HighPeak Energy, Inc. (HPK) Q1 2021 Earnings Report, Transcript and Summary

Thank you for standing by and welcome to the HighPeak Energy First Quarter 2021 Earnings Conference 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] As a reminder, today's program may be recorded. I would now like to introduce your host for today's program, Steven Tholen, Chief Financial Officer, please go ahead, sir.

Good morning everyone and welcome to HighPeak Energy's first quarter 2021 conference call. Representing HighPeak today are Chairman and CEO, Jack Hightower; and President, Michael Hollis. During today's call, we will make reference to our May Investor Presentation and our first quarter 2021 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, which was issued on Monday afternoon. Our prepared remarks will begin on Slide four of our May Investor Presentation. I will now turn the call over to our Chairman and CEO, Jack Hightower.

Thank you, Steve, and I want to welcome each and every one of you this morning to our today's call. Our first quarter of 2021 operations went smooth even in light of the fact that we had the Winter Storm Uri. We are continuing to build upon and improve our peer-leading capital efficiency metrics. We are definitely a growth story. And as I go through the presentation on the website, if you – those of you who have access to it, turn to Page 4, but the one biggest important factor there is the fact that we had 150% growth from the end of the first quarter through the middle of May and that's unprecedented relative to growth story. We are extremely excited. We have a significant all weighted growth story and we are creating value very, very quickly with efficient operations. We're focused on fiscally responsible production growth and high operating margins. In the first half of May, as I mentioned, we're up to 8,300 barrels a day now with 90% oil cut. So our growth is continuing. That 8,300 barrels a day represents approximately 28 wells that are producing and we have 11 additional wells with another well drilling that. We'll add to that growth story as we get these wells online, most of them have been completed, but we are continuing that program. We have – what allows that is we have a continuous acreage position. Of course management's expertise contributes to our peer leading in costs and full cycle economics and our EBITDA margins are over $41 a barrel at current commodity prices, which is either the leading or second leading best returns in the industry. We definitely have a differentiated financial strategy. We're committed to low level or low leverage and currently have no debt. Recently, we had just approximately 2,500 barrels a day of oil for one year at a price of $61.40 a barrel. That's in keeping with our conservative nature to keep a strong balance sheet. If you turn to Slide 5, we generated a profit and we generated over $20 million of EBITDAX in the first quarter, which on a comparative basis is very, very successful. Our average production in the quarter was almost 5,300 barrels a day. We have zero debt and $9.6 million cash on hand. And we've also completed the first phase of our company-owned water system is now fully operational. That's going to continue leading the ability for us to lower our lease operating expenses as we go forward. So we are continuing our guidance with a one rig program, and we've been able, as you can see, to have tremendous production growth, and we are on track to have exit the year at the 10,500 to 12,000 Boe a day. So we are achieving significant production in reserve growth while maintaining a conservative balance sheet and we're going to continue focusing on low cost operations, peer-leading capital efficiency while we sustain our leading EBITDAX margins driven by high oil cuts and low cost structure. And we will continue implementation of our ESG program. On Slide 6, the most important thing here is that in every case it's zero debt, but we've increased production almost 150% in five months. That's unprecedented in the industry. And we've been able to do that in drilling these additional wells and still maintaining our low cost structure, which Michael will go over at a later date when we get into the operational overview. Our EBITDAX has gone up 187%, but as you start looking forward and projecting that EBITDAX, we're well over $200 million on an annual basis with where we're going to exit the year. We also continued, as you recall, the investor presentation in our last presentation, we were averaging about 9,300 feet per lateral foot drilled. And now we're up almost 64% and averaging approximately 14,000 feet. And we maintain our oil mix of 90% oil. So it's been very effective in terms of our drilling as costs are going up, we've been able to still maintain our capital efficiency and maintain our cost to drill, complete, equip, and put facilities in place on the wells. Turning up to Slide 7, this is also contributing to our operational efficiency. We lowered our lease operating expenses 28% that will continue to take place as our production increases and as these facilities we've put in place and infrastructure we've put in place become more effective as we continue our growth story. Our cash G&A went down almost 42%. Again that will continue to happen as we improve and continue our production. Our operating margin went up over 44%, so that's really unprecedented that we've been able to do that. We have a cash margin of $42.14 per Boe, which is one of the highest in the industry and realized pricing of $54 of Boe. So we're extremely excited about what we've been able to accomplish there in drilling over 84,000 feet with 1 rig 6 wells drilled, completed, equipped, and finance – and facilities in place 14,000 feet of average lateral length as opposed to 9,300 in the first quarter and still maintaining $505 a foot for our drilling costs. And you all know we have some inflation taking place in all costs, every single area from drilling rigs to completion, to sand, to pipe, everything is going up and yet we've still been able to continue the efficiency at the $505 a foot cost. So with that basic update, I'm going to turn the presentation over to Mike Hollis, our President, to talk about operations.

Thanks, Jack. I'd like to take this chance to thank all of the HighPeak employees, our service providers, as well as our business partners for the exceptional job that these folks handled Winter Storm Uri, the pandemic for the last year and just the monumental performance that we've had with such a lean and effective workforce. As Jack mentioned, we are one of the few growth stories out there. We've had growth of 150% from four quarter – or from the fourth quarter of 2020 and we've done that with zero debt. Jack mentioned, we're planning on running one rig. We've drilled and completed six wells as mentioned with a lateral length of that 14,000 feet in Q1. The machine's not going to slow down we've got more to come. We've got eight wells that are in flowback, four being completed and two in the drilling phase. Jack mentioned we have our first – our Phase 1 water system fully operational and planned to recycle very soon. We've also got the basins first high volume horizontal deep Ellenburger SWD. And in our Southern acreage block its Signal Peak, we've drilled the Wolfcamp D and Wolfcamp C wells, which are online, flowing back and cleaning up. The Wolfcamp D well is flowing naturally and has been the quickest to cut oil of any well we have in our company so far. We're extremely excited about these wells and the drilling potential of these two zones in Signal Peak. Again, these can greatly increase our inventory in our Southern acreage. As Jack mentioned, despite these recent inflationary pressures, our capital efficiency has been rock solid and continues to be peer leading. If you turn to Slide 9, we'll walk you through or peer leading capital efficiency and margins. Post IPO or business combination, or capital efficiency has continued to improve and been significantly less than where we were pre-combination. Our current all-in drilling completion, equipping and facilitating these wells at $505 a foot is best-in-class. Since IPO we've increased our lateral length dramatically and continue to reduce the number of days to drill the TD. For comparison sake, to many of our peers, our current drilling and completion cost is $400 per foot. And to help explain why our margins are so differential to our peers, we have to start with high peaks. BOE unit of measure is differential to our peers. And by that, I mean, our oil cut is significantly different. We have 90% oil cut today, but the difference between our area in Eastern Howard County and the rest of the Midland basin is the life of these wells; our oil cut is 84%. With natural gas liquids we are 95% liquids for the life of these wells. Oil and liquids drive your revenue. So with a unit of measure that has a higher revenue per unit and with our costs continuing to come down, again our cash cost LOE down 28% quarter-over-quarter, G&A down 42% quarter-over-quarter. So again, higher oil cut cost that continue to come down, equal that best-in-class cash margin. Cash margin this quarter we're $42.14 per BOE. If you turn to Slide 10, these best-in-class execution metrics, low cost and high oil cut, generate phenomenal returns. A 10,000 foot Wolfcamp A well at $65 oil generates roughly 200% IRR. Our average lateral length for the year is closer to 12,500 foot, that extra footage will increase single well economics in IRR by roughly 30%, again peer leading returns. The net present value of one of these 12,500 foot Wolfcamp A wells is approaching $14 million of well. Our low cost and well performance drives capital efficient growth in production, value and reserves. If you turn to Slide 11, we'll give you a midstream and marketing update. The team has been excrutiatingly busy this quarter, and I got to give many thanks to our midstream partners, both on the gas and oil side. A lot of midnight oil has been burnt this quarter. We signed a new long-term crude oil gathering and marketing agreement, and in that agreement, the gatherer will install our system up in flattop and this is extremely important because HighPeak, 97% of our revenue is attributed to the oil cells for HighPeak and this new system will improve our realized price as we move from trucks to pipe, we've also assigned a long-term natural gas gathering and processing agreement to expand our gas gathering system in Flat Top to meet our development plans. This system will be a low pressure system, which will eliminate the need for in-fuel compression, as well as the emissions associated with that. It will reduce downtime and flaring. Our Phase 1 of our SWD water system is fully operational in Q1. It provides a very cost efficient disposal system for all of our produced fluids, and also gives us the ability to recycle that stimulation fluid. Phase two is currently being constructed in the Southern area of Flat Top. We've attacked both sides of the margin equation. Higher realized prices, lower operating cost that's how HighPeak will continue to deliver this peer leading margin in the future. If you turn to Slide 12, give you our ESG highlights. In January, we established our ESG committee at the board level. Our SWD system has allowed us to remove 11,500 trucks from our Flat Top area in Q1. To-date we're almost double that number of trucks off the road, reducing emissions and surface disturbance. We've also signed a preliminary contract to build a new electrical substation and wire upgrade, as well as currently evaluating the use of renewable energy sources for our field operations. To date, we've had zero safety incidents. We've also had zero regulatory violations. HighPeak is active in our local community and continue to provide our employees with flexibility to work from home, as well as from the office in this post-COVID environment. Again, I couldn't be more proud of what our organization has accomplished in such a short order and I absolutely believe that we're just getting started here at HighPeak, and we'll have several more exciting developments that we can disclose in the future. And with that, I'll turn the call back over to Jack.

Thanks Mike. And I want to reiterate also how proud I am of our team, and we have a lean team. We are very efficient from a G&A perspective, not necessarily on a per BOE basis because we're just getting started, but in terms of overall costs to our investors, we have the lowest costs for our overall G&A of any public company that I'm aware of. So we're going to continue that program and make sure we give you all the opportunity in the world to have the best return on investment. As you can see in looking at Slide 13, 150% growth, very responsible, a strong balance sheet with zero debt and an undrawn revolver, which gives us access to additional capital that we need in our operations as we continue our program, and the ability to increase our growing program as we go forward and de-risk our area. We have great operational success and capital efficiency, and I think the bottom line is on our operating profit margin as Mike discussed, we literally have the highest profit in the base of any company in terms of operating profit margin of any public company. We don't know about the private companies, but that's very successful and one thing that drives that is 90% all cut, but also this experience team contributes to that profitability in addition to that. Mike mentioned our new wells down South at Signal Peak, I'm not going to spend a lot of time on that, but one unusual feature of our – the will be well is after five days, we have almost 17% oil cut, and to my knowledge, I know it's the best way we have, but it's one of the very best wells in the basin. So we're extremely excited about that and geologically cover's our entire acreage position, so we're very, very excited about that. And so basically our first quarter was a tremendous success. Positive earnings, significantly increased production, increased EBITDAX, lower cash costs, and are currently debt-free, I'm proud of our lean organization and the success we've had. And I guess I just within the conference call and the context of every company in my 50 something years in business that has tremendous success also has a very successful investor base. An investor base that recognizes the importance of it initially paying a little bit more for stock value and having a company that can utilize all the efficiencies of their currency and their value stream. You saw where I bought almost $2 million more stock last time and we just can't, even though we need float, we need you to invest more dollars if you see fit and to tell your friends, because we need flow, we don't mind having an offering as long as it's not deluded to us and presently our stock price is below what our peers are trading at on a multiple of what we project our EBITDA to be. And so we feel like we have a lot of movement and a lot of upside, and we're tremendously excited about what we've accomplished and everything from a production perspective is exceeding our expectations. So with that, I'll open the call up for any questions.

[Operator Instructions] Our first question comes from the line of Jeff Robertson from Water Tower Research. Your question please.

Thank you. Good morning. Jack, can you talk a little bit about consolidation opportunities in Howard County and whether given you're still relatively early stage of both Flat Top and Signal Peak. How that might fit into your business model?

Yes. Jeff, that's a great question. Historically, with the 139 companies out run, we've basically been balanced with growth through the drill bit, as well as consolidation. We have such a large inventory and such an ability to grow our present company that we're going to be a lot more selective on consolidation and making sure that anything that we consolidated with would be accretive to us. And it's good as an asset as what we have. But we are looking at lots of opportunities in our area. We're not at all restricted from having good accretive opportunities in our area, both adjacent to our acreage both down South and up North, and also moving out from East to West in Howard County. A lot of the companies are over levered and are having a hard time developing. So we're continuing to look at and evaluate and work on consolidation and as you know our history, even back at Lehman brothers, we did not transactions in two years with pure or so. We will be very much thoughtful in looking at, but we'll be very restrictive in the sense of it has to be as good as what we have and we want to…

Thanks. Mike, a question on LOE, you all made significant progress in the quarter compared to the fourth quarter. Can you talk about the drivers of that and what you see over the balance of the 2021?

Absolutely Jeff. There's a lot of knobs that we attack every one of them, right? So our water system is huge. Again, we've taken a lot of water off of trucks, third-party SWDs and went into our company owned SWD that is very efficient to operate. Getting some of these ESPs on electricity and off generators is a big a big job and project that we have throughout this year. So as we've mentioned in the presentation, we have a – we've signed a preliminary contract to upgrade the electrical system up in Flat Top that will come in over time. And once we get the substation built in, you will see dramatically lower LOE as we start to remove some of the generators that are still out there. So again, we try to hit everything from both sides here on the kind of that margin equation. We want to reduce our cost and again, we not only do we try to address it from the unit cost, as far as lifting these fluids and disposing of them, being able to reuse them for recycle. We also want to reduce the amount of downtime that we have from both electrical issues, as well as our lifting equipment. So to date, I'm knocking on wood here. To-date we have had zero ESP failures. So the team in Midland has done a fantastic job operating the equipment. And again, some of these failures can be roughly a quarter million dollars, every time we have to replace one of these ESPs and we've had zero to date. So all of those go into the factor for reducing that LOE. The other piece is these new wells with their high rates and their low lifting costs. Again, help us average down that number. And we'll continue to do that in the future. As we build out our oil gathering system and have lacked units again, you will also see increased production because we'll have less downtime with weather in trucks and nice. So everything will become more efficient over the next six months as we continue to implement all of the processes that we have in place. So again, great question. And we're attacking every angle that we can from the cost, as well as the realized price equation.

Thanks. And lastly, at Signal Peak, it's clearly quite early with these first two wells, but can you talk about any plans you might have there for later in 2021 for additional wells? And then secondly, are there any infrastructure issues down there that you have to deal with if you become more aggressive with your drilling there?

So early time infrastructures in place, it's a – there was a – the old Wolfcamp C gas field was there or is still there. So there is infrastructure for gas and oil takeaway early time will mostly be trucked. The development plan, of course, we've got locations across all the Signal Peak mapped out as well as how we would lay out our infrastructure. Once again these wells come in and we go to full development, we would also have to upgrade the gathering systems in Signal Peak as well as the power infrastructure a year or two out. Again, this is different than what was done back in the '70s and '60s. So we require a lot more power and generate a lot more oil and gas than what was done in the past. So yes, we'd have to upgrade those in the future, but early time, everything is in place and we're ready to go.

Right. Thank you very much.

You bet.

Thank you. [Operator Instructions] Our next question comes from the line of Carter Dunlap with DEM. Your question please. Carter, you might have your line on mute.

I'm sorry. Is that better?

Yes. There we go.

Pardon me. Hi, guys. You've included in the deck in the appendix three Slides, 17, 18 and 19, but not spoken to them. What is the takeaway from those, I mean, for the layman's on the call, including me?

Well, Carter, basically, if you know the growth of Howard County back in 2016, we just had a hundred and something wells drilled in the western part of the County. And the industry has moved from west to east. And there was a mentality out there that as you move closer to the shelf edge of the basin on the eastern side, you're moving up dip. You definitely have more carbonates. You're going to have more water, which you naturally have with carbonates, but the people didn't realize that the zone itself was there and it was almost as thick. And as we moved from that Slide 17 over, you can see our zone of production is just as thick and just as profitable and it's going to recover as much oil. We increased the carbonate side and that gets into Slide 18. And with that carbonate, one limestone 52% of all the oil that's been produced in the Permian Basin came out of the carbonates. The historical thought geologically was that this is a dense limestone that didn't have any oil in place wasn't organic, it would be tied, and you wouldn't be able to get any oil out of that particular formation. Well, we had been working in the area for a long, long time since 1978. And we knew that that was not a typical limestone. In fact, when you look at it just coming out of the sample, it's totally black. It's organic. It's got a very high level of carriage in. It actually is in the generation of oil and makes oil out of the carbonate. So, we really have almost two reservoirs inside of one reservoir in our area, which leads to not being on the treadmill is bad, not having as high of the decline curve and having more oil in place. And then the Slide 19 is simply showing our inventory and while we'll be so selective in terms of consolidation, because we can build a very large company by just developing what we already know and what we already had. And we didn't put any value on the Wolfcamp C or in the Wolfcamp D even though we knew that the possibility existed for those zones and that's starting to prove that now down at Signal Peak to the south with our new wells. So it's just to show you that we have a big inventory, a decade of inventory, and that geologically, geophysically and petrophysical physically, our area is flush and very much oil in place. And that gets on back off further in the appendix in terms of oil in place numbers. And we're looking at in the Wolf A and the Spraberry 30 to 40 million barrels in place per section and 35 to 40 and all the way up to 50 million barrels in the D and in the Wolfcamp C, a lot of potential throughout our areas through the north and south.

That was about as robust of an answer as I could have expected, I'll have to listen to the replay to make sure I sort it all, but thank you very much.

Okay, thank you.

Thank you.

Thank you. This does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.