Business Overview and History
HighPeak Energy, Inc. (HPK) is an independent crude oil and natural gas exploration and production company that has firmly established its footprint in the prolific Permian Basin, specifically the Midland Basin region of West Texas. With a keen focus on maximizing shareholder value, HighPeak Energy has navigated the industry's challenges with strategic precision, delivering robust operational and financial performance.
HighPeak Energy was formed in October 2019 as an independent crude oil and natural gas exploration and production company. The company's assets are primarily located in Howard and Borden Counties, Texas, within the northeastern part of the crude oil-rich Midland Basin in the Permian Basin. In December 2020, HighPeak Energy entered into a credit agreement to establish a revolving credit facility, which was subsequently amended several times over the following years to increase the borrowing base and make other changes.
The company took significant steps to strengthen its financial position in 2022. In February of that year, HighPeak Energy issued $225 million aggregate principal amount of 10.00% Senior Notes due 2024. The proceeds were used to pay down the balance of the credit facility at that time and to fund its ongoing capital development program. Later, in November and December 2022, the company issued an additional $225 million and $25 million, respectively, of 10.62% Senior Notes due 2024. These proceeds were used to reduce the outstanding balance of the credit facility and for general corporate purposes.
In September 2023, HighPeak Energy made a significant financial move by redeeming the 10.00% and 10.62% Senior Notes in connection with entering into a new term loan credit agreement and senior credit facility agreement. This refinancing demonstrates the company's ability to adapt to changing market conditions and optimize its capital structure.
HighPeak Energy's asset base is divided into two core areas: Flat Top, situated in the northern portion of Howard County and extending into southern Borden County, southwest Scurry County, and northwest Mitchell County, and Signal Peak, located in the southern portion of Howard County. The company operates approximately 97% of its net acreage, with over 90% of the net operated acreage suitable for horizontal wells with lateral lengths of 10,000 feet or greater.
Financial Strength and Operational Efficiency
HighPeak Energy's financial performance has been consistently strong, with the company generating positive free cash flow for the past five consecutive quarters. As of September 30, 2024, the company reported net income of $49.9 million, or $0.35 per diluted share, and EBITDAX (a non-GAAP financial measure) of $214.3 million, or $1.51 per diluted share.
The company's operational efficiency is a key differentiator, as evidenced by its peer-leading EBITDAX per Boe. During the third quarter of 2024, HighPeak Energy converted 80% of its realized price per Boe into cash, outpacing its industry peers. This impressive performance is attributed to the company's high-margin oil-weighted production, as well as its cost-optimization initiatives, which have resulted in sustained reductions in lease operating expenses.
Expanding Midland Basin Footprint and Inventory
HighPeak Energy has strategically expanded its Midland Basin footprint, both organically and through targeted acquisitions. The company's 2024 capital budget is expected to range between $540 million and $580 million, focused on drilling, completion, facilities, and infrastructure buildout. This investment has led to the successful completion and placement of 51 gross (41.4 net) horizontal wells during the first nine months of 2024, with an additional 19 gross (18.9 net) wells in various stages of completion as of September 30, 2024.
The company's well performance has been notable, with the Kallus 34-39 well in the Middle Spraberry formation achieving a maximum oil IP rate of approximately 1,500 barrels of oil per day, significantly exceeding initial expectations. Additionally, the Judith 67-5 well, HighPeak Energy's farthest east-operated Wolfcamp A well, has demonstrated strong production performance, further validating the quality of the company's acreage.
These positive results have not only bolstered HighPeak Energy's production guidance for 2024, which has been increased to a range of 48,000 to 51,000 Boe per day, but have also expanded the company's sizable inventory of high-quality, sub-$50 per barrel breakeven locations. With over 1,150 such locations currently identified, HighPeak Energy is well-positioned to continue delivering exceptional shareholder value.
Financials
HighPeak Energy's financial performance has been robust, as evidenced by its consistent positive free cash flow generation and strong operational metrics. The company's revenue growth has been driven by increased production volumes and efficient cost management. HighPeak Energy's focus on high-margin oil production has contributed to its impressive EBITDAX per Boe, which outperforms industry peers.
For the fiscal year 2023, HighPeak Energy reported revenue of $1.11 billion, net income of $215.87 million, operating cash flow of $756.39 million, and free cash flow of -$369.55 million. In the most recent quarter (Q3 2024), the company generated revenue of $271.58 million, net income of $49.93 million, operating cash flow of $177.10 million, and free cash flow of $36.40 million. This represents a 21% decrease in revenue compared to the same quarter in 2023, mainly due to a 19% decrease in average realized prices per Boe, coupled with a 3% decrease in sales volumes. The decrease in sales volumes was primarily the result of a major storm in early September that caused some production to be offline, as well as a reduction in the company's drilling program compared to 2023. Despite these challenges, HighPeak Energy was still able to generate positive free cash flow during the quarter.
HighPeak Energy's product mix as of September 30, 2024, consisted of approximately 89% crude oil, 6% natural gas liquids (NGLs), and 5% natural gas. The company sells its crude oil production at the lease, with sales contracts tied directly to or correlated with NYMEX WTI Cushing and Argus WTI Midland crude oil prices. HighPeak Energy uses NYMEX WTI Cushing derivative contracts and Argus WTI Midland basis swaps to manage future crude oil price volatility. Natural gas is sold under percentage of proceeds processing contracts or a hybrid of percentage of proceeds and fee-based contracts, while NGLs are extracted from the natural gas stream.
Liquidity
The company has demonstrated prudent management of its liquidity position through strategic refinancing efforts and optimization of its capital structure. HighPeak Energy's recent refinancing activities, including the redemption of Senior Notes and establishment of new credit facilities, have enhanced its financial flexibility and provided additional liquidity to support ongoing operations and growth initiatives.
As of Q3 2024, HighPeak Energy reported a debt-to-equity ratio of 0.67, cash balance of $135.57 million, and available credit of $93.1 million under its Senior Credit Facility Agreement. The company's current ratio stood at 0.96, while its quick ratio was 0.93, indicating a relatively strong short-term liquidity position.
Commitment to Environmental, Social, and Governance (ESG) Initiatives
Integral to HighPeak Energy's operations is a steadfast commitment to environmental, social, and governance (ESG) principles. The company has implemented a range of initiatives to reduce its carbon footprint, including the use of 100% ultra-local wet sand, the expansion of its low-pressure gas gathering system to eliminate flaring, and the installation of a solar farm that offsets approximately 10,000 metric tons of CO2 emissions per year.
Additionally, HighPeak Energy has prioritized the health and safety of its workforce, as well as fostering strong community relationships in the areas where it operates. The company's robust governance structure and adherence to best practices further solidify its position as a responsible and forward-thinking player in the industry.
Navigating Challenges and Capitalizing on Opportunities
HighPeak Energy has demonstrated its ability to navigate the industry's challenges, including commodity price volatility, supply chain disruptions, and inflationary pressures. The company's disciplined approach to capital allocation, coupled with its operational excellence, has enabled it to consistently outperform its peers and generate substantial shareholder value.
Looking ahead, HighPeak Energy remains well-positioned to capitalize on the Midland Basin's vast resource potential. The company's strategic acreage position, robust infrastructure, and exceptional well performance provide a solid foundation for continued growth and value creation. As HighPeak Energy executes on its strategic initiatives, investors can look forward to the company's continued success in unlocking the untapped potential of the Permian Basin.
Guidance and Future Outlook
HighPeak Energy has consistently demonstrated strong operational execution, which has led to impressive well results and production outperformance. The company beat its previous production guidance for 2024, with Q3 2024 production averaging over 51,000 barrels of oil per day (Boe/d), higher than both Q1 and Q2 2024 averages.
In response to this strong performance, HighPeak Energy has raised its full-year 2024 production guidance to 48,000 - 51,000 Boe/d, representing over a 5% increase compared to their prior increase in August 2024, and a 10% increase compared to their initial 2024 guidance. The company has reaffirmed its 2024 lease operating expense (LOE) and capital expenditure (CapEx) guidance, with CapEx expected to be in the range of $540 million to $580 million.
HighPeak Energy continues to efficiently convert its production into value, with Q3 2024 EBITDAX per Boe remaining strong at $45.68 per Boe. The company has also identified around 300 additional Middle Spraberry locations across their acreage, which could further expand their sub-$50 breakeven inventory, providing additional opportunities for future growth and value creation.
Industry Trends and Positioning
The Permian Basin, particularly the Midland Basin where HighPeak Energy operates, has seen robust activity and production growth in recent years. This growth has been driven by advancements in horizontal drilling and completion techniques that have enabled operators to economically develop tight oil and gas plays. HighPeak Energy is well-positioned in this prolific basin, with a large, contiguous acreage position that the company continues to develop.
As a small-cap exploration and production company, HighPeak Energy does not have significant geographic diversification outside of its core operating area in the Midland Basin. However, this focused approach allows the company to leverage its expertise and operational efficiencies in a region known for its high-quality oil and gas resources.
The company's ability to consistently outperform production guidance, coupled with its efficient cost management and strong EBITDAX per Boe metrics, positions HighPeak Energy favorably within the competitive landscape of Permian Basin operators. As the energy industry continues to evolve, HighPeak Energy's strategic focus on high-margin oil production and commitment to responsible development practices should enable it to navigate future challenges and capitalize on emerging opportunities in the dynamic Permian Basin market.