HPK - NASDAQ

Good day and thank you for standing by. Welcome to the HighPeak Energy 2024 Third Quarter Earnings Conference Call. [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, Chief Financial Officer. Please go ahead.

Good morning everyone, and welcome to HighPeak Energy's third quarter 2024 earnings call. Representing HighPeak today are, Chairman and CEO, Jack Hightower; President, Michael Hollis; and I'm Steven Tholen, the Chief Financial Officer. During today's call we will make reference to our November investor presentation and our third quarter earnings release which can be found on HighPeak's website. Today's call participants may make certain forward-looking statements, relating to the Company's financial condition, results of operations, expectations, plans, goals, assumptions, and future performance. So please refer to the cautionary information regarding forward-looking statements and related risks in the Company's SEC filings, including the fact that actual results may differ materially from our expectations due to a variety of reasons, many of which are beyond our control. We will also refer to certain non-GAAP financial measures on today's call, so please see the reconciliations in the earnings release and in our November investor presentation. I will now turn the call over to our Chairman and CEO, Jack Hightower.

Thank you Steve. Good morning ladies and gentlemen, and thank you for joining us today. My prepared remarks will begin on Slide 4 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 HighPeak 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 disciplined 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 HighPeak 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 5 of the presentation. The third quarter was a huge, another operational huge success for HighPeak, as our production volumes averaged 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 HighPeak, 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 6, 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 BOEs 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 million 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 through 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 7. HighPeak'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 HighPeak does on 50,000 BOEs a day, thanks to our very oily mix at low OpEx. The cartoon on Slide 7 shows how efficiently HighPeak converts our oily BOEs into cash. Starting from left to right on the slide, HighPeak's BOE is 75% oil and 88% liquids versus our peer average of 45% oil, plus HighPeak's efficiency of converting that higher realized price per BOE to EBITDAX is higher than our peers. HighPeak 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 remained strong, and differential at $45.68 per BOE. HighPeak's 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 breakeven inventory to exploit, and equates to significant value creation. Jack mentioned a 100-year flood that caused HighPeak 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 HighPeak and our peers. Now turning to Slide 8. 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 Kallus well. This well is HighPeak's first operated Middle Spraberry well. Our Kallus well achieved a Max Oil IP of roughly 1,500 barrels of oil per day, plus associated gas out of a 2-mile lateral, far exceeding our initial Middle Spraberry expectations. And as you can see on the production chart on Slide 8, the Kallus well is also outperforming our bread-and-butter Wolfcamp A type curve. I would like to point out that the landing point in the Middle Spraberry formation is approximately 800 feet above where we land in the Lower Spraberry formation, which we believe will allow us to efficiently and effectively develop areas of the field, where we already have drilled Lower Spraberry wells without seeing any parent-child influence. We have identified approximately 300 Middle Spraberry locations across our acreage. Note, we have obviously, drilled through the Middle Spraberry 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 Kallus well equates to a lot of additional HighPeak inventory that will break even at well below $50 a barrel. This Middle Spraberry inventory resides in our 2,600 total well inventory that HighPeak carries. But 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 HighPeak 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 8. This well is HighPeak's furthest east, operated producing Wolfcamp 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 type 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 northern most extension area of Flat Top, both in the Wolfcamp A and Lower Spraberry formations are continuing to exhibit very strong early performance. We anticipate providing additional production details next quarter. But as a preview, our Lower Spraberry and Wolfcamp 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 9. 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 & 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 cost per pumping hour, OTCG pricing, fuel cost, and incremental performance improvements. But let's talk a little about what folks are missing about HighPeak's cost structure. Let's start from some -- a truth that everybody has bought into overtime. 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 HighPeak would lead the public to miss the extraordinary efficiency, value, and runway that HighPeak offers. So how does the Delaware Basin to Midland Basin comparison relate to the HighPeak'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 D, C, E & F costs. 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 stimulation 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 HighPeak to further optimize the tubular goods used, which reduce and significantly reduce the additional savings or increase the additional savings for our wells at HighPeak. So why is this important and what are folks missing? It's no secret that HighPeak's BOEs generate significantly higher EBITDAX per BOE compared to our peers, mainly driven by our high oil cut. 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 HighPeak'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% of the comparable cost, wins the race for generating shareholder value every time. And having multiple decades of this inventory that will allow HighPeak 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 HighPeak'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 frac crews. 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 HighPeak's CapEx and OpEx. We have continued to expand our low-pressure gas gathering system to HighPeak's new acreage, eliminating the need for flaring. With our gas gatherer's addition of compression, and processing throughput HighPeak has enjoyed lower field-wide pressures, equating to slightly higher natural gas production. HighPeak 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 have 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 HighPeak 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 in-field 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 HighPeak and our shareholders. Now we'll open up the presentation to any questions that anybody might have.

[Operator Instructions] 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 8 and your Kallus 34-39 Spraberry Well, do you plan to offset that and if so, to what direction and what would be the timing on offsetting this Middle Spraberry Well?

John, this is Mike and hey, thank you for the question. Obviously, we're extremely excited about the Middle Spraberry results. There's some offset data out a little bit farther west. You can see it on the map that we've inset on this slide. Our Kallus 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, 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 drilled through the Middle Spraberry 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 Wolfcamp A further to the east. So for the Wolfcamp A and the Middle Spraberry, 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, I've mentioned in the prepared remarks a handful of wells and 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'd 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 8 for our wells up north. And again, as this is our farthest east-operated Wolfcamp 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 almost 30 wells that are the A and Lower Spraberry and even some other zones that are producing farther east than HighPeak. 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 Spraberry wells. I think we have an offset or two to this Kallus well that sits in it. But outside of that, the vast majority of the 300 Middle Spraberrys 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 Kallus, and all of our rock and petrophysical and geological data suggest 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 HighPeak drills and completes. And if you're adding a couple hundred into your sub $50 breakeven 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. I'll --

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 8, on both the Kallus 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. The great news is obviously, while we were drilling the wells, they acted very similar. And you wouldn't know that you were drilling 5 miles east or 6 miles east of our first Wolfcamp A Lower Spraberry 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. And 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 HighPeak 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 sand box, and you're starting to see a little bit better performance on these wells, as well as our base production. I mean, we don't want to forget our production guys. They're doing a fantastic job on keeping well up time, as well as costs, being able to keep these wells producing, and reducing our LOE. So all of those things kind of come together to build the efficiency of the machine that we have here at HighPeak 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.

Yes. 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.

And 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 or it is sometimes hard to understand and believe. And again, when you look at public data, public data does a really good job when everything looks the same, i.e. the Delaware proper, and the Midland Basin proper. So your public sources do a pretty good job of saying how much people are spending because that data is made public. Again with HighPeak, 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 HighPeak, 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 Basin. And those structural changes as I went through kind of pressures and what it takes to frac these wells and the tubular goods you have to have, how much horsepower and fuel. When you take all of those into consideration, and you look at some of these wells that again can produce 1,500 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.

Good. 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 roughly a hundred 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 a -- what we used to call the Spraberry 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 HighPeak's 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, hat 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 noticed that people are having a hard time believing that the differential is as big as it is, but we've got the data in the well performance to show that.

Then lastly, on that Mike, your acreage block on Page 8 is a little bit -- it's filled in a little bit more than it was like 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, you know, every day obviously, with the well results we have. I mean, look, our industry does a whole lot of closeology, 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. So I think it's reasonable to expect over time you'll see a little bit more 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 Spraberry 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 1 billion barrels of oil equivalents of net recoverable resource in place. All these things translate to HighPeak 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.