HighPeak Energy, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
HighPeak Energy is an independent oil and natural gas exploration and production company focused on the Midland Basin in West Texas, with core areas in Flat Top and Signal Peak. The company operated approximately 58,452 gross acres, including 50,635 net acres, as of March 31, 2021. Approximately 95% of production was liquids-based.
The filing covers the three months ended March 31, 2021. Comparisons are to the Predecessor for the three months ended March 31, 2020; results are not fully comparable because the HighPeak business combination closed on August 21, 2020, and the Predecessor was a pass-through partnership for tax purposes.
Financial and operating metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $25.7 million | $4.6 million | +456% |
| Income from operations | $5.9 million | $(4.3) million | Improved |
| Net income (loss) | $4.7 million | $(80.8) million | Improved by $85.6 million |
| Diluted earnings per share | $0.05 | Not clearly provided for the Predecessor | Not comparable |
| Cash flow from operations | $11.4 million | $6.0 million | +89% |
| Capital additions and acquisitions | $45.2 million | $51.0 million | Lower |
| Cash and equivalents, March 31 | $9.6 million | $25.6 million | Lower |
Calculated operating margin was approximately 23.0% and net margin was approximately 18.4% for Q1 2021. Revenue growth reflected a 270% increase in average daily sales volumes to 5,290 Boe/d and a 52% increase in realized revenue per Boe to $54.01.
- Average daily production consisted of 4,735 barrels of oil, 294 barrels of NGLs and 1,568 Mcf of natural gas.
- Realized prices were $58.36 per oil barrel, $27.82 per NGL barrel and $2.23 per Mcf of natural gas.
- Lease operating expenses declined 7% to $2.2 million, or $4.68 per Boe, aided by the company’s water disposal infrastructure and lower generator use.
- DD&A increased 286% to $13.0 million, and DD&A per Boe increased 5% to $27.22.
- Production and ad valorem taxes increased to $1.7 million, primarily because of higher prices, production and the greater proportion of horizontal wells.
- General and administrative expense declined 39% to $1.8 million, while stock-based compensation was $1.0 million.
Balance sheet, debt and liquidity
Total assets were $564.3 million at March 31, 2021, including $535.0 million of net oil and natural gas properties. Stockholders’ equity was $487.0 million. Current liabilities were $34.8 million, compared with $27.5 million of current assets.
The company had no borrowings under its revolving credit facility at quarter-end. The facility had an initial $40.0 million borrowing base and $20.0 million of elected commitments; the borrowing base and commitments were increased to $50.0 million in March 2021, subject to customary documentation. Management expected to begin borrowing in the second quarter. The facility matures June 17, 2024 and is secured by substantially all company assets.
Cash decreased by $9.9 million during the quarter. Operating cash flow of $11.4 million and $10.6 million of financing proceeds, primarily from warrant and option exercises, were more than offset by $31.9 million of investing outflows. Accounts receivable increased to $16.9 million, including $13.4 million related to commodity sales.
Material changes versus the prior comparable period
- Production increased substantially as a result of the horizontal drilling program, with six horizontal wells completed and placed on production during the quarter.
- The prior-year period included a $76.5 million loss related to the terminated Grenadier acquisition, including a nonrefundable $61.5 million deposit and $15.0 million extension payment. No comparable charge occurred in 2021.
- The company shifted from a Predecessor partnership structure to a taxable public corporation, resulting in $1.1 million of deferred income tax expense in Q1 2021.
- Capitalized exploratory well costs declined to $7.2 million from $41.0 million as $67.4 million was reclassified to proved properties.
- The company’s share count increased to 92.7 million shares, primarily from warrant and employee option exercises.
Guidance, outlook, risks and unusual items
Management established a 2021 capital budget of approximately $115 million to $125 million for drilling, completion, facilities and well equipment, plus $20 million to $25 million for field infrastructure and other costs. Q1 capital expenditures were $45.2 million. The company planned to operate one drilling rig and an average of one frac fleet during the remainder of 2021, while retaining flexibility to adjust activity monthly based on economics.
As of March 31, two wells were being drilled and eight were in various stages of completion. Subsequent to quarter-end, six of the eight completion-stage wells were placed on production. The company expects to fund its capital program with cash, operating cash flow and borrowings under the revolving facility, but stated that funding adequacy is not assured.
- In April 2021, the company entered into WTI oil swaps covering 612,500 barrels in 2021 and 300,000 barrels in the first half of 2022 at $61.40 per barrel.
- In May 2021, the company entered into an oil gathering contract with minimum volume commitments beginning at 5,000 Bopd in October 2021, increasing to 10,000 Bopd in later years. Failure to meet commitments could create payment obligations, although management expects to meet them.
- A replacement natural gas contract is expected to improve gas and NGL pricing and reduce flaring, but requires aid-in-construction payments to expand gathering infrastructure.
- Commodity prices, production levels, drilling results, reserve estimates, capital availability, weather, regulation, supply-chain conditions, cyber risks and the continuing COVID-19 effects remain significant risks.
- Approximately 96% of Q1 commodity purchases were made by Lion Oil Trading and Transportation, creating customer concentration risk.
- The company had approximately $760,000 of potential remaining payment exposure under salt-water disposal volume commitments if it does not deliver the required volumes.
- No impairment of proved or unproved oil and gas properties was recorded, but management stated that future impairment remains reasonably possible if commodity prices, reserves or cost assumptions deteriorate.
Important facts for investors to verify
- Finalize the reported increase in the revolving facility borrowing base and commitments to $50 million and confirm actual second-quarter borrowings and covenant compliance.
- Compare production growth and realized prices with the 2021 capital budget, hedging terms and current WTI and natural gas prices.
- Assess whether the company can meet its oil gathering and salt-water disposal volume commitments as production expands.
- Review reserve additions, proved reserve classifications and the elevated DD&A rate, particularly for recently completed wells.
- Monitor customer concentration, accounts receivable collections and liquidity after planned capital expenditures.
- Evaluate dilution from outstanding warrants, stock options and up to 2.125 shares issuable per contingent value right.
- Confirm the effect of the May 2021 gas gathering and processing contract, including aid-in-construction payments and expected reductions in flaring.