Yahoo Finance HighPeak Energy, Inc. (NASDAQ:HPK) Q3 2023 Earnings Call Transcript
HighPeak Energy, Inc. (NASDAQ:HPK) Q3 2023 Earnings Call Transcript November 7, 2023
Operator: Good day and thank you for standing by. Welcome to the HighPeak Energy 2023 Third Quarter Earnings Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. And I would now like to hand the conference over to your first speaker today, Steven Tholen, CFO.
Steven Tholen: Good morning, everyone, and welcome to the HighPeak Energy’s third quarter 2023 earnings call. Representing HighPeak today, our Chairman and CEO, Jack Hightower; President, Michael Hollis; Vice President of Business Development, Ryan Hightower; and I’m Steven Tholen, the Chief Financial Officer. During today’s call, we will make reference to our November investor presentation and our third quarter earnings release, which can be found on HighPeak’s website. Today’s call, participants may make certain forward-looking statements relating to the company’s financial condition, results of operations, expectations, plans, goals, assumptions and future performance. So please refer to the cautionary information regarding forward-looking statements and related risks in the company’s SEC filings, including the fact that actual results may differ materially from our expectations due to a variety of reasons, many of which are beyond our control.
We will also refer to certain non-GAAP financial measures on today’s call, so please see the reconciliations in the earnings release and in our November investor presentation. I will now turn the call over to our Chairman and CEO, Jack Hightower.
Jack Hightower: Thank you, Steve, and good morning, ladies and gentlemen, and I want to thank you for joining our third quarter earnings call today. My prepared remarks will begin on Slide 4 of our presentation. Historically, I always start off saying it’s an exciting time to talk about HighPeak. And there is no question that this is an exciting – but beyond that exciting time, this is a transformational quarter for HighPeak Energy. It’s perhaps our best quarter in the history of the company today. Our production averaged over 52,000 Boe a day for the quarter. Our third quarter EBITDAX translates to over $1 billion on an annual run rate. We transitioned from a historical capital outspend of generating a material amount of positive free cash flow, and we secured necessary capital and liquidity needed to accomplish our long-term strategic plan.
We definitely are substantially a different company today than where we were just a few short months ago and we’ll further discuss these points in greater detail as we go through the presentation. So if you’ll turn to Slide 5 in the presentation, this will start the amazing, exciting time at HighPeak. Looking at this slide, we achieved three major company milestones during the third quarter and not only position us to achieve our primary goals, but also these are transforming us into a completely different looking company. All three of these milestones were in accordance with our internal projections and our expectations. First and primary is we average over 50,000 barrels a day, which continues not only to highlight the high quality of our asset base, but also establishes a new level of scale for HighPeak, thinking about increasing our production as much as we did, starting at 42,000 barrels a day average, that 25% increase compared to our second quarter average and over 100% increase compared to our third quarter to 2022 average.
That is phenomenal growth when we only had two rigs running. Prior to that, we had six rigs running, but the last quarter we had two returning. Second, in conjunction with our increase in production, our third quarter EBITDAX increased 44% compared to our second quarter and equates to over $1 billion on an annual run rate again translates to a new level of scale for the company. Third, we reached a milestone of generating significant free cash flow during the third quarter of over $75 million. This is a major achievement for the company and illustrates the quality of our asset base and our strong financial health. At current prices and our third 3-rig cadence, we expect to generate positive free cash flow this quarter and throughout 2024. I can’t emphasize that enough that we’re going to continue our strategy of responsible growth while maintaining capital discipline.
In accordance with our updated development program, we averaged 2 rigs and 1 frac crew during the quarter. We recently introduced both a third rig and a second frac crew into the field after the quarter. We plan to maintain the 3-rig program throughout the remainder of the year and the second frac crew is currently completing a handful of DUCs that we generated during the third quarter. We will use – this third frac crew will be used intermittently while we are running through rigs. As we previously said, from here forward, we intend to finance our development program through cash flow from operations, generate additional free cash flow, reduce our outstanding debt and increase our return to shareholders. At the end of the quarter, we still had a considerable number of wells in progress, which will continue to support our production profile as these wells are turned online.
We ended the quarter with a little under a one turn of leverage, which is a significant improvement over the past three months. If commodity prices continue to stay in the current range, we expect to exit this year at well below one times net debt to EBITDA and continue that progress into 2024. Pro forma with the closing of our super priority revolving credit facility, our liquidity is greater than $220 million. Our recent debt refinancing should provide all the capital we need to accomplish our objectives. In addition, on a go-forward basis as we generate additional free cash flow, we expect our liquidity to continue to increase and our net debt to decrease. Now going to Slide 6. This is a very enticing slide. And by evidence on the charts on the slide, we have demonstrated a track record of delivering consistent organic production and cash flow growth through the drill bit.
Very few companies have grown the way we’ve grown through the drill bit. Over the past year, our quarterly production average has grown over 100%, which has also translated into significant cash flow growth through the same timeframe despite declining oil prices. We continue to exemplify our high-quality asset base through our consistent growth in production, our high oil and liquids content, and our sustained peer-leading margins, all of which are reflected on this slide. It’s also a true testament to the high quality of our reservoirs that our current production level continues to be supported by a small number of producing wells. And it’s worth noting that we’ve been able to achieve this level of growth while maintaining a very reasonable amount of leverage, which is now back below one turn.
Result of the aforementioned attributes is the transition to free cash flow generation, which we expect to maintain going forward without sacrificing our measured production growth expectations. Now I’m going to turn the call over to Mike Hollis to discuss the next few slides in our operational efficiencies. Mike?
Mike Hollis: Thanks, Jack. Now turning to Slide 7, as Jack mentioned earlier on the call, we have continued to sustain our peer-leading EBITDAX margin. You may notice that this slide looks a little different this quarter for a couple of reasons. HighPeak is now an accelerated filer. Therefore, several in our peer group are releasing their data at the same time or later than we are. Not to mention there has been some major consolidation since last quarter. So as a result, we’ve added a few large peers to the group. The new chart on the left shows second quarter results as well as the third quarter results, which are the blue boxes for HighPeak and for the peers that have already announced. Please note that HighPeak has continued to maintain its high oil cut and its peer-leading margins.
This oil cut gives HighPeak a higher gearing or leverage to oil price. So with that higher gearing and our laser focus on reducing our operating cost, HighPeak’s margin spread has expanded even further this quarter above our peer group average. From this chart, you’ll see that HighPeak margin growth quarter-over-quarter is much higher than any of the peers shown as indicated by the larger move from second quarter, the circle to third quarter, the box. And as you know, Q3 average oil prices increased by approximately $8.50 per barrel compared to the second quarter. With that said, during the same period, HighPeak’s margin per BOE increased by almost $10 per BOE, much more than any of our peers. We expect our margins to continue to expand with our forecasted production growth and as we realize additional benefits of our LOE cost cutting initiatives.
I want to drive home again that not all BOEs are created equal. HighPeak’s margin was approximately 60% higher than our peer average during the second quarter. Although we do not have all the third quarter margin numbers available for our peers yet, it would be safe to say HighPeak’s margin will expand further from the pack in Q3, driven again, mainly by our high oil cut. But applying only the second quarter factor of 60% to our third quarter production level of 52,700 BOEs a day would equate to the economic equivalent production level of our peer group at approximately 85,000 BOE a day. Said another way, our average peer would have to have produced 85,000 BOEs a day with their product mix to have the same EBITDAX that HighPeak generated.
Now turning to Slide 8, HighPeak is currently running 3 drilling rigs, focusing on the Wolfcamp A and Lower Spraberry development. We will turn in line approximately 41 wells in the second half of 2023, giving confidence that we will hit our guided exit production volume. The addition of the third rig will add meaningful volumes in the second half of 2024. We continue to be encouraged by our strong well results to the north and east in our Flat Top area, that’s the northern block of our acreage. With the strong Wolfcamp A and Lower Spraberry results from the Conrad pad in Eastern Borden County, it’s the light blue wells and the strong Wolfcamp A results from our neighbor south and east of us in Mitchell County, that’s the Oasis and Luxor pad you can see the gray well touching the southern edge of our Scurry County acreage.
And in response to these strong well results, HighPeak has just spud our first Wolfcamp A well in Scurry County, details will be forthcoming late Q1, early Q2. We are also encouraged by some Middle Spraberry results directly west of our Flat Top block. We plan to keep an eye on these wells to determine if they will compete for capital in the future. But it’s easy to see HighPeak’s large runway of inventory in the Wolfcamp A and Lower Spraberry. And when you add in the other zones, we will be able to generate significant free cash flow for decades. We are beginning to see rig rates and frac costs beginning to roll over. It’s too early to say what costs will do in 2024, but with our electrical infrastructure, recycling of produced fluid, dual fuel implementation and our use of local wet sand, these well all help insulate HighPeak from any future potential, cost inflations.
And looking into 2024, HighPeak’s electrical build-out and solar farm will provide reduced lifting cost and significant protection from high spot pricing during peak summer months. It stands to reason that the solar panels gather a significant amount of sunlight during the peak demand hours. And this summer, we saw unhedged power spiked roughly five times the normal cost levels. This fixed solar low-cost power will reduce our lifting cost and further increase our margins next year. We continue the efficient build-out of our oil and gas midstream pipelines, again, ensuring HighPeak receives the highest realized prices for our products. Our dedication to financial discipline and prudent management is reflected in the generation of over $75 million of free cash flow last quarter which demonstrates our strong financial health and stability.
We maintain a keen focus on capital discipline, reducing our debt and ensuring continued return of capital to our stakeholders. I want to extend my heartfelt gratitude to our remarkable team of employees who have been the driving force behind our success. And with my comments now complete, I’ll turn the call back over to Jack.
Jack Hightower: Thanks, Mike. If you’ll turn to Slide 9. This is one of the major accomplishments in the third quarter. And that debt restructuring, we successfully completed a transformative debt refinancing. In fact, to our knowledge, this unparalleled transaction is the largest, privately arranged financing for a public energy company. This financing included a very diverse and sophisticated energy lender group and they did a tremendous amount of due diligence and analysis. Many, many people had internal engineering and almost every external engineering firm in the United States studied our assets and that clearly demonstrates a high level of confidence, not only in our team but in our unique asset base and with the upside opportunity that we have as a company.
We’re extremely pleased with the investor group and the structure of the new term loan facility. The unique structure of our term loan provides the company with multiple benefits, including streamlining our capital structure and extending all debt maturities to September of 2026, securing our financial position by providing financial certainty, especially during an ever-changing banking market environment by removing the risk associated with standard borrowing based redeterminations that are associated with reserve based loans and commercial bank availability. And it also provide the company with flexibility to pay down debt with a 1.5 year no call and being able to pay down debt without penalty utilizing free cash flow, which will allow for rapid de-leveraging.
We also recently closed our $100 million super priority revolving credit facility, which provides the company with additional sources of liquidity and flexibility for working capital purposes. Due to this transformative debt refinancing, we are stronger, more resilient, and more equipped to seize opportunities in this dynamic energy market. Turning to Slide 10, now that our debt refinancing is behind us, the company’s capital structure is in great shape. Our current EBITDAX run rate is greater than $1 billion. Our net debt level is already below one turn as we discussed earlier. It will continue to decrease as we generate additional free cash flow and pay down debt. Don’t want any misunderstanding. Our goal is to pay down debt and only stay with capital discipline to not overextend and to stay within our free cash flow.
The pro forma of our new revolving credit facility we have over $220 million of liquidity. This provides all the capital that we currently need to accomplish our long-term strategic plan. As you can see on this slide, our financial statistics have improved significantly over the past three months and assuming that commodity prices stay in their current range, we anticipate continued improvement over the coming quarters. I’d also like to point out based on our third quarter EBITDAX run rate, that our stock price is currently trading at approximately 3 times multiple, which in my opinion is relatively cheap compared to our SMid-cap peer universe considering our asset quality, drilling inventory, return on investment metrics, financial strength and growth profile.
And as you can see from some of the recent transactions in E&P a lot of times analysts and even we in the – inside companies have a difficult time differentiating between the multiples and the value of one asset group versus another asset group. But there’s no doubt that a lot of these new transactions have traded at much higher multiples, which you would expect with good assets. Given these things, it should be no surprise that in my opinion, our current share price does not reflect the true underlying value of the company’s assets. So now if you’ll turn to Slide 11, I’ll wrap up what’s happening with HighPeak. We continue to check all the investment criteria boxes. We have a prime oil weighted Permian Basin asset base that has now achieved significant scale as illustrated by our current production of over 50,000 barrels a day and an EBITDA run rate of over $1 billion.
We’ve streamlined our capital structure and pull – pushed out all of our debt maturities until 2026. Our financial metrics have improved significantly over the past quarter and we have line of sight to further near-term enhancement. We’ve de-risked our contiguous acreage position in our core development zones and have a long runway of Tier 1 inventory to develop with exciting additional opportunities. We’ve transitioned from a historical capital outspend mode while rapidly growing our business into a business that generates material free cash flow that will continue into the future. And when you start thinking about 2024, what are our objectives there? Well, they’re clear, and they’re defined. We will remain focused on responsible growth while maintaining capital discipline.
Again, from this point, we expect to fund our development program through operational cash flow. We will also be keenly focused on continuing to build on the success of our improved well performance while lowering our costs on both CapEx and OpEx on both sides of that equation. We expect to consistent generation of free cash flow will provide us with ultimate optionality, including the continued reduction of debt, which is very important feature in our new term loan facility. In addition to the debt reduction, we expect to be positioned of material increase return of capital to our shareholders. This increase of return of capital can be accomplished in many ways. One, which we’ve talked about before, an outright sale of the company. It’s no secret that we’re in the midst of a very active M&A market cycle.
In my opinion, we should see this theme continue in 2024, especially for companies like HighPeak has such quality assets and a lot of remaining resource left to be recovered. We may also increase our current dividend in next year’s business. We may consider instituting a share buyback program, especially if there continues to be a significant dislocation in our share price compared to the true value of our asset base. In addition to debt reduction in return of capital to shareholders, we expect to continue and if you look back and reflect to continue the company’s performance of growing reserves and production, I don’t think anybody’s had the growth that we’ve had over the last three years. And if commodity prices justify, we remain positioned to further increase our drilling program, which will allow us to continue to pull additional value forward for our investors.
But hold that thought, make sure you realize that is a function of commodity prices that allow us to justify to increase our drilling program. We are going to maintain positive free cash flow and be financially disciplined. So these are the important reasons that I remain confident in our ability to create additional value for our shareholders. And I’m very excited about the opportunities that lie ahead for IP. So my comments are complete now and we’ll open up the call for questions from our analyst.
See also 20 Best Online Jewelry Stores In the World and 20 Least Productive States in the US.
To continue reading the Q&A session, please click here.
