HPK - HighPeak Energy: Equity Raise Improves Odds Of Note Refinancing

2023-07-25 13:14:44 ET

Summary

• HighPeak raised over $150 million in net proceeds via an equity offering at $10.50 per share.
• The majority of shares in the offering were purchased by insiders.
• HighPeak now has until September to deal with its February 2024 notes.
• It will need to demonstrate that it can rein in its high rate of spending.
• Net debt (including working capital deficit) may still be around $1 billion post-offering.

As expected , HighPeak Energy ( HPK ) needed to do an equity offering to improve its chances of refinancing its 2024 unsecured notes. It raised $151.2 million in net proceeds from issuing 14.835 million common shares at $10.50 per share , the majority of which were purchased by insiders .

The news of the insider purchases (and higher oil prices) have boosted HighPeak's share price above what it was prior to the offering. However, I now estimate HighPeak's value at $13.00 per share in a long-term $75 WTI oil and $3.75 NYMEX gas scenario. HighPeak now has around 128 million shares outstanding and also has warrants and options that could add another 21 million shares, with an average exercise price of approximately $11.68 per share.

Equity Offering

HighPeak announced on July 21 that it had closed its offering of 14.835 million common shares at $10.50 per share, which was an 18% discount to its closing price before the offering announcement.

The 14.835 million shares included the July 20 exercise of the underwriter's option to purchase 1.935 million shares. HighPeak received net proceeds of $151.2 million after commissions and other fees.

HighPeak reported having 113.2 million outstanding shares on May 5, so this offering increases its outstanding share count to 128 million.

One interesting thing about the equity offering is that various insiders (including multi-billionaire John Paul DeJoria) ended up purchasing approximately 10 million shares in the offering, or approximately 68% of the 14.835 million shares being issued.

The high level of insider support should help HighPeak navigate through its debt issues. However, such help comes at a price, which in this case was a significant discount to HighPeak's share price before the offering announcement.

Warrants And Options

The various Form 4 filings for HighPeak also show that it awarded another 1.58 million in employee options with an exercise price of $10.50. HighPeak also reported (at the end of Q1 2023) that it had approximately 8.29 million warrants outstanding with an exercise price of $11.50 per share, along with 11.29 million exercisable stock options with an average exercise price of $12.02 million.

All combined, HighPeak now has approximately 21.16 million outstanding warrants and options with an average exercise price of $11.68 per share. If exercised, these warrants and options would bring HighPeak's outstanding share count up to approximately 149 million.

These warrants and options are a moderately negative drag on HighPeak's share price as their average exercise price is more than 20% below HighPeak's current share price.

Preliminary Q2 2023 Results

HighPeak mentioned that its estimated production in Q2 2023 was between 41,000 to 43,000 BOEPD, a 10% to 16% increase from its Q1 2023 production levels. It also noted that its estimated production reached 45,500 to 47,500 BOEPD in June 2023 and averaged over 50,000 BOEPD during the first 10 days of July 2023.

This rapid production growth has contributed to considerable outspend though, as its estimated EBITDAX for Q2 2023 was between $180 million and $190 million, compared to D&C capex between $260 million to $300 million for the same period. HighPeak also has a small amount of non D&C capex and around $20 million per quarter in interest costs, so excluding working capital changes, HighPeak's cash burn was likely around $125 million for the quarter.

At the end of Q2 2023, HighPeak had $30 million in cash on hand and $1.0 billion in outstanding debt, resulting in $0.97 billion in net debt. HighPeak also has been carrying a significant working capital deficit, which (excluding the current portion of its long-term debt) was over $200 million at the end of Q1 2023.

HighPeak's recent equity offering reduces its net debt to approximately $0.82 billion (not including its working capital deficit). This is around 1.1x its annualized Q2 2023 EBITDAX. Including HighPeak's working capital deficit would increase this measure to approximately 1.4x.

While this leverage ratio doesn't seem particularly elevated on the surface, HighPeak's base decline rate is very high, so its EBITDAX would quickly fall from Q2 2023 levels without sufficient further investment in new wells.

Note Refinancing And Estimated Valuation

HighPeak's credit facility has a borrowing base of $700 million with $575 million in aggregate elected commitments. It had only $78 million in liquidity (and a significant working capital deficit) as of the end of June, so the equity offering should give it some breathing room (and was also necessary for it to be able to borrow more credit facility funds). It now has until the beginning of September 2023 to deal with its February 2024 notes.

HighPeak's 2028 note offering is still likely to come with a very high interest rate, but the insider support should allow it to refinance its notes. If needed, HighPeak can likely raise more funds from DeJoria and others, although that would result in more dilution at a discount to HighPeak's market share price.

HighPeak's estimated value has been reduced to $13.00 per share in a long-term $75 WTI oil and $3.75 NYMEX gas environment to reflect the impact of the dilution. This also assumes that HighPeak can now refinance its 2024 notes without needing to resort to additional measures.

This would be an enterprise value of approximately $2.7 billion, including HighPeak's working capital deficit and assuming the exercise of all its outstanding warrants and options.

Conclusion

HighPeak Energy raised over $150 million in net proceeds with its recent equity offering. This allows it to borrow more under its credit facility (as it needed to raise at least $95 million in net proceeds to be able to access its credit facility) and improves its chances of refinancing its 2024 notes.

Insiders purchased the majority of HighPeak's offering and can likely be counted on to help HighPeak if it needs to raise more money in the future. The cost of this help was an 18% discount to HighPeak's share price before the offering announcement though.

HighPeak still has a substantial amount of debt and will need to rein in its spending (and thus production growth). I now estimate its value at approximately $13 per share in a long-term $75 WTI oil and $3.75 NYMEX gas environment. This is a bit lower than its current share price, but still close enough for me to rate it a hold rather than an outright sell at the moment.

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