Good day, and thank you for standing by. Welcome to the HighPeak Energy 2022 Second Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand the conference over to your speaker today, Steven Tholen, Chief Financial Officer. Please go ahead.

Good morning, everyone, and welcome to HighPeak Energy's Second Quarter 2022 Conference Call. Representing HighPeak today are Chairman and CEO, Jack Hightower; President, Michael Hollis; Vice President of Business Development, Ryan Hightower; and I am Steven Tholen, the Chief Financial Officer. During today's call, we will make reference to our August investor presentation and in our second quarter 2022 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 yesterday afternoon. Our prepared remarks will begin on Slide 4 of our August investor presentation. I will now turn the call over to our Chairman and CEO, Jack Hightower.

Steve, thank you very much for the introduction, and I am extremely excited about this quarter's performance and our growth -- continued growth strategy, being able to execute that. I'd like everybody to think about the press release and earnings release that we just had. And in looking at that and studying that, it's just been a phenomenal quarter. You could say it's business as usual in terms of executing everything we set out to accomplish in the quarter. We, of course, increased our legacy HighPeak production volumes substantially. And if you think about going from 12,000 something on a pro forma basis to almost doubling that, we ended up integrating properties and infrastructure into our operations. We ended the quarter with six rigs running and three frac crews running, which was an increase when you think about last year's business of almost 3x the number of -- we had 1 rig running most of last year, and now we have six rigs running. We commissioned our Flat Top electrical substation project, and we're in the process of converting our Flat Top field operations to electrical power. Our sand mine partnership became operational in June, and we're integrating that into our completion operations. We increased our revolving credit facility up to $400 million, and we added multiple banks to our group syndication. I want to definitely congratulate our team in with what we were able to accomplish, increasing our drilling activity, field operations, integrating the acquisitions without having to add significantly to our personnel and our employee base and continuing to lower our lease operating expenses and on a per boe basis, lower our G&A per barrel. We are evolving on a quarterly basis as evidenced by our track record of consistent, responsible growth. I've talked about that many times.…

Thanks, Jack. Now turning to Slide 7, HighPeak differentiated margins. Again, not all boes are created equal. Slide 7 highlights HighPeak's continued unhedged peer-leading margins. Our second quarter 2022 margins are 20% above our closest peer and 38% above our peer average. HighPeak is positioned to continue our margin expansion with our LOE reduction initiatives. For example, our removal of generators, electrifying our operations and the expanded use of our recycling and company-owned SWD system. HighPeak will also benefit from the dilution of fixed cost as our production continues to increase. The main takeaway from Slide 7 is production mix matters. It would take an average peer production of 35,000 boe a day with their average margins to equate to the EBITDA that HighPeak generated in the second quarter with our margin per boe over our 25,000 boe per day on a pro forma basis. Combining our high-margin oil-weighted mix with HighPeak's differentiated growth model emphasizes the potential for shareholder value creation through levered exposure to oil price and production growth. And now turning to Slide 8. I'll provide a brief operational update on both Flat Top and Signal Peak. In Flat Top, we've added over 14,000 net acres contiguous with our block since the beginning of the year. We've already begun drilling a portion of the new acreage and are in the process of integrating the associated infrastructure with our legacy operations in the area. We commissioned our local HighPeak electrical substation in late May and are in the process of converting our field operations from rental generators over to more cost-efficient high-line electrical power. To date, we've removed 70% of those generators in Flat Top and should start to see the financial benefits show up in our LOE in the third and fourth quarters. We have also plugged…

Thanks, Mike. If you turn to Slide 11, we've talked about these things before responsible growth, great operating margins, operational foresight and maintaining flexibility. I've also had a lot of questions in terms of inventory, I had questions regarding increasing with six rigs, where are we going to turn out. Everything we do is geared towards maintaining these four principles of having great operational foresight and operating margins, and making sure we have a pristine balance sheet not going over onetime in effect debt-to-EBITDA. Our production cash flows are increasing significantly. We are very quickly approaching cash flow neutrality. And in terms of thinking about the value of the company, whatever level of production we decide to grow the company in the next 12 months, somewhere between 65,000 and 80-plus thousand barrels a day. At that point in time, we can literally go down almost 50% of budget and 50% less rigs running and still maintain in excess of $1 billion a year, possibly as high as $1.5 billion a year of operational free cash flow. We have two of the largest contiguous acreage positions in the Midland Basin with full spectrum operational synergies. We have one of the very best experienced teams to be able to execute and provide operational excellence. We will continue with our peer-leading margins. And actually, you can see from what Mike was telling you that we're improving on those margins. We are going to continue to innovatively adapt to market conditions as we plan for our future. We're going to focus on our capital and operational excellence, and lead our peers in cost structure. We're going to monitor the market and we truly as a controlled company have luxury that our competitors don't have. We are an operational differentiated growth story in that if…

[Operator Instructions] And our first question comes from the line of Nicholas Pope with Seaport.

I was hoping you guys could update on Signal Peak a little bit more. I know you talked about it in the prepared remarks, but I guess in 1Q, I think we brought on four or five, five or six wells. I guess was there any -- were any brought on in the second quarter? And also, what's kind of the longer term profile relative to kind of your expectations on that kind of basket of Signal Peak wells that came on earlier in the year?

Mike, since Nick's question is more geared to operations, I'll let you answer that.

Absolutely, we've had the two rigs running constantly down in Signal Peak. As with the rest of the company as a whole, we don't have any operational, anything other than operational DUCs. So to that point, as we've been drilling wells in Signal Peak, we've been bringing them on and we're pleased to announce that we've now got wells in the Wolfcamp D delineated all the way across both Hannathon to the West and IP legacy to the East, fully delineated across Signal Peak. We've been bringing on wells as we drill and complete them. And we've had a couple of wells come on this quarter in Signal Peak, and they come on looking very similar to the other wells that we had in the quarter prior. So again, very pleased with our Wolfcamp D performance as well as we brought on a well on the very southern portion of our Signal Peak area that is performing the same, actually a little better than some of the wells to the North. So again, extremely pleased with the Wolfcamp D. We have mentioned the Lower Spraberry and Wolfcamp A wells that we drilled kind of in the center of our Signal Peak pro forma block. Those wells were extremely excited about. They are very similar in production profile to our Lower Spraberry and Wolfcamp A at Flat Top. And as you know, the economics there are fantastic. So I think it would be reasonable to expect we're going to drill several wells out of the 18 the rest of this year that will be turned online. Some of the wells we drill this well this year will be turned online in '23. But between now and the end of the year, we will drill some additional Lower Spraberrys and [As] down in Signal Peak.

Also, Nick, I'll add a little bit to what Mike said. From a geological perspective, almost half of our acreage to the west has the Wolfcamp A and the Lower Spraberry in terms of locations. And if you refer to the appendix, you can see how many locations we have in terms of developing that area, not only in the Wolf A and the Lower Spraberry, but also considerable number of locations in the Wolf B, and we'll be delineating that further throughout the next 12 months. So it's turning out great. We're very excited about it and, of course, very pleased about increasing our acreage position in that area.

And kind of looking at a little bit at the big figure from production, the previous guidance that you had given after the Hannathon announcement, I think, was kind of mid-30s for barrels of oil production for the year. It seems like a pretty big uptick for the second half of the year. Is that -- I mean, are you all still comfortable with the targets that -- with the exit rate that I think you've given for 2022 and that full year production guidance kind of, with where production is and kind of where you all expect to be with these large number of wells coming on in the second half of the year?

Yes. We both Mike and I will visit on this particular question a little bit and respond to it. We, of course, have not changed our guidance, and we're very excited. It all depends on how much interference we have across our entire block as we're fracking additional wells. But we definitely are going to have a growth and use mid-30s in the -- by the end of the year. We think that we'll be a much better number than that. But we are excited about keep maintaining our production growth profile going forward and we'll continue with six rigs drilling to continue that growth profile. And if anything, relative to looking at the past is also going to happen in the future, doubling production in a quarter. I don't think we're going to have that kind of growth that will be very much on par with what we are projecting. Mike, go ahead.

You bet, Nick. Yes, your number of the kind of mid-30s there. That's an average for the year, and that is pro forma Hannathon with an effective date of January 1. So just keep that in mind when you're looking at that average number. Now exit numbers, and again, we closed that so the production volumes, you will start seeing basically in third and fourth quarter. So that is part of that step-up jump that you're talking about. And then also on Slide 5, you'll see a large number of wells that are kind of in progress to be turned in line. So as you go forward in time, kind of an average run rate for HighPeak running the six rigs will be roughly 30 to 33 wells a quarter. And you can see a big number of those 10 were turned in line kind of mid-July. So to answer that question, yes, as we picked up activity over the last couple of quarters going from two to four to now six rigs, yes, we will have a large number of wells coming online toward the end of the year and a large production response associated with that year end kind of exit rates are going to be very similar to what we put out as guidance. But again, your numbers are pretty -- numbers are pretty close there. And on a run rate, Jack had mentioned kind of interference from offset stimulations that we're doing. Again, as you pick up activity, obviously, you affect more wells as you pick up frac crews and start fracking additional pads. The good news is, we've been running our three frac crews for quite some time now. So that effect is immediate. When you pick the frac crew up and start fracking, it affects roughly within about a week of starting that. So our run rate going forward has that offset kind of baked into it going forward in those projected numbers.

And our next question comes from the line of Jeff Robertson with Water Tower Research.

Jack and/or Mike, just a question on the six rig base. And how does the decision around pad sizes play into how you look at production and also the effect of interference when you bring wells online?

From a macro perspective, and I'll let Mike go into more detail if he wants to, Jeff, if it doesn't answer your question. But from a macro perspective, we do not try to run the business on the basis of worrying about shutting in production. We do what's necessary relative to the reservoir and relative to proper growth, proper maintenance and proper care of the reservoir. So on any given day, as Mike saying, we might have as much as 6,000 barrels a day, with numerous offset wells shut in as we drill. But undoubtedly, drilling pads and multiple wells on a pad is much more commercial, much more much cheaper from an operational perspective. So as you can tell, we really focus on our profit margin and most of our decisions are made to protect the reservoir and not necessarily worry about production growth. We are going to have some lumpiness at times. Some quarters are not going to grow as fast. And if you look at our past, we literally had quarters that went down on production. And then all of a sudden, we get wells back online and all of a sudden, our production is much higher than what we projected. So it's not really a conscious decision other than proper maintenance of the reservoir and protecting and getting the best frac and the best [prop] in place. Mike, anything else you want to add?

You bet. No, Jack, you covered it very well. And Jeff, to your question about the fixed rigs and the frac crews, we feel very confident that 6% is the right number for HighPeak today. And the capital split that we have of four rigs running up in Flat Top and 2 down on Signal Peak seems to be, again, based on 100 different variables. But probably the biggest one for Signal Peak is we want to make sure that we have the infrastructure in place to be very efficient in moving into a development plan in mode down and signal. So running the two rigs down there is the most efficient today. Now up in Flat Top to your question about the number of wells per pad. Obviously, there's competing things on either side. We'd love to be able to do as many wells per pad as possible. But to your point earlier, timing is important. It does take time to drill and complete each additional well as you do bigger and bigger pads. So we have to be mindful of how much capital we deploy into an investment before we start receiving returns. So again, there are some competing factors, but we do feel like we've got the most optimal for where we sit today. As Jack mentioned, yes, we do have some -- every company does lumpiness in production growth. Now in the past, when your base volume was smaller and you were adding frac crews, you saw much larger percentage changes in that kind of lumpiness. Now from a forward-looking basis, our base production has grown significantly. And as I mentioned before, we have the three frac crews running. Now as you move from one pad to another, there will be small lumpiness but going forward, production will continue to increase each quarter. It may not increase by 100%. It's going to be quarters where it's a couple of thousand a day in other quarters, it's 10-plus thousand a day in a quarter. So it's going to be up and to the right. And the lumpiness going forward will hopefully not be any lumpiness down because, again, the base is so large, and we already have kind of an equilibrium amount of frac impact that will just live with those three frac crews as we go through time. So again, think up and to the right and that lumpiness will just be a little bit of flattening of that kind of up into the right curve.

And a question, moving to margins. You obviously have some of the strongest margins in the industry. Mike, can you talk more specifically about the impact that the high line moving the generators off and Flat Top could have on third quarter and fourth quarter LOE now that there -- the substation is fully operational?

Today, we've got, again, the 70% of the generators removed and on highline power. Going through third quarter into fourth quarter, we'll continue to remove the rest of them. Again, it takes a little time to run the high line power lines out to the locations. So we kind of look for that full-blown effect in the fourth quarter. Third quarter, again, you've got about 70% of it. Generators locally in the field are an extremely expensive operation. One, you have to rent the units. They don't run at a very high efficiency and then you have to supply fuel. And as everyone knows, depending on the fuel that you use, whether it's liquefied petroleum gas or it's CNG or even diesel at the worst. It's all extremely expensive. So it's an order of magnitude cheaper to go off a high line power. So if we look into third quarter into fourth quarter, you would see roughly -- and again, our volumes are increasing as well as we grow in the third and fourth quarter. But on an individual boe basis, you're looking somewhere in the $1.25 in the third quarter and something a little north of that closer to the 150-ish range in fourth quarter for total boe difference. But again, remember, as our production grows, so to decreases our fixed cost. G&A is continuing to level out at $1 or boe or less. Again, we've added these acquisitions, grown production and not added a lot of staff. And we've got a very confident staff that's able to scale. So again, we do see this margin expanding and appreciate you saying in pointing out that it is an industry-leading margin per boe. We're very proud of that and blessed to be in the right spot that provides very, very oily mix.

And turning to CapEx. You all outlined in the press release that highline power on the 1 rig will save you about $90,000 per well. And I think sand with the wet sand will save about $300,000 per well, but you also talked about servicing one crew with recycled water. Can you talk about what that will save maybe on a per well basis?

Yes, it's -- and we can do two frac crews now fairly close with just recycled fluid. And we supplement that recycled fluid with non-potable water from the Santa Rosa field. And both of those have very similar cost structures. So when you look at whether we use one or the other, we kind of look at those is virtually the same. They do offset bringing in fresh water from local farmers and folks that need that freshwater to take care of crops and/or livestock. However, you mentioned a very good point. There is a huge difference in cost between supplying your simulation needs with freshwater or what we're doing here at HighPeak with recycled and non-potable water. There's roughly a $200,000 a well difference in CapEx cost just for the stimulation fluid side. And again, as you mentioned, the sand and being able to recycle on the LOE side as well seeing those savings. So a lot of -- we look at that equation holistically. We want to attack all sides of it, a great realized price, which we've gotten again from location being close to the refinery and close to gas plants, putting the infrastructure in place such that we can acquire that great realized price. And again, with that infrastructure and looking forward and making sure we have all of these initiatives in place, reduce our CapEx and OpEx, giving us a very high recycle ratio for this HighPeak machine that's been built.

Thank you. And I'm showing no further questions at this time. And I would like to hand the conference back over to CEO, Jack Hightower for any further remarks.

Well, I just would like to say that everything is going along the way we had planned it. Our production is increasing. Our costs are going down, and we'll continue with the efficiencies that Mike just outlined with Jeff. We are very, very pleased with market conditions. Nobody likes to have a decline in production. I mean, in oil prices like we've had over the course of the last two months, but that can't stay very long. We will have times when oil prices go down. We will continue to always have volatility in the market. But on the whole, oil prices are going to continue going up into the right over the course of the next year or 1.5 years and our production is going to continue going up and to the right, and our operational efficiency is going to continue to become better and better and lower cost, lower G&A, lower lifting costs with LOE. So we're extremely pleased with what's taking place, and we just -- we appreciate the support of the shareholders. Honestly, I think we're trading at a market price below what our peers are trading for. And when you have production growth of doubling in effect in one quarter, the market ought to start recognizing that this growth is going to continue and our stock price should start reflecting that growth. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.