HighPeak Energy, Inc. (HPK) Earnings Call Transcript

Good day and welcome to HighPeak Energy 2026 Second Quarter Earnings Conference Call. [Operator Instructions] The call is being recorded. I would now like to turn the call over to Steven Tholen, CFO. Please go ahead.

Good morning, everyone, and welcome to HighPeak Energy's second quarter 2026 earnings call. Representing HighPeak today are President and CEO Michael Hollis, Executive Vice President [ Daniel Silver ], Senior Vice President [ Chris Munday ], and I'm Steven Tholen, the Chief Financial Officer. During today's call, we may refer to our August investor presentation and press release, which can be found on HighPeak's website. Today's call participants may make certain forward-looking statements relating to the company's financial condition, results of operations, expectations, plans, goals, assumptions, and future performance, so please refer to the cautionary information regarding forward-looking statements and related risks in the company's SEC filings, including the fact that actual results may differ materially from our expectations due to a variety of reasons, many of which are beyond our control. We will also refer to certain non-GAAP financial measures on today's call, so please see the reconciliations in the earnings release and in our August investor presentation. I will now turn the call over to our President and CEO, Michael Hollis.

Good morning, everyone, and thank you for joining us today to discuss our second quarter 2026 results. It was another strong quarter for HighPeak. Our team continued to do what they've consistently done, execute the development plan, operate efficiently, spend capital responsibly, and focus on creating long-term value for our shareholders. Production during the quarter was essentially flat with the first quarter and once again came in above the high end of our guidance range. That performance reflects the quality of our assets, and more importantly, the ability of our operations team to consistently deliver results. From a capital spending perspective, the second quarter was expected to be our highest spending quarter of the year when we built our 2026 plan. During the quarter, we also chose to pull forward some completion activity that was originally scheduled later in the year. We saw an opportunity to lock in attractive frac pricing and continue working with a simul-frac crew that has been generating meaningful efficiency gains, faster cycle times, and lower costs. When we see opportunities to improve returns and create additional value, we're going to take advantage of them. Advancing that work allowed us to do exactly that, while staying within the disciplined framework we've used throughout the year. As a result, we expect capital spending to decline meaningfully during the second half of 2026, which is consistent with our original plan and reflects the amount of development work completed during the first 6 months of the year. On the cost side, our team continued to make solid progress. Drill, complete, and equip costs remained in line with expectations, and we continue to drive operational improvements across the field. Lease operating expense performance was particularly strong with the first half unit LOE coming in approximately 13% below the midpoint of our full-year guidance. It's worth noting that these results include the impact of an expanded workover program that we intentionally pursued during the quarter. As commodity prices improved, we identified opportunities to invest modest amounts of capital into low-cost, high-return workovers that brought meaningful production back online as well as enhanced the productive capability of those wells, generating attractive economics. We'll discuss that program in more detail later because it highlights the kind of practical, return-focused decision-making that drives value at HighPeak. Financially, stronger realized oil prices combined with consistent production drove sequential growth in both adjusted EBITDA and free cash flow. We achieved those results despite absorbing approximately $55 million of net cash hedge losses during the quarter. Looking ahead, a larger percentage of our expected production remains exposed to spot pricing, which positions us to benefit if commodity prices remain supported by the ongoing uncertainty in the global supply market. Bottom line, we are pleased with where the company stands today. Our priorities have not changed. We're going to continue developing our assets safely and efficiently, allocating capital with discipline, keeping a close eye on cost, and building a stronger business quarter over quarter. That's how we've operated for multiple years now, and that's how we'll continue creating value for our shareholders. Turning to slide 5 and 6 of our investor presentation. These slides highlight the progress we've made against our 2026 development plan throughout the first half of the year. The operations team continues to execute at a high level across the board. On the drilling side, we kept driving efficiencies and drilled 17 of our planned 29 wells during the first 6 months of the year. On the completion side, we completed 24 of our planned 33 wells for the year, reflecting the decision to pull forward a portion of our second half completion activity and take advantage of favorable market conditions. As we've discussed, the accelerated completion schedule allowed us to capitalize on attractive service costs and continue working with a high-performing simul-frac crew that has consistently delivered strong results. Despite some additional fully expected frac-impacted oil volumes, production was supported in the quarter by the success of our workover program and the associated oil volumes from that work. We've already turned 20 wells to sales this year, which puts us in a strong position to achieve our full-year target of 37 turn-in-lines. When we built our 2026 development plan, we expected roughly 60% of the year's capital to be spent in the first half. Because we elected to accelerate a portion of our completion activity, first half spending ultimately moved into the mid to upper 60% range of our annual budget. Now that wasn't unplanned spending, it was capital deployed against productive work that generated value and advanced our development program ahead of schedule. The benefit of that strategy is that a significant amount of this year's development work is now behind us. We've put ourselves in a position to maintain strong production levels while materially reducing capital spending in the second half of the year. That's exactly the kind of setup we like. We get the benefit of the work completed earlier in the year, lower capital requirements going forward, and the opportunity to generate stronger free cash flow through the balance of 2026. Most importantly, we're accomplishing that while staying disciplined, executing the plan, and continuing to focus on long-term value creation for our shareholders. Turning to the base production optimization. One of the best examples of value creation during the quarter was the successful work of our workover program. As commodity prices improved, we saw an opportunity to put additional capital to work in parts of the business where the returns were compelling and the risk was low. The team went well by well across the asset base and identified opportunities where a relatively small investment could bring meaningful production back online as well as enhance the productive capability of those wells. Again, all while generating attractive economics. We like these projects because they're straightforward, capital efficient, and pay back quickly. In many cases, we're investing a fraction of what it costs to drill a new well, while getting production back online in a much shorter timeframe. From a returns perspective, these are some of the highest value opportunities we have available. The workover program is not a replacement for our development program, it's a complement to it. We're continuing to develop our inventory, but we're also making sure we maximize the value of every asset that we already own. That's just good wellfield management. At HighPeak, we've always believed capital should go where it can generate the strongest returns, whether that's drilling a new well, completing a DUC, or putting capital into a workover, we're going to evaluate every opportunity the same way. The goal is simple, invest wisely, increase production, generate more free cash flow, and create long-term value. This quarter's workover results are another example of our team's operational focus and disciplined approach to capital allocation. We identified an opportunity, moved quickly to capture it, and delivered strong return on that investment. Now, looking ahead to the rest of 2026, we're in a good position. A large portion of our expected oil production is exposed to market pricing, which gives us a greater participation if commodity prices remain strong. At the same time, we're not in the business of speculating. We're in the business of generating cash flow and protecting returns. That's why we continue to maintain a solid hedge position with the majority of our oil hedges sitting in the mid $60 per barrel range. These hedges provide meaningful downside protection while still allowing us to benefit from a stronger price environment. We take a practical and disciplined approach to risk management. During the quarter, we added a number of positions designed to reduce volatility and protect cash flow where we saw the opportunity to do so at attractive levels. Specifically, we added NYMEX WTI roll swaps to manage calendar spread exposure and Waha basis swaps to help reduce our exposure to fluctuations in West Texas natural gas pricing. The objective is pretty simple. We want to protect the balance sheet, preserve cash flow, and maintain the financial flexibility to continue executing our development plan regardless of where commodity prices move in the near term. We believe that is the right approach for our shareholders. We want meaningful upside when markets are strong, but we also want to make sure that we're protecting the business during periods of volatility. This approach positions HighPeak to continue generating value for shareholders in any market environment. Turning to our first half 2026 operational and financial scorecard. I think this slide tells a pretty simple story. Our team went out and executed. Across the board, we either met or exceeded the goals we set for ourselves while continuing to stay disciplined on cost, capital, and operations. Production averaged 45,500 BOEs per day during the first 6 months of the year, exceeding the high end of our guidance range. That's a direct result of strong well performance, disciplined execution of our development program, and the ongoing work our team is doing to maximize the value of our existing production base. On the cost side, the results were equally strong. Unit LOE averaged $7.56 per BOE, which came in approximately 13% below our guide level. That's not the result of a one-time event or simply getting lucky. It's the result of years of work focused on building more efficient operations through infrastructure improvements, electrification, fluid level optimization, and a culture that's constantly looking for ways to do things better. Most importantly, these cost savings are proving to be durable and sustainable. Our development program also continued to perform exactly as planned. During the first half, again we drilled 17 operated wells, completed 24, and turned 20 wells to sales. As we discussed earlier, we made the decision to accelerate a portion of the completion activity into the second quarter to capture favorable service costs. That decision allowed us to get more work done sooner, improve capital efficiency, and position the company for significantly lower capital spending during the second half of the year. From a capital standpoint, we invested $185.9 million during the first 6 months of 2026. Even with the accelerated completion program, we remained fully aligned with our full-year development budget. We didn't spend more money. We simply chose to spend a portion of it earlier to capture efficiencies and create additional value. The combination of strong production, lower operating costs, and disciplined capital execution generated approximately $281 million of EBITDAX during the first half. Those results highlight the quality of our asset base, the strength of our operating model, and the cash-generating capability of the business. At the end of the day, this is exactly the kind of performance we strive for. We delivered production above expectations, kept costs under control, executed the development plan, and maintained capital discipline. More importantly, we positioned the company to generate stronger free cash flow during the second half of the year as capital spending comes down while production remains strong. That's the formula we're focused on. Consistent execution, efficient operations, disciplined capital allocation, and creating long-term value. As we wrap up today's prepared remarks, I leave you with a few final thoughts. HighPeak is exactly where we want to be. We built this year's plan with the understanding that commodity prices would remain volatile, and we managed the business accordingly. The results we're delivering today reflect the strategy that was designed to generate strong returns and free cash flow across a range of market conditions, not just in the perfect environment. Our maintenance mode development program is doing exactly what it was intended to do. We're maintaining strong production, spending substantially less capital than we have in prior years, and generating increasing amounts of free cash flow. Just as important, we preserve flexibility. If the market conditions change, we have the ability to adapt while continuing to focus on long-term value creation. We can't control commodity prices, interest rates, or geopolitical events, but we can control how we operate the business, and that's where our focus remains. We will continue allocating capital with discipline, protecting the balance sheet, driving operational efficiencies, and generating substantial free cash flow. We've always believed that successful companies are built by making sound decisions quarter after quarter and year after year. And that's exactly what we're doing at HighPeak today. We have a high-quality asset base and a proven team and a development inventory that gives us confidence in the future of this company. Most importantly, we're committed to creating long-term value for the people who have invested alongside us. Our strategy is straightforward. Operate efficiently, spend capital wisely, and generate strong returns and let the results speak for themselves. Before we close, I want to thank the employees. The results we discussed today are a direct reflection of their hard work, commitment, and focus on operating safely and efficiently every day. I'd also like to thank our shareholders for their continued support and confidence in HighPeak. We don't take that trust lightly and we are committed to earning it every day. With that, operator, we're ready to open the call for questions.

[Operator Instructions] Our first question is coming from the line of Jeff Robertson of Water Tower Research. Please go ahead.

Mike, can you talk a little bit about the impact on second quarter production from accelerating some of the completions into the quarter and what you would anticipate for the rest of the year just based on your schedule of additional wells to turn-in-lines?

Absolutely, Jeff. No, great question. Obviously, with a smaller production base and as we move activity around, more specifically on the completion side of the business, you do affect existing production by stimulating wells in a certain area, kind of refer to that as water out or frac-impacted oil volumes. So as you can imagine, second quarter was going to be a more active, completion-intense quarter by design, and then we pulled 4 additional completions into that quarter. So to your point, we watered out or frac-impacted even more oil than we had initially anticipated. When you look at our kind of maintenance mode program, you will have some lumpiness as we move that frac crew around and have breaks in the schedule. You'll see, if you were looking at daily volumes, you'll see some movement, but again, we guide on a yearly guide, and when you look at the first 6 months of the year, you know, we are above that guided range pretty significantly. And there's a lot of pieces that go into that. The actual well performance that we're seeing from our development program. And we talked a little earlier about the workover program. But the read-through there is that the budget is set. We just pulled forward some of that opportunity because we had a condition where we had a good frac crew at a good price in a good market, and they were very efficient and effective. So we went ahead and let them do a little more work. But for the whole year, what that read-through is, obviously less capital would be spent. You know, the drilling rig toggle was a little tougher, right, because it's 1 rig, it's either an on or an off. So the plan is to continue to drill with that 1 rig throughout the entire year. And again, you can kind of see in the first 6 months, we drilled 1 additional well above what we had planned for the year, just because of the drilling efficiencies throughout the year. So we would expect something similar for the second half of the year, maybe 1 additional well drilled. But the drilling portion of capital spend is fairly small, I think somewhere in the 30% range of a well's AFE. Now on the completion side, the read-through there is we will do the budgeted amount of completions throughout the year. We just performed 69% of that work in the first half of the year. So think less water out volumes as you go throughout the rest of the year, not like what we've had in the first half, as well as some impact from the workover program that we have. So we think volumes will stay strong throughout the last half of the year. And hopefully commodity prices are supportive as well, but at any reasonable oil price, we will generate significant free cash flow throughout the remainder of 2026.

Mike, I know it's way too early to talk about, or it's too early to talk about 2027 guidance, but can you just talk about the cadence in the second half of 2026 and maybe any stress spilling over into the first part of 2027? And will the setup for next year from a production standpoint be somewhat similar to what you all were thinking when you came into 2026?

Yes. Absolutely, Jeff. So the original plan was to have somewhere in the 10-plus DUCs move into 2027 out of this year's program. Being able to drill 2 additional wells throughout the year, just because the rig is that much more efficient, just means 2 additional DUCs move into 2027. The fact that we are only going to do the set number of completions we had in the budget, again, 2027 is set up to look a lot like 2026 as far as capital requirements as well as production volumes.

Just turning to the balance sheet, Mike. You had $146 million of cash at the end of the quarter, and scheduled amortization of the term loan at $30 million per quarter starts at the end of the third quarter. Could you talk a little bit about how you're thinking of liquidity on the balance sheet and paying down or amortizing the term loan and the free cash flow build? Would it be reasonable to expect that you amortize the term loan to the extent you can faster than the $30 million per quarter?