/d, up 133% |
Six-month average daily production was 33,506 crude oil Bbls, 3,482 NGL Bbls and 16,444 Mcf of natural gas. Liquids represented approximately 93% of production on a Boe basis. Six-month realized prices, excluding derivatives, were $74.55 per crude oil Bbl, $23.71 per NGL Bbl and $1.37 per natural gas Mcf.
At June 30, 2023, cash and cash equivalents were $30.3 million, accounts receivable were $101.0 million and total assets were $2.79 billion. Total debt, net of discounts and issuance costs, was $973.0 million, consisting primarily of $525.0 million outstanding under the Credit Agreement, $225.0 million of 10.000% Senior Notes and $250.0 million of 10.625% Senior Notes. Gross debt was approximately $1.0 billion before discounts and issuance costs. Current liabilities were $1.14 billion, including $741.2 million of current debt.
The Credit Agreement borrowing base and elected commitments were each $575.0 million at quarter-end, with $47.6 million of available borrowing capacity disclosed in the market-risk discussion. The Company paid $51.0 million of interest during the first six months. Open commodity derivatives had a net liability of $11.4 million at June 30, 2023.
Capital expenditures for oil and gas properties were $678.7 million during the first six months. The revised 2023 capital budget was approximately $900 million to $975 million for drilling, completion, facilities and equipping, plus $50 million to $60 million for field infrastructure and other costs, excluding acquisitions and certain other items.
Material changes versus the prior comparable period
- Revenue increased 19% in the second quarter and 58% for the first six months, driven primarily by higher production from the horizontal drilling program and bolt-on acquisitions.
- Average second-quarter sales volumes increased 92%, but total realized price per Boe decreased 38% to $62.68. Crude oil, NGL and natural gas prices declined 34%, 56% and 88%, respectively.
- Second-quarter net income declined $45.8 million. Higher DD&A, interest expense, lease operating costs, other expense and production taxes more than offset the increase in revenue and lower stock-based compensation and derivative losses.
- DD&A increased 167% in the second quarter to $93.0 million, and DD&A per Boe increased 39% to $24.22, reflecting higher production, inflation in capital costs and acquisitions.
- Interest expense increased 323% in the second quarter to $39.3 million. The increase included $8.3 million of additional interest on the 10.625% Senior Notes because the required rating increase was not obtained by June 30, 2023.
- Operating cash flow increased substantially, but investing cash outflows also increased as the Company continued its development program. The Company borrowed $255.0 million under the Credit Agreement during the first six months.
- The Company completed 74 gross horizontal wells during the first six months and had 42 gross horizontal wells drilled and awaiting completion at June 30.
Guidance, outlook, commentary and risks
Management reduced the 2023 development program from a six-rig program to an anticipated two-rig program and stated that drilling and completion activity would be evaluated monthly based on economic conditions. Management cited lower commodity prices, recession risk, inflation, higher interest rates, supply-chain constraints and geopolitical uncertainty. Temporary production disruptions from weather, a facility fire, offset completion activity and limited natural gas takeaway capacity affected first-half production; the Company expected the gas takeaway issue to be fully resolved during the third quarter.
The filing states that management identified conditions that raise substantial doubt about the Company’s ability to continue as a going concern, primarily because of significant current debt and working capital deficits. The financial statements assume continued operations and do not include adjustments that could result from this uncertainty. The Company’s ability to continue depends on strong operating cash flow and successfully refinancing, repaying or extending near-term debt.
Under the July 2023 Ninth Amendment, the Company received a waiver of the minimum current ratio covenant for June 30, 2023, postponed a borrowing-base redetermination to September 2023, increased pricing and hedging requirements, and agreed to provide weekly 13-week cash-flow forecasts. The amendment postponed the deadline for addressing the 10.000% Senior Notes obligation to September 1, 2023, or a later date agreed by the majority lenders. Failure to refinance, repay or extend the $225.0 million 10.000% Senior Notes, or to allocate cash flow to retire them by November 30, 2023, could trigger a Credit Agreement default and acceleration of outstanding debt, potentially causing cross-defaults under the Existing Notes.
In July 2023, the Company completed a public offering of 14.835 million shares at $10.50 per share and received approximately $151.2 million of net proceeds for working capital and liquidity. The Company also entered into an additional WTI swap covering approximately 8,000 Bopd during the second half of 2023 at a $74.46 per barrel strike price.
Other unusual items included a $6.5 million payment to terminate a water-treatment contract with a former outside director’s company and approximately $1.0 million of facility repair costs following a fire. Strategic alternatives, including a potential sale of the Company, remained exploratory and preliminary, with no transaction or timetable established.
Key ongoing risks include commodity-price volatility, refinancing and covenant risk, floating-rate debt, concentrated customer exposure, development and reserve-estimation risk, inflation in oilfield services, regulatory and environmental requirements, supply-chain disruptions, geopolitical events and the possibility that proved undeveloped reserves may not be developed within the required time frame.
Important facts for investors to verify
- Whether the Company successfully met or obtained further extensions to the September 1, 2023 10.000% Senior Notes obligation and avoided Credit Agreement default or acceleration.
- The outcome of the September 2023 borrowing-base redetermination and the Company’s remaining borrowing capacity.
- Whether the $151.2 million equity offering and operating cash flow adequately addressed near-term working capital and debt maturities.
- The maturity and refinancing status of the $225.0 million 10.000% Senior Notes, $250.0 million 10.625% Senior Notes and Credit Agreement borrowings.
- Whether natural gas takeaway constraints were fully resolved in the third quarter and whether operating costs per Boe and workover expenses declined as management expected.
- Actual 2023 capital expenditures and drilling activity compared with the revised $950 million to $1.035 billion aggregate capital budget.
- Updates to the strategic alternatives review, including whether it progressed beyond preliminary discussions.
- The Company’s ability to maintain covenant compliance, liquidity and going-concern status under changing commodity prices and interest rates.