HighPeak Energy, Inc. 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. The filing covers the quarter and six months ended June 30, 2021. The company completed its business combination on August 21, 2020; therefore, 2021 results are reported as “Successor” results and 2020 results as “Predecessor” results, which limits direct comparability.
At June 30, 2021, the company held approximately 58,771 gross and 51,875 net acres, operated approximately 95% of its net acreage, had 123 gross producing wells, and was operating one drilling rig. Second-quarter sales volumes averaged 8,783 Boe/d; liquids represented approximately 96% of first-half production.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 |
|---|---|---|
| Total revenue | $48.3 million | $74.0 million |
| Income from operations | $21.0 million | $27.0 million |
| Operating margin | 43.6% | 36.4% |
| Net income | $5.7 million | $10.5 million |
| Net margin | 11.9% | 14.2% |
| Diluted earnings per share | $0.06 | $0.10 |
| Net cash from operating activities | $35.9 million | $47.3 million |
| Capital expenditures and property additions | Not separately provided for the quarter | $92.0 million |
| EBITDAX | $38.4 million | $58.4 million |
Second-quarter revenue increased from $0.9 million in the 2020 Predecessor period to $48.3 million, primarily due to higher production and commodity prices. Crude oil revenue was $47.0 million and NGL and natural gas revenue was $1.3 million.
At June 30, 2021, cash and cash equivalents were $12.8 million, accounts receivable were $23.8 million, and total assets were $604.4 million. Long-term debt, net of issuance costs, was $11.9 million, reflecting $14.0 million drawn under the revolving credit facility. The facility had a $125.0 million borrowing base and elected commitments, leaving approximately $109.1 million available.
Total current liabilities were $54.3 million, including a $12.6 million current derivative liability. Stockholders’ equity was $493.7 million. The company reported a net decrease in cash of $6.7 million during the first six months, as operating cash flow and financing proceeds were more than offset by capital spending.
Material Changes Versus the Prior Comparable Period
- Second-quarter average sales volumes increased 1,059% to 8,783 Boe/d from 758 Boe/d, driven by horizontal drilling and the resumption of production that had been largely shut in during the 2020 pandemic-related downturn.
- First-half average sales volumes increased 545% to 7,046 Boe/d from 1,093 Boe/d.
- Second-quarter realized prices excluding derivatives increased to $60.40 per Boe from $13.68 per Boe. Oil prices rose to $64.93 per barrel from $15.61; NGL prices rose to $26.77 per barrel from $4.55; and natural gas prices rose to $2.81 per Mcf from negative $0.03 per Mcf.
- Second-quarter net income improved to $5.7 million from a $4.1 million Predecessor net loss. First-half net income was $10.5 million compared with an $85.0 million Predecessor net loss, which included a $76.5 million charge related to the terminated Grenadier acquisition.
- Production costs increased in absolute dollars with higher production but declined to $5.87 per Boe from $26.28 per Boe in the second quarter. DD&A increased to $16.9 million, while DD&A per Boe declined 16% to $21.09.
- The company recorded a $13.6 million net derivative loss, including a $12.6 million noncash mark-to-market loss and $1.0 million of cash settlement payments, as oil prices increased after the company entered into swaps.
- The company increased its revolving credit facility borrowing base and commitments from $20.0 million of elected commitments to $125.0 million in June 2021 and added a bank syndicate.
Guidance, Outlook, Risks and Unusual Items
- Management’s 2021 capital budget was approximately $210 million to $225 million for drilling, completion, facilities and equipment, plus $35 million to $45 million for field infrastructure and other costs. First-half capital expenditures were $92.0 million.
- The company planned to operate two drilling rigs and an average of one frac fleet during the remainder of 2021, while retaining flexibility to adjust activity based on economics and the effects of COVID-19.
- As of June 30, the company had drilled 14 horizontal wells and completed 16 horizontal wells during the first six months. It was drilling one salt-water disposal well and had wells in various stages of completion.
- The company entered into oil marketing and gathering arrangements with minimum volume commitments beginning in October 2021. If no volumes were delivered under the crude oil contract, the stated monetary commitment would be approximately $25.4 million; management expects to satisfy the commitments under its development plan.
- The company entered into a natural gas gathering and processing arrangement with improved pricing and no minimum volume commitment. It paid a $3.9 million aid-in-construction amount to WTG in July 2021.
- The company entered into contracts for a new electrical substation, distribution system and 13-megawatt solar facility. It issued a $1.9 million letter of credit to Oncor, subject to release if specified power-load requirements are met by May 20, 2023.
- Commodity price risk remains significant. Open crude oil swaps covered 920,000 barrels in the third and fourth quarters of 2021 at approximately $61.91 per barrel and 752,500 barrels in the first and second quarters of 2022 at approximately $61.95 per barrel.
- The revolving credit facility 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 adjustments. Covenant breaches could restrict access to a major liquidity source.
- Lion accounted for approximately 95% of first-half 2021 revenue, creating customer concentration risk, although management believes alternative purchasers are available.
- In July 2021, the company announced planned bolt-on acquisitions representing approximately 6,200 net acres and producing properties expected to contribute approximately 1,400 Boe/d for the remainder of 2021. The acquisitions were expected to close in the third quarter.
- In July 2021, the board approved a regular dividend of $0.025 per share and a special dividend of $0.075 per share, resulting in $9.3 million paid on July 26, 2021.
- COVID-19, commodity-price volatility, drilling and completion execution, reserve estimates, supply-chain availability, regulatory changes, counterparty performance and future impairment risk remain material risks. Management reported no material change to the risk factors in its 2020 Form 10-K.
Important Facts for Investors to Verify
- Reconcile production growth, realized prices and cash margins against the company’s 2021 drilling and completion schedule.
- Monitor compliance with the revolving credit facility’s leverage and current-ratio covenants, borrowing-base redeterminations and interest-rate provisions.
- Evaluate the economic impact of the crude oil swaps, including the $12.6 million derivative liability and potential limitation of upside in higher-price environments.
- Confirm closing terms, production contributions and financing requirements for the planned third-quarter acquisitions.
- Assess the company’s ability to fund the remaining 2021 capital program while maintaining liquidity after dividends, infrastructure commitments and contractual volume obligations.
- Review concentration with Lion and other counterparties, reserve revisions, impairment indicators and the potential effects of renewed COVID-19 disruption or lower commodity prices.