HighPeak Energy(HPK) - 2021 Q4 - Annual Report

Part I Items 1 and 2. Business and Properties HighPeak Energy is an independent oil and gas company focused on Midland Basin reserves, operating two main land positions with a four-rig drilling program, subject to extensive competition and regulation - The company's assets are primarily located in Howard County, Texas, within the Midland Basin, consisting of two main contiguous areas: Flat Top (northern) and Signal Peak (southern)[33] Acreage and Operational Overview (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Gross Acres | 82,023 | | Net Acres | 62,603 | | Average Working Interest | ~76% | | Operated Net Acreage | ~90% | | Held by Production | ~44% | - HighPeak Energy's development strategy focuses on horizontal drilling in the Wolfcamp A and Lower Spraberry formations, utilizing multi-well pads to enhance efficiency and returns[35] - As of year-end 2021, the company was operating with four drilling rigs and two frac crews to develop its properties[42] - For the year ended December 31, 2021, Lion Oil Trading and Transportation, LLC accounted for 94% of the company's revenues, representing a significant customer concentration[77] Properties and Reserves The company's Midland Basin properties saw substantial growth in proved reserves to 64,213 MBoe in 2021, with PV-10 value surging to $1.34 billion due to increased drilling and higher commodity prices Proved Reserve Summary | As of Date | Proved Total (MBoe) | % Crude Oil & NGL | % Developed | | :--- | :--- | :--- | :--- | | December 31, 2021 | 64,213 | 92% | 45% | | December 31, 2020 | 22,515 | 94% | 46% | Proved Undeveloped Reserves (PUDs) Development | Period | PUDs at Start (MBoe) | Extensions & Discoveries (MBoe) | Conversions to Proved Developed (MBoe) | PUDs at End (MBoe) | | :--- | :--- | :--- | :--- | :--- | | FY 2021 | 12,233 | 26,806 | (3,186) | 35,628 | PV-10 and Standardized Measure (in thousands) | As of December 31 | PV-10 (Present Value of Estimated Future Net Cash Flows, in thousands) | Standardized Measure (in thousands) | | :--- | :--- | :--- | | 2021 | $1,338,193 | $1,118,809 | | 2020 | $235,490 | $222,192 | Production and Acreage In 2021, average net daily sales volumes significantly increased to 9,304 Boepd, with the company holding 62,603 net acres and planning to retain expiring undeveloped acreage through drilling Average Net Daily Sales Volumes | Year | Average Net Daily Sales (Boepd) | | :--- | :--- | | 2021 | 9,304 | | 2020 | 1,925 | Acreage Summary (as of Dec 31, 2021) | Acreage Type | Gross Acres | Net Acres | | :--- | :--- | :--- | | Developed | 38,282 | 25,600 | | Undeveloped | 43,741 | 37,003 | | Total | 82,023 | 62,603 | - The company has 21,155 net undeveloped acres expiring in 2022, which it intends to retain through drilling, completions, and lease renewals/extensions[68] Regulation of the Crude Oil and Natural Gas Industry Operations are subject to extensive federal, state, and local regulations covering production, environmental protection, and safety, with evolving rules on hydraulic fracturing and emissions posing cost and operational risks - Operations are substantially affected by federal, state, and local laws governing drilling permits, well spacing, surface use, water disposal, and well abandonment[88][89] - The company is subject to stringent environmental laws such as CERCLA (Superfund), RCRA, the Clean Water Act, and the Clean Air Act, which impose significant compliance costs and potential liabilities for pollution[105][108][111][117] - Federal and state agencies are increasingly regulating methane emissions from oil and gas operations. The EPA has proposed new rules (OOOOb and OOOOc) that would establish stricter standards for both new and existing sources[121] - State regulators, including the Texas Railroad Commission (TRRC), have imposed new requirements and restrictions on wastewater disposal wells in response to concerns about induced seismicity, which could impact the company's operations[115][248] Item 1A. Risk Factors The company faces significant risks from volatile commodity prices, capital-intensive operations, uncertain reserve estimates, concentrated asset base, evolving environmental regulations, and substantial influence by the HighPeak Group - The business is highly sensitive to volatile commodity prices. Sustained low prices could adversely affect financial condition, results of operations, and the ability to fund capital expenditures[144][148] - Development projects require substantial capital. The 2022 capital expenditure plan of approximately $750-$800 million is dependent on commodity prices and the availability of financing[144][153] - Reserve estimates are based on numerous assumptions that may prove inaccurate, potentially affecting the quantities and value of reserves[147][196] - The company's assets are geographically concentrated in the northeastern Midland Basin, making it vulnerable to regional risks such as transportation constraints, regulatory changes, and localized market conditions[208] - Increasing attention to ESG matters and climate change presents regulatory, political, litigation, and financial risks, which could increase compliance costs and restrict access to capital[219][237] - The HighPeak Group owns approximately 84% of the company's common stock, giving it significant influence over corporate actions. The company qualifies as a "controlled company" under Nasdaq rules, exempting it from certain corporate governance requirements[259][265] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[299] Item 3. Legal Proceedings The company is not party to any material legal proceedings outside the ordinary course of business - The company states that it is not party to lawsuits that would have a material adverse effect on its assets, other than those arising in the ordinary course of business[140][300] Item 4. Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[301] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities HighPeak Energy's common stock and warrants trade on Nasdaq, with CVRs on OTC, and the company initiated quarterly cash dividends in 2021 - The company's common stock and warrants are listed on Nasdaq under the symbols "HPK" and "HPKEW." The CVRs are quoted on the OTC market under "HPKER"[303] - The company initiated a quarterly cash dividend of $0.025 per share in the third quarter of 2021 and paid a special dividend of $0.075 per share in July 2021[304] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, financial performance dramatically improved with $55.6 million net income, driven by increased sales volumes and commodity prices, supporting a $750-$800 million 2022 capital budget funded by cash flow and debt - The company's 2022 capital budget is projected to be between $715 million and $760 million for drilling and completions, plus $35 million to $40 million for infrastructure, assuming a four-rig program[353] - Net income attributable to common stockholders was $55.6 million ($0.54 per diluted share) for 2021, compared to a combined net loss of $101.5 million for 2020[319] - The improved financial results were driven by a 383% increase in average daily sales volumes (to 9,304 Boepd) and an 86% increase in average realized commodity prices per Boe[319][322] - In February 2022, the company issued $225.0 million of 10.00% senior unsecured notes due 2024 to pay down its revolving credit facility and fund its 2022 capital budget[355] Results of Operations Revenues surged to $220.1 million in 2021 due to higher production and prices, while per-unit operating costs decreased, despite a $26.7 million derivative loss Revenue and Production Volume Comparison | Metric | 2021 | 2020 (Combined) | | :--- | :--- | :--- | | Total Revenues | $220.1M | $24.6M | | Avg. Daily Sales (Boe/d) | 9,304 | 1,925 | | Avg. Realized Price ($/Boe) | $64.82 | $34.94 | Key Operating Costs per Boe | Expense ($/Boe) | 2021 | 2020 (Combined) | | :--- | :--- | :--- | | Lease Operating Expense | $7.38 | $10.68 | | Production & Ad Valorem Taxes | $3.16 | $2.06 | | DD&A Expense | $19.20 | $23.08 | | General & Administrative | $2.62 | $10.68 | - The company recorded a net derivative loss of $26.7 million in 2021, consisting of $11.3 million in cash settlement payments and a $15.4 million non-cash mark-to-market loss[348] Liquidity and Capital Resources Primary liquidity sources include $147.0 million cash from operations, a revolving credit facility, and capital markets, with a $225 million senior notes issuance in 2022 to fund the capital budget Cash Flow Summary (in thousands) | Cash Flow Activity | 2021 (in thousands) | 2020 (Combined, in thousands) | | :--- | :--- | :--- | | Operating Activities | $147,015 | $1,311 | | Investing Activities | $(250,371) | $(139,825) | | Financing Activities | $118,673 | $135,355 | - As of December 31, 2021, the company had $100.0 million outstanding on its Revolving Credit Facility and $93.1 million available[355] EBITDAX Reconciliation (Non-GAAP, in thousands) | Line Item | 2021 (in thousands) | 2020 (Combined, in thousands) | | :--- | :--- | :--- | | Net income (loss) | $55,559 | $(101,463) | | Interest expense | $2,484 | $8 | | Income tax expense (benefit) | $16,904 | $(4,223) | | DD&A & Accretion | $65,368 | $16,402 | | Exploration and abandonment | $1,549 | $5,036 | | Stock based compensation | $6,676 | $15,776 | | Other adjustments | $15,634 | $76,503 | | EBITDAX | $164,173 | $8,033 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk The primary market risk is commodity price volatility, mitigated by derivative instruments, with a $1.00/Bbl crude oil price change impacting 2021 revenues by approximately $3.1 million - The company's major market risk is the pricing of its crude oil, NGL, and natural gas production[385] - A $1.00 per barrel change in the average crude oil price for 2021 would have changed revenues by approximately $3.1 million[386] - The company uses commodity derivative instruments to hedge price risk, which is a requirement under its Credit Agreement and the indenture for its 2024 Notes[387] Item 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements, detailing accounting policies, debt, and subsequent events, with supplementary data showing proved reserves increased to 64,213 MBoe in 2021 Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total Assets | $818,960 | $537,930 | | Total crude oil and natural gas properties, net | $725,615 | $502,636 | | Total Liabilities | $264,897 | $61,504 | | Long-term debt, net | $97,929 | $0 | | Total Stockholders' Equity | $553,063 | $474,226 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2021 (Successor, in thousands) | 2020 (Combined Successor/Predecessor, in thousands) | | :--- | :--- | :--- | | Total operating revenues | $220,124 | $24,623 | | Income (loss) from operations | $101,847 | $(29,181) | | Net income (loss) | $55,559 | $(101,463) | - In February 2022, the company issued $225.0 million of 10.00% Senior Unsecured Notes due 2024 and amended its credit facility, reducing the borrowing base to $138.8 million[540][541] Changes in Proved Reserves (MBoe) | Description | 2021 (MBoe) | 2020 (Combined, MBoe) | | :--- | :--- | :--- | | Beginning Reserves | 22,515 | 11,497 | | Extensions and discoveries | 44,967 | 15,396 | | Revisions of previous estimates | (1,658) | (3,723) | | Production | (3,396) | (705) | | Purchases / Sales of minerals-in-place | 1,784 | 50 | | Ending Reserves | 64,213 | 22,515 | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[561] Item 9A. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of December 31, 2021 - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of December 31, 2021[562] - Management assessed the effectiveness of internal control over financial reporting as of December 31, 2021, and concluded it was effective based on the COSO framework[565] Part III Items 10-14 Information for Items 10-14, covering governance, compensation, and ownership, is incorporated by reference from the company's upcoming Definitive Proxy Statement - Information for Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accountant Fees and Services (Item 14) will be incorporated by reference from the company's upcoming Definitive Proxy Statement[568][569][570][571][572] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists financial statements included in Item 8 and exhibits filed with the Annual Report, with schedules omitted as not applicable - The consolidated financial statements are included in Item 8 of this report[573] - A list of exhibits filed with the report is provided, including the Business Combination Agreement, corporate governance documents, credit agreements, and reserve reports[576][577][578] Item 16. Form 10-K Summary The company has not provided a summary for Form 10-K in this section - None[579]