HPK - NASDAQ

Good day, and thank you for standing by. Welcome to HighPeak Energy 2024 Fourth 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. To ask a question during the session, you will need to press star one one on your phone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steven Tholen, CFO. Please go ahead.

Good morning, everyone, and welcome to HighPeak Energy's fourth 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 March investor presentation and our fourth quarter earnings release which can be found on HighPeak's website. Today's call participants may make certain forward-looking statements related 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 Chairman and CEO, 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 four of our March investor presentation. So if everybody's had a chance to do that, and hopefully everybody's had a chance to review our press release. But before we turn the focus of today's call towards our 2025 plans and guidance, I want to take a few minutes to highlight the tremendous success that we realized during last year's business. As you recall, going into the 2024 calendar year, we laid out a set of core values which included maintaining disciplined operations, strengthening our balance sheet, and maximizing shareholder value. Maintaining disciplined operations incorporated our plan of maintenance level CapEx to hold production volumes flat while aggressively focusing our attention on reducing our cost structure both on the CapEx and OpEx side of the equation. Not only did we achieve our goals, we delivered significant improvements across the board. Our efficient two-rig program delivered a 10% increase in production year over year. This was a significant beat compared to our initial 2024 expectations of flat production volumes. We are continuing to realize strong production performance across the acreage position, including our extension areas, in the middle of the Spraberry zone, and that is extremely exciting. We increased our proved reserves by almost 30% to year-end 2023, and that considers utilizing lower SEC guideline prices for 2024. We not only continue to organically increase our acreage position, but we've already drilled wells and have demonstrated proven results on our new acreage that is similar to the core areas of our field. Our operations team's continued hard work and intense focus translated to a 17% decrease in our lease operating expenses on a BOE basis. This is impressive as we have added a lot of new acreage and are tying those areas into our efficient infrastructure. We lowered our absolute debt by $120 million during 2024. We will pay down another $30 million of our term loan balance at the end of March, and we were able to achieve a 10% production increase in conjunction with a capital spend that was 40% less than in 2023. All these positive achievements translate into HighPeak continuing to improve our overall corporate efficiency, which is a theme that I will come back to here in a few slides as we discuss our 2025 outlook. Now if you'll turn to slide five, our key objectives slide and pillars of success. We're going to maintain capital discipline, especially in light of current market conditions, which remain volatile due to external factors. We will remain focused on continuing to improve our corporate efficiency, which is evidenced by our anticipated flat production volumes coupled with a two-rig maintenance capital budget that is approximately 20% lower than in 2024. We will look to optimize our capital, which we anticipate will significantly reduce our interest expense burden and consequently increase our levered free cash flow. And we will continue to pursue shareholder-friendly initiatives, which include paying down absolute debt, maintaining our dividend, and opportunistically buying back shares. Now I'd like everyone to turn to slide six and take a few minutes talking about the last quarter's results. The fourth quarter was another solid quarter for us on all fronts. Production continued to average over 50,000 BOEs per day. And as you can see on the slide, we're off to another strong start in the first quarter as our volumes have averaged over 52,000 barrels a day. We were also able to reduce our lease operating expenses during the year and expect them to remain steady in 2025. The value of our proved reserves increased by 17% to the prior year, and again, that considers utilizing lower SEC guideline commodity prices. Our 2024 EBITDA was roughly flat year over year, even though oil prices were lower on average during 2024. I'd also like to point out that our fourth quarter CapEx was a little higher than we originally anticipated. This was a result of some efficiency gains that we are realizing on the drilling and completion side of our business. That allowed us to pull forward some drilling and stimulation activities in July 2024 and to a lesser extent was also a result of initiating a couple of our key 2025 projects. We ended the year at just over 1.2 times levered, and we remained in a very healthy financial position, even in light of oil prices declining. On the shareholder value front throughout 2024, we reduced our absolute debt by $120 million, paid out roughly $22 million in dividends, and repurchased approximately 2.4 million shares of stock, equating to shareholder-friendly initiatives of about $177 million. Again, 2024 was a very successful year for HighPeak, and we expect to continue to build off of that positive momentum in 2025. Now I'm going to turn the call over to Michael Hollis, our president, and he's going to walk you through the next exciting slides.

Thanks, Jack. Now turning to slide seven. As Jack mentioned, we are continuing to see improved well performance across our entire acreage. This helped translate to a 29% increase in our proved reserves year over year, which includes a 36% increase in our proved developed reserves. I would like to mention that our PUD reserves value is very conservative. It only includes roughly 200 of our remaining 700 Wolfcamp A and lower Spraberry locations and no material middle Spraberry PUDs. HighPeak has had an impressive CAGR of 72% on our net proved reserves from year-end 2020, especially considering that nearly 100% of our production growth has been through the drill bit. Our reserve growth translated to a notable reserve replacement of 345%. This includes extensions of 45 million BOE and positive revisions of 18 million BOE. And that's another strong statement in spite of lower SEC pricings in 2024. HighPeak had upward revisions that virtually offset the 18.3 million BOE we produced for the calendar year. Now turning to slide eight, now for one of the most important slides in the deck. We continue to achieve improved well performance across the board. This chart on the right shows our average performance over certain time periods going back to 2023. And as you can see, our results have continued to steadily improve. I'll take this opportunity to counter the naysayers over the last several years that implied that HighPeak's ability to generate high returns would degrade quickly as they have already drilled all of their good locations. Well, the results speak for themselves. As you can see on the map, the stars represent our recent activity, and they are all representative of HighPeak's decade and a half of primary inventory. Look forward to helping folks understand what has been missed in the past. As I've already discussed in last quarter's call, the red stars on the map are the Judith A3H in the Callas Middle Spraberry well. These wells, as well as what we and offset operators have drilled even further east of what is shown by the stars, have achieved IPs of over 1,000 barrels of oil per day and associated gas. We now have our second middle Spraberry well on production. It's an early flowback producing approximately 400 barrels of oil a day and associated gas, and we expect this well to match the production capability of our first middle Spraberry well. This delineates five miles north and south in the hard flat top. And you may remember that I said virtually no middle Spraberry PUDs were in our 2024 reserve report. It would be reasonable to assume that this will change in our 2025 reserve report. Now turning to slide nine. As we've discussed on previous calls, HighPeak is absolutely differentiated from our peers due to the depth of our high-quality inventory-rich portfolio. Our technical and land teams have done a fantastic job of organically adding inventory to the extent that we have successfully replaced our inventory in our primary Wolfcamp A and Lower Spraberry zones year over year. And these are just sticks on the map. Again, we have actively been drilling in our expansion areas and have proven results in both formations that meet or beat our previous core areas in the field. Our bread and butter Wolfcamp A and lower Spraberry wells have almost 15 years of remaining inventory at our current two-rig development cadence. And as we've mentioned on last quarter's call, we continue to delineate the middle Spraberry zone, and at our current cost structure, we would potentially add more than 200 additional locations in our flat top area to our sub-$50 breakeven inventory. Now turning to slide ten, the key themes of our 2025 development plan remain consistent. Maintain capital discipline, prioritize what we can control, OpEx and CapEx, and continue to increase our overall corporate efficiency by holding production flat with less CapEx. We're going to continue our steady and efficient two-rig development program with a primary focus of co-developing our high-return Wolfcamp A and lower Spraberry results. In addition to continuing our thoughtful and strategic delineation of the Middle Spraberry. This plan is level loaded, meaning we'll stay steady with our two-rig and one frac crew throughout the year, with the caveat that as Jack mentioned earlier, we are continuing to realize some efficiency gains on the D and C side which translates into more work being done with the same number of rigs. As noted on slide ten, we will realize about 33% of our annual budget in the first quarter. The majority of our 2025 infrastructure projects are already in progress, causing our full-year 2025 CapEx budget to be first-half weighted. Also, during the first quarter, we picked up a second spot completion crew to complete a four-well pad. Again, drilling efficiencies outpacing original plans. As noted on our 2025 guidance, we have committed to some very important one-time infrastructure projects that are also weighted to the first half of the year. Over the past 15 months, we have added 30,000 net acres to our flat top position. Our first priority was establishing commercial, proven success on this newly acquired acreage which we have now demonstrated. The second step is to now connect all of these extension areas to our core life of field infrastructure system, which includes our company-owned water system, and our overhead electrical power distribution system. As well as we're doing some additional work on expanding our low-pressure gas gathering system to all areas of our field. And we're also connecting our gathering system to additional takeaway outlets with other midstream partners. This will provide us with valuable redundancy in situations where our primary providers are down due to maintenance projects, or experience capacity constraints. These projects are very important for the full development over the life of our field. Now focusing on our improving corporate efficiency. A few key things I would like to draw your attention to. Our 2025 development plan is anticipated to deliver similar production volumes coupled with a capital budget that's inclusive of these one-time infrastructure projects that I just detailed, that is over 20% lower than last year. If we look ahead to the future, and factoring in not having these one-time 2025 projects, but also taking into account that our base infrastructure budget will continue to decrease compared to years past assuming we don't continue to add new acreage at the same pace that we have, you could be looking at an all-in maintenance CapEx budget that could be close to 30% less in 2026 over our lower budget in 2025 that's 20% lower than our previous year of 2024. Thus providing a significant increase to our overall corporate efficiency and ultimately translate to more free cash flow for the company. Another item I would like to point out even though our 2025 guided turn-in-line range is slightly less than last year's, on a lateral footage basis, we are expecting to complete roughly 5% more lateral footage on a year-over-year basis, again, for a substantially lower all-in capital budget. The HighPeak team has built an extremely efficient machine designed for the long haul. We know there's always room for additional improvement. We have the right team in place to realize those gains. With my comments now complete, I'll turn the call back over to Jack to discuss HighPeak's current capitalization.

Thanks, Mike, and congratulations on a very successful 2024 and what we expect to be an even more efficient program this year. Now turning to Slide eleven. Ladies and gentlemen, we wanted to include a slide highlighting our current capitalization for a few reasons. First, as everyone is aware, our current term loan carries a very high cost of capital at SOFR plus 750 basis points. Last year, this equated to roughly a 13% average interest rate. Very high. Which translated into about $150 million of annual cash interest expense. One of our primary 2025 objectives is to transition to a more traditional capital structure. We anticipate this would lead to significant cash interest expense savings, materially extend our debt maturities, and further increase our liquidity. Remove the mandatory amortization associated with our term loan providing HighPeak with more flexibility in paying down debt at par. We have the freedom to navigate and choose our own path as HighPeak is currently in a very healthy financial position. With a reasonable amount of leverage, ample liquidity, no near-term debt maturities, and a demonstrated track record of operating within cash flow and paying down absolute debt. However, normal way financing would materially improve our corporate structure and our financial position even further. This is something we're going to work on when our May co provision expires March the twelfth. The key takeaways, if you turn now to slide twelve, the key takeaways that I'd like to leave everyone with today are we've built a very efficient machine here at HighPeak. We expect to continue to build off of our 2024 improvements. We've successfully continued to expand our large contiguous acreage position and have demonstrated strong well results in our expansion areas and some of our upside zones. We expect to continue that success going forward. Our well performance has continued to improve across our entire acreage block while we have simultaneously lowered our drilling and completion costs which translate into better overall returns for the company. We have a long runway of oily, high-value inventory, which is underpinned by roughly 15 years of locations in our bread and butter Wolfcamp A and Lower Spraberry formations. Our intense focus on operational efficiency covered with our advantageous life of field infrastructure system continues to deliver peer-leading margins. We're in a very healthy financial position, which we expect will be further enhanced as we look to optimize our capital structure. Our corporate efficiency is projected to continue to improve highlighted by flat production volumes combined with a 20% lower capital budget this year. All these things ultimately lead to HighPeak being positioned for sustainable long-term success. And with that, we'd like to open up the call to questions and we will answer any questions that you have. Thank you.

Thank you. As a reminder, to ask a question, please press star one one on your phone. Our first question comes from the line of John White from Roth MKM Capital.

Good morning, and congratulations on the nice result, especially your improved report. Can you hear me okay?

Barely. John, if you could speak up a little bit, we could barely hear you, buddy.

Yeah. I said congratulations on the nice results. It's especially your proved reserve report.

Thank you.

For 2025, how many middle Spraberry wells are you planning?

John, that's a great question. We've had the first being a couple quarters ago that we announced. Our second middle Spraberry well is in early flowback today. It looks very similar to the first well. I think it would be reasonable to expect this to be prudent and cautious as we step out and delineate the middle Spraberry. The great thing is we have 200 locations up just in flat top, that we suspect will be as good as what we're seeing here. Again, through 2025, I would think the number would be two to three additional wells this year would be reasonable. CapEx kind of break out. We get this question a lot between flat top and signal peak. Almost follows the acreage distribution between flat top and signal peak kind of seventy, thirty, seventy percent of that CapEx being co-developed lower Spraberry and Wolfcamp A mostly in Flat Top with, again, that kind of two to three middle Spraberry wells that we would expect to do later in the year. And the remaining kind of thirty percent being scanned down in signal peak.

Okay. So all the middle Spraberry wells for 2025 are gonna be in flat top. And none in Signal Peak. Is that right?

That's what we're anticipating today. Again, there's middle Spraberry wells that offset operators have drilled near our signal peak areas, and we're watching that, obviously. But as we sit today, we're looking to delineate up in flat top as our main priority.

Yes. Okay. Well, thanks very much, and good luck in 2025.

Alright. Thank you, John.

Thank you. One moment for our next question. Our next question comes from the line of Jeffrey Robertson from Water Tower Research.

Thanks. Good morning. Mike, when you've spoken about infrastructure improvements, you talked about improving HighPeak's flexibility to handle gas volumes and deliver those to more potential outlets. Does that also have an impact on your ability to move more oil barrels by being able to effectively capture and sell gas?

You bet, Jeff. No. That's a great question, dude. And to that point, yes, we have made great strides in improving our infrastructure out to some of these newly acquired acreage positions that we've tested. Again, your first well or two, you don't have your entire infrastructure built out, so we did have some gas volumes that had to go to flare early on. They're all now tied in. So that's increased some of it. To your point, had you not built out the infrastructure, there is a time limit to how long you could test an area before you have to have a solution for moving those gas molecules. And there's obviously value associated with those gas molecules, and you know, one of on our hedge position, you can see that we layered on some additional gas hedges. We layered it about 30,000 MMBtu a day from March of 2025 to February of 2026 at about $4.43 per MMBtu. Again, gas will never be a huge part of HighPeak production with our current acreage position. Again, because we do have such an oily mixture of our BOE, and so we're very low API gravity oil barrel as well. We run about 36, 37 gravity on average. So when you look at our reserve report and you see that our oil percentage for the life of all these wells that are in that report, move from about 70% at 2023 year-end to about 68% in year-end 2024. That's more of what I think you're gonna see for the next decade or so from HighPeak. We've been in maintenance mode, for about a year and a half now. We were drilling with six rigs back in 2023, so I think what you've seen is things level out. And if I was looking from a modeling standpoint, I would say kind of low to mid 70% oil range and kind of that 85% liquids, as a go forward for HighPeak.

Thanks. And when you think about corporate efficiency over the next several years, you've talked about being in 2024 growing production with less CapEx and expect that to be the case in 2025 and likely in 2026. How does the infrastructure build-out support your efficiency goals for the company?

You bet, Jeff. No. Great questions. Again, this infrastructure, you see that in our LOE. This infrastructure also helps us on the CapEx side to a lesser degree. For instance, we can run rigs off of High Line Power. We get ample recycled fluid that we can utilize for our frac crews. We run as high as 100% recycled fluid on our frac jobs. Again, helping CapEx and OpEx. So as we build this infrastructure and tie everything together, it definitely improves the things we like to be able to control. Again, drilling, OpEx, CapEx calls. Now whenever we look forward into 2025 and 2026, I think you hit on a very important point. We talk about being 20% less CapEx, as a maintenance mode inclusive of some one-time and we tried to break this out on the guidance slide, the one-time infrastructure that we have to put in once it's there, it's there the life of field. But then if you also look at the line that breaks out the kind of midpoint of $45 million, for infrastructure. Again, from just a little bit of clarity from HighPeak that's a little different than our peers, again, I always like to call it blood guts and feathers. When we give our D and C CapEx if you notice, we know that it's drilling, completion, equipping, the facilities for those wells. As well as a little bit of capitalized flowback water. So all in blood, guts, and feathers is the D and C portion of the guidance. Now the $45 million that's anything that is not on the well pad. So that's pipelines, overhead electric that tie in some of these new areas. So again, assuming that we don't go and put on another 30,000 acres in 2026, what you will see is that $45 million line will also decrease. If I was a betting guy, I would say it would be about half or less of that $45 million. Of course, the one-time piece goes away. All else being equal, that would reduce our 2026 budget by roughly 30%. Again, being in a maintenance mode, relatively flat. Now I mentioned that in 2023, we were running six rigs, we've been kind of in maintenance mode for a year and a half. What you're starting to see with HighPeak is a maturity right, of our asset. Our corporate decline is beginning to come down, so again, when you look into the future, it's going to take less wells and completed feed to hold that production flat, which might translate into a couple percentage gain each year at even while we're staying at a maintenance CapEx mode because, again, we can't fine-tune down to the exact number of completed lateral feet to stay perfectly flat, but as our production days age, and corporate decline goes down, you'll see a slight build in production even at the two-rig program. Again, all growing corporate efficiency, increasing free cash flow, again, allowing us to pay down debt. Again, at par, we assume within the future, we had normal way financing we would be able to do that at par.

And operationally, Mike, is it fair to think then that the infrastructure that will be in place with the current plan essentially sets the asset base up such that you could scale capital depending on the amount of cash flow you have and the prevailing economic conditions?

Great question. You know, HighPeak is, again, uniquely positioned with our asset base and our land position. To do or to have the flexibility to go either way. If you remember, we were running six rigs back in 2023, this life of field infrastructure was built such that we could flex upwards since six, eight rigs if needed. We have the capacity through all these lines to move that type of volume but also this land position if for instance oil prices were to drop precipitously lower than they are today and we had to slow down activity, we can hold through the drill bit all of the acreage that HighPeak has, 143,000 acres, with less than one rig running. So again, it gives HighPeak the flexibility to take advantage of any kind of pricing environment that we have either now or in the future.

If I could switch gears quickly to the capitalization, if you reduce the borrowing cost on the term loan by one percent by a hundred basis points, I think it would be about $10 million that would fall straight to free cash flow. Can you talk about how do you weigh the merits of reducing debt under a new capital structure and buying back shares?

Actually, I'll answer that question, Jeff. If you look at what our borrowing base rate is on our term loan, with Fitch. And, of course, we'd have new rating agency numbers as we go forward with the potential bond transaction or normalized capital structure. And based on that right now, you would expect as you say, roughly $10 million per basis point, but if you go from, let's say, hypothetically 8% down from 13%, that's almost $50 million. And then if you eliminate the amortization on that, you've got almost $170 million. As Mike said earlier, in terms of negative with oil prices going down, the flip side is if they go up, and we decided to increase drilling, have that flexibility too. So we have a lot of variability in our plan to do that. And with corporate efficiency improving also, we are going to be adding to our free cash flow. And by adding to our free cash flow, that's where we would be able to reduce debt. And do it very quickly. Should we choose to do so. And in fact, internally, when we model it, we can literally pay off a large RBL and a corporate bond in less than five years. If we want to just maintain where we are today.

Thank you very much.

Uh-huh. Thank you, Jeff.