HighPeak Energy, Inc.
Q1 2021 Earnings Call Transcript

Published: 18 May 2021

[Operator:]

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. 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.

[Steven Tholen:]

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.

[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.

[Michael Hollis:]

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.

[Jack Hightower:]

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.

[Operator:]

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

[Jeff Robertson:]

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?

[Jack Hightower:]

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…

[Jeff Robertson:]

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?

[Michael Hollis:]

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.

[Jeff Robertson:]

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?

[Jack Hightower:]

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.

[Jeff Robertson:]

Right. Thank you very much.

[Jack Hightower:]

You bet.

[Operator:]

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

[Carter Dunlap:]

I'm sorry. Is that better?

[Operator:]

Yes. There we go.

[Carter Dunlap:]

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?

[Jack Hightower:]

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.

[Carter Dunlap:]

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.

[Jack Hightower:]

Okay, thank you.

[Steven Tholen:]

Thank you.

[Operator:]

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.