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 properties in the Midland Basin of West Texas, primarily in Howard and Borden Counties. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
- At September 30, 2022, the Company had approximately 124,011 gross acres and 105,458 net acres, with approximately 53% held by production and an average working interest of 85%.
- The Company operated approximately 98% of its net acreage, was running six drilling rigs and three frac fleets, and had 113.2 million common shares outstanding.
- During the nine months, the Company completed acquisitions totaling $523.4 million, adding approximately 42,855 net acres and associated producing properties and infrastructure.
Financial performance and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|
| Total operating revenues | $204.1 million, versus $47.5 million | $497.8 million, versus $121.5 million |
| Income from operations | $118.3 million, versus $22.0 million | $295.7 million, versus $48.9 million |
| Net income | $107.9 million, versus $8.0 million | $169.0 million, versus $18.5 million |
| Diluted earnings per share | $0.85, versus $0.08 | $1.40, versus $0.18 |
| Net cash provided by operating activities | $158.3 million, versus $40.5 million | $302.8 million, versus $87.7 million |
| EBITDAX | $169.7 million, versus $33.3 million | $356.2 million, versus $91.8 million |
- Calculated operating margin was approximately 58.0% for the quarter and 59.4% for the nine months; calculated net margin was approximately 52.9% and 33.9%, respectively.
- Average sales volumes were 26,247 Boe per day in the quarter, up 221%, and 20,150 Boe per day for the nine months, up 171%.
- For the quarter, realized prices excluding derivatives were $94.21 per crude oil barrel, $36.59 per NGL barrel and $7.73 per Mcf of natural gas. Total realized price was $84.53 per Boe.
- For the nine months, realized prices excluding derivatives were $100.91 per crude oil barrel, $41.23 per NGL barrel and $6.47 per Mcf of natural gas. Total realized price was $90.49 per Boe.
- Nine-month production was approximately 94% liquids on a Boe basis.
- Quarterly net income benefited from a $35.8 million derivative gain. For the nine months, derivatives produced a $42.5 million net loss, including $64.1 million of cash settlement losses partially offset by a $21.6 million mark-to-market gain.
- Interest expense increased to $14.6 million for the quarter and $29.1 million for the nine months, principally because of senior notes, higher revolver borrowings and amortization of debt discounts and issuance costs.
- Stock-based compensation increased to $10.7 million for the quarter and $29.2 million for the nine months, compared with $0.9 million and $2.9 million, respectively, in the prior-year periods.
Financial position, debt and liquidity
| Balance-sheet item | September 30, 2022 | December 31, 2021 |
|---|
| Cash and cash equivalents | $34.3 million | $34.9 million |
| Total assets | $2.04 billion | $818.96 million |
| Total current liabilities | $260.4 million | $103.0 million |
| Long-term debt, net | $561.8 million | $97.9 million |
| Stockholders’ equity | $1.10 billion | $553.1 million |
- At September 30, 2022, debt consisted of $355.0 million outstanding under the revolving credit facility and $225.0 million of 10.000% senior notes, reduced by net discounts and issuance costs.
- The revolving facility had a $400.0 million borrowing base and elected commitments at September 30, 2022. The Company reported approximately $41.1 million of available borrowing capacity and $34.3 million of unrestricted cash.
- Nine-month investing cash outflows were $843.4 million, including $725.1 million of property additions and $258.4 million of cash acquisitions. Financing cash inflows were $540.0 million, including revolver borrowings, senior-note proceeds and $85.0 million from a common-stock private placement.
- The Company paid $7.6 million of common dividends and $0.9 million of dividend equivalents during the nine months.
- The credit agreement requires a total debt-to-EBITDAX ratio no greater than 3.00 to 1.00 and a current ratio of at least 1.00 to 1.00, subject to contractual adjustments.
Material changes versus the prior comparable period
- Revenue increased 330% for the quarter and 310% for the nine months, driven by substantially higher production volumes from horizontal drilling and acquisitions, as well as higher commodity prices.
- Net income increased by $99.9 million for the quarter and $150.4 million for the nine months.
- Operating cash flow increased by $117.8 million for the quarter and $215.1 million for the nine months.
- Production growth substantially increased operating expenses, production taxes and DD&A, although DD&A per Boe declined to $17.65 for the quarter and $17.18 for the nine months.
- The Company materially increased leverage and capital spending to support its six-rig development program and acquisitions.
- Common shares outstanding increased from 96.8 million at December 31, 2021 to 113.2 million at September 30, 2022, primarily due to acquisition-related issuances, a private placement and exercises of warrants and options.
Guidance, outlook, risks and unusual items
- Fourth-quarter 2022 capital expenditures were budgeted at approximately $285 million to $295 million, excluding acquisitions, asset retirement obligations, geological and geophysical general and administrative expenses and corporate facilities.
- Management expected to operate six rigs and approximately three frac fleets for the remainder of 2022, while retaining flexibility to adjust activity monthly based on economics.
- Management expected production costs per Boe to decline beginning in the fourth quarter as wells and tank batteries are connected to the electric grid, rental generators are removed and production volumes increase.
- In October 2022, the revolving facility was amended to increase the borrowing base to $550 million and elected commitments to $525 million. The lenders also waived technical defaults related to hedge requirements and the September 30 current-ratio covenant.
- In November 2022, the Company issued $225.0 million of 10.625% senior unsecured notes due 2024, receiving approximately $200.0 million net of discounts and fees. Proceeds were intended to reduce revolver borrowings and fund general corporate purposes.
- The Company faces significant commodity-price, inflation, supply-chain, drilling, acquisition-integration, counterparty, interest-rate, regulatory, environmental and geopolitical risks, including impacts from the Russia-Ukraine conflict, OPEC+ actions and potential recession.
- The Company had a material customer concentration: Lion accounted for approximately 88% of nine-month sales revenue, compared with 94% in the prior-year period.
- Contractual exposures included approximately $20.7 million of potential remaining crude-oil delivery commitment payments and approximately $6.4 million of potential remaining sand commitment payments, assuming no additional deliveries.
- The Company disclosed that, absent an extension, retirement or refinancing of the 10.000% senior notes, the revolving facility could mature on October 1, 2023. The Company also disclosed approximately $450 million of debt maturing in 2024 after giving effect to the November note issuance.
- Legal proceedings were described as ordinary-course matters that management does not expect to have a material adverse effect. Disclosure controls and procedures were assessed as effective.
Important facts for investors to verify
- Verify the post-November 2022 debt balance, revolver paydown, available borrowing capacity and compliance with all amended financial covenants.
- Assess the Company’s ability to refinance or repay approximately $450 million of 2024-maturity debt and manage the potential October 2023 springing maturity provision.
- Reconcile production growth, realized commodity prices, derivative settlements and the effect of hedging on future cash flows.
- Evaluate whether operating-cost-per-Boe reductions and the planned six-rig, three-frac-fleet program were achieved.
- Review acquisition integration, reserve estimates, capital efficiency and the economic returns on the $523.4 million of 2022 acquisitions.
- Monitor commodity prices, inflation in drilling and completion inputs, interest rates, supply-chain conditions and customer and derivative-counterparty concentration.
- Consider dilution from the 113.2 million shares outstanding, 8.3 million warrants and approximately 11.5 million outstanding stock options at September 30, 2022.
