HighPeak Energy, Inc.

Good day, and thank you for standing by. Welcome to the High Peak Energy 2024 Third Quarter Earnings Conference 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 your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Stephen Tholen, Chief Financial Officer. Please go ahead.

Good morning, everyone, and welcome to High Peak Energy's third quarter 2024 earnings call. Representing High Peak today are Chairman and CEO Jack Hightower, President Michael Hollis, 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 in the earnings release and in our November investor presentation. I will now turn the call over to our chairman and CEO, Jack Hightower.

Thank you, Steve. Good morning, ladies and gentlemen, and thank you for joining us today. My prepared remarks will begin on slide four of our November investor presentation. And after looking at our press release and seeing our results, I'm extremely excited to report yet again that High Peak has achieved another solid quarter of execution across the board. Heading into the 2024 calendar year, we laid out a set of core values, including maintaining discipline operations, strengthening our balance sheet, and focus on maximizing shareholder value. Our unwavering commitment to these values has driven our continued success. Operationally, our drilling program has continued to deliver strong well results, and production levels have continued to outperform initial expectations. This has resulted in another beat and raise of our production guidance this quarter, and our operations team has remained aggressively focused on production optimization and reducing our cost structure across the board. Financially, last quarter marks the fifth consecutive quarter that High Peak has generated positive free cash flow. And true to our core values, we have utilized a substantial portion of our free cash flow to pay down absolute debt while simultaneously executing our opportunistic share buyback program. As we set out at the beginning of the year, we continue to implement our primary objective of increasing absolute shareholder value through improved operational results, our return of capital strategy, and ultimately through our strategic alternatives process. So now if you'll turn to page five of the presentation. The third quarter was a huge another operational huge success for High Peak, as our production volumes average over 51,000 barrels of oil per day. This level was higher than our first and second quarter averages this year, even taking into account the continuation of our moderated two-rig development program. Operations during the quarter were affected by a major storm akin to a 100-year flood that hit in early September. This storm caused some of our production volumes to be offline and translated into our lease operating expenses running a little hot during the quarter due to remedial work associated with the storm damage. It's a true testament to our operations team and our robust infrastructure system that a storm of this magnitude only caused minimal shut-in volumes and operational issues. As you can see, our fourth quarter is off to another strong start as production volumes have continued to average over 50,000 barrels of oil per day thus far. We're continuing to see impressive results from our most recent wells, including our extension wells in the northern and northeastern flat top. We remain extremely excited about these areas of the field as well as our potential of upside zones. Mike will provide additional details regarding our continued strong production levels and our recent well results later in the presentation. I'd just like to reemphasize the major positives of these results. In addition, we continue to efficiently convert our products into value for the company, as evidenced by our sustained peer-leading EBITDAX per BOE. Our third quarter results translated into HPI converting 80% of our realized price per BOE into cash. We generated another strong quarter of free cash flow, and we remain in a very healthy financial position. Now turning to slide six, and as you look at this slide, you can realize the raise and the reaffirmation. As I mentioned earlier, as a result of continued strong production volumes, we're going to yet again increase our full year 24 production guidance. Our new range is 48,000 to 51,000 VOEs per day. This range translates to over a 5% increase compared to our prior increase back in August, and a 10% increase compared to our initial 24 guide. This is due to our strong well performance and continued production optimization efforts. We're also reaffirming our 24 lease operating expense and CapEx guidance, which we updated back in August. Our team continues to execute on optimizing our field-wide operations and we remain optimistic there are still some incremental savings we can achieve going forward. We expect our capital expenditures will fall within our narrow range of 540 to 580 million. We've now completed the bulk of our 2024 infrastructure projects, so the vast majority of our capital expenses during the fourth quarter will be associated with drilling and completing wells. On that note, our drilling and completions team is doing a tremendous job in achieving additional cost savings, even compared to the lower cost levels that we realized earlier this year. I believe this is one of the critical areas of our business that not only differentiates from our peer group, but that is also being missed by the public investor universe. Our current cost structure is significantly lower than our Midland Basin peers, and alongside our strong well results absolutely translates into our per well economics competing with anyone in the Midland Basin. Mike will provide additional detail on this topic. but I want to take this opportunity to emphasize this point and to also call out great work that our drilling and completions team is achieving. The key takeaway is that we deliver extremely impressive results to the first three quarters of the year, and I feel confident that this trend will continue. Now I'll turn the call over to our president, Mike Hollis.

Thanks, Jack. Now turning to slide seven. High Peak's EBITDAX per BOE continues a commanding lead amongst our peer group. Said differently, no other public company can generate close to the same EBITDAX that High Peak does on 50,000 BOEs a day, thanks to our very oily mix and low OpEx. The cartoon on slide seven shows how efficiently High Peak converts our oily BOEs into cash. Starting from left to right on the slide, High Peak's BOE is 75% oil and 88% liquids versus our pure average of 45% oil. High peak efficiency of converting that higher realized price per BOE to EBITDAX is higher than our peers. High peak converts 80% of our realized price to EBITDAX. That compares to our peers converting only 70%. Beginning with a significantly higher BOE value than our peers, and converting at a greater percentage of that price into EBITDAX results in a substantially higher EBITDAX per BOE. And in our third quarter, our unhedged EBITDAX per BOE remains strong and differential at $45.68 per BOE. High peaks EBITDAX per BOE continues to be over 65% higher than our peer group average. The operations team has done a fantastic job building one of the most efficient machines in the business. These efficiencies are extremely sticky. By that, I mean they're here to stay. This is very important when a company has multiple decades of sub-$50 break-even inventory to exploit. and equates to significant value creation. Jack mentioned a 100-year flood that cost High Peak roughly 800 high oil cut BOEs during the third quarter per day. We also had an additional expense in Q3 for repairing that flood damage with fewer BOEs to allocate for the quarter. Had this not happened, we would be on pace to exit the quarter at or below the midpoint of the LOE guide. This gives us confidence to reaffirm the LOE guide. There's always wood to chop on the LOE front. The team continues to find innovative ways to reduce costs, which will further widen the gap between High Peak and our peers. Now turning to slide eight. Let's talk about some recent well results. We are continuing to see very positive performance from wells in our northern and northeastern extension areas in Flat Top, as well as some of our upside target zones. First, let's discuss our Calus well. This well is High Peak's first operated middle sprayberry well. Our callous well achieved a max oil IP of roughly 1,500 barrels of oil per day plus associated gas out of a two-mile lateral, far exceeding our initial middle spray barrier expectations. And as you can see on the production chart on slide 8, The callus well is also outperforming our bread and butter Wolf Camp A tide curve. I would like to point out that the landing point in the middle sprayberry formation is approximately 800 feet above where we land in the lower sprayberry formation, which we believe will allow us to efficiently and effectively develop areas of the field where we already have drilled lower sprayberry wells without seeing any parent-child influence. We have identified approximately 300 middle sprayberry locations across our acreage. Note, we have obviously drilled through the middle sprayberry formation on every well that we have drilled to date. Since all were drilled to deeper zones, we have collected extensive data on this zone And that makes this test a technical no-brainer. Utilizing our current well cost and the initial performance of the callus well equates to a lot of additional high peak inventory that will break even at well below $50 a barrel. This middle spray buried inventory resides in our 2,600 total well inventory that high peak carries. These continued results like this and much of that inventory will surely migrate over and add to our current $1,150 sub $50 breakeven locations. And I know that High Peak and I believe that our investors and the industry as a whole would all agree that we would all take a 1,500 barrel oil well per day at a cost well below $6 million, and we would take those all day long. We've also highlighted our Judith well on slide eight. This well is High Peak's furthest east, operated producing Wolf Camp A well, which has demonstrated very strong performance to date. This well reached an oil IP of 1,700 barrels of oil per day plus associated gas. Over the first roughly five months of production since the well initially cut oil, it has produced over 135,000 barrels of oil, outperforming the conservative tide curve we have for this area. This data point is further proof that our primary zones are good across our entire acreage position. In addition, as we mentioned last quarter's update, The results of our first handful of wells in our northernmost extension area of Flat Top, both in the Wolf Camp A and lower sprayberry formations, are continuing to exhibit very strong early performance. We anticipate providing additional production details next quarter. But as a preview, our lower sprayberry and Wolf Camp A results in this extension area are performing as good as, or better, than the core development in Flat Top, nearly 10 miles south. Again, underscoring our already sizable and differentiated inventory of sub $50 breakeven runway. This area undeniably has legs. Now turning to slide nine. As Jack mentioned earlier, our drilling and completions group has done a tremendous job of reducing our cost structure to drill, complete, and equip our wells. All in D, C, E, and F, that has facilities as well, costs are currently running 9% below the cost we achieved in Q1 of this year. We have seen the usual suspects contribute to those cost reductions. rig rates, stimulation costs per pumping hour, OTCG pricing, fuel cost, and incremental performance improvements. But let's talk a little about what folks are missing about high peaks cost structure. Let's start from a truth that everybody has bought into over time. That truth is that the Delaware Basin is more expensive than the Midland Basin proper to drill and complete wells, to the tune of almost $3 million per well. Now the returns compete in both basins because the production and value are almost proportional to the differences in cost. Midland Basin costs are less due to the structural nature of the wells. What does that mean? The Midland Basin is shallower, has lower pressure, requires less horsepower to complete the wells. The industry and investors have accepted this fact. Public sources also do a decent job accounting for average regional descriptions of these costs. However, utilizing a regional cost structure for high peak would lead the public to miss the extraordinary efficiency, value, and runway that High Peak offers. So how does the Delaware Basin to Midland Basin comparison relate to High Peak's acreage, which resides on the eastern side of the Midland Basin? We enjoy similar structural differences to the center part of the basin as the Midland Basin does to the Delaware Basin. Our zones are shallower than our peers out to the west in the Midland Basin. Obviously, that means less total footage to drill, less pipe, less cement, less time and variable cost. All in, this equates to less DCE and E and F cost. Our frac pressures are significantly lower than our other public peers in the Midland Basin. requiring far less horsepower, fewer pump trucks, and therefore significantly less fuel. Having access to all of the recycled simulation fluid that we need and ultra local wet sand enhance our environmental stewardship and greatly reduce our capital requirements. Those lower stimulation pressures, roughly 30% lower, allow high peak to further optimize the tubular goods used which reduce and significantly reduce the additional savings or increase the additional savings for our wells at high peak so why is this important and what are folks missing it's no secret that high peaks boes generate significantly higher ebadax per boe compared to our peers mainly driven by our high oil cuts But what's the read-through? We make similar oil recoveries, but make less natural gas. However, gas and NGLs are only about 1% of High Peak's total revenue. They are closer to 10%, give or take, of our peers' revenue in the center part of the Midland Basin. So distilling all of this down, being able to generate slightly less revenue per well i.e the gas but doing it at less than 75 percent of the comparable cost wins the race for generating shareholder value every time and having multiple decades of this inventory that will allow high peak to continue this performance for the foreseeable future is the value that the market has yet to grasp. Now turning to slide 10. ESG is ingrained in every aspect of High Peak's operational and strategic planning. We continue to build large central tank batteries that meet all regulatory requirements, use 100% of ultra-local wet sand, reducing cost and associated emissions, We continue to use recycled stimulation fluid and have the capacity to supply multiple frack rigs. We continue to build out oil infrastructure to our newer acreage blocks. Oil on pipe garners a better realized price per barrel and reduces emissions. We have electrified field wide and continue to run our two rigs off of high line power. Our solar farm supplants 10,000 metric tons of CO2 per year, and the electricity from the solar farm is cheaper than grid power, so it also reduces high peaks, CAPEX, and OPEX. We have continued to expand our low-pressure gas gathering system to high peaks new acreage, eliminating the need for flaring. With our gas gatherer's addition of compression and processing throughput, High Peak has enjoyed lower field-wide pressures equating to slightly higher natural gas production. High Peak prioritizes ESG initiatives throughout all operational and governance decisions. Doing the right thing is not only the right thing to do, But more often than not, it is also the right financial decision for our shareholders. With my comments now complete, I'll turn the call back over to Jack to wrap things up.

Thanks, Mike, and congratulations on another very successful quarter. Now, if everybody would turn to slide 11. Ladies and gentlemen, the important points, the key takeaways I want to leave you with today are, first, we continue to execute on all cylinders. Our asset base continues to deliver strong production results, full of oily, high margin barrels. We expect to maintain this trend going forward, which is why we're raising our production guidance again. Throughout the past year, we have been intensely focused on optimizing our field-wide operations and expanding our world-class infrastructure system to reach all areas of the field. These initiatives has led to sustained operating cost reductions as evidenced by our results over the past four quarters. Second, we have positioned the company for optimal value creation. We've amassed a sizable, highly contiguous acreage position, which is prime for large-scale development. We've continued to add organic high-value inventory both through expanding our flat-top acreage position and also through the delineation of some of our upside target zones, which we will continue. This is truly one of the few remaining opportunities of significant scale in the most sought-after basin in the country. We've rapidly grown our high-margin oil-weighted production and reserves to a significant level. We've delineated a long runway of high-value sub-$50 breakeven inventory that spans our entire leasehold position. Again, the scarcity of sub-$50 per barrel breakeven inventory amidst the current market trend of extreme consolidation puts High Peak in a very unique and advantageous position. We've expanded our world-class infrastructure system to our extension areas, and we've worked with primary midstream partners to provide for the expansion of our infill crude oil and natural gas gathering and takeaway capability, which will support life of field development and maintain our peer-leading profit margins for decades to come. I can't give specific details at this time, but I do want to say that we are continuing to make significant progress in our strategic alternatives process, and we remain very excited about the possibilities for High Peak in our shareholders. Now we'll open up the presentation to any questions that anybody might have.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you'll 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 the Q&A roster. Our first question comes from the line of John White of Roth MKM Capital. Your line is now open.

Good morning, gentlemen, and congratulations on a very strong quarter. Thank you. Focusing on slide A and your CALIS 34-39 very well, do you plan to offset that? And if so, to what direction?

and what would be the timing on offsetting this middle sprayberry well john this is mike and hey thank you for the question you know obviously we're extremely excited about the middle sprayberry results uh there's some offset data out a little bit farther west you can see it on the on the map that we've inset on this slide Our callus well at 10,000 feet and 1,500 barrels of oil a day is something that obviously we would like to have more of. So I think it would be reasonable to expect in the future that we would look for the right place to delineate. And typically, you know... Again, to just offset would be great, and we think we would get a very similar result. At this stage, when it's early, you would probably see us walk away from this well a couple miles, either north, south, or east to, again, draw a little bit more credence to a larger swath of our acreage that would be perspective. So to do a direct offset might not carry the same amount of weight, but the good news is we've got the data on all of those wells that we've drilled through the Meadows Freeberry, and it looks perspective across the vast majority of our acreage. So I think it would be reasonable that we would move either north, south, or east from where we are here and do a test sometime in the next quarter or two.

Okay, next quarter or two. I appreciate that. Yes. And on the Judith 67-5, you've extended your Wolf Camp A further to the east. So for the Wolf Camp A and the Middle Sprayberry, as you work your way north and east, in the flat top block, you continue to get strong well results. So, you must feel pretty good about this expansion.

Absolutely, John. You know, I've mentioned in the prepared remarks, a handful of wells in the far northern extension of flat top. Those wells, you know, again, next quarter, we'll be able to have enough production data to kind of see where they do peak because some of these wells are still inclining in production today. So once they start to roll over, we'll be able to kind of put an EUR curve on those. And that would be something when we feel comfortable letting everybody know. But early time results look very similar to the kind of production chart that you're seeing here on slide eight for our wells up north. And again, as this is our farthest east operated Wolf Camp A well, if you look at the hashed box that kind of sits to the southeast of our flat top area, I can't read the number here, but there's, you know, almost 30 wells that are in the A and lower Sprave area and even some other zones that are producing farther east than high peak And you have very similar results even east of our acreage block that look just like our wells kind of in the center part of Flat Top. So absolutely, we feel very strongly that our inventory is good throughout all of our acreage here and that it supports the 1,150 wells that we currently have today that are sub $50 breakeven. But to that point, I want to stress again that not in that number are very many middle sprayberry wells. I think we have an offset or two to this callus well that sits in it. But outside of that, the vast majority of the 300 middle sprayberries that we have identified are not in our $1,150, sub $50 breakeven. So as we go forward and drill some of those additional tests that you were asking about, And assuming that we get similar results to what we've seen on the Calas, and all of our rock and petrophysical and geological data suggests that it will be, then you'll start to see us move more of those wells into the sub-$50 break-even category. And that's important to know that we're only drilling with two rigs. That's about 48 to 50 wells a year that High Peak Drills completes. And if you're adding a couple hundred into your sub-$50 break-even category, I would suspect in the next year or so, we will have even more inventory that's Tier 1 in anybody's portfolio than what we have today with the results we're seeing.

Well, good luck with that. Nice slide. Nice explanations. I appreciate it. You bet. Thank you, John.

One moment for our next question. Our next question comes from the line of Jeff Robertson of Water Tower Research. Your line is now open.

Thanks, Mike. To further that conversation with respect to slide eight, on both the Callas Well and the Judith Well, what can you take from the log penetrations and the data you got while the well was drilling and now the performance and use that to help de-risk the locations that you have.

You bet, Jeff. You know, the great news is obviously while we were drilling the wells, they acted very similar and you wouldn't know that you were drilling five miles east or six miles east of our first Wolf Camp A and Lower Sprayberry well that we drilled five or six years ago. So again, it's very consistent from an operational standpoint on the drilling and completion side. Obviously, we gather our log data as well as cutting samples through every one of these wells and we can look at the maturation of the oil. So again, we feel very confident that all the way out to the east as well as all the way up to the north. Look, at the end of the day, I'm a very pragmatic guy. I like to see oil in the stock tank. We can do all the science we want, which de-risks the initial dollars that we invest to test. But the real test is what's the commerciality of the well and how much oil shows up for sale in that stock tank. We have proved that all the way out to the east and to the north that substantiates our large inventory that High Peak has.

Mike, does the performance of the Judith well so far versus your type curve reflect any kind of a change in the way the well was drilled and the way that actually the well was stimulated, or is that geology and petrophysics?

So a couple things there, Jeff. It is a parent well by itself. That's one. If we had drilled 12 wells around it all at the same time, Would I suspect there would be a 5% difference in performance, give or take? Probably. So that plays a small piece. What I will say is every day we are tweaking our completion, landing, perforation scheme, everything we're trying to optimize with every new data point that we get. Do we suspect that the rock is any different here than what we have back to the west? not enough to make a large enough difference. Had we done all of the things we're doing today on the Judith well, on our very first well, I think we would have got a better result even on the very first well, which was the Jasmine well that we had drilled. So I think it's just an evolution over time. But when we have a very consistent sandbox and you're starting to see little bit better performance on these wells, as well as our base production. We don't want to forget our production guys. They're doing a fantastic job on keeping well uptime, as well as cost, being able to keep these wells producing and reducing our LOE. So all of those things kind of come together to to build the efficiency of the machine that we have here at High Peak that I think is very differential. But I think what you're going to see is over time, these wells will continue to get incrementally better from all of the day-to-day changes that we're looking at.

Yeah. Also, just to add on to that, If you just study looking backwards in the Permian Basin, whether it's Midland Basin, Delaware Basin, or my 54 years of drilling wells out here, you realize that you improve your performance with time. You have technological changes. And our operations team and our drilling guys and our completion guys are up to speed. And if you look at the industry's performance, and then look at our performance, your expectation can be that you're going to see significant improvements in the future as we go forward in increasing performance and increasing recovery. So we're really excited about the basic rock and what we can recover from that rock.

Jeff, this might be another time or another opportunity to jump in and kind of run back over this. Because, again, it's something we see as we talk to investors that is sometimes hard to understand and believe. And again, when you look at public data, you know, public data does a really good job when everything looks the same, i.e., the Delaware proper and the Midland Basin proper. So, you know, your public sources do a pretty good job of saying how much people are spending because that data is made public. Again, with high peak, part of this is we had to put some money in for infrastructure over the last four years, a sizable amount, and it's paying dividends today. But on that capital front and going forward, that infrastructure is in place. We just now have to tie into it whenever we drill a new well. But I talked a little bit about those structural differences and why they are so important to economics. And for high peak, again we've got very similar structural differences to the center part of the midland basin as that center part of the midland basin has to the delaware and those structural train changes as i went through kind of pressures and what it takes to crack these wells and the tubular goods you have to have how much horsepower and fuel when you take all of those into consideration you know when you look at some of these wells that again can produce 1500 barrels of oil a day and cost well under $6 million of well to complete, those economics will compete with anything in either one of those two basins. So I think that is a piece that folks are having a hard time believing that something in the Midland Basin can produce that well and be that cost to complete.

And Mike, your cost differences versus the central part of the Midland Basin is you're further up on the shelf a little bit, right?

So it's not quite as deep? That's correct. As we're coming to the eastern side of the basin, it's, you know, roughly 100 foot per mile of depth that you move up. So as you go farther into the basin, you could be 1,000, 1,500 or more feet deeper. And different strings of those casings have to be set at different spots. And some of that has to do with some of the legacy drilling that was done in these areas. For instance, if you take some of the operators in the middle part of the basin, they're having to drill the vertical part of their horizontal well. through what we used to call the sprayberry or the wolfberry play that has been around for 50 years. So a lot of depletion has happened in these vertical parts of the center part of the basin, which require different practices and cost to drill through it. Where high-piece acreage sits, Any development that was done in this area was much deeper than the zones we're drilling to. So none of that depletion has taken place. All that equates to less pipe that we need, less time to drill these wells. That's again why our two rigs can drill an average of 24 to 25 wells per year per rig. at an average lateral length of about 13 000 feet so again it all comes out in our numbers and all of the math works out but again it's just we notice that people are having a hard time believing that the differential is as big as it is but we've got the data and the well performance to show that then lastly on that mike your acreage block on page eight's a little bit

it's filled in a little bit more than it was in one of your previous presentations. Are you still, I guess that one, it reflects your confidence in the northern part of this acreage position, excuse me, but are you still seeing opportunities to pick up offset acreage at reasonable prices?

You know, Jeff, our land department does a yeoman's job every day. Obviously, with the well results we have, I mean, look, our industry does a whole lot of close ology, right? You get a good well, you're trying to pick acreage up around it. We have enough data in the area to know where we want to have that acreage and these guys are doing a great job picking it up uh so i think it's reasonable to to expect over time you'll see a a little bit more if on this chart our map is showing gray a little bit more gray on there over time as we're picking up and filling in As well as even where there's some gray, we're just picking up additional ownership in some of those blocks. So we really like our position in kind of Eastern Howard and Borden County. And these well results are fantastic. Thank you. You bet. Thank you, Jeff.

This concludes the question and answer session. I would now like to turn it back to Jack Hightower, Chief Executive Officer, for closing remarks.

Thank you. Ladies and gentlemen, I'd like to reemphasize the key takeaways from today's call. First, operationally we're executing on all cylinders. We will continue to strive for incremental improvements going forward. Second, our strong well performance is continuing to outperform initial expectations. Third, we've expanded our truly world-class infrastructure system to our extension areas, which will help maintain our lower cost structure and our peer-leading profit margins for the entire life of our field. Fourth, with the success of our new middle sprayberry well and our northern extension area wells and flat top, combined with our lower capital cost structure, we're adding significant highly economic inventory to our already deep portfolio. As we continue to delineate our other upside zones, and we've mentioned those things in the past, we're convinced that our field has upwards of one billion barrels of oil equivalent of net recoverable resource in place. All these things translate to High Peak being positioned to create optimal value for our shareholders. Our inventory competes with any of our peers in the Permian Basin or would also fit nicely within any potential suitor's portfolio. So again, thanks for joining us today.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.