Moderating Growth for Free Cash Flow Generation
HighPeak has pivoted its FY24 development plan to concentrate on free cash flow generation from growth. Our updated adjusted EBITDA and free cash flow estimates, incorporating NYMEX reference prices of $79.19/bbl for oil and $2.33/MMBtu for natural gas, are $858 million and $168 million, respectively. FY23 free cash flow was negative $271 million. HighPeak dropped back to two operated rigs in February 2024 from three and plans to maintain that pace along with one frac crew over the balance of FY24. At that activity level, FY24 total capital expenditures are estimated to fall within the range of $500-585 million. The 45.0 MBOE/d midpoint of the company’s FY24 production guidance compares with an average of 45.6 MBOE/d in FY23 and 50.0 MBOE/d in 4Q23. The company owns an average 97% working interest in two generally contiguous acreage positions spanning 143,187 gross (131,636 net) acres referred to as Flat Top and Signal Peak in the northeast portion of the Midland Basin in Texas. Management estimates the acreage could support ~700 future development locations in the Lower Spraberry and Wolfcamp A formations, the current focus of its capital program. The strategic alternative review process that commenced in January 2023 is ongoing. In the 10K filed on March 6, 2024, management indicated that the process had been exploratory and remained in preliminary stages and that discussions with potential counterparties had excluded potential valuation, structure, or other key transaction terms. We do not anticipate further updates until the board has approved a specific course of action or deems additional disclosure necessary. In the past 18 months, more than $200 billion of corporate M&A transactions between oil & gas producers have been announced. The common theme appears to be asset scale and portfolio optimization to capitalize on cost synergies to increase the free cash flow capacity of the acquiror. A moderated development plan in FY24 could decrease the capital intensity of HighPeak’s asset base over time and enhance its ability to sustain free cash flow. The company entered 2024 with a considerably stronger liquidity position following the 3Q23 refinancing transactions. We estimate pro forma liquidity was ~$295 million as of December 31, 2023, including $195 million of cash and $100 million available under the company’s undrawn RBL facility. Demonstrating a commitment to free cash flow, HighPeak’s board increased the common stock dividend by 60% to $0.04/share and authorized a $75 million repurchase program on February 5, 2024. We expect any repurchases would be funded from free cash flow.
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