10-Q: HighPeak Energy Reports Q1 2024 Results: Production Up, Net Income Down Amidst Derivative Losses

HighPeak Energy's Q1 2024 saw a significant increase in production volumes but a decrease in net income due to derivative losses and increased expenses.

Summary

• HighPeak Energy reported a net income of $6.4 million for the first quarter of 2024, a significant decrease compared to $50.3 million in the same period last year.
• The company experienced a 34% increase in average daily sales volumes, reaching 49,729 Boepd, driven by successful horizontal drilling programs.
• Despite increased production, the company's net income was negatively impacted by a $53.0 million loss on derivative instruments, a $49.7 million increase in depletion, depreciation, and amortization (DD&A) expense, and a $16.7 million increase in interest expense.
• The company's weighted average realized crude oil price was $77.65 per barrel, while NGL and natural gas prices were $24.94 per barrel and $1.33 per Mcf, respectively.
• Cash provided by operating activities was $171.4 million, compared to $190.0 million in the first quarter of 2023.
• The company's capital expenditures for the quarter were $147.8 million, excluding acquisitions.
• HighPeak Energy repurchased 565,540 shares of its common stock at an average cost of $15.50 per share for a total of approximately $8.8 million, excluding any potential excise taxes.

Sentiment

Score: 4

Explanation: The document presents mixed results with strong production growth offset by significant losses from derivatives and increased expenses. The overall tone is cautious due to the volatile market conditions and the company's strategic review process.

Positives

• The company achieved a 34% increase in average daily sales volumes, demonstrating strong operational performance.
• Crude oil prices increased slightly to $77.65 per barrel compared to $76.07 in the same period last year.
• The company's interest income increased by $2.4 million due to increased cash on hand.
• Exploration and abandonment expenses decreased by $1.7 million primarily due to less abandoned leasehold costs.
• The company successfully completed and placed on production twelve (12) gross (12.0 net) horizontal wells, all in the Flat Top area.

Negatives

• The company experienced a significant $53.0 million loss on derivative instruments.
• Net income decreased substantially from $50.3 million to $6.4 million year-over-year.
• DD&A expense increased by $49.7 million due to higher production and inflationary pressures.
• Interest expense increased by $16.7 million due to higher debt and interest rates.
• Cash provided by operating activities decreased by $18.6 million compared to the same period last year.
• NGL and natural gas prices decreased by 8% and 40% respectively.

Risks

• The company's financial performance is heavily dependent on volatile commodity prices.
• The company is exposed to interest rate risk on its variable rate debt.
• The company faces credit risk from counterparties and customers.
• The company's strategic alternatives review process may not result in any transaction or strategic change.
• The company is subject to risks related to the ongoing war between Russia and Ukraine, the Israel-Hamas conflict and the Israel-Iran conflict.
• The company is subject to risks related to global supply chain disruptions and cost inflation.

Future Outlook

The company expects to maintain flexibility in its capital plan and will continue to evaluate drilling and completion activity on an economic basis, with future activity levels assessed monthly. The company's 2024 capital budget is expected to be in the range of approximately $450 to $525 million for drilling, completion, facilities and equipping crude oil wells plus $50 to $60 million for field infrastructure buildout and other costs.

Management Comments

• The company is focused on maintaining its ability to sustain strong operational performance and financial stability while maximizing returns, improving leverage metrics, and increasing the value of its Midland Basin assets.
• The company will continue to evaluate drilling and completion activity on an economic basis, with future activity levels assessed monthly.

Industry Context

The report highlights the volatility in the crude oil and natural gas industry, with prices subject to unpredictable fluctuations. The company's performance is influenced by global supply and demand dynamics, geopolitical events, and OPEC production decisions. The company is also facing inflationary pressures and supply chain disruptions.

Comparison to Industry Standards

• The company's production growth of 34% is a strong result compared to many peers in the industry, indicating successful drilling programs.
• The company's net income decrease due to derivative losses is a common risk in the industry, especially for companies that hedge their production.
• The company's DD&A expense increase is in line with the industry trend of rising capital costs due to inflation.
• The company's interest expense increase is a result of higher debt levels and interest rates, which is a common challenge for many companies in the industry.
• The company's hedging strategy is similar to many other oil and gas companies, but the specific contracts and their impact on the company's financials are unique to HighPeak Energy.
• The company's stock repurchase program is a common practice in the industry to return value to shareholders.

Related Party Transactions

• In connection with the Companys underwritten equity offering in July 2023, certain of the Companys existing stockholders, John Paul DeJoria Family Trust and Jack Hightower, the Companys Chairman and Chief Executive Officer, and entities and individuals associated with them, purchased an aggregate of approximately 10 million shares of Common Stock in the offering at the public offering price per share.

Stakeholder Impact

• Shareholders are impacted by the decrease in net income and the stock repurchase program.
• Employees are impacted by the company's performance and the stock-based compensation plans.
• Customers are impacted by the company's production volumes and pricing.
• Creditors are impacted by the company's debt levels and financial performance.
• Suppliers are impacted by the company's capital expenditures and operational activities.

Next Steps

• The company will continue to evaluate drilling and completion activity on an economic basis, with future activity levels assessed monthly.
• The company will continue to monitor the impact of global supply and demand imbalances, geopolitical events, and OPEC production decisions.
• The company will continue to evaluate strategic alternatives to maximize shareholder value.

Key Dates

Keywords

HighPeak Energy, Permian Basin, Crude Oil, Natural Gas, Production, Derivatives, Financial Results, Exploration, Drilling, Commodity Prices