To The Moon

Summary

• HighPeak Energy sold off due to trimming their production forecast. As with many companies, this was an overreaction.

• HPK has very strong fundamentals, including an 85% oil cut in their core area that enables 12,000' laterals.

• We rate the company as a Strong Buy maintaining our call last year.

Young man refueling his vehicle while looking worried at the high gas prices.

Introduction

I don't do this enough-revisit a former pick to see how it's doing. Back in October, I picked HighPeak Energy, Inc. (NASDAQ:HPK) as a strong buy. I am pretty conservative and rarely rate a company that highly. I couldn't find a fault in their business model, and with oil prices in the $90's then, I made a bullish forecast based on their EV/EBITDA metrics at the time. Quoting myself from the article:

Using the EV/EBITDA metric, to maintain the same 5X multiple, the shares should rerate to $90-100. Obviously no one is forecasting this, but it makes the analyst projections of up to $50 per share seem fairly achievable, and would put the multiple at a very competitive ~3X. That would also put their P/FB down in the $75K per barrel range and be more consistent with other companies or at a slight advantage to many.

Original article.

HPK share price chart

As you can see from the price chart above, I wasn't entirely wrong. From the $20 level when the article came out, HighPeak Energy, Inc. rallied to $30 early this year. That's 50% in three months, and I'll put one in the Dubbayah column for that call.

Come the Implosion of March, HPK stock sank back toward $20, and currently stands at $23, after a slight rally last week. Some of the company's selloff is self-inflicted, with the drop of two rigs from its H-1 program. Cutting these rigs will take its daily average output for the year into a range of 47-53K BOEPD, and 70-76K BOEPD in 2024. Capex will drop commensurately to a max $1.2 bn this year, and a max of $930 mm in 2024. The company is also reviewing strategic options to include the possible sale of the company.

I am again calling a strong buy on HighPeak Energy, Inc. at the current level, and will discuss why in this article.

The thesis for HighPeak

I covered this fairly extensively in the original article, so will give a bullet point version here. Please give the original a read if you'd like more color.

• Rapid counter-cycle growth (Drill like mad when prices are high, slow down and cut capex when prices are weaker)

• Blocky acreage allowing 12,000' average laterals

• High oil-cut-85%+ from top tier rock

• Unhedged high cash margin-$65-$70 per bbl/low LOE costs

• Multi-year drilling inventory-15 years at current development rates

• Comprehensive plan to lower unit costs and ESG footprint-water recycling, wet, local sand, central tank batteries, field electrification

• Possible buyout target.*

Honestly, it's sort of like Jack Hightower read one of my Occidental Petroleum Corporation (OXY) articles in 2019, and decided to model his company along those lines.

HighPeak Exit Production Rate for 2022

From around 20K BOEPD at the beginning of the year, HPK doubled output to 39K BOEPD, with proved reserves rising to 123 mmboe, a nearly 92% increase YoY. This is forecast to rise again in 2023 to ~62K BOEPD, slightly more than 50% YoY. Folks, this is 2017 style growth funded with cash flow, nearly. (We'll come back to cash flow breakeven.)

HPK Overview

Note the operators whose acreage surrounds HPK's. Any one of these companies would have their results improved with the blocky position HPK holds. It's just a matter of time in my view.

Proving up the dirt

Another thing that benefits the HighPeak Energy, Inc. plan is the advantageous locations at Flat Top and Signal Peak. As noted in the slide below, HPK wells are performing at higher levels than wells in the western part of Howard and Borden counties. These wells lie in the deeper section of the Midland sub-basin and have more thermal maturity and higher TOC than those to the west.

HPK drilling results

Estimated Ultimate Recoveries, or EURs, run about 10% higher in the east and should. The slide above notes the ratio of wells with EURs above 500K. The numerical advantage to the east is only 29 wells, but the number of wells and the increase in EUR - probably due to lateral length - as you go east provides the 10% advantage being seen. Jack Hightower, CEO, comments in this regard-

HighPeak is outperforming its peers, its peers in the [indiscernible] county. We now have over wells drilled [indiscernible] and our results are over 500,000 barrel recoverable compared to 471 of our peers in the West. We're almost 10% higher on EUR and almost 10% higher on economics, not counting consideration of having a higher oil cut.

Source.

Cash peak still ahead

Here is the outcome of this model. In 2023, at the previously forecast 64% reinvestment rate, HPK expected to go cash flow positive in the second half of this year. Applying a factor to the numbers in the slide below to reflect the curtailment in drilling and capex, we get $1.228 bn of EBITDAX forecast for full year 2023. Debt can be quickly wiped away. This year should net ~$900 mm, and in 2024, ~$1.2 bn at $80 WTI. So barely cash positive in 2024, perhaps leaning toward the YE, if they stick to the reduced plan. If we get back into the $90's, on WTI, I think they will restore the capex and go back to their original "Drill Baby, Drill," plan.

HPK Growth Story

Insider trading

Senior execs have been making regular open market buys through the first of the year. That's often interpreted as a sign of confidence in the company. It should be noted that many of these buys were at substantially higher prices that the stock trades at today.

Insider trading

Source.

Possible sale of the company

I expect this notion came as a result of the decline in WTI prices throwing them off their growth trajectory. Nothing is certain yet, and HPK could put these rigs back to work if oil prices improve. Here is Jack Hightower discussing why a sale might be in investors best interests-

That is a major component of our position. We've developed this not to be critical of private equity but to be in consideration of building something long term for the future as a major company development that would make this an attractive asset to give optionality for a potential purchaser where they can control their destiny because the profit margins are so great here. They literally could move drilling rigs into this area and be able to improve on and improve their production and return on investment by focusing some of their capital in this area and growing it if they wanted to do so. They would have that luxury to do that.

Source.

Jack is not a gifted orator, but he managed to convey many of the companies that surround HPK acreage at Flat Top, and Signal Peak might do well to take a run at them.

My view the company is not quite ready to be sold. With 1P reserves of just 62 mm bbls, the PV-10 of the company is only $2.3 bn, that's slightly less than the company trades at now.

Risks to the thesis

It's hard to think of a shale player with more going for them right now, than HighPeak Energy, Inc. Still, as reactive to oil prices as they are, an external move to suppress oil prices - more releases from the SPR, the economy tanking, in particular - could derail the thesis.

Your takeaway

This slide shows HighPeak Energy, Inc.'s adjusted plans for the next couple of years. The company is currently trading at an EV/EBITDA multiple of 3X and a flowing barrel price of $82K per barrel. Quite decent by one metric, a bit high on the other. By the end of this year, at current valuations those multiples will drop nicely, to 2.6X and $62K per flowing barrel using average daily output of 53K BOEPD in the calculation - not terrific, but in the black at today's WTI price.

2023/2024 Development plan

2023/2024 Development plan (HPK)

So what should the price of HighPeak Energy, Inc. be? The company is under-covered by the analyst community, but the two who do rank it as a buy and have a median price target of $43.38 on the company. Nearly a double from today's price and justification for taking a position. At that $43.38 per share, HighPeak Energy, Inc. would trade at only 2.72 this year's EBITDAX, and using the YE 2023 exit production rate of 66K BOEPD, $63K per barrel. Both seem reasonable to me.

For YE 2024 and a production rate of 75K BOEPD, they should be back on target and a stock price of $60 justified with that 2.62 EBITDAX multiple. Multiples might also expand at the company hits it targets, adding still further to the value of an entry point at the present price.

All told, I think HighPeak Energy, Inc. makes a solid case at present prices, particularly as the market seems to be turning in its favor. I wrote most of this article before the OPEC bunch announced they were going to cut a million barrels a day. The good sheikhs are giving themselves a raise, and obviously everything "Earl" is going to rally hard tomorrow. The question is this a "paper cut" like the last one or are they really going to cut back production. We'll know pretty soon.

As to someone taking out HPK, it will surprise me if the company is sold before next year, as I just don't think the incentives are there for Hightower and his bunch. If we get a hard and sustained rally in oil though, those dynamics might shift.

Investors with a modest risk tolerance may find the company attractive at current prices. HighPeak Energy stock again gets a Strong Buy from me based on their fundamentals, and my view of the oil market.

$Highpeak Energy Acquisition Corp(HPK)$

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