HighPeak Energy, Inc. (NASDAQ:HPK) generated $75.7 million in free cash flow in Q3 2023 after significantly reducing its capex. It appears to be entering a new phase for the company where it has flat-to-modest sequential production growth and generates significant free cash flow.
I am now modeling HighPeak’s 2024 volumes at 54,000 BOEPD, which should be similar to its 2H 2023 sales volumes. At current $77 WTI oil strip for 2024, I project HighPeak to generate $300 million in free cash flow. This would reduce its net debt to approximately $700 million at the end of 2024.
HighPeak’s shares appear fairly priced for long-term high-$70s to $80 WTI oil (CL1:COM) now, although I have increased my estimate of its value by around $0.50 per share to account for slightly better capital efficiency than what I had modeled before.
Q3 2023 Results
HighPeak averaged 52,708 BOEPD (84% oil) in Q3 2023 sale volumes. This was a 25% increase from its Q2 2023 sales volumes of 42,207 BOEPD (84% oil). HighPeak had mentioned that its Q3 volumes (up to early August) were over 50,000 BOEPD, so its growth has slowed since then with its reduction in capex.
HighPeak reported $163 million in Q3 2023 capex, including $1.8 million for leasehold acquisitions. This is a substantial reduction from HighPeak’s $301.9 million in capex in Q2 2023, which included $2.3 million incurred for leasehold acquisitions.
While production growth has slowed with the reduction in capex, the lowered spending has allowed HighPeak to generate positive $75.7 million in free cash flow during Q3 2023.
HighPeak’s net debt ended up at around $1.05 billion at the end of Q3 2023 and it may be able to reduce this to around $1 billion (or slightly under) by the end of 2023.
Notes On Hedging
HighPeak has now added a large amount of oil hedges until Q3 2025. HighPeak’s hedges consist of a mix of swaps, collars and puts. HighPeak’s hedging strategy still gives it a fair amount of exposure to oil price upside, but comes at the cost of around $43 million in future deferred premiums related to its hedges.
HighPeak’s Hedges (highpeakenergy.com)
HighPeak has just over 50% of its 2024 oil production hedged if production remains relatively close to 2H 2023 levels. I’ve modeled HighPeak’s 2024 production at 54,000 BOEPD (83% oil).
HighPeak has swaps covering around 10% of its 2024 oil production at an average of $81.58 per barrel. It also has collars covering around 13% of its 2024 oil production with an average floor of $70.42 per barrel and an average ceiling of $94.13 per barrel.
HighPeak’s puts cover 28% of its 2024 oil production with an average strike price of $62.69 per barrel.
With around 41% of its 2024 oil production hedged with collars and puts with a floor/strike price below current strip, HighPeak does still have some downside exposure to lower oil prices.
Updated 2024 Outlook
I’ve increased my projection around HighPeak’s 2024 production to approximately 54,000 BOEPD (83% oil). This is around 1,000 BOEPD higher than what I had modeled HighPeak’s 2024 production at before. I have assumed that HighPeak spends around $600 million on capex in 2024.
At the current roughly $77 WTI oil strip for 2024, HighPeak is projected to generate $1.323 billion in revenues before hedges. HighPeak’s 2024 hedges have negative $18 million in estimated value at current strip prices.
| Type | Barrels/Mcf | $ Per Barrel/Mcf | $ Million |
| Oil | 16,359,500 | $77.00 | $1,260 |
| NGLs | 1,773,900 | $21.00 | $37 |
| Natural Gas | 9,460,800 | $2.70 | $26 |
| Hedge Value | -$18 | ||
| Total | $1,305 |
I am now modeling HighPeak’s lease operating expense at $8.75 per BOE in 2024, including workover expenses.
This results in a projection that HighPeak will generate $300 million in free cash flow at current strip prices. HighPeak’s 2024 production in this scenario is relatively flat to its expected 2H 2023 production.
| Expenses | $ Million |
| Lease Operating Expense And Workovers | $172 |
| Production And Ad Valorem Taxes | $73 |
| Cash G&A | $15 |
| Cash Interest | $145 |
| Capital Expenditures | $600 |
| Total Expenditures | $1,005 |
HighPeak pays out a small amount of dividends and after factoring that in, it probably could end 2024 with around $700 million in net debt now.
Notes On Valuation
HighPeak appears to be trending slightly better than I expected, so I’ve adjusted my model for its 2024 production and lease operating expenses. The result of these tweaks is that I now estimate HighPeak’s value at approximately $14.50 per share at long-term $75 WTI oil and $3.75 NYMEX gas. At long-term $80 WTI oil instead, HighPeak’s estimated value is around $17.25 per share.
These are around $0.50 per share higher than what I previously estimated HighPeak’s value at. HighPeak’s current share price appears to fairly value it for long-term high-$70s to $80 WTI oil.
Conclusion
HighPeak Energy significantly reduced its capex in Q3 2023, allowing it to generate $75.7 million in free cash flow during the quarter. HighPeak’s sales volumes increased by 25% compared to Q2 2023, but growth within the quarter (from the early part of Q3 to the end of Q3) appeared to be much flatter.
I am modeling HighPeak’s 2024 results at 54,000 BOEPD, which should be similar to its 2H 2023 sales volumes. At current strip (including $77 WTI oil) for 2024, this would allow HighPeak to generate around $300 million in free cash flow, putting it at around $700 million in net debt at the end of 2024.
HighPeak appears to be entering a new phase now with flat to modest production growth and significant free cash flow generation, after previously growing production rapidly while burning cash.
I believe HighPeak Energy, Inc. is currently fairly valued for a long-term high-$70s to $80 WTI oil scenario.
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