HighPeak Energy, Inc.

Good day, and thank you for standing by. Welcome to the High Peak Energy 2023 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your questions, please press star 11 again. 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.

Good morning, everyone, and welcome to High Peak Energy's third quarter 2023 earnings call. Representing High Peak today are Chairman and CEO Jack Hightower, President Michael Hollis, Vice President of Business Development Ryan Hightower, and I'm Stephen 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 High Peak'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 and the earnings release in our November investor presentation. I will now turn the call over to our Chairman and CEO, Jack Hightower.

Thank you, Steve, and good morning, ladies and gentlemen, and want to thank you for joining our third quarter earnings call today. My prepared remarks will begin on slide four of our presentation. Historically, I always start off saying it's an exciting time to talk about High Peak. And there's no question that this is an exciting, but beyond that exciting time, this is a transformational quarter for High Peak 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 to 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 five in the presentation, this will start the amazing, exciting time at High Peak. Looking at this slide, we achieved three major company milestones during the third quarter, and not only positioned 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 high peak. Thinking about increasing our production as much as we did starting at 42,000 barrel a day average, that 25% increase compared to our second quarter average and over 100% increase compared to our third quarter 22 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 rigs running. 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 three-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 two rigs and one frack crew during the quarter. We recently introduced both a third rig and a second frack crew into the field after the quarter. We plan to maintain the three rig program throughout the remainder of the year, and the second frac crew is currently completing a handful of ducts that we generated during the third quarter. This third frac crew will be used intermittently while we are running three 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. Proforma 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 six, this is a very enticing slide, and by evidence on the charts on this 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 and 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 term. The 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 and our operational efficiencies.

Mike. Thanks, Jack. Now turning to slide seven. 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. High Peak 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 high peak and for the peers that have already announced. Please note that High Peak has continued to maintain its high oil cut and its peer leading margins. This oil cut gives High Peak a higher gearing or leverage to oil price. So with that higher gearing and our laser focus on reducing our operating costs, High Peak's margin spread has expanded even further this quarter above our peer group average. From this chart, you'll see that high peak 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, high peaks 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. High-piece 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 high-piece 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 EBIDACs that High Peak generated. Now turning to slide eight. High Peak is currently running three drilling rigs, focusing on the Wolf Camp A and Lower Sprayberry 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 Wolf Camp A and lower spray berry results from the Conrad pad in eastern Borden County, the light blue wells And the strong Wolf Camp A results from our neighbors 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, High Peak has just spud our first Wolf Camp A well in Scurry County. Details will be forthcoming late Q1, early Q2. We are also encouraged by some middle spray berry 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 High Peak's large runway of inventory in the Wolf Camp A and lower spray berry. 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 frack 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 will all help insulate Hy-Vee from any future potential cost inflation. And looking into 2024, High Peak's electrical build-out and solar farm will provide reduced lifting costs and significant protection from high spot pricing in 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 spike roughly five times the normal cost levels. This fixed solar low-cost power will reduce our lifting costs and further increase our margins next year. We continue the efficient build-out of our oil and gas midstream pipelines, again ensuring High Peak 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.

Thanks, Mike. If you'll turn to slide nine, this is one of the major accomplishments in the third quarter, and that's our 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 26, 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 provides the company with flexibility to pay down debt with a one and a half year no call and being able to pay down debt without penalty utilizing free cash flow, which will allow for rapid deleveraging. 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 term 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 three times multiple, which in my opinion is relatively cheap compared to our SMIDCAP peer universe, considering our asset quality, drilling inventory, return on investment metrics, financial strength, and growth profiles. 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 High Peak. 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 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 one 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 wealth performance while lowering our costs on both CapEx and OpEx on both sides of that equation. We expect the consistent generation of free cash flow will provide us with ultimate optionality, including the continued reduction of debt, which is a very important feature in our new terminal facility. In addition to the debt reduction, we expect to be positioned to 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 High Peak that 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 might 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 and 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 as 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 analysts.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster. Our first question is from John White with Roth MKM Capital. Your line is open.

Thank you, operator. Good morning, everybody. Want to make any comments about well downtime due to wells that are offsetting frac operations in the fourth quarter?

Yeah, Mike, why don't you answer that question?

Absolutely. Yeah, John, nothing different than normal blocking and tackling. Obviously, the wells closest to whatever you're simulating, we tend to shut in and protect as well as to make sure that we get a good frack on the wells that we are stimulating currently. But no change in what we have. Obviously, when you go from one frack crew and you pick up one, again, the second frack crew we have is just to pick up a few of the ducts that we had generated over the last several months. So don't see a very material change. Obviously, offset wells will be affected for a short period of time, but nothing material.

Yeah, I'm sure you've learned a little bit, and I think a lot of the financial community has, too. Companies are reporting the tight oilfield service market has loosened to a certain extent. Are you seeing that as well? Absolutely.

So, you know, obviously, oil-filled tubulars kind of rolled over about a quarter or so ago. They've more or less flattened out. So, we're getting the benefit as we work through some of the inventory we had. So, What you're seeing for all the tubular goods and casing that we run in the ground today, it's the newer, lower pricing that you're seeing in today's market. Again, we don't have a lot of long-term contracts on drilling rigs or frack crews, virtually none. So we ride spots. So coming out of COVID, we got penalized when prices came up. But again, today, where prices are starting to roll over, we're seeing rig rates dropping. Again, not large drops, a couple thousand dollars a day. And then on the pumping side for the dollar per pumping hour, we're starting to see those roll over again in kind of the mid-single digits to lower than 10% is what we're seeing in the 2024. But again, that's all going to be predicated on how active the market is. We're also kind of insulated from some of those costs just due to some of the planning we have had in the past. a very local wet sand mine that sits right next to our two acreage blocks. We have that access to the sand, reducing our transportation costs, so you will see that going forward in the future. Again, we are a little exposed to diesel prices with transportation, but diesel prices have been pretty flat over the last couple quarters. So, no, as we look forward into 2024, again, no one has a crystal ball, but I would say pricing would be kind of flat. And again, as we've reduced our activity, we've been able to high-grade rig fleets, frack crews, and get a little higher utilization percentage of the local sand, our recycled water. as well as being able to have rigs on electricity, high line power, instead of utilizing diesel. So you're going to see a little bit higher weighted change in our CapEx than what you may see with some of the other folks, our peer group, based just on service costs with some of the initiatives we put in place over the last couple of years.

Thanks for that very comprehensive detail and excellent results. And I'll turn it back to the operators. Thank you, John.

Thank you for your question.

Our next question comes from Jeff Robertson from Water Tower Research. Your line is open.

Thank you. Good morning. Mike, to follow up on the cost, can you give an estimate for the net cost currently to run one frat crew and one rig for one year?

You bet. You know, Jeff, obviously High Peak's a little different than some of our peers back to the to the west and in the center part of the basin. And what I mean by that is a rig at High Peak generates more completed lateral foot per year than a lot of our peers. So although our dollar per foot DC&E is $150 to $200 a foot cheaper than our peers, we can spend more money with one rig because it drills more footage that we can complete. So with all of that said, basically a rig and a frack through is about $200 million a year is a very good number for you.

Thanks. And operating costs came down in the quarter. You outlined some of the things that you all have been working on over the last couple of years to continue to drive not only capital cost savings but also OPEX. Can you just talk about where you are there and where you think things might directionally go in 2024?

You bet. So, you know, you see LOE coming down quarter over quarter. We've got a lot of initiatives that we've put in place. You know, of course, increased production over time. That helps with some of the fixed cost dilution, optimization of our artificial lift, and some of our chemical and treatment programs being optimized. as well as designing some more upgrades into our produced water infrastructure. And then, of course, the energizing of our solar farm, kind of call it second quarter this year. Again, that's probably one of the biggest disappointments is how long it's taken us to get our solar farm up and running. We've had some governmental issues and delays and A little bit of that's been associated with the Inflation Reduction Act, but it's all starting and going. We're actually doing a ribbon cutting this Friday. So when that comes online, that'll reduce some of our energy costs as well as some of, as I mentioned in the prepared remarks, some of the costs. floating price that we pay for electricity because you can't hedge 100% of it. You've got to kind of do it in blocks. So we'll always have a small percentage, kind of 3% to 5% that floats. And now we will be able to have that during the heat of the summer and the highest demand. these solar panels will be generating their 10 megawatts of power, and that is a low fixed cost. So again, when we look into next year, we will see a lower dollar per BOE for Hypeek, and we're estimating somewhere in the $7.50 range, and we hope to be able to beat that. But one thing to note that is a little different here, when you have a really high oil mix like we do, you know, we talk about it on the margin side. It's a great thing for our margins. But when you look at some of the other metrics like LOE, we don't have a lot of low value BOEs that we get to spread our cost over. So if you looked at some of our peers and with their mix of product, Again, if we had, you know, a similar economic kind of mix, you know, again, we'd be in that 85,000 BOE a day range to generate the same kind of EBITDA. And if we did that and looked like our peers with that mix, our LOE would be in the $5 range amongst the best of any of our peer groups. So, again, we've got some more, you know, more distance to go, and we've got some things in place that are going to continue to drive it down. But somewhere in that 750 range kind of average next year, I think it's a really good number for it.

Thanks. Jack, you talked about capital return to shareholders, and I know that the term loan has, I think, a $30 million per quarter amortization feature that begins at the end of the first quarter of next year. Can you talk about how you think about the best outcome for shareholders in terms of maybe paying down more of the term loan if you have the opportunity or cash flow and weighing that against the dividend and potentially share repurchases?

Yeah, Jeff, it's hard to differentiate between the three. We look at it more as a basket and we think that we can accomplish pieces of all of that. And so definitely we will be retiring debt through the amortization. We also have a cash sweep opportunity. And so when we're building cash sitting on our balance sheet, we might as well get good utilization of that cash. And two ways to do that is to support our share price by having a stock repurchase, and then also returning more capital back to the shareholders by increasing our dividend. So it's a combination of things that we're going to balance as we go forward. recognizing that our debt is going to be going down and we're going to be so healthy within the mid-year of 2024 from a financial perspective, it gives us that luxury to do that, especially when we're not trading for a price that we feel like is fair in the marketplace. Thank you for that.

Thank you very much.

One moment, please. Our next call comes from Nicholas Pope with Seaport Research.

Your line is open.

Morning, everyone. Morning. Morning, Nick. There's been a lot of moving parts the last few months. You talked about guidance on production. I just want to make sure I'm clear on where... what your expectation is right now for, I guess, exit rate or fourth quarter, what the expectation is right now for production here in the near term?

Yeah, Nick, we're not changing our guidance. As Mike mentioned, with the wells to be completed in the fourth quarter and with the momentum we have right now in increasing our production, we fully expect to accomplish our exit rate that we provided in prior guidance of 57,000 barrels a day. Now, those numbers could change on the upside. I don't think they'll change on the downside simply because of having lumpy production and how many wells are being fracked and what wells have to go offline. It's very hard to predict that as we go forward, but undoubtedly we're going to hit the 57,000 barrel a day exit and then production will continue increasing into the first quarter. And, of course, adding the third rig, and we may even add another rig once we get down to less than .75 depth to EBIDOC, three-quarters of a turn, we can increase drilling. But we're going to do that with very much adherence to capital discipline and not get out over our skis, so to speak.

Got it. That's great. Appreciate that. And then looking at kind of the progression of working capital for you over the last few quarters, obviously it got very negative lead into the refinance. Looks like I'll really kind of brought that back into balance here this quarter with everything completed. Is this kind of the run rate you're expecting with working capital and going forward, because you have this big cash number for CapEx relative to kind of the accrued number. Just trying to get a sense of what that movement might look like here in the near term and what the kind of plan is.

Well, if you'll think back, looking back, we had six rigs running. We had a real substantial decline in oil prices. A lot of things hit us there that were out of our control. But now we know that where we have oil prices, we have a considerable amount of our production hedged. We know that it costs us roughly $200 million a rig. So if you take 600 to $700 million of capital and you're already at 52,000 barrels a day at over a billion dollar run rate, you have plenty of free cash flow to do all those things that we said we were potentially going to do as objectives in 2024. So unless we have a precipitous decline in oil prices, and if you recall in the past, we never obligate ourselves. We can drop a rig in 30 days if we want to. So we're going to maintain capital discipline and maintain control over our working capital and not ever get ourselves back in that position again. Now that we have grown the company, we've reached a plateau of growth that we didn't have in the second quarter of last year. We were only making 20-something thousand barrels a day, and now we're up to 52,000 barrels a day. So this has truly been a transformational quarter for the company.

That's great. I appreciate the time, everyone. Thank you.

Thank you, David.

Thank you. I am showing no further questions at this does conclude our question and answer session. Thank you for your participation in today's conference. This concludes the program and you may now disconnect. Have a good day.