Development Program Exposes Shareholders to Significant Upside

Key Points

  • HighPeak Energy (HPK) is a Midland Basin-focused independent oil and gas exploration and production company that owns approximately 51,000 net acres in the eastern portion of Howard County, Texas. The company operates approximately 93% of its acreage and owns average 84% working interest in the operated acreage.  The position consists of two contiguous blocks giving HighPeak the opportunity to maximize capital efficiency with long-lateral horizontal well development.
  • The Flat Top area, which accounts for ~33,000 net acres in northeast Howard County, has been substantially de-risked in the Wolfcamp A and Lower Spraberry zones. 
  • Management estimates that Flat Top can hold about 320 Wolfcamp A and Lower Spraberry locations on  880-foot spacing.  Based on analogous landing zones in more developed parts of the play, HighPeak estimates that 12,500-foot laterals in the Wolfcamp A and Lower Spraberry can achieve single-well IRRs of 120% and 71%, respectively, at $50/bbl oil.
  • HighPeak has laid out a one-rig development plan for 2021 aimed at growing production from about 6 MBOE/d in early February to 12 to 14 MBOE/d at year-end 2021 with a full-year average of 10.5 to 12 MBOE/d. 
  • HighPeak’s 2021 estimated production is around 90% oil, which could translate into peer-leading production netbacks.   
  • Management plans to maintain conservative leverage levels targeting debt/EBITDAX below 1.0x.

Our Insights

The Opportunities

HighPeak owns approximately 51,000 net acres in the northern Midland Basin in Howard County, Texas that could position the company for rapid volume growth.  Management has laid out a $135 to $150 million capital program for 2021 that aims to generate average daily production of 10.5 to 12.0 MBOE/d for the full year, including a December average of 12.0 to 14.0 MBOE/d.  Production was about 7.8 MBOE/d in mid-March. 

Approximately 90% of 2021 development capital will be spent on Wolfcamp A and Lower Spraberry development at the Flat Top area.   Management estimates that based on analogous data from wells drilled in the area, Flat Top could hold approximately 320 horizontal locatons on 880-foot spacing targeting those two primary targets combined.  Based on $50.00/bbl oil, HighPeak’s planned 12,500-foot horizontal wells could yield IRRs of 120% in the Wolfcamp A and 71% in the Lower Spraberry.

HighPeak has drilled two wells in the Signal Peak area that are scheduled to be completed during 2Q21.  One is a 7,500-foot test in the Wolfcamp C and one is a 12,500-foot test in the Wolfcamp D and follows positive results from offset operators in the Wolfcamp D.  Performance from these two “upside” zones will help to de-risk Signal Peak.

HighPeak’s development plan could translate into rapid cash flow growth.  Cash flow at current oil prices could allow the company to internally fund a one-rig program in 2021.  Depending on the pricing outlook and results, management could increase the development program to two-rig program that could be funded with cash flow and the current $50-million borrowing base.  Management aims to maintain a leverage ratio below 1.0x EBITDAX.

The Risks

The development program is subject to reservoir, execution, and economic risks that could impact the ability to convert potential value into realizable value.  Volatile oil prices and costs could impact the pace of HighPeak’s development program.

The Wolfcamp A and Lower Spraberry are primary reservoir targets in Howard County. Management’s expectations of the reservoir quality of both zones across its acreage are based on its detailed analysis of the geology and well performance coupled with analogous data from industry activity in the area.  The company’s planned development activity will help to confirm management’s assumptions.