HighPeak Energy, Inc. (NASDAQ:HPK) Q1 2024 Earnings Call Transcript

HighPeak Energy, Inc. (NASDAQ:HPK) Q1 2024 Earnings Call Transcript May 9, 2024

HighPeak Energy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the HighPeak Energy 2024 First 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. I would now like to hand the conference over to your first speaker today, Steven Tholen, CFO. Please go ahead.

Steven Tholen: Good morning, everyone, and welcome to HighPeak Energy's first quarter 2024 earnings call. Representing HighPeak today are Chairman and CEO, Jack Hightower; President, Michael Hollis; and I am Steven Tholen, the Chief Financial Officer. During today's call, we will make reference to our May Investor Presentation and our first 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 refer to certain non-GAAP financial measures on today's call, so please see the reconciliations in the earnings release and in our May 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 thank you for joining us today. My prepared remarks will begin on Slide 4 of our May Investor Presentation. I'm very excited to report we had a great start to the year. Results were in line or exceeded our expectations. We continued to stay committed to our 2024 core values, which, if you recall, include maintaining disciplined operations, strengthening our balance sheet, and maximizing shareholder value. We are going to continue staying within our capital budget expenditures and not getting out over our skis. Operationally, you heard me say last quarter that running a two-rig development program will allow our operations team to aggressively focus on reducing capital costs, optimize daily operations, and drive down operating expenses.

The operations team absolutely delivered on these goals. Financially, we generated positive free cash flow from operations for the third consecutive quarter. We are prioritizing debt reduction in the utilization of that free cash flow while also steadily increasing capital returns to shareholders. In addition, we continued our pursuit of increasing shareholder value through raising our dividend, implementing our share buyback program, continuing to organically add high value liquids-rich inventory to our portfolio and ultimately maximizing shareholder value through our strategic alternatives process. Now turning to Side 5 on the operations front, we had a great first quarter. We held our average production levels flat compared to the fourth quarter at roughly 50,000 barrels a day.

We made huge strides in continuing to lower our operating expenses, as evidenced by the 16% decrease in LOE or BOE from last quarter down to $6.30. And I want to take this opportunity to congratulate and thank our operations team for all their hard work as we are starting to realize significant progress and savings in this area. The reduction in LOE costs further improved our already peer-leading EBITDAX margins. Our operational success led to generating first quarter EBITDAX in line with our fourth quarter, which on a run rate approaches $1 billion. We increased our free cash flow by 42% compared to the last quarter and we've now generated positive free cash flow of over $150 million in the last three quarters. We utilized free cash generated in the first quarter to reduce long-term debt by $30 million.

We increased our dividend by 60%, and we implemented our share repurchase plan, whereby we acquired over 565,000 shares during the first quarter. Now I'll turn the call back over to our President, Mike Hollis, to provide an update on our first quarter operations. Mike?

Michael Hollis: Thanks, Jack. Now turning to Slide 6. As Jack previously mentioned, the team has been intensely focused on reducing costs across the board. On the capital side of the equation, costs continue to trend in the right direction for HighPeak, leading to increased capital efficiency. As I mentioned last quarter, we are trending well below our guided dollar per completed lateral foot costs for the year. One additional point that I'd like to make on the capital cost front that will continue to improve as we progress in our development program are our facility costs. Our central tank battery configuration is large, scalable, and efficient. And as our drilling program advances, we will be able to reduce the per-well facility cost on our new well tie-ins, thus reducing future total capital cost per foot.

We anticipate seeing additional improvement throughout the year, but as always we continue to adhere to the under-promise, over-deliver philosophy. Now turning the focus to the operations side of the equation. And I'd like to take this opportunity to put a couple of numbers out there. HighPeak was able to keep our absolute dollars spent on LOE this quarter to roughly $200,000 below what we spent in Q1 of 2023, a year ago when our production was only 37,200 BOE per day. And again, we spent less in Q1 of 2024 while our production was roughly 50,000 BOEs a day. Some of the key drivers to accomplishing this feat are shown on the right-hand side of this slide, where you can see the field-wide build-out of our world-class electrical and produced water infrastructure systems.

This system is built for the life of field. The operations group has been extremely busy over the past few years constructing these systems in both Flat Top and Signal Peak. And the fruits of their labor are absolutely starting to show. Other areas where our operation teams continue to make positive strides include optimizing our field-wide chemical programs, exploiting that world-class infrastructure, and maximizing the production of our base, all of which is supported by the reliability of our overhead electrical power distribution system. The capital investment the company has made in this system is and will continue to pay huge dividends as we develop our large inventory of high-value locations for decades to come, and by improving EBITDAX margins and lowering well breakeven costs.

And as you can see on these maps, the majority of our acreage is now tied into these systems, which means only small incremental infrastructure dollars will be needed in the future as our development program continues, thus reducing future CapEx needs. Our overhead electrical system will be further enhanced by our flat top solar farm, which we look to commission within the next week or two. The timing of which is great, as we'll be able to take advantage of the summer West Texas sunshine to provide power to the field during daylight hours. This will greatly reduce our exposure to electrical spot prices and brownouts, which are frequent during the hot summer months in West Texas. As a reminder, our 2024 capital budget is slightly first half-weighted due to entering the year with three rigs and completing the ducts we carried into this year.

And our infrastructure span is also first half-weighted to extend our infrastructure to our newly acquired acreage. Having great ROC coupled with low-cost operations and efficient deployment of capital, leads to increased corporate efficiency and free cash flow generation. And HighPeak will be able to continue this for decades because of our extensive runway of inventory. Now turning to Slide 7. HighPeak’s margins per BOE continues a commanding lead amongst our peer group. Our unhedged first quarter EBITDAX margin of $52.68 per BOE was close to 70% higher than our public peer average and over 30% higher than our closest peer. Adjusting our current volumes to an equivalent economic production rate to achieve the same cash flow for HighPeak based on our peer groups average cash margins would equate to HighPeak producing 85,000 BOE a day.

We produce and generate meaningful EBITDAX no matter how you look at it. One contributing factor to increasing our margin is our focus on reducing LOE cost. As you can see on the chart on the right-hand side of the slide, we have delivered four consecutive quarters of reducing LOE cost per BOE. HighPeak posted a 26% reduction quarter-over-quarter, which equates to roughly $6 million less absolute dollars spent this quarter for roughly the same production we had last quarter of 4Q of 2023. All of that savings is additional free cash flow now and in the future. As we always say, not all BOEs are created equal, our high oil cut, coupled with our improving cost structure, will continue to drive differential margins for our shareholders. I'm always surprised and appreciative of what the operations team can deliver.

They have met every stretch goal we've placed in front of them. And for such a liquids-rich BOE to have a lifting cost that competes with the best operators in the basin without having the added low-value gas BOEs in the denominator of the equation is a feat. If we had the same GOR of our peer group, think how lower LOE would be here at HighPeak. It would have a four handle on the number. Again, this is first-class performance and my hat goes off to the operations team. And as natural gas and NGL prices continue to face significant headwinds and our lifting costs continue to decrease, in my opinion, our margins will continue to stand head and shoulders above the peer group over the next handful of years. Now turning to Slide 8 to highlight our inventory-rich portfolio.

HighPeak entered the year with approximately 2,600 locations, with over 1,700 in what we currently consider our primary delineated zones. Our current development plan is focused on our bread and butter, Wolfcamp A and Lower Spraberry adventures, where we have close to 15 years of high-value oil-rich inventory at our current development case. In addition, some of the zones that we presently classify as upside are being delineated throughout the county and directly offsetting our acreage. We remain extremely excited about these early results and are looking forward to moving some of these locations into our primary zone classification. I'd like to take a moment to focus on a very topical concept within our industry, and that's the notion of break-even cost.

At HighPeak's current cost, including DCE&F, West Texas Lane, that's blood, guts, and feathers all in. Our portfolio has over 1,100 locations that generate a 10% or higher IRR at $50 a barrel. In addition, we anticipate being able to move more of our sticks into the sub $50 a barrel break-even category as we continue to drive down our costs and as our upside zones are proven out across the acreage position. We are extremely blessed at HighPeak to have decades worth of oil-rich, low-cost, high-margin inventory, which we will economically convert to free cash flow for our shareholders. And with those comments now complete, I'll now turn the call back over to Jack to wrap up on Slide 9.

Jack Hightower: Thanks, Mike. That's a really great operational performance during this quarter. And as Mike just talked about, we have a great asset base full of high-margin, high oil production with decades of inventory. Over the last year, we have focused on operational and capital discipline in drilling within cash flow. Extremely important, we are going to maintain capital discipline. This, along with some oil price support, has led to us to being able to generate over $150 million of free cash flow over the last nine months. We will continue to proceed with the disciplined exploitation of our asset base to generate more free cash flow moving forward. As we do, we will use that cash flow to strengthen our balance sheet, pay down debt, and increase our liquidity.

Through doing all these steps, I believe it is only a matter of time before the market recognizes the value dislocation of our stock and start to reward our shareholders with increased value. With emphasis, I would say we are going to maintain our capital discipline in our current drilling program, but a great way to think about strategic alternatives looking to the future is to think about what our asset base could do in the hands of a company that has the financial resources to significantly increase drilling activity. These assets and our inventory, which is one of the largest inventories that can be acquired in the Permian Basin, would allow a purchaser the opportunity to increase production while staying within cash flow to almost double its current level and maintain that level for many years into the future.

That's why we add so much value to so many companies that might be looking to acquire oil-rich assets. So now, I'll open up the conference call to questions from our analysts.

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