HighPeak Energy, Inc. (HPK) Earnings Call Transcript & Summary

At Signal Peak, so we talked about the acreage increase during 2022. The recent Hannathon acquisition added about 150 drilling locations and nearly 19,000 net acres in Signal Peak. And I guess it's worth noting that HighPeak already owned a non-operated interest in about 60% of the acquired acreage. So you obviously had a lot of knowledge about what you were buying. And I think you're running 2 rigs and 1 frac spread at Signal Peak. Like most of the wells have been drilled, I think, to the Lower Spraberry, Wolfcamp A and Wolfcamp D., what do you think you'll do over the rest of 2022 with the program as far as further delineation and development of those zones?

You bet. As Jack mentioned, the Wolfcamp D is fully delineated across our entire acreage block, including the newly acquired Hannathon acreage. Our recent announcement of our Wolfcamp A and Lower Spraberry well performance that we had on our Martin Wells kind of in the airport of our block. Again, delineated all the way from the Western side where our offset operators have some Wolfcamp A and Lower Spraberry. So it's reasonable to expect that we'll continue to drill some of those wells this year. As we mentioned as well, we have about 18 wells, we'll turn online in Signal Peak, still left in 2022. As we look forward for further delineation into the first kind of early part of 2023, you'll see us step out to the east with the Lower Spraberry and Wolfcamp A. Geologically, we feel extremely confident that we can go as much as 3/4 of the way to the east on our entire block in the Wolf A Lower Spraberry. But one of the other zones that we've mentioned in the past that we are extremely excited about is the Wolfcamp C. From our recent core analysis that we've done, there's just too much oil in place not to put a drill bit in it. So I think it's, again, reasonable to expect that we will have a well that we can talk about early next year. With production that we are extremely excited about and very optimistic that it will perform like we expect. To that point, though, as Jack mentioned, the Wolfcamp C is extremely thick and oil-rich over more than half of our Single Peak acreage. So again, with that test and delineation of the Wolf C could add an additional several hundred wells to our inventory.

You all have had -- or HighPeak has done a lot around infrastructure at flat top with oil and natural gas gathering processing agreements with electrical substation with saltwater disposal systems and wells and recycling capability. What kind of infrastructure do you need at Signal Peak as you continue to advance that development plan?

You bet it. At Signal Peak, we're still maybe a year behind where we are at flat top. The #1 in the highest priority today is upgrading the infrastructure -- SWD infrastructure that we have. We're currently integrated into the legacy Hannathon SWD system. So we are utilizing that fully today. We've got an SWD permitted in Signal Peak to drill to expand that system. So over time, you'll see us upgrade that system. We are recycling today. Again, the production volumes are smaller in Signal Peak. So again, we're not at the recycled percentage levels we are at flat top, but very quickly, we'll get there. So our goal is in 2023 to have all of the infrastructure in place in Signal Peak and have it operating as efficiently as we are up in Flat Top.

The acreage added from Hannathon essentially is just to the west of your original Signal Peak footprint. Does having that larger acreage position there give you some advantages on infrastructure, especially with respect to trying to maximize the capital efficiency of that program.

Absolutely, it does, as I mentioned, we're already connected with the SWD systems that allows us to move our production fluid throughout the field and being able to use it for recycle, which again is extremely important on the CapEx side of completing these wells. Having the larger acreage block not only helps us with operationally being able to take advantage of infrastructure and moving fluids, moving gas and oil around, but it's also a large contiguous block undedicated. So you'd mentioned the oil and gas gathering takeaway negotiations that we're in today. This is a very unique situation to have 50,000 acres virtually undedicated on the oil side and the vast majority of it as well on the gas side. Huge value potential that we are taking advantage of in our negotiations to make sure that we get not only decreased OpEx as we build up this infrastructure, decrease CapEx associated with it as well, but also making sure that we get the very best realized price kind of the trifecta for operating in these areas.

Mike or Jack, I think oil represented about 86% of HighPeak second quarter production which resulted in the company posting the best margins of the Permian Basin peers. Can you all talk about what you're doing on -- or what some of the infrastructure investments you all have made and the impact those have had on trying to preserve your margins and maybe offset some of the oilfield inflation that everyone is experiencing?

You bet. And Jeff, you know that we look at it holistically so I'll run through some of the infrastructure initiatives that we've put in place. And again, a lot of these projects are multiyear projects. So we've started to ease, we foresaw this coming, and we got out in front of this 1.5 years, 2 years ago. But at flat top, our water handling system now allows us to supply 2 frac crews with 100% recycled fluid, again, reducing our need for fresh water as well as reducing our CapEx cost. Our horizontal SWD Ellenburger wells. We've now had several of them. They are extremely efficient high-volume, large casing, reduces the costs needed and the energy needed to push this fluid into the ground, again, reducing our OpEx cost. The power substation that was energized back in late May. We've now removed over 70% of our local power generation generators that we were using, which you have to rent and fuel. So again, from an ESG standpoint, we removed a ton of emissions point sources from our field as well as reduce our OpEx cost of operating and lifting the fluid from our wells. But with that system in place, we've also been able to plug in 1 drilling rig to electrical power from the grid. That saves us roughly $90,000 to $100,000 a well, depending on diesel price. We will have our second rig plugged in by the fourth quarter and plan to continue with all the rigs we have up in Flat Top over time as transformers come available. We're also supplying one of our frac crews up in Flat Top with wet sand from our sand mine partnership that became operable about a month ago. We've ramped up to 1. We've got line of sight to running our second one by the fourth quarter. And as quickly as we can get equipment to run the wet sand at our locations, we'll continue to ramp up that usage. Wet sand being right next to your field operations reduces the truck traffic and number of trucks needed to get the sand on location as well as the cost of the sand is less than half, close to 1/3 of what we're having to pay for the sand FOB wherever it's being delivered from. Again, roughly $300,000 to $400,000 per well that we can utilize in all of these frac crews. So as we increase the number of frac crews, you'll start to see our cost structure come down on the CapEx side. Again, we're getting both the CapEx and the OpEx side of our infrastructure fully utilizing that, integrating it into our system. And again, we try to look at everything holistically so that we're able to take full advantage of it. And again, it's kind of the best of both worlds.

Mike, I'm sure with 6 rigs running now, you're putting the pieces in place for what you'll need equipment wise in 2023. Can you share with us any thoughts around what you're seeing for oilfield inflation looking out through next year?

Absolutely. And again, no one has a crystal ball kind of our guess today since we have had a very large move industry-wide and inflationary pressures. We're looking into 2023 at about 5% to 10% is what we're planning for. Whether that happens or not, and it's more or less, again, we walk through some of the initiatives that we have in place to take care of that. You had mentioned some of the equipment and things needed for our program in '23. Again, the machine is built, the rigs, the frac crews, the people. We've already purchased pumps, tanks, downhole equipment, tubing, pipe all the way out into kind of the mage in time of 2023 now, and we're working to fill in the gaps for the rest of '23. So again, we want to make sure that we have 0 hiccups, anything that can affect our efficiencies of this machine that's built and purring today. As far as cost of what we're seeing today, kind of the DC E&F cost for Flat Top today, they're running right at $600 a foot. And again, that's all in calls. Again, we talked about the wet sand usage, powering the rigs. And by fourth quarter, we're -- that's roughly $35 to $50 a foot different from the $600 that we're paying today. So look at that trending somewhere in the $550 range. Signal Peak runs about 10% higher. So kind of the goal we have internally is that 2023, if there is that 5% or 10% inflationary pressure that we can hold our CapEx numbers flat or slightly down trending into 2023.

Jack, maybe we can just circle back to the notion of creating value. You've obviously been involved with a lot of different platforms in the oil and gas industry for a lot of years. Can you talk about where -- what you think HighPeak path is over the next several years and how you think that will translate into value creation for stakeholders.

Jeff, I learned a long time ago, the macroeconomics and what's happening in the world have a great impact on value creation and timing. And so we look at the overall industry, and we then go to saying, okay, where are oil prices, what's the probability of oil prices staying at this level are increasing -- are declining from here? We know, and I've said this before in prior presentations that the industry as a whole, and it doesn't matter if it's your sovereign wealth nations, if it's the Middle East, if it's China, Russia, the U.S., we are not reinvesting but about 30% of what's necessary to maintain our present deliverability. These things happen in the marketplace looks at it in the short term. They say, well, in the short term, we went from $130 plus a barrel now down to $80 something a barrel, a very big decline in the marketplace. But at the end of the day, if you just think about looking at the amount of oil that's been coming out of storage every week, a little bit. There's been a few weeks where we've had added oil into storage, but not when you consider the decline that's coming out of the strategic petroleum reserve. Every single week, we would have not had oil added to storage. We know that there's technical problems that can happen in pulling oil out of the strategic reserve. I'm not going to sit here and be an engineer until I know exactly what's happening. But when you look at less and less oil each week coming out of the reserve and an administration that definitely wants to lower the price of fossil fuels, then all of a sudden, you start saying, okay, last week, we had a 7 million-barrel drawdown of our storage. You add the 3-point-some million barrels, almost 10 million-barrel drawdown. This is going to be a continuing thing because of lack of reinvestment. Most of the big companies are making distributions of free cash flow, they are only drilling enough to maintain. But on a worldwide basis, we are not reinvesting enough to not only not maintain, but we're going to have a decline. And this -- we see that as value creation going forward. We see it as just factual. It's not hypothetical. These projects take a lot of time, a lot of capital, a lot of money, and they even have to have a risk factor in terms of are they going to be ultimately successful or not successful. And Sheikh Ahmed Zaki Yamani [indiscernible] that in 24 years, he founded OPEC and minister of oil from Saudi Arabia, and that's the approach we take is looking at macro. So on a macro scale and with where oil prices are now, we already know the value creation is fantastic. When you have the reservoirs that we have compounded with that, and you have a 6-rig program that we're going to continue with going into the future. So HighPeak is destined to be one of the few public companies that's going to grow production, establish free cash flow and have tremendous returns and growth over the next year and 2023 is going to be a breakout year for us. And so we're extremely encouraged relative to worldwide macroeconomics with our own reservoir back home, with our ability to generate capital and the liquidity we have in maintaining a strong balance sheet. So we thank you for your support and help and we like to thank our shareholders and anybody listening also.

Jack, I think you summed up the value proposition for High Peak very well with a company with a deep inventory and a very constructive macro environment. I'd like to thank you for joining us today. Mike, thank you for your time today.

Thank you.

We appreciate it and look forward to hosting another fireside chat at some point in the not-too-distant future.

Thanks, Jeff. We appreciate it.

Thank you.