Free Cash Flow Tailwind
We are updating our estimates to reflect actual 2Q24 NYMEX reference prices of $80.66/bbl for oil and $2.32/MMBtu for natural gas. Oil accounts for 78% of our 2Q24 oil production estimate and 98% of our 2Q24 revenue estimate. Management’s FY24 production outlook is 43.0-47.0 MBOE/d (Figure 1). 1Q24 production averaged 49.7 MBOE/d (80% oil). HighPeak carried three operating rigs into January before falling back to two operated rigs in 1Q24. The activity cadence is expected to result in capital spending and production being more heavily weighted in 1H24. Efforts to enhance field-level operations are contributing to lower lease operating expenses (LOE) in 2024. 1Q24 LOE averaged $6.69/BOE, including expensed workovers, well below the $8.74/BOE FY23 average. Absolute lease operating costs in 1Q24 were 20% lower in 1Q24, while Q/Q production was essentially flat. LOE is expected to benefit in future periods from HighPeak’s ability to leverage in-field infrastructure investments to lower recycled water and chemical costs and maximize capacity utilization. HighPeak’s new WildHorse Solar Farm, a 9.9 MW facility serving the Flat Top area, was commissioned at the end of May 2024. Power supplied by the facility will help lower electricity prices and mitigate the adverse effects of periodic grid unreliability. Electrical infrastructure upgrades in the Flat Top are enabling HighPeak to power drilling rigs with electricity. Our 2Q24 adjusted EBITDA estimate is ~$215 million based on a production estimate of 45.5 MBOE/d (80% oil). Our FY24 and FY25 adjusted EBITDA estimates are ~$885 million and $875 million based on 2H24 and FY25 average NYMEX oil prices of $80/bbl (Figures 2 to 5). Since 3Q23, HighPeak has enjoyed a free cash flow tailwind, generating ~$157 million over the three consecutive quarters ending with 1Q23. For FY24, we estimate ~$162 million of free cash flow, reflecting a conversion of 41% of adjusted EBITDA (Figure 6). HighPeak is trading at 3.4x and 3.2x our FY24 and FY25 adjusted EBITDA estimates (Figure 6). Using FY24 FactSet consensus estimates, the company trades at a discount to the 4.6x average for a broad group of producers (Figure 7). HighPeak’s oil-weighted asset base in the Midland Basin contributes to peer-leading adjusted EBITDA margins (Figures 8 and 9). The FY24 development program is primarily geared toward continuing to derisk HighPeak’s Lower Spraberry and Wolfcamp A inventory across its ~136,000 net acre lease position. HighPeak is scheduled to release 2Q24 results after market close on Monday, August 5, 2024, and host a conference call at 10:00 am CT on Tuesday, August 6, 2024.
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