HighPeak Energy, Inc.

Good day and thank you for standing by. Welcome to the High Peak 2025 Fourth 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'll need to press star 1-1 on your telephone. You will then hear an automated message device and your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised, today's conference is being recorded. I would like to hand the conference over to your speaker today, Stephen Tholen, CFO. Please go ahead.

Good morning, everyone, and welcome to High Peak Energy's earnings call. Representing High Peak today are President and CEO Michael Hollis, Executive Vice President Ryan Hightower, Executive Vice President Daniel Silver, Senior Vice President Chris Munday, and I'm Stephen Tholen, the Chief Financial Officer. During today's call, we may refer to our March investor presentation and press 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 March investor presentation. I will now turn the call over to our President and CEO, Mike Hollis. Thank you, Steve.

Good morning, everyone, and thank you for joining us. I thought about kicking off things today by walking through our 2025 results and the execution of our business plan. But that feels like a whole different world today. I'm far more energized by what lies ahead than by revisiting what's already behind us and implement it. For anyone interested in a deeper look at the changes that brought us to this point, our prior quarter's investor presentation and earnings call transcript offer a comprehensive overview. So with that, let's turn the page and talk about 2026 and how we're positioning the company to move forward with purpose, confidence, and a whole lot of momentum. In today's fast-moving geopolitical and commodity landscape, we are approaching 2026 with focus and discipline. And our focus is clear, protect profitability, maximize cash flow, and strengthen the foundation of our business, not pursue growth for its own sake. Over the past several quarters, we have taken a hard, honest look at every part of our business, And that work continues today. It has given us a firm handle grounded on financial discipline and operational excellence. This means a plan we can fully and confidently execute within cash flow, sustaining stable production with minimal capital intensity and driving further efficiency gains to expand margins. Our top financial priority is strengthening the balance sheet As commodity prices rise, incremental cash flow will be directed first toward debt reduction and liquidity improvement. To support that objective, we're taking several decisive steps. First, we right-sized our annual capital budget to ensure our development program stays within cash flow, even in a much softer price environment. Second, we expanded our hedging program to reduce exposure to volatility and secure pricing that supports continued investment and debt reduction. Third, we suspended our dividend, which will increase annual liquidity by an estimated $20 to $25 million. The reality is the market wasn't giving us credit for the dividend. And most of the investors we speak with regularly have shared that same perspective. We believe that capital is far better deployed, strengthening the balance sheet and building long-term value for our shareholders. We are positioning the company to thrive, not just for the next couple quarters, but for years to come. Our 2026 development plan is intentionally conservative and built for durability. It is anchored around one drilling rig and roughly one completion crew, which positions us to drill about 30 wells and bring 36 to 38 wells online over the course of the year. We designed this pace of development with three clear objectives in mind. First, to ensure we operate fully within cash flow, covering every financial obligation even if oil prices settle in the mid to upper 50s. Second, to maximize free cash flow in a stronger commodity environment so we can accelerate debt reduction. And third, to maintain strict cost discipline across the organization. Given the recent strength in oil prices, this is an opportune time for us to lean into debt reduction and continue improving our financial footing. Our 2026 program also reflects a balanced approach between investing in new wells and optimizing our existing base production. You can see that balance clearly in our capital allocation. Our capital budget is nearly 50% lower than last year, while unit lease operating expenses per BOE are modestly higher as we invest in targeted initiatives to enhance base production. The result is a development program built for capital efficiency, highlighted by an estimated 65% increase in production per dollar invested. And the early results are encouraging. Quarter to date, production is averaging more than 46,000 BOE per day. That is roughly 10% above the midpoint of our 2026 guidance range even after accounting for the impacts of winter storm fur. Based on today's market environment, we believe production in the low to mid 40,000 BOE per day range represents a sustainable baseline for our 2026 budget and our plans to reduce absolute debt. Stepping back. it's important to recognize how the market is valuing companies like ours today. In the current environment, SmidCap ENPs are rewarded for durable free cash flow, balance sheet strength, and meaningful high-quality inventory depth. What they are not rewarded for is headline production growth. Now, there are a few realities shaping our industry right now. Core Permian inventory is becoming increasingly strategic. Tier one shell inventory is finite. Future wells will naturally move down the quality curve as inventory tightens and preserving and expanding high quality inventory is what drives long-term value. Now with that in mind, our guiding principle is straightforward. Return on capital employed matters more than production growth. disciplined development today allows us to protect and preserve our tier one inventory for a future time when our financial capacity and a strong sustained commodity environment align so what are we doing to support this strategy our disciplined approach centers on several key priorities first We are protecting liquidity and reinforcing our financial cushion by eliminating the dividend and expanding our hedge position. Second, we are moderating drilling activity so the business remains cash flow neutral, even if oil prices move down into the mid to high 50s, while still positioning us to accelerate debt reduction if prices remain strong. Third, We are investing in optimizing across our base production, generating incremental volumes and cash flow without the capital intensity that comes with drilling new wells. And finally, we've continued to delineate additional high-return inventory across our acreage, expanding the long-term opportunity set for the company, taking together These actions position High Peak to increase free cash flow, reduce leverage, and potentially lower our cost of capital in the future, preserve premium inventory for periods of sustained stronger commodity prices, expand our strategic optionality, whether through drilling, production optimization, or potential accretive M&A, increase long-term NAV realization for shareholders, and ultimately, implementing these key priorities will strengthen the value of our equity. Let me take a moment to talk about our capital allocation philosophy, because it's the backbone of long-term shareholder value. Our approach, again, is straightforward and disciplined. We will protect the balance sheet. A strong financial position gives us the flexibility to navigate commodity cycles and act when appropriate and opportunities present themselves. We will prioritize high return investments. Every dollar we deploy must earn its place, whether it's drilling a new well, optimizing existing production, reducing debt, or pursuing strategic opportunities. We will preserve premium inventory. Tier 1 drilling locations are finite across the industry, and disciplined development today safeguards the long-term value of those assets. And finally, we will focus on generating sustainable free cash flow that strengthens the balance sheet, allows us to potentially lower our cost of capital in the future, and ultimately supports a higher long-term equity valuation. When you look at 2026 Development Plan, through that lens, every decision from reducing activity levels, eliminating the dividend, expanding our hedging program is designed to enhance the durability and long-term value of the business. Simply put, our goal isn't to grow the fastest. Growth should be the outcome of a well-executed, financially solid plan. This does not happen overnight. High Peak's goal is to build a resilient, valuable company that delivers for shareholders over the long haul. A key part of our capital efficiency strategy in 2026 is the continued optimization of our existing production base. These efforts include targeted well workovers, artificial lift enhancements, and other operational improvements designed to increase recoveries from wells already online. Projects like these typically generate strong returns on invested capital and allow us to unlock additional value from assets we already own. It's a practical high return way to drive incremental volumes and cash flow without the capital intensity of new well drilling. Let me now provide a quick operational update across our core development areas. At flat top, our results in the North Borden area, see slide six of our presentation, continue to demonstrate strong performance in both the Lower Sprayberry and Wolf Camp A. These wells are delivering outcomes comparable to what we see in our core flat top area, which reinforce the quality and consistency of this acreage. The northernmost row of wells in our north Borden area is the only part of the field that will require minimal incremental infrastructure and we expect that work to take place in tranches beginning in late 2026 and into 2027. Now in the core of the flat top area, we will continue developing lower Spravery and Wolf Camp A locations using the infrastructure already in place, driving corporate efficiency higher. Now the northeast flat top area, highlighted by the small red box, also on slide six of our March investor deck, shows where six wells experienced anomalous water inflows. We completed remedial work on several of those wells and are seeing encouraging early results. Because of the presence of the water flows, our 2026 plan includes no new drilling in the northeast flat top area. Instead, we are focused on maximizing value through the remediation and optimization of the existing producing wells. Importantly, the impact to our long-term inventory is minimal. Even if we chose not to drill any additional wells in this area, it would affect only 18 Wolf Camp A locations that we carry in inventory, as we do not carry any additional zones in inventory for this area. We're also seeing encouraging progress in delineating the middle spray berry across both high peak and our offset operators. There are now nine successful producers, and we expect that momentum to continue with roughly six additional delineation wells planned between high peak and our offset operators in the first half of 2026. Our long-term objective for the middle spray berry is clear. Convert more than 200 middle sprayberry locations at flat top into fully delineated sub $50 breakeven inventory. At signal peak, we will continue developing our core area in the Wolf Camp A and lower sprayberry, both of which continue to deliver strong, consistent results. See slide seven of the presentation. Beyond those core zones, Signal Peak holds substantial upside. We've demonstrated Wolf Camp D performance across the field in two different landing zones with results that closely track one another. The resource is clearly present across the acreage and it's not going anywhere. We haven't drilled a Wolf Camp D well in roughly three years. However, during that time, the industry has made meaningful strides in optimizing deeper wells. We will continue to evaluate the development of the Wolf Camp D to determine when the economics fully support those wells competing for capital. We also see additional long-term potential in the middle spray berry, Wolf Camp B, and Wolf Camp C formations, which add further depth and optionality to our inventory over time. Our drilling results and technical work continue to reinforce what we believe is one of the deepest premium inventories among SMID cap operators. Today, High Peak has more than 2,600 total drilling locations across the Stat, Sprayberry, and Wolf Camp formations. At our current cadence of drilling, that includes more than 30 years of high return inventory in the Wolf Camp A, Lower Sprayberry, and Middle Sprayberry alone. over 100 total rig years of inventory across the full stack. This level of inventory depth meaningfully differentiates High Peak from most of our peers. One point that we believe the market continues to underappreciate is the growing scarcity of Tier 1 shell inventory across the Permian Basin. The industry has spent the last decade or so developing its best rock, And the reality is that premium locations are not infinite. As that inventory tightens across the basin, the strategic value of companies that still hold significant high return drilling inventory will only increase. Our responsibility is to develop those locations with discipline, maximizing the long-term value for our shareholders. When we think about the value of this company, several key components stand out. First, our existing production base, a highly visible, reliable source of cash flow that underpins the business today. And at current valuation levels, High Peak is trading close to the PV10 proved developed value. But the real long-term value lies with the untapped inventory. That inventory includes approximately 200 proved undeveloped locations in our core zones, more than 400 additional premium Wolf Camp A and lower spray barrier locations, over 200 middle spray barrier locations progressing toward the sub $50 breakeven delineation, and further upside potential in the Wolf Camp B, C, and D zones. All of this is complemented by our continued focus on optimizing existing production, which enhances returns and strengthens the value of our asset base over time. In closing, our focus in 2026 is on returns and resilience, not headline growth. We will apply strict capital and operational discipline to protect the bottom line. We will prioritize free cash flow generation. Any incremental free cash flow will first be directed toward reducing leverage and strengthening balance sheet, positioning us for a lower cost of capital over time. We will remain precise and selective in how we deploy capital. concentrating on high return inventory, base production optimization, and disciplined delineation of additional premium locations. At our current development pace, our premium inventory alone represents decades of high return drilling. Even before accounting for the additional upside, we continue to delineate across our acreage. And as Tier 1 shell inventory becomes increasingly scarce across the industry, the strategic value of remaining core drilling locations will only continue to rise. Ultimately, we are building a company designed to generate strong returns across commodity cycles, improve long-term NAV realization, and strengthen our equity value. And it all starts with reinforcing our financial foundations. Before I close, I want to recognize our employees. The progress we've discussed today is a direct result of their hard work, grit, and professionalism. Day after day, they show up, tackle challenges, and keep this company moving forward. Their commitment both in the field and in the office is the backbone of everything we're building. Again, I'm deeply grateful for what they do. With my comments now complete, operator, please open the call up for questions.