UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20202021
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission File Number: 333-248898
HighPeak Energy, Inc. | ||
(Exact name of Registrant as specified in its charter) | ||
Delaware | 84-3533602 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
421 W. 3rd3rd St., Suite 1000
Fort Worth, Texas 76102
(Address of principal executive offices and zip code)
(817) (817) 850-9200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, par value $0.0001 per share | HPK | The Nasdaq Stock Market LLC | ||
Warrants to purchase Commons Stock | HPKEW | The Nasdaq Stock Market LLC |
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☐☒ No ☒☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐No ☒
As of November 11, 2020,August 5, 2021, there were 91,654,85492,743,677 shares of common stock, par value $0.0001 per share, issued and outstanding.
HIGHPEAK ENERGY, INC.
TABLE OF CONTENTS
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Definitions of Certain Terms and Conventions Used Herein | 1 | |
Cautionary Statement Concerning Forward-Looking Statements | 5 | |
PART I. FINANCIAL INFORMATION | ||
Item 1. | Condensed Consolidated and Combined Financial Statements (Unaudited) | 6 |
Condensed Consolidated Balance Sheets | 6 | |
Condensed Consolidated and Combined Statements of Operations | 7 | |
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Condensed Consolidated Statement of Changes in Stockholders’ Equity (Successor) | 8 | |
Condensed Consolidated Statement of Changes in Partners’ Capital (Predecessor) | 9 | |
Condensed Consolidated and Combined Statements of Cash Flows | 10 | |
Notes to Condensed Consolidated and Combined Financial Statements | 11 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 26 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 36 |
Item 4. | Controls and Procedures | 37 |
PART II. OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 38 |
Item 1A. | Risk Factors | 38 |
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Item 6. | Exhibits | 39 |
Signatures |
HIGHPEAK ENERGY, INC.
Cautionary Statement Concerning Forward-Looking Statements
The information in this Quarterly Report on Form 10-Q (this "Report") contains forward-looking statements that involve risks and uncertainties. When used in this document, the words "believes," "plans," "expects," "anticipates," "forecasts," "intends," "continue," "may," "will," "could," "should," "future," "potential," "estimate" or the negative of such terms and similar expressions as they relate to HighPeak Energy, Inc. ("HighPeak Energy," the "Company" or the “Successor”) are intended to identify forward-looking statements, which are generally not historical in nature. The forward-looking statements are based on the Company's current expectations, assumptions, estimates and projections about the Company and the industry in which the Company operates. Although the Company believes that the expectations and assumptions reflected in the forward-looking statements are reasonable as and when made, they involve risks and uncertainties that are difficult to predict and, in many cases, beyond the Company's control.
These risks and uncertainties include, among other things, volatility of commodity prices, product supply and demand, the impact of a widespread outbreak of an illness, such as the coronavirus disease 2019(“COVID-19”) pandemic, on global and U.S. economic activity, competition, the ability to obtain environmental and other permits and the timing thereof, other government regulation or action, the ability to obtain approvals from third parties and negotiate agreements with third parties on mutually acceptable terms, litigation, the costs and results of drilling and operations, availability of equipment, services, resources and personnel required to perform the Company's drilling and operating activities, access to and availability of transportation, processing, fractionation, refining and storage facilities, HighPeak Energy's ability to replace reserves, implement its business plans or complete its development activities as scheduled, access to and cost of capital, the financial strength of counterparties to any credit facility and derivative contracts entered into by HighPeak Energy, if any, and purchasers of HighPeak Energy's oil, NGL and gas production, uncertainties about estimates of reserves, identification of drilling locations and the ability to add proved reserves in the future, the assumptions underlying forecasts, including forecasts of production, expenses, cash flow from sales of oil and gas and tax rates, quality of technical data, environmental and weather risks, including the possible impacts of climate change, cybersecurity risks and acts of war or terrorism. These and other risks are described in the Company's combined Registration Statement on Form S-4 and Form S-1, declared effective by the Securities and Exchange Commission (the “SEC”) on August 7, 2020 and initially filed with the SEC on December 2, 2019 (File No. 333-235313) (the “Registration Statement”), this and other filings with the SEC. In addition, the Company may be subject to currently unforeseen risks that may have a materially adverse effect on it. Accordingly, no assurances can be given that the actual events and results will not be materially different than the anticipated results described in the forward-looking statements. See "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," "Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk" and "Part II, Item 1A. Risk Factors" in this Report and "Risk Factors,” “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk” in the Registration Statement for a description of various factors that could materially affect the ability of HighPeak Energy to achieve the anticipated results described in the forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no duty to publicly update these statements except as required by law.
HIGHPEAK ENERGY, INC.
Definitions of Certain Terms and Conventions Used Herein
Within this Quarterly Report on Form 10-Q (this “Quarterly Report”), the following terms and conventions have specific meanings:
• | "3-D |
• | "Basin" |
• | "Bbl" |
• | " |
• | " |
• | " |
• | "Btu" means British thermal unit, which is a measure of the amount of energy required to raise the temperature of one pound of water one degreeFahrenheit. |
• | “Business Combination Agreement” are to the Business Combination Agreement, dated May 4, 2020, as amended, by and among the Company, Pure, MergerSub, HighPeak I, HighPeak II, |
• | “ |
• | “common stock” or “HighPeak Energy common stock” means the Company’s common stock, par value $0.0001 per share. | |
• | “Completion” The process of treating a drilled well followed by the installation of permanent equipment for the production of natural gas or oil, or in the case of a dry hole, the reporting of abandonment to the appropriate agency. |
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| “Contingent Value |
• | “Credit Agreement” means the Company’s Credit Agreement, dated as of December 17, 2020, as amended from time to time, among HighPeak Energy, Inc., as Borrower, Fifth Third Bank, National Association, as administrative agent, and the Lenders party thereto. | |
• | "DD&A" means depletion, depreciation and amortization expense. |
• | “Development |
• | “Development |
• | “Development |
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• | “Dry |
• | “Economically |
• | “EUR” or “ |
• | “Exploratory |
• | “ |
• | “First Amendment” means the First Amendment to Credit Agreement, dated as of June 23, 2021, among HighPeak Energy, Inc., as Borrower, Fifth Third Bank, National Association, as administrative agent, and the Lenders party thereto. | |
• | “ |
• | "GAAP" means accounting principles generally accepted in the United States of America. |
• | “Gross |
• | “Held by |
• | “HighPeak business |
• | "HighPeak Energy" or the |
• | “HighPeak | |
• | “HighPeak I” means HighPeak Energy, LP, a Delaware limited partnership. |
• | “HighPeak |
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| “Horizontal |
• | “HPK |
• | “HPK |
• | “HPK |
• | “Hydraulic |
• | “Lease operating |
• | "MBbl" means one thousand Bbls. |
• | " |
• | "Mcf" means one thousand cubic feet and is a measure of natural gas volume. |
• | “ |
• | "MMBbl" means one million Bbls. | |
• | "MMBtu" means one million Btus. |
• | "MMcf" means one million cubic feet and is a measure of natural gas volume. |
• | “Net |
• | “Net |
• | " |
• | "NYMEX" means the New York Mercantile Exchange. |
• | "OPEC" means the Organization of Petroleum Exporting Countries. |
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• | “Production |
• | “Productive |
• | “Proration |
• | “ |
• | “Proved developed | |
• | “Proved developed producing reserves | |
• | “Proved developed reserves” Proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods and can be expected to be recovered through extraction technology installed and operational at the time of the reserve estimate. |
• | “Proved |
(i) The area of the reservoir considered as proved includes: (A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or natural gas on the basis of available geoscience and engineering data. |
(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons as seen in a well penetration unless geoscience, engineering or performance data and reliable technology establishes a lower contact with reasonable certainty. |
(iii) Where direct observation from well penetrations has defined a highest known oil elevation and the potential exists for an associated natural gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering or performance data and reliable technology establish the higher contact with reasonable certainty. |
(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when: (A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (B) The project has been approved for development by all necessary parties and entities, including governmental entities. | ||
(v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. |
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• | “PUD” or “ |
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• | “Realized price” The cash market price less all expected quality, transportation and demand adjustments. | |
• | “Recompletion” The process of re-entering an existing wellbore that is either producing or not producing and completing new reservoirs in an attempt to establish or increase existing production. | |
• | “Reserves” Reserves are estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and natural gas or related substances to market, and all permits and financing required to implement the project. | |
• | “Reservoir” A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is separate from other reservoirs. | |
• | “Resources” Quantities of oil and natural gas estimated to exist in naturally occurring accumulations. A portion of the resources may be estimated to be recoverable and another portion may be considered unrecoverable. Resources include both discovered and undiscovered accumulations. | |
• | “Royalty” An interest in an oil and natural gas lease that gives the owner the right to receive a portion of the production from the leased acreage (or of the proceeds from the sale thereof) but does not require the owner to pay any portion of the production or development costs on the leased acreage. Royalties may be either landowner’s royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner. | |
• | "SEC" means the United States Securities and Exchange Commission. |
• | “Service |
• | “ |
• | “Sponsor” means HighPeak Pure Acquisition, LLC, a Delaware limited liability company. | |
• | “Spot market |
• | “Standardized |
• | “Stratigraphic test |
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| “Undeveloped |
• | “ |
• | "U.S." means the United States. |
• | “ |
• | “ |
• | “Working interest” The right granted to the lessee of a property to explore for and to produce and own natural gas or other minerals. The working interest owners bear the exploration, development and operating costs on either a cash, penalty or carried basis. |
• | “ |
• | "WTI" means West Texas Intermediate, a light sweet blend of oil produced from fields in western Texas and is a grade of oil used as a benchmarkin oil pricing. |
• | With respect to information on the working interest in wells | |
• | All currency amounts are expressed in U.S. dollars. |
All currency amounts are expressed in U.S. dollars.
The terms “condensate,” “development costs,” “development project,” “development well,” “economically producible,” “estimated ultimate recovery,” “exploratory well,” “production costs,” “reserves,” “reservoir,” “resources,” “service wells” and “stratigraphic test well” are defined by the SEC. Except as noted, the terms defined in this section are not the same as SEC definitions.
Cautionary Statement Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included or incorporated by reference in this Report, including, without limitation, statements regarding the Company’s future financial position, business strategy, budgets, projected revenues, projected costs, and plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company’s management. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “believes,” “plans,” “expects,” “anticipates,” “forecasts,” “intends,” “continue,” “may,” “will,” “could,” “should,” “future,” “potential,” “estimate” or the negative of such terms and similar expressions as they relate to the Company are intended to identify forward-looking statements, which are generally not historical in nature. The forward-looking statements are based on the Company’s current expectations, assumptions, estimates and projections about the Company and the industry in which the Company operates. Although the Company believes that the expectations and assumptions reflected in the forward-looking statements are reasonable as and when made, they involve risks and uncertainties that are difficult to predict and, in many cases, beyond the Company's control. In addition, the Company may be subject to currently unforeseen risks that may have a materially adverse effect on it. Accordingly, no assurances can be given that the actual events and results will not be materially different from the anticipated results described in the forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no duty to publicly update these statements except as required by law.Important factors that could cause actual results to differ materially from the Company’s expectations include, but are not limited to, the Company’s assumptions about:
● | the length, scope and severity of the ongoing coronavirus disease 2019 (“COVID-19”) pandemic, including the effects of related public health concerns and the impact of continued actions taken by governmental authorities and other third parties in response to the pandemic and its impact on commodity prices, supply and demand considerations, and storage capacity; |
● | the market prices of oil, NGL, natural gas, and other products or services; |
● | the supply and demand for oil, NGL, natural gas, and other products or services; |
● | production and reserve levels; |
● | drilling risks; |
● | economic and competitive conditions; |
● | the availability of capital resources; |
● | capital expenditures and other contractual obligations; |
● | weather conditions; |
● | inflation rates; |
● | the availability of goods and services; |
● | legislative, regulatory, or policy changes; |
● | cyber-attacks; |
● | occurrence of property acquisitions or divestitures; |
● | the integration of acquisitions; |
● | the securities or capital markets and related risks such as general credit, liquidity, market, and interest-rate risks; and |
● | other factors disclosed under “Part I, Items 1 and 2. Business and Properties”, “Part I, Item 1A. Risk Factors”, “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk,” included in the Company’s Annual Report on Form 10-K filed on March 15, 2021 and “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part I, Item 3. Quantitative and Qualitative Disclosures about Market Risk,” included in this Quarterly Report on Form 10-Q, and elsewhere in this Report. |
All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements. Except as required by law, the Company assumes no duty to update or revise its forward-looking statements based on changes in internal estimates or expectations or otherwise.
Additionally, we caution you that reserve engineering is a process of estimating underground accumulations of oil, NGL and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions could change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil, NGL and natural gas that are ultimately recovered.
PART I. FINANCIAL INFORMATION |
ITEM 1. CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED) |
HighPeak Energy, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)(in thousands, except share data)
Successor | Predecessors | June 30, 2021 | December 31, 2020 | |||||||||||||
(in thousands, except share and per share amounts) | September 30, 2020 | December 31, 2019 | ||||||||||||||
(Unaudited) | ||||||||||||||||
ASSETS | ASSETS | |||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 54,874 | $ | 22,711 | $ | 12,842 | $ | 19,552 | ||||||||
Accounts receivable | 5,949 | 3,363 | 23,786 | 7,722 | ||||||||||||
Subscription receivable | 0 | 3,596 | ||||||||||||||
Prepaid expenses | 2,801 | 25 | 1,062 | 2,254 | ||||||||||||
Right-of-use assets | 541 | - | ||||||||||||||
Inventory | 405 | 184 | 217 | 121 | ||||||||||||
Deposits | 50 | 61,550 | 50 | 50 | ||||||||||||
Notes receivable | - | 4,193 | ||||||||||||||
Total current assets | 64,620 | 92,026 | 37,957 | 33,295 | ||||||||||||
Oil and natural gas properties, using the successful efforts method of accounting: | ||||||||||||||||
Proved properties | 272,167 | 178,835 | 497,938 | 367,372 | ||||||||||||
Unproved properties | 204,335 | 228,105 | 114,435 | 152,741 | ||||||||||||
Accumulated depletion, depreciation and amortization | (10,135 | ) | (1,566 | ) | (47,200 | ) | (17,477 | ) | ||||||||
Total oil and natural gas properties, net | 466,367 | 405,374 | 565,173 | 502,636 | ||||||||||||
Other property and equipment, net | 415 | 508 | 1,057 | 1,092 | ||||||||||||
Right-of-use assets | 100 | - | ||||||||||||||
Other noncurrent assets | 236 | 907 | ||||||||||||||
Total assets | $ | 531,502 | $ | 497,908 | $ | 604,423 | $ | 537,930 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY / PARTNERS' CAPITAL | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable - trade | $ | 8,971 | $ | 11,118 | $ | 18,018 | $ | 7,581 | ||||||||
Accrued liabilities | 5,214 | 19,678 | 20,727 | 12,374 | ||||||||||||
Operating leases | 538 | - | ||||||||||||||
Revenues payable | 329 | 184 | ||||||||||||||
Derivatives | 12,558 | 0 | ||||||||||||||
Other current liabilities | 3,037 | 2,480 | ||||||||||||||
Total current liabilities | 15,052 | 30,980 | 54,340 | 22,435 | ||||||||||||
Noncurrent liabilities: | ||||||||||||||||
Long-term debt, net | 11,918 | 0 | ||||||||||||||
Deferred income taxes | 40,496 | - | 41,432 | 38,898 | ||||||||||||
Asset retirement obligations | 2,399 | 2,212 | 2,965 | 2,293 | ||||||||||||
Operating leases | 103 | - | ||||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders' equity / partners' capital: | ||||||||||||||||
Partners' capital | - | 464,716 | ||||||||||||||
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, none issued and outstanding at September 30, 2020 | - | - | ||||||||||||||
Common stock, $0.0001 par value, 600,000,000 shares authorized, 91,592,354 shares issued and outstanding at September 30, 2020 | 9 | - | ||||||||||||||
Other | 26 | 78 | ||||||||||||||
Commitments and contingencies (Note 10) | ||||||||||||||||
Stockholders' equity: | ||||||||||||||||
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, none issued and outstanding at June 30, 2021 and December 31, 2020 | 0 | 0 | ||||||||||||||
Common stock, $0.0001 par value, 600,000,000 shares authorized, 92,728,781 and 91,967,565 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | 9 | 9 | ||||||||||||||
Additional paid-in capital | 575,739 | - | 590,455 | 581,426 | ||||||||||||
Accumulated deficit | (102,296 | ) | - | (96,722 | ) | (107,209 | ) | |||||||||
Total stockholders' equity / partners' capital | 473,452 | 464,716 | ||||||||||||||
Total liabilities and stockholders' equity / partners' capital | $ | 531,502 | $ | 497,908 | ||||||||||||
Total stockholders' equity | 493,742 | 474,226 | ||||||||||||||
Total liabilities and stockholders' equity | $ | 604,423 | $ | 537,930 |
The accompanying notes are an integral part of these condensed consolidated and combined financial statements.
HighPeak Energy, Inc. |
Condensed Consolidated and Combined Statements of Operations (in thousands, except per share data) |
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Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||
Successor | Predecessors | Successor | Predecessors | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
(in thousands, except per share amounts) | August 22, 2020 through September 30, 2020 | July 1, 2020 through August 21, 2020 | Three Months Ended September 30, 2019 | August 22, 2020 through September 30, 2020 | January 1, 2020 through August 21, 2020 | Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||||||
Operating Revenues: | ||||||||||||||||||||||||||||||||||||||||
Crude oil sales | $ | 4,787 | $ | 2,607 | $ | 1,419 | $ | 4,787 | $ | 8,069 | �� | $ | 4,154 | $ | 46,985 | $ | 938 | $ | 71,855 | $ | 5,462 | |||||||||||||||||||
Natural gas and NGL sales | 47 | 49 | 24 | 47 | 154 | 103 | ||||||||||||||||||||||||||||||||||
NGL and natural gas sales | 1,285 | 6 | 2,132 | 105 | ||||||||||||||||||||||||||||||||||||
Total operating revenues | 4,834 | 2,656 | 1,443 | 4,834 | 8,223 | 4,257 | 48,270 | 944 | 73,987 | 5,567 | ||||||||||||||||||||||||||||||
Operating Costs and Expenses: | ||||||||||||||||||||||||||||||||||||||||
Oil and natural gas production | 671 | 667 | 536 | 671 | 4,870 | 1,794 | 4,692 | 1,814 | 6,919 | 4,203 | ||||||||||||||||||||||||||||||
Production and ad valorem taxes | 257 | 164 | 80 | 257 | 566 | 261 | 2,543 | 94 | 4,207 | 402 | ||||||||||||||||||||||||||||||
Exploration and abandonments | 66 | - | 159 | 66 | 4 | 2,817 | 463 | 1 | 654 | 4 | ||||||||||||||||||||||||||||||
Depletion, depreciation and amortization | 2,327 | 1,294 | 822 | 2,327 | 6,385 | 2,657 | 16,857 | 1,735 | 29,820 | 5,091 | ||||||||||||||||||||||||||||||
Accretion of discount on asset retirement obligations | 15 | 20 | 14 | 15 | 89 | 38 | 37 | 35 | 72 | 69 | ||||||||||||||||||||||||||||||
General and administrative | 816 | 567 | 841 | 816 | 4,840 | 2,523 | 1,617 | 1,412 | 3,376 | 4,273 | ||||||||||||||||||||||||||||||
Stock-based compensation | 14,508 | - | - | 14,508 | - | - | 1,023 | 0 | 1,989 | 0 | ||||||||||||||||||||||||||||||
Total operating costs and expenses | 18,660 | 2,712 | 2,452 | 18,660 | 16,754 | 10,090 | 27,232 | 5,091 | 47,037 | 14,042 | ||||||||||||||||||||||||||||||
Loss from operations | (13,826 | ) | (56 | ) | (1,009 | ) | (13,826 | ) | (8,531 | ) | (5,833 | ) | ||||||||||||||||||||||||||||
Income (loss) from operations | 21,038 | (4,147 | ) | 26,950 | (8,475 | ) | ||||||||||||||||||||||||||||||||||
Interest income | 1 | - | - | 1 | - | - | 0 | 0 | 1 | 0 | ||||||||||||||||||||||||||||||
Interest expense | (152 | ) | 0 | (206 | ) | 0 | ||||||||||||||||||||||||||||||||||
Derivative loss, net | (13,596 | ) | 0 | (13,596 | ) | 0 | ||||||||||||||||||||||||||||||||||
Other expense | - | - | - | - | (76,503 | ) | - | (127 | ) | 0 | (127 | ) | (76,503 | ) | ||||||||||||||||||||||||||
Loss before income taxes | (13,825 | ) | (56 | ) | (1,009 | ) | (13,825 | ) | (85,034 | ) | (5,833 | ) | ||||||||||||||||||||||||||||
Income tax benefit | (2,309 | ) | - | - | (2,309 | ) | - | - | ||||||||||||||||||||||||||||||||
Net loss | $ | (11,516 | ) | $ | (56 | ) | $ | (1,009 | ) | $ | (11,516 | ) | $ | (85,034 | ) | $ | (5,833 | ) | ||||||||||||||||||||||
Income (loss) before income taxes | 7,163 | (4,147 | ) | 13,022 | (84,978 | ) | ||||||||||||||||||||||||||||||||||
Income tax expense | 1,420 | 0 | 2,535 | 0 | ||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 5,743 | $ | (4,147 | ) | $ | 10,487 | $ | (84,978 | ) | ||||||||||||||||||||||||||||||
Earnings per share: | ||||||||||||||||||||||||||||||||||||||||
Basic net loss | $ | (0.13 | ) | $ | (0.13 | ) | ||||||||||||||||||||||||||||||||||
Diluted net loss | $ | (0.13 | ) | $ | (0.13 | ) | ||||||||||||||||||||||||||||||||||
Basic net income | $ | 0.06 | 0 | $ | 0.11 | 0 | ||||||||||||||||||||||||||||||||||
Diluted net income | $ | 0.06 | 0 | $ | 0.10 | 0 | ||||||||||||||||||||||||||||||||||
Weighted average shares outstanding: | ||||||||||||||||||||||||||||||||||||||||
Basic | 91,592 | 91,592 | 92,676 | 0 | 92,634 | 0 | ||||||||||||||||||||||||||||||||||
Diluted | 91,592 | 91,592 | 92,676 | 0 | 92,830 | 0 |
The accompanying notes are an integral part of these condensed consolidated and combined financial statements.
HighPeak Energy, Inc. |
Condensed Consolidated |
(in thousands) |
|
(Unaudited) |
From January 1, 2020 and July 1, 2020 through August 21, 2020 | ||||||||||||
General Partner Capital | Limited Partners' Capital | Total Partners' Capital | ||||||||||
Balance, December 31, 2019 | $ | - | $ | 464,716 | $ | 464,716 | ||||||
Cash capital contributions | - | 54,000 | 54,000 | |||||||||
Net loss | - | (80,831 | ) | (80,831 | ) | |||||||
Balance, March 31, 2020 | - | 437,885 | 437,885 | |||||||||
Net loss | - | (4,147 | ) | (4,147 | ) | |||||||
Balance, June 30, 2020 | - | 433,738 | 433,738 | |||||||||
Distribution to partners | - | (2,780 | ) | (2,780 | ) | |||||||
Net loss | - | (56 | ) | (56 | ) | |||||||
Balance, August 21, 2020 | $ | - | $ | 430,902 | $ | 430,902 |
Three and Six Months Ended June 30, 2021 | ||||||||||||||||||||
Shares Outstanding | Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Total Stockholders' Equity | ||||||||||||||||
Balance, December 31, 2020 | 91,968 | $ | 9 | $ | 581,426 | $ | (107,209 | ) | $ | 474,226 | ||||||||||
Exercise of warrants | 554 | 0 | 5,466 | 0 | 5,466 | |||||||||||||||
Stock-based compensation costs: | ||||||||||||||||||||
Shares issued upon options being exercised | 154 | 0 | 1,574 | 0 | 1,574 | |||||||||||||||
Compensation costs included in net income | - | 0 | 966 | 0 | 966 | |||||||||||||||
Net income | - | 0 | 0 | 4,744 | 4,744 | |||||||||||||||
Balance, March 31, 2021 | 92,676 | 9 | 589,432 | (102,465 | ) | 486,976 | ||||||||||||||
Stock-based compensation costs: | ||||||||||||||||||||
Restricted shares issued to outside directors | 53 | 0 | 0 | 0 | 0 | |||||||||||||||
Compensation costs included in net income | - | 0 | 1,023 | 0 | 1,023 | |||||||||||||||
Net income | - | 0 | 0 | 5,743 | 5,743 | |||||||||||||||
Balance, June 30, 2021 | 92,729 | $ | 9 | $ | 590,455 | $ | (96,722 | ) | $ | 493,742 |
Three and Nine Months Ended September 30, 2019 | ||||||||||||
General Partner Capital | Limited Partners' Capital | Total Partners' Capital | ||||||||||
Balance, December 31, 2018 | $ | - | $ | 84,057 | $ | 84,057 | ||||||
Cash capital contributions | - | 6,997 | 6,997 | |||||||||
Net loss | - | (3,413 | ) | (3,413 | ) | |||||||
Balance, March 31, 2019 | - | 87,641 | 87,641 | |||||||||
Net loss | - | (1,411 | ) | (1,411 | ) | |||||||
Balance, June 30, 2019 | - | 86,230 | 86,230 | |||||||||
Cash capital contributions | - | 12,937 | 12,937 | |||||||||
Net loss | - | (1,009 | ) | (1,009 | ) | |||||||
Balance, September 30, 2019 | $ | - | $ | 98,158 | $ | 98,158 |
The accompanying notes are an integral part of these condensed consolidated and combined financial statements.
HighPeak Energy, Inc. |
Condensed Consolidated Statement of Changes in |
(in thousands) |
|
From August 22, 2020 through September 30, 2020 | ||||||||||||||||||||
Shares Outstanding | Common Stock | Additional Paid-in Capital |
Retained Earnings (Accumulated Deficit) | Total Stockholders' Equity | ||||||||||||||||
Balance, August 21, 2020 | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
HighPeak business combination with HPK LP | 81,383 | 8 | 521,674 | (90,780 | ) | 430,902 | ||||||||||||||
Conversion of Pure Common Stock | 1,232 | - | 12,324 | - | 12,324 | |||||||||||||||
Forward Purchases | 8,977 | 1 | 89,768 | - | 89,769 | |||||||||||||||
Offering costs (including costs incurred at Pure prior to HighPeak business combination) | - | - | (22,035 | ) | - | (22,035 | ) | |||||||||||||
Deferred income tax liability at HighPeak business combination | - | - | (40,500 | ) | - | (40,500 | ) | |||||||||||||
Stock-based compensation costs: | ||||||||||||||||||||
Shares issued upon options being exercised | - | - | - | - | - | |||||||||||||||
Compensation costs included in net loss | - | - | 14,508 | - | 14,508 | |||||||||||||||
Net loss | - | - | - | (11,516 | ) | (11,516 | ) | |||||||||||||
Balance, September 30, 2020 | 91,592 | $ | 9 | $ | 575,739 | $ | (102,296 | ) | $ | 473,452 |
Three and Six Months Ended June 30, 2020 | ||||||||||||
General Partner Capital | Limited Partners' Capital | Total Partners' Capital | ||||||||||
Balance, December 31, 2019 | $ | 0 | $ | 464,716 | $ | 464,716 | ||||||
Cash capital contributions | 0 | 54,000 | 54,000 | |||||||||
Net loss | 0 | (80,831 | ) | (80,831 | ) | |||||||
Balance, March 31, 2020 | 0 | 437,885 | 437,885 | |||||||||
Net loss | 0 | (4,147 | ) | (4,147 | ) | |||||||
Balance, June 30, 2020 | $ | 0 | $ | 433,738 | $ | 433,738 |
The accompanying notes are an integral part of these condensed consolidated and combined financial statements.
HighPeak Energy, Inc. |
Condensed Consolidated and Combined Statements of Cash Flows (in thousands) |
|
Nine Months Ended September 30, 2020 | Six Months Ended June 30, | ||||||||||||||||||||
Successor | Predecessors | 2021 | 2020 | ||||||||||||||||||
(in thousands) | August 22, 2020 through September 30, 2020 | January 1, 2020 through August 21, 2020 | Nine Months Ended September 30, 2019 | ||||||||||||||||||
Successor | Predecessor | ||||||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||
Net loss | $ | (11,516 | ) | $ | (85,034 | ) | $ | (5,833 | ) | ||||||||||||
Adjustments to reconcile net loss to net cash provided by (used in) operations: | |||||||||||||||||||||
Net income (loss) | $ | 10,487 | $ | (84,978 | ) | ||||||||||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations: | |||||||||||||||||||||
Exploration and abandonment expense | 14 | 4 | 2,817 | 369 | 4 | ||||||||||||||||
Depletion, depreciation and amortization expense | 2,327 | 6,385 | 2,657 | 29,820 | 5,091 | ||||||||||||||||
Accretion expense | 15 | 89 | 38 | 72 | 69 | ||||||||||||||||
Stock-based compensation expense | 14,508 | - | - | 1,989 | 0 | ||||||||||||||||
Amortization of debt issuance costs | 77 | 0 | |||||||||||||||||||
Derivative-related activity | 12,558 | 0 | |||||||||||||||||||
Loss on terminated acquisition | - | 76,500 | - | 0 | 76,500 | ||||||||||||||||
Deferred income taxes | (3 | ) | - | - | 2,535 | 0 | |||||||||||||||
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | ||||||||||||||||||||
Accounts receivable | (3,404 | ) | 844 | 1,425 | (16,064 | ) | 2,886 | ||||||||||||||
Inventory and other current assets | (357 | ) | (196 | ) | - | ||||||||||||||||
Prepaid expenses, inventory and other current assets | (366 | ) | (3,621 | ) | |||||||||||||||||
Accounts payable and accrued liabilities | (430 | ) | (2,694 | ) | 744 | 5,803 | (763 | ) | |||||||||||||
Net cash provided by (used in) operating activities | 1,154 | (4,102 | ) | 1,848 | 47,280 | (4,812 | ) | ||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||
Additions to oil and natural gas properties | (17,908 | ) | (47,548 | ) | (14,823 | ) | (89,959 | ) | (49,016 | ) | |||||||||||
Changes in working capital associated with oil and natural gas property additions | (23,421 | ) | 5,532 | 5,586 | 15,223 | 7,652 | |||||||||||||||
Acquisitions of oil and natural gas properties | (704 | ) | (3,338 | ) | (9,440 | ) | (2,070 | ) | (3,298 | ) | |||||||||||
Other property additions | (61 | ) | (50 | ) | |||||||||||||||||
Issuance of notes receivable | - | (7,482 | ) | - | 0 | (5,907 | ) | ||||||||||||||
Other property additions | - | (50 | ) | (7 | ) | ||||||||||||||||
Extension payment on acquisition | - | (15,000 | ) | - | 0 | (15,000 | ) | ||||||||||||||
Net cash used in investing activities | (42,033 | ) | (67,886 | ) | (18,684 | ) | (76,867 | ) | (65,619 | ) | |||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||
Proceeds from stock offering | 102,093 | - | - | ||||||||||||||||||
Stock offering costs | (8,383 | ) | - | - | |||||||||||||||||
Cash acquired from non-successors in HighPeak business combination | 100 | - | - | ||||||||||||||||||
Borrowings under revolving credit facility | 14,000 | 0 | |||||||||||||||||||
Proceeds from exercises of warrants | 5,466 | 0 | |||||||||||||||||||
Proceeds from subscription receivable from exercises of warrants | 3,596 | 0 | |||||||||||||||||||
Proceeds from exercises of stock options | 1,574 | 0 | |||||||||||||||||||
Debt issuance costs | (1,759 | ) | 0 | ||||||||||||||||||
Contributions from partners | - | 54,000 | 19,934 | 0 | 54,000 | ||||||||||||||||
Distributions to partners | - | (2,780 | ) | - | |||||||||||||||||
Net cash provided by financing activities | 93,810 | 51,220 | 19,934 | 22,877 | 54,000 | ||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 52,931 | (20,768 | ) | 3,098 | |||||||||||||||||
Net decrease in cash and cash equivalents | (6,710 | ) | (16,431 | ) | |||||||||||||||||
Cash and cash equivalents, beginning of period | 1,943 | 22,711 | 894 | 19,552 | 22,711 | ||||||||||||||||
Cash and cash equivalents, end of period | $ | 54,874 | $ | 1,943 | $ | 3,992 | $ | 12,842 | $ | 6,280 | |||||||||||
Supplemental disclosure of certain cash and non-cash transactions: | |||||||||||||||||||||
Cash paid for interest | $ | 133 | $ | 0 | |||||||||||||||||
Cash paid (received) for income taxes | $ | 0 | $ | 0 | |||||||||||||||||
Non-cash additions to asset retirement obligations | $ | 600 | $ | 97 |
The accompanying notes are an integral part of these condensed consolidated and combined financial statements.
HIGHPEAK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
NOTE 1. Organization and Nature of Operations
HighPeak Energy, Inc. ("HighPeak Energy" the "Company""Company," or the “Successor”) is a Delaware corporation, initially formed in October 2019 whoseas a wholly owned subsidiary of Pure Acquisition Corp (“Pure”), a Delaware corporation, formed in November 2017, which was a special purpose acquisition company for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving Pure and one or more businesses. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 regarding the business combination which resulted in the Company becoming the parent company and Pure becoming a wholly owned subsidiary along with the businesses acquired.
HighPeak Energy’s common stock and warrants are listed and traded on the Nasdaq Global Market (the "Nasdaq"). under the ticker symbols “HPK” and “HPKEW,” respectively. HighPeak Energy’s Contingent Value Rights (“CVRs”) are currently traded on the Over-The-Counter market under the ticker symbol “HPKER,” although the Company has applied for listing on the Nasdaq. The Company is an independent oil and natural gas exploration and production company that explores for, develops and produces oil, natural gas liquidsNGL and natural gas in the Permian Basin in West Texas.Texas, more specifically, the Midland Basin. Our acreage is composed of two core areas, Flat Top to the north and Signal Peak to the south.
The accompanying condensed consolidated and combined statements of operations for the periods from January 1, 2020 and July 1, 2020 to August 21, 2020 and condensed consolidated and combined statement of cash flows for the period from January 1, 2020 through August 21, 2020 are those of HPK Energy, LP, a Delaware limited partnership ("HPK LP") which is the predecessor to HighPeak Energy prior to the business combination between the Company, Pure Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the Company (“Pure”) and HPK LP that closed on August 21, 2020 (the “HighPeak business combination”). The accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and the statement of cash flows for the nine months ended September 30, 2020 are those of HighPeak Energy, LP, a Delaware limited partnership ("HighPeak I") which is the predecessor to HPK LP prior to the HPK LP business combination that closed on October 1, 2019 (the “HPK LP business combination”). HPK LP and HighPeak I are individually and collectively referred to as the "Predecessors" herein. However, if we refer to the "Company" for a date or activity prior to August 21, 2020, we are also referring to the Predecessors. See Note 10 for further information regarding the two aforementioned business combinations.
NOTE 2. Basis of Presentation and Summary of Significant Accounting Policies
Presentation. In the opinion of management, the unaudited interim condensed consolidated and combined financial statements of the Company as of SeptemberJune 30, 2021 and December 31, 2020 and for the period from August 22, 2020 through Septemberthree and six months ended June 30, 2021 (Successor), and for the three and six months ended June 30, 2020 (Successor), July 1, 2020 through August 21, 2020 and January 1, 2020 through August 21, 2020 and three and nine months ended September 30, 2019 (Predecessors)(Predecessor) include all adjustments and accruals, consisting only of normal, recurring adjustments and accruals necessary for a fair presentation of the results for the interim periods in conformity with generally accepted accounting principles in the United States ("GAAP"). The operating results for the periods presented three and six months ended June 30, 2021 are not necessarily indicative of results for a full year.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). These unaudited interim condensed consolidated and combined financial statements should be read together with the consolidated and combined financial statements and notes thereto included in the Registration StatementCompany’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Principles of consolidation. The condensed consolidated and combined financial statements include the accounts of the Company and its wholly owned subsidiaries since August 22, 2020, and its Predecessors and their wholly owned subsidiaries since their acquisition or formation for all periods prior to and including August 21, 2020. All material intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior period amounts to conform to the current period’s presentation.
Use of estimates in the preparation of financial statements. Preparation of the Company's unaudited interim condensed consolidated and combined financial statements inconformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Depletion of oil and natural gas properties and evaluations for impairment of proved and unproved oil and natural gas properties, in part, is determined using estimates of proved, probable and possible oil, NGL and natural gas reserves. There are numerous uncertainties inherent in the estimation of quantities of proved, probable and possible reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and natural gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves, and commodity price outlooks.outlooks and future undiscounted and discounted net cash flows. Other items subject to such estimates and assumptions include, but are not limited to, the carrying value of oil and natural gas properties, asset retirement obligations, equity-based compensation, fair value of derivatives and estimates of income taxes. Actual results could differ from the estimates and assumptions utilized.
Cash and cash equivalents. The Company’s cash and cash equivalents include depository accounts held by banks and marketable securities with original issuance maturities of 90 days or less. The Company’s cash and cash equivalents are generally held in financial institutions in amounts that may exceed the insurance limits of the Federal Deposit Insurance Corporation. However, management believes that the Company’s counterparty risks are minimal based on the reputation and history of the institutions selected.
Accounts receivable. TheAs of June 30, 2021 and December 31, 2020, the Company’s accounts receivablereceivables primarily consist of amounts due from the sale of crude oil, NGL and natural gas of $16.3 million and $4.2 million, respectively, and are primarily comprisedbased on estimates of oilsales volumes and gas salesrealized prices the Company anticipates it will receive, joint interest receivables of $4.2 million and $345,000, respectively, a current U.S. federal income tax receivable joint interest receivablesof $3.2 million and $3.2 million, respectively, and other receivables for which the Company does not require collateral security.of $123,000 and zero, respectively. The Company’s share of oil, NGL and natural gas production is sold to various purchasers who must be prequalified under the Company’s credit risk policies and procedures. The Company records allowances for doubtful accounts based on the age of accounts receivables and the financial condition of its purchasers. The Company’s credit risk related to collecting accounts receivables is mitigated by using credit and other financial criteria to evaluate the credit standing of the entity obligated to make payment on the accounts receivable, and where appropriate, the Company obtains assurances of payment, such as a guarantee by the parent company of the counterparty or other credit support.
HIGHPEAK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
As of September 30, 2020 and December 31, 2019, the Company’s accounts receivables primarily consist of amounts due from the sale of crude oil, natural gas and natural gas liquids of $3.6 million and $2.9 million, respectively, and are based on estimates of sales volumes and realized prices the Company anticipates it will receive, a current U.S. federal income tax receivable of $2.3 million and zero, respectively, related to U.S. federal income taxes paid prior to the HighPeak business combination that will be received by carrying back and utilizing the net operating losses generated from August 22, 2020 through September 30, 2020, and joint interest receivables of $77,000 and $440,000, respectively. The Company routinely reviews outstanding balances and establishes allowances for bad debts equal to the estimable portions of accounts receivable for which failure to collect is considered probable. As of SeptemberJune 30, 2020 2021 and December 31, 2019, 2020, the Company had no0 allowance for doubtful accounts recorded.accounts.
Subscription receivable.Notes receivable. In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 505-10-45-2, “Receivables for Issuance of Equity,Pursuant to an agreement between HPK LP and Pure, whereby Pure obtained extensions to complete its initial business combination to August 21, 2020, HPK LP made loans to Pure totaling $11.7 million and $4.2 million”the Company recorded a subscription receivable as of August 21, 2020 and December 31, 2019, respectively. The Company routinely reviews outstanding balances and establishes allowances for bad debts equal2020 related to the estimable portionsexercise of notes receivable for which failurewarrants prior to collect is considered probable. As of December 31, 2019,2020 as the Company had no allowancecash was collected before the financial statements were issued or available to be issued. Prior to December 31, 2020, a total of 312,711 warrants were exercised for doubtful accounts recorded. See additional information regarding Pure cash proceeds of $3.6 million. Due to the timing of the exercises, the shares underlying the warrants were issued in December 2020 and the notesproceeds were received subsequent to December 31, 2020. The outstanding proceeds were recorded as a subscription receivable cancellations in relationsthe accompanying balance sheets as of December 31, 2020. There is 0 subscription receivable as of June 30, 2021 as all cash related to exercises of warrants was received prior to the HighPeak business combination in Note 10 to these condensed consolidated and combined financial statements.balance sheet date.
Deposits. During 2019, HPK LP paid $61.5 million to Grenadier Energy Partners II, LLC (“Grenadier”) as a non-refundable deposit for an acquisition (the “Grenadier Acquisition”) and an additional $15.0 million extension payment was paid in 2020 that was to be accounted for as additional consideration for the Grenadier Acquisition upon closing. The Grenadier Acquisition was terminated in April 2020 and the $76.5 million in deposits and extension payments were charged to expense during the first quarter of 2020 as conditions existed as of March 31, 2020 that made this termination probable at the time. In addition, the Company has paid the Texas Railroad Commission $50,000 in lieu of a plugging bond as statutorily required.
Inventory. Inventory is comprised primarily of oil and natural gas drilling or repair items such as tubing, casing, proppant used to fracture-stimulate oil and natural gas wells, water, chemicals, operating supplies and ordinary maintenance materials and parts. The materials and supplies inventory is primarily acquired for use in future drilling operations or repair operations and is carried at the lower of cost or market,net realizable value, on a weighted average cost basis. Valuation allowances for materials and supplies inventories are recorded as reductions to the carrying values of the materials and supplies inventories in the Company’s condensed consolidated balance sheet and as charges to other expense in the condensed consolidated statements of operations. The Company’s materials and supplies inventory as of SeptemberJune 30, 2020 2021 and December 31, 2019 2020 is $405,000$217,000 and $184,000,$121,000, respectively, and the Company has not recognized any valuation allowance to date.
Oil and natural gas properties. The Company utilizes the successful efforts method of accounting for its oil and natural gas properties. Under this method, all costs associated with productive wells and nonproductive development wells are capitalized while nonproductive exploration costs and geological and geophysical expenditures are expensed.
The Company does not carry the costs of drilling an exploratory well as an asset in its consolidated balance sheet following the completion of drilling unless both of the following conditions are met: (i) the well has found a sufficient quantity of reserves to justify its completion as a producing well and (ii) the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project.
Due to the capital-intensive nature and the geographical location of certain projects, it may take an extended period of time to evaluate the future potential of an exploration project and the economics associated with making a determination on its commercial viability. In these instances, the project’s feasibility is not contingent upon price improvements or advances in technology, but rather the Company’s ongoing efforts and expenditures related to accurately predict the hydrocarbon recoverability based on well information, gaining access to other companies’ production data in the area, transportation or processing facilities and/or getting partner approval to drill additional appraisal wells. These activities are ongoing and are being pursued constantly. Consequently, the Company’s assessment of suspended exploratory well costs is continuous until a decision can be made that the project has found sufficient proved reserves to sanction the project or is noncommercial and is charged to exploration and abandonment expense. See Note 56 for additional information.
The capitalized costs of proved properties are depleted using the unit-of-production method based on proved reserves.reserves for leasehold costs and proved reserves for drilling, completion and other oil and natural gas property costs. Costs of significant nonproducing properties, wells in the progress of being drilled and development projectsunproved leasehold costs are excluded from depletion until the related project is completed and proved reserves are established or, if unsuccessful, impairment is determined.
Proceeds from the sales of individual properties and the capitalized costs of individual properties sold or abandoned are credited and charged, respectively, to accumulated depletion, depreciation and amortization, if doing so does not materially impact the depletion rate of an amortization base. Generally, no gain or loss is recorded until an entire amortization base is sold. However, gain or loss is recorded from the sale of less than an entire amortization base if the disposition is significant enough to materially impact the depletion rate of the remaining properties in the amortization base.
The Company performs assessments of its long-lived assets to be held and used, including proved oil and natural gas properties accounted for under the successful efforts method of accounting, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future cash flows is less than the carrying amount of the assets. In these circumstances, the Company recognizes an impairment charge for the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.
HIGHPEAK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
Unproved oil and natural gas properties are periodically assessed for impairment on a project-by-project basis. These impairment assessments are affected by the results of exploration activities, commodity price outlooks, planned future sales or expirations of all or a portion of such projects. If the estimated future net cash flows attributable to such projects are not expected to be sufficient to fully recover the costs invested in each project, the Company will recognize an impairment charge at that time.
Other property and equipment, net. Other property and equipment is recorded at cost. The carrying values of other property and equipment, net of accumulated depreciation of $189,000$334,000 and $46,000$237,000 as of SeptemberJune 30, 2020 2021 and December 31, 2019, 2020, respectively, are as follows:follows (in thousands):
Successor | Predecessors | June 30, 2021 | December 31, 2020 | |||||||||||||
September 30, 2020 | December 31, 2019 | |||||||||||||||
(in thousands) | ||||||||||||||||
Land | $ | 731 | $ | 725 | ||||||||||||
Information technology | $ | 333 | $ | 459 | 208 | 292 | ||||||||||
Transportation equipment | 44 | - | 92 | 41 | ||||||||||||
Leasehold improvements | 27 | 37 | 17 | 24 | ||||||||||||
Field equipment | 11 | 12 | 9 | 10 | ||||||||||||
Total other property and equipment, net | $ | 415 | $ | 508 | $ | 1,057 | $ | 1,092 |
Other property and equipment is depreciated over its estimated useful life on a straight-line basis. Land is not depreciated. Information technology is generally depreciated over three years, transportation equipment is generally depreciated over five years and field equipment is generally depreciated over seven years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the underlying terms of the associated leases.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recorded is measured by the amount by which the carrying amount of the asset exceeds its estimated fair value. The estimated fair value is determined using either a discounted future cash flow model or another appropriate fair value method.
Debt issuance costs. The Company has paid a total of $2.2 million in debt issuance costs, $1.8 million of which was incurred during the six months ended June 30, 2021, related to its revolving credit facility. Amortization based on the straight-line method over the term of the revolving credit facility which approximates the effective interest method was $77,000 and zero during the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, the net debt issuance costs are netted against the outstanding long-term debt on the accompanying balance sheet in accordance with GAAP. As of December 31, 2020, the net debt issuance costs are included in noncurrent assets on the accompanying consolidated balance sheet due to the fact that the revolving credit facility was undrawn at the time. See Note 7 for additional information regarding the Company’s revolving credit facility.
Leases. The Company enters into leases for drilling rigs, storage tanks, equipment and buildings and recognizes lease expense on a straight-line basis over the lease term. Lease right-of-use assets and liabilities are initially recorded on the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s lease contracts do not provide an implicit discount rate, the Company uses its incremental borrowing rate, which is determined based on information available at the commencement date of a lease. Leases may include renewal, purchase or termination options that can extend or shorten the term of a lease. The exercise of those options is at the Company’s sole discretion and is evaluated at inception and throughout the contract to determine if a modification of the lease term is required. Leases with an initial term of 12 months or less are not recorded as lease right-of-use assets and liability. See Note 710 for additional information.
Accounts payable, accrued liabilities and accruedderivative liabilities. Accounts payable, accrued liabilities and accruedderivative liabilities as of SeptemberJune 30, 2020 2021 and December 31, 2019 2020 totaled approximately $15.1$54.3 million and $31.0$22.4 million, respectively, including trade accounts payable, derivative liabilities, revenues payable and accruals for capital expenditures, operating and general and administrative expenses, operating leases and other miscellaneous items.
Asset retirement obligations. The Company records a liability for the fair value of an asset retirement obligation in the period in which the associated asset is acquired or placed into service, if a reasonable estimate of fair value can be made. Asset retirement obligations are generally capitalized as part of the carrying value of the long-lived asset to which it relates. Conditional asset retirement obligations meet the definition of liabilities and are recorded when incurred and when fair value can be reasonably estimated. See Note 68 for additional information.
Revenue recognition. The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) FASB ASC 606, “Revenue from Contracts with Customers,” (“ASC 606”) whereby the Company recognizes revenues from the sales of oil and natural gas to its purchasers and presents them disaggregated on the Company’s condensed consolidated and combined statements of operations.
The Company enters into contracts with purchasers to sell its oil and natural gas production. Revenue on these contracts is recognized in accordance with the five-stepfive-step revenue recognition model prescribed in ASC 606. Specifically, revenue is recognized when the Company’s performance obligations under these contracts are satisfied, which generally occurs with the transfer of control of the oil and natural gas to the purchaser. Control is generally considered transferred when the following criteria are met: (i) transfer of physical custody, (ii) transfer of title, (iii) transfer of risk of loss and (iv) relinquishment of any repurchase rights or other similar rights. Given the nature of the products sold, revenue is recognized at a point in time based on the amount of consideration the Company expects to receive in accordance with the price specified in the contract. Consideration under the oil and natural gas marketing contracts is typically received from the purchaser one to two months after production. At SeptemberAs of June 30, 2020 2021 and December 31, 2019, 2020, the Company had receivables related to contracts with purchasers of approximately $3.6$16.3 million and $2.9$4.2 million, respectively.
HIGHPEAK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
Oil Contracts. The majority of the Company’s oil marketing contracts transfer physical custody and title at or near the wellhead, which is generally when control of the oil has been transferred to the purchaser. The majority of the oil produced is sold under contracts using market-based pricing which is then adjusted for the differentials based upon delivery location and oil quality. To the extentSince the differentials are incurred after the transfer of control of the oil, the differentials are included in oil sales on the condensed consolidated and combined statements of operations as they represent part of the transaction price of the contract. If the differentials, or other related costs, are incurred prior to the transfer of control of the oil, those costs are included in lease operating expenses on the Company’s condensed consolidated and combined statements of operations as they represent payment for services performed outside of the contract with the purchaser.
Natural Gas Contracts. The majority of the Company’s natural gas is sold at the lease location, which is generally when control of the natural gas has been transferred to the purchaser. The natural gas is sold under (i) percentage of proceeds processing contracts (ii) fee-based contracts or (iii)(ii) a hybrid of percentage of proceeds and fee-based contracts. Under the majority of the Company’s contracts, the purchaser gathers the natural gas in the field where it is produced and transports it to natural gas processing plants where natural gas liquidNGL products are extracted. The natural gas liquidNGL products and remaining residue natural gas are then sold by the purchaser. Under the percentage of proceeds and hybrid percentage of proceeds and fee-based contracts, the Company receives a percentage of the value for the extracted liquids and the residue natural gas. Under the fee-based contracts, the Company receives natural gas liquids and residue gas value, less the fee component, or is invoiced the fee component. To the extentSince control of the natural gas transfers upstream of the transportation and processing activities, revenue is recognized as the net amount received from the purchaser. To the extent that control transfers downstream of the transportation and processing activities, revenue is recognized on a gross basis, and the related costs are classified in gathering, processing and transportation within lease operating expenses on the Company’s condensed consolidated and combined statements of operations.
The Company does not disclose the value of unsatisfied performance obligations under its contracts with customers as it applies the practical exemption in accordance with ASC 606. The exemption, as described in ASC 606-10-50-14(a)606-10-50-14(a), applies to variable consideration that is recognized as control of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
Derivatives. All of the Company’s derivatives are accounted for as non-hedge derivatives and are recorded at estimated fair value in the condensed consolidated balance sheets. All changes in the fair values of its derivative contracts are recorded as gains or losses in the earnings of the periods in which they occur. The Company enters into derivatives under master netting arrangements, which, in an event of default, allows the Company to offset payables to and receivables from the defaulting counterparty. The Company classifies the fair value amounts of derivative assets and liabilities executed under master netting arrangements as net current or noncurrent derivative assets or net current of noncurrent derivative liabilities, whichever the case may be, by commodity and counterparty.
The Company’s credit risk related to derivatives is a counterparties’ failure to perform under derivative contracts owed to the Company. The Company uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments. Although the Company does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Company’s credit risk policies and procedures.
The Company has entered into International Swap Dealers Association Master Agreements (“ISDA Agreements”) with each of its derivative counterparties. The terms of the ISDA Agreements provide the Company and the counterparties with rights of set off upon the occurrence of defined acts of default by either the Company or a counterparty to a derivative, whereby the party not in default may set off all derivative liabilities owed to the defaulting party against all derivative asset receivables from the defaulting party. See Note 5 for additional information.
Income taxes. The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the carrying amounts for income tax purposes and net operating loss and tax credit carryforwards. The amount of deferred taxes on these temporary differences is determined using the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, as applicable, based on tax rates and laws in the respective tax jurisdiction enacted as of the balance sheet date.
The Company reviews its deferred tax assets for recoverability and establishes a valuation allowance based on projected future taxable income, applicable tax strategies and the expected timing of the reversals of existing temporary differences. A valuation allowance is provided when it is more likely than not (likelihood of greater than 50 percent) that some portion or all of the deferred tax assets will not be realized. The Company has not established a valuation allowance as of SeptemberJune 30, 2021 and December 31, 2020.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based upon the technical merits of the position. If all or a portion of the unrecognized tax benefit is sustained upon examination by the taxing authorities, the tax benefit will be recognized as a reduction to the Company’s deferred tax liability and will affect the Company’s effective tax rate in the period it is recognized. See Note 1213 for addition information.
The Company records any tax-related interest charges as interest expense and any tax-related penalties as other expense in the condensed consolidated and combined statements of operations of which there have been none to date.
Prior to August 21, 2020, the Predecessors did not record a provision for U.S. federal income tax because the Predecessors were treated as partnerships for U.S. federal income tax purposes and, as such, the partners of the Predecessors reported their share of the Company’s income or loss on their respective income tax returns. The Predecessors were required to file tax returns on Form 1065 with the Internal Revenue Service (“IRS”). The 2017 to 2019 tax years remain open to examination.
The Predecessors recognize in their condensed consolidated and combined financial statements the effect of a tax position, if that position is more likely than not to be sustained upon examination, including resolution of any appeals or litigation processes, based upon the technical merits of the position. Tax positions taken related to the Predecessors’ status as limited partnerships, and state filing requirements have been reviewed, and management is of the opinion that they would more likely than not be sustained by examination. Accordingly, the Company has not recorded an income tax liability for uncertain tax benefits for periods prior to August 21, 2020. Under the new centralized partnership audit rules effective for tax years beginning after 2017, the IRS assesses and collects underpayments of tax from the partnership instead of from each partner. The partnership may be able to pass the adjustments through to its partners by making a push-out election or, if eligible, by electing out of the centralized partnership audit rules. The collection of tax from the partnership is only an administrative convenience for the IRS to collect any underpayment of income taxes including interest and penalties. Income taxes on partnership income, regardless of who pays the tax or when the tax is paid, is attributed to the partners. Any payment made by the Company as a result of an IRS examination will be treated as an expense from the Company in the condensed consolidated and combined financial statements.
HIGHPEAK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
The Company is also subject to Texas Margin Tax. The Company realized no Texas Margin Tax in the accompanying condensed consolidated and combined financial statements as we do not anticipate owing any Texas Margin Tax for the periods presented.
Stock-based compensation. Stock-based compensation expense for stock options (“Equity Awards”)option awards is measured at the grant date or modification date, as applicable, using the fair value of the award, and is recorded, net of forfeitures, on a straight-line basis over the requisite service period of the respective award. The fair value of Equity Awardsstock option awards is determined on the grant date or modification date, as applicable, using a Black-Scholes option valuation model with the following inputs; (i) the grant date’s closing stock price, (ii) the exercise price of the stock options, (iii) the expected term of the stock option, (iv) the estimated risk-free adjusted interest rate for the duration of the option’s expected term, (v) the expected annual dividend yield on the underlying stock and (vi) the expected volatility over the option’s expected term.
Stock-based compensation for HighPeak Energy common stock issued to directors with no restrictions thereon, is measured at the grant date using the fair value of the award and is recognized as stock-based compensation in the accompanying financial statements immediately. Stock-based compensation for restricted stock awarded to outside directors is measured at the grant date using the fair value of the award and is recognized on a straight-line basis over the requisite service period of the respective award.
Segments. Based on the Company’s organizational structure, the Company has one1 operating segment, which is oil and natural gas development, exploration and production. In addition, the Company has a single, company-wide management team that allocates capital resources to maximize profitability and measures financial performance as a single enterprise.
Impact of the COVID-19COVID-19 Pandemic. A novel strain of the coronavirus disease 2019 ("COVID-19"COVID-19") surfaced in late 2019 and has spread around the world,including to the United States. In March 2020, the World Health Organization declared COVID-19COVID-19 a pandemic, and the President of the United States declared the COVID-19COVID-19 outbreak a national emergency. The COVID-19COVID-19 pandemic has significantly affected the global economy, disrupted global supply chains and created significant volatility in the financial markets. In addition, the COVID-19COVID-19 pandemic has resulted in travel restrictions, business closures and other restrictions that have disrupted the demand for oil throughout the world and when combined with pressures on the global supply-demand balance for oil and related products, resulted in significant volatility in oil prices beginning late February 2020. The length of this demand disruption is unknown, and there is significant uncertainty regarding the long-term impact of the effects of the COVID-19COVID-19 pandemic to global oil demand, which has negatively impacted the Company's results of operations and led to a significant reduction in the Company's 2020 capital activities.demand.
Adoption of new accounting standards. In June 2016, December 2019, the FASB issued Accounting Standards Update("ASU" (“ASU”) 2016-13, "Financial Instruments No.2019- Credit Losses12, “Simplifying the Accounting for Income Taxes (Topic 326): Measurement740).” The new guidance simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes, and the recognition of Credit Losses on Financial Instruments" ("ASU 2016-13"). Effective January 1, 2020,deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. Amendments are to be applied prospectively, except for certain amendments that are to be applied either retrospectively or with a modified retrospective approach through a cumulative effect adjustment recorded to retained earnings. The Company adopted ASU 2016-13 prospectively. 2019-12 on January 1, 2021, which did not have a material impact on the Company's condensed consolidated and combined financial statements.
New accounting pronouncements. In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.2020-04,Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2016-13 replaces2020-04”), and in January 2021, issued ASU No.2021-01,Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”), to provide clarifying guidance regarding the incurred loss impairment modelscope of Topic 848. ASU 2020-04 was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Generally, the guidance is to be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. ASU 2020-04 and ASU 2021-01 are effective for all entities through December 31, 2022. As of June 30, 2021, the Company has not elected to use the optional guidance and continues to evaluate the options provided by ASU 2020-04 and ASU 2021-01. See Note 7 for discussion of the use of the London Interbank Offered Rate (“LIBOR”) in connection with an expected credit loss impairment model for financial instruments, including trade receivables. The amendment requires entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due, which were not consideredborrowings under the previous accounting guidance. The impact of the adoption of ASU 2016-13 was not material.Credit Agreement.
The Company is exposed to credit losses primarily through sales of oil, NGLs and natural gas. The Company's expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on an aging of the accounts receivable balances and the financial condition of customers. The Company's monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined that the estimate of credit losses was not significantly impacted.
New accounting pronouncements. The Company has evaluated other recently issued, but not yet effective, accounting pronouncements and does not believe they would have a material effect on the Company’s condensed consolidated and combined financial statements.
NOTE 3. Acquisitions
During the period from August 22, 2020 to Septembersix months ended June 30, 2020 2021 and the period from January 1, 2020, to August 21, 2020, the Company spentincurred a total of $704,000$2.1 million and $3.3 million, respectively, to acquire primarily undeveloped acreage, threeand in the case of the 2020 period, 3 vertical producing properties and two salt water2 salt-water disposal wells in and around the Company’s existing properties for future exploration activities in the Midland Basin.
Grenadier Acquisition. In June 2019, HighPeak Energy Assets II, LLC (“HighPeak Assets II”) signed a purchase and sale agreement with Grenadier Energy Partners II, LLC (“Grenadier”) to acquire substantially all the oil and natural gas assets of Grenadier, effective June 1, 2019, subject to certain customary closing adjustments for a total purchase price of $615.0 million. Since HighPeak Assets II was contributed to the PredecessorsPredecessor in the HPK LP business combination, discussed in Note 10, this purchase and sale agreement became part of the PredecessorsPredecessor effective October 1, 2019. TheA nonrefundable deposit of $61.5 million was paid to Grenadier Acquisition was originally scheduledin 2019 in addition to close no later than October 2019 but was extended twicea $15.0 million nonrefundable extension payment in 2020 to extend the potential closing to May 2020. In consideration for the initial extension, HPK LP: (i) released the then existing $30.75 million deposit from escrow and (ii) paid directly to Grenadier an additional $30.75 million and (iii) agreed to treat the collective sum as a nonrefundable deposit to Grenadier. In consideration for the second extension, HPK LP agreed to pay Grenadier an additional $15.0 million that was also nonrefundable but, unlike the $61.5 million deposit, was not to be credited toward the purchase price. The Grenadier Acquisition was terminated in April 2020 and was not consummated. As such, consummated and therefore a charge to expense of $76.5 million was recognized induring the first quarter ofsix months ended June 30, 2020.
HIGHPEAK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
NOTE 4.Fair Value Measurements
The Company determines fair value based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company's own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
The three input levels of the fair value hierarchy are as follows:
● | Level 1 – quoted prices for identical assets or liabilities in active markets. | |
● | Level 2 – quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means. | |
● | Level 3 – unobservable inputs for the asset or liability, typically reflecting management’s estimate of assumptions that market participants would use in pricing the asset or |
Assets and liabilities measured at fair value on a recurring basis. TheAssets and liabilities measured at fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest levela recurring basis as of input that is significant to the measurement in its entirety.June 30, 2021 are as follows (in thousands):
As of June 30, 2021 | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||
Liabilities: | ||||||||||||||||
Commodity price derivatives | $ | 0 | $ | 12,558 | $ | 0 | $ | 12,558 |
The Company did not have any assets or liabilities that are measured at fair value on a recurring basis as of September 30, 2020 or December 31, 2019.2020.
Commodity price derivatives. The Company’s commodity price derivatives are currently made up entirely of crude oil swap contracts. The Company measures derivatives using an industry-standard pricing model that is provided by a third party. The inputs utilized in the third-party discounted cash flow and option-pricing models for valuing commodity price derivatives include forward prices for crude oil, contracted volumes, volatility factors and time to maturity, which are considered Level 2 inputs.
Assets and liabilities measured at fair value on a nonrecurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. Specifically, (i) stock-based compensation is measured at fair value on the date of grant based on Level 1 inputs for restricted stock awards or Level 2 inputs for stock option awards based upon market data, and (ii) the oilestimates and gas properties of HighPeak Assets II that were contributed to one of the Predecessors discussed further and in more detail in Note 10 were measured at current estimated fair value measurements used for the evaluation of proved property for potential impairment using Level 3 inputs based upon market conditions in the area. The Company assesses the recoverability of the carrying amount of certain assets and liabilities whenever events or changes in circumstances indicate the carrying amount of an asset or liability may not be recoverable. These assets and liabilities can include inventories, proved and unproved oil and natural gas properties and other long-lived assets that are written down to fair value when they are impaired or held for sale. The Company did not record any impairments to proved andor unproved oil and natural gas properties for the periods presented in the accompanying condensed consolidated and combined financial statements.
The Company has other financial instruments consisting primarily of cash equivalents, accounts receivable, accounts payable, long-term debt and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities.
Concentrations of credit risk. As of September 30, 2020 and December 31, 2019, management has concluded that there are no concentrations of credit risk, based on the nature of the assets held by the Company.
Impact of the COVID-19COVID-19 pandemic on certain assets and liabilities measured at fair value on a nonrecurring basis.
Proved Properties. The Company performs assessments of its proved oil and natural gas properties accounted for under the successful efforts method of accounting whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future cash flows is less than the carrying amount of the assets. In these circumstances, the Company recognizes an impairment charge for the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.
Due to the decrease in management's commodity price outlooks ("Management's Price Outlooks"), theThe Company performed an impairment assessment of its proved oil and natural gas properties as of SeptemberJune 30, 2021 and December 31, 2020 and determined that its proved oil and natural gas properties were not impaired. The primary factors that may affect estimates of future cash flows for the Company's proved oil and natural gas properties are (i) future reserve adjustments, both positive and negative, to proved reserves and risk-adjusted probable and possible reserves, (ii) results of future drilling activities, (iii) Management's Price Outlooksmanagement's price outlooks and (iv) increases or decreases in production and capital costs.
There is significant uncertainty surrounding the long-term impact to global oil demand due to the effects of the COVID-19COVID-19 pandemic. These conditions are negatively impacting the Company's 2020 forecasted capital activities and production levels. It is reasonably possible that the carrying value of the Company's proved oil and natural gas properties could exceed their estimated fair value resulting in the need to impair their carrying values in the future. If incurred, an impairment of the Company's proved oil and natural gas properties could have a material adverse effect on the Company's financial condition and results of operations.
NOTE 5. Derivative Financial Instruments
The Company primarily utilizes commodity swap contracts to (i) reduce the effect of price volatility on the commodities the Company produces and sells, and (ii) support the Company’s capital budgeting and expenditure plans and (iii) support the payment of contractual obligations.
The following table summarizes the effect of derivatives on the Company’s condensed consolidated statements of operations:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||
Noncash derivative gain (loss), net | $ | (12,558 | ) | $ | 0 | $ | (12,558 | ) | $ | 0 | ||||||
Cash payments on settled derivative instruments, net | (1,038 | ) | 0 | (1,038 | ) | 0 | ||||||||||
Derivative gain (loss), net | $ | (13,596 | ) | $ | 0 | $ | (13,596 | ) | $ | 0 |
Crude oil production derivatives. The Company sells its oil production at the lease and the sales contracts governing such oil production are tied directly to, or are correlated with, NYMEX WTI oil prices. As such, the Company uses NYMEX WTI derivative contracts to manage future oil price volatility.
The Company’s outstanding crude oil derivative contracts as of June 30, 2021 and the weighted average oil prices per barrel for those contracts are as follows:
2021 | 2022 | |||||||||||||||||||||||
Third Quarter | Fourth Quarter | Total | First Quarter | Second Quarter | Total | |||||||||||||||||||
Oil Price Swaps | ||||||||||||||||||||||||
Volume (Bbls) | 460,000 | 460,000 | 920,000 | 450,000 | 302,500 | 752,500 | ||||||||||||||||||
Price per Bbl | $ | 61.91 | $ | 61.91 | $ | 61.91 | $ | 61.91 | $ | 62.16 | $ | 61.95 |
HIGHPEAK ENERGY, INC.The Company uses credit and other financial criteria to evaluate the credit standings of, and to select, counterparties to its derivative financial instruments. Although the Company does not obtain collateral or otherwise secure the fair value of its derivative financial instruments, associated credit risk is mitigated by the Company’s credit risk policies and procedures.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
SeptemberNet derivative liabilities associated with the Company’s open commodity derivatives are all with Fifth Third Bank, National Association (“Fifth Third”) as of June 30, 20202021.
(Unaudited)
NOTE 5.6. Exploratory Well Costs
The Company capitalizes exploratory well and project costs until a determination is made that the well or project has either found proved reserves, is impaired or is sold. The Company's capitalized exploratory well and project costs are included in proved properties in the condensed consolidated balance sheets. If the exploratory well or project is determined to be impaired, the impaired costs are charged to exploration and abandonments expense.
The changes in capitalized exploratory well costs are as follows:follows (in thousands):
Successor | Predecessors | |||||||
August 22, through September 30, 2020 | January 1, through August 21, 2020 | |||||||
Beginning capitalized exploratory well costs | $ | 41,524 | $ | 11,427 | ||||
Additions to exploratory well costs pending the determination of proved reserves | 14,652 | 48,169 | ||||||
Reclassification due to determination of proved reserves | (33,351 | ) | (18,072 | ) | ||||
Exploratory well costs charged to exploration and abandonment expense | - | - | ||||||
Ending capitalized exploratory well costs | $ | 22,825 | $ | 41,524 |
Six Months Ended June 30, 2021 | ||||
Beginning capitalized exploratory well costs | $ | 32,592 | ||
Additions to exploratory well costs | 75,289 | |||
Reclassification to proved properties | (106,749 | ) | ||
Exploratory well costs charged to exploration and abandonment expense | 0 | |||
Ending capitalized exploratory well costs | $ | 1,132 |
All capitalized exploratory well costs have been capitalized for less than one year based on the date of drilling.
Note 67. Long-Term Debt
The components of long-term debt, including the effects of debt issuance costs, are as follows (in thousands):
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
Revolving Credit Facility due 2024 | $ | 14,000 | $ | 0 | ||||
Debt issuance costs, net (a) | (2,082 | ) | 0 | |||||
Total debt | 11,918 | 0 | ||||||
Less current portion of long-term debt | 0 | 0 | ||||||
Long-term debt, net | $ | 11,918 | $ | 0 |
(a) Debt issuance costs as of June 30, 2021 consisted of $2.2 million in costs less accumulated amortization of $81,000. Debt issuance costs as of December 31, 2020 of $401,000, net of accumulated amortization of $4,000, were classified in other noncurrent assets on the accompanying balance sheet due to the fact that the Company had 0 outstanding debt at that time. |
Revolving Credit Facility. In December 2020, the Company entered into a Credit Agreement with Fifth Third as the administrative agent and sole lender to establish a revolving credit facility (“Revolving Credit Facility”) that matures on June 17, 2024. The Revolving Credit Facility had an initial borrowing base of $40.0 million. However, the Company elected to reduce the aggregate elected commitments under the Revolving Credit Facility to $20.0 million. In June 2021, the Company entered into the First Amendment to the Credit Agreement to among other things, (i) complete the semi-annual borrowing base redetermination process which increased the borrowing base from $40.0 million to $125,0 million and (ii) modify the terms of the Credit Agreement to increase the aggregate elected commitments from $20.0 million to $125.0 million. A syndicate of banks joined the credit facility at differing levels of commitments with Fifth Third remaining the administrative agent.
The borrowing capacity under the Revolving Credit Facility is equal to the lowest of (i) the borrowing base (which currently stands at $125.0 million), (ii) the aggregate elected commitments (which currently stand at $125.0 million) and (iii) $500.0 million. As of June 30, 2021 and December 31, 2020, the Company had $14.0 million and zero, respectively, outstanding borrowings under the Revolving Credit Facility. Borrowings under the Revolving Credit Facility bear interest, at the option of the Company, based on (a) a rate per annum equal to the higher of (i) the prime rate announced from time to time by Fifth Third, (ii) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System during the last preceding business day plus 0.5 percent or (iii) the Adjusted LIBOR Rate, plus a margin (the “Applicable Margin”), which is currently 3.25 percent and is also determined by the Borrowing Base Utilization Percentage as defined in the Revolving Credit Facility. Letters of credit outstanding under the Revolving Credit Facility are subject to a per annum fee, representing the Applicable Margin plus 0.125 percent. The Company also pays commitment fees on undrawn amounts under the Revolving Credit Facility equal to 0.50 percent. Borrowings under the Revolving Credit Facility are secured by a first lien security interest on substantially all assets of the Company and its restricted subsidiaries, including mortgages on the Company’s and its restricted subsidiaries’ oil and natural gas properties. The Revolving Credit Facility is scheduled to have the borrowing base redetermined semiannually in April and October. Additionally, the Company and Fifth Third each have the option for a wild card evaluation between redeterminations.
The Credit Agreement specifies that if LIBOR is no longer a widely used benchmark rate, or if it is no longer used for determining interest rates for loans in the United States, a replacement interest rate that fairly reflects the cost to the lenders of funding loans shall be established by the Administrative Agent, as defined in the Credit Agreement, in consultation with the Company. See Note 2 for reference rate reform.
The Revolving Credit Facility requires the maintenance of a ratio of total debt to EBITDAX, subject to certain adjustments, not to exceed 3.00 to 1.00 as of the last day of any fiscal quarter (commencing with the fiscal quarter ending June 30, 2021) and a current ratio, subject to certain adjustments, of at least 1.00 to 1.00 as of the last day of any fiscal quarter.
The Company has limited equity cure rights for a breach of the above-listed financial covenants. Additionally, the Revolving Credit Facility contains additional restrictive covenants that limit the ability of the Company and its restricted subsidiaries to, among other things, incur additional indebtedness, incur additional liens, make investments and loans, enter into mergers and acquisitions, make or declare dividends and other payments, enter into certain hedging transactions, sell assets and engage in transactions with affiliates. The Revolving Credit Facility contains customary mandatory prepayments, including a monthly mandatory prepayment if the Consolidated Cash Balance (as defined in the Revolving Credit Agreement) is in excess of $20.0 million. In addition, the Revolving Credit Agreement is subject to customary events of default, including a change in control. If an event of default occurs and is continuing, the administrative agent or the majority of the lenders may accelerate any amounts outstanding and terminate lender commitments.
Note 8. Asset Retirement Obligations
The Company’s asset retirement obligations primarily relate to the future plugging and abandonment of wells and related facilities. Market risk premiums associated with asset retirement obligations are estimated to represent a component of the Company’s credit-adjusted risk-free rate that is utilized in the calculations of asset retirement obligations.
Asset retirement obligations activity is as follows (in thousands):
Successor | Predecessors | |||||||||||
August 22, 2020 through September 30, 2020 | January 1, 2020 through August 21, 2020 | Six Months Ended June 30, 2021 | ||||||||||
Beginning asset retirement obligations | $ | 2,398 | $ | 2,212 | $ | 2,293 | ||||||
New wells placed on production | 15 | 97 | ||||||||||
Liabilities settled | (29 | ) | - | |||||||||
Liabilities incurred from new wells | 610 | |||||||||||
Revision of estimates (a) | (10 | ) | ||||||||||
Accretion of discount | 15 | 89 | 72 | |||||||||
Ending asset retirement obligations | $ | 2,399 | $ | 2,398 | $ | 2,965 |
(a) The revisions to the Company’s asset retirement obligation estimates are primarily due to changes in estimated costs based on experience with the properties and their expected useful lives. |
As of SeptemberJune 30, 2020 2021 and December 31, 2019, 2020, all asset retirement obligations are considered noncurrent and classified as such in the accompanying consolidated balance sheet.
HIGHPEAK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
NOTE 7. Leases
The Company adopted ASC Topic 842, “Leases” electing the transition method which permits entities to change the date of initial application to the beginning of the year of adoption and to recognize the effects of applying the new standard as a cumulative-effect adjustment to the opening balance of retained earnings. The Company elected this transition approach, however the cumulative impact of adoption in the opening balance of retained earnings as of January 1, 2020 was zero. Therefore, as of September 30, 2020 the Company recorded operating right-of-use assets and liabilities totaling $641,000. The Company does not currently have any finance right-of-use leases. Maturities of the operating lease obligations are as follows (in thousands):
Successor | ||||
September 30, 2020 | ||||
2020 | $ | 137 | ||
2021 | 439 | |||
2022 | 79 | |||
Total lease payments | 655 | |||
Less present value discount | (14 | ) | ||
Present value of lease liabilities | $ | 641 |
NOTE 8.9. Incentive PlansPlans
401(k) 401(k) Plan. Plan. The HighPeak Energy Employees, Inc 401(k)401(k) Plan (the “401(k)“401(k) Plan”) is a defined contribution plan established under Section 401 of the Internal Revenue Code of 1986, as amended (the "Code"). As of October 1, 2020, all regular full-time and part-time employees of the Company are eligible to participate in the 401(k)401(k) Plan after three continuous months of employment with the Company. Participants may contribute up to 80 percent of their annual base salary into the 401(k)401(k) Plan. Matching contributions are made to the 401(k)401(k) Plan in cash by the Company in amounts equal to 100 percent of a participant’s contributions to the 401(k)401(k) Plan that are not in excess of up to four percent of the participant’s annual base salary (the “Matching Contribution”). Each participant’s account is credited with the participant’s contributions, Matching Contributions and allocations of the 401(k)401(k) Plan’s earnings. Participants are fully vested in their account balances at their eligibility date. TheDuring the six months ended June 30, 2021 and 2020, the Company has not made any contributions as of September 30, 2020.contributed $111,000 and zero to the 401(k) Plan, respectively.
Long-Term Incentive Plan. The Company’s 2020 Long-Term Incentive Plan (“LTIP”) provides for the granting of stock awards, stock options, dividend equivalents and substitute awards to directors, officers and employees of the Company. The number of shares available for grant pursuant to awards under the LTIP are as follows:
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Approved and authorized awards | |||||
Awards | ( | ) | |||
Awards available for future grant |
Stock Options. Stock optionsoption awards were granted to employees on August 24, 2020. Stock-based compensation expense related to the Company’s stock option awards for the period from August 22, 2020 to Septembersix months ended June 30, 2021 and 2020 for the Company was $14.5$1.9 million and zero, respectively, and as of SeptemberJune 30, 2021 and December 31, 2020 there was $4.8$1.9 million and $3.8 million, respectively, of unrecognized stock-based compensation expense related to unvested stock-based compensationstock option awards. The unrecognized compensation expense will be recognized on a straight-line basis over the remaining vesting periods of the awards, which is a period of less than two years.
HIGHPEAK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
The Company estimates the fair values of stock options granted on the grant date using a Black-Scholes option valuation model, which requires the Company to make several assumptions. The expected term of options granted was determined based on the simplified method of the midpoint between the vesting dates and the contractual term of the options. The risk-free interest rate is based on the U.S. treasury yield curve rate for the expected term of the option at the date of grant and the volatility was based on the volatility of a peer group of companies with similar characteristics of the Company on the date of grant since the Company did not have any trading history. More detailed stock options activity and details are as follows:
Stock Options | Exercise Price | Remaining Term in Years | Intrinsic Value | |||||||||||||
Outstanding at August 22, 2020 | - | |||||||||||||||
Awards granted | 9,705,495 | $ | 10.00 | |||||||||||||
Awards forfeited | - | |||||||||||||||
Exercised | - | |||||||||||||||
Outstanding at September 30, 2020 | 9,705,495 | $ | 10.00 | 9.9 | - | |||||||||||
Vested at September 30, 2020 | 7,204,037 | $ | 10.00 | 9.9 | - | |||||||||||
Exercisable at September 30, 2020 | 7,204,037 | $ | 10.00 | 9.9 | - |
Stock Options | Exercise Price | Remaining Term in Years | Intrinsic Value (in thousands) | |||||||||||||
Outstanding at August 22, 2020 | 0 | |||||||||||||||
Awards granted | 9,705,495 | $ | 10.00 | |||||||||||||
Outstanding at December 31, 2020 | 9,705,495 | $ | 10.00 | 9.7 | $ | 57,942 | ||||||||||
Exercised | (154,268 | ) | $ | 10.00 | ||||||||||||
Outstanding at June 30, 2021 | 9,551,227 | $ | 10.00 | 9.2 | $ | 0 | ||||||||||
Vested at December 31, 2020 | 7,204,163 | $ | 10.00 | 9.7 | $ | 43,009 | ||||||||||
Exercisable at December 31, 2020 | 7,204,163 | $ | 10.00 | 9.7 | $ | 43,009 | ||||||||||
Vested at June 30, 2021 | 7,049,895 | $ | 10.00 | 9.2 | $ | 2,232 | ||||||||||
Exercisable at June 30, 2021 | 7,049,895 | $ | 10.00 | 9.2 | $ | 2,232 |
Stock Issued to Directors. A total of 67,779 shares of restricted stock was approved by the board of directors to be granted to the outside directors of the Company on June 1, 2021, which vest on the one-year anniversary of such grant assuming the director remains in his or her position as of the anniversary date. Out of the 67,779 shares of restricted stock granted, 52,883 were issued during June 2021 and 14,896 shares were issued in July 2021. Therefore, stock-based compensation expense of $57,000 was recognized during the six months ended June 30, 2021, and the remaining $626,000 will be recognized over the remaining restricted period, which was based upon the closing price of the stock on the date of the restricted stock issuance.
Stock was issued to the outside directors of the Company in November 2020 in the amount of 12,500 shares for each outside director, totaling 62,500 shares. There were no restrictions of these shares. Therefore stock-based compensation expense was recognized immediately upon the issuance of these shares in the amount of $302,000 which was based upon the closing price of the stock on the date the stock issuance was approved by the board of directors of the Company.
NOTE 9.10. Commitments and Contingencies
Leases. The Company adopted ASC Topic 842, “Leases” electing the transition method which permits entities to change the date of initial application to the beginning of the year of adoption and to recognize the effects of applying the new standard as a cumulative-effect adjustment to the opening balance of retained earnings. The Company elected this transition approach, however the cumulative impact of adoption in the opening balance of retained earnings as of January 1, 2020 was zero. Therefore, as of June 30, 2021 the Company had right-of-use assets totaling $236,000 included in other noncurrent assets and operating lease liabilities totaling $239,000, $213,000 of which are included in other current liabilities and $26,000 of which are included in other noncurrent liabilities, and as of December 31, 2020 the Company had right-of-use assets totaling $506,000 included in other noncurrent assets and operating lease liabilities totaling $508,000, $430,000 of which are included in other current liabilities and $78,000 of which are included in other noncurrent liabilities on the accompanying condensed consolidated balance sheets. The Company does not currently have any finance right-of-use leases. Maturities of the operating lease obligations are as follows (in thousands):
June 30, 2021 | ||||
Remainder of 2021 | $ | 164 | ||
2022 | 79 | |||
Total lease payments | 243 | |||
Less present value discount | (4 | ) | ||
Present value of lease liabilities | $ | 239 |
Legal actions. From time to time, the Company ismay be a party to various proceedings and claims incidental to its business. While many of these matters involve inherentuncertainty, the Company believes that the amount of the liability, if any, ultimately incurred with respect to these proceedings and claims will not have a material adverse effect on the Company's consolidated financial position as a whole or on its liquidity, capital resources or future annual results of operations. The Company records reserves for contingencies when information available indicates that a loss is probable, and the amount of the loss can be reasonably estimated.
Indemnifications. The Company has agreed to indemnify its directors, officers and certain of its officers, employees and agents with respect to claims and damages arising from acts or omissions taken in such capacity, as well as with respect to certain litigation.
EnvironmentalEnvironmental. . Environmental expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Environmental expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. Liabilities for expenditures that will not qualify for capitalization are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Such liabilities are undiscounted unless the timing of cash payments for the liability is fixed or reliably determinable. Environmental liabilities normally involve estimates that are subject to revision until settlement or remediation occurs.
Salt-Water Disposal Commitments. The Company has committed to deliver a total of 3.0 MMBbl of produced water for disposal with a third-party salt-water disposal company between July 24, 2020 and July 24, 2022. As of June 30, 2021, the Company has delivered approximately 1.7 MMBbl under the agreement. The agreement requires a payment for any volumes not delivered should the Company not perform under the agreement, indicating a remaining monetary commitment of approximately $603,000 as of June 30, 2021.
Crude Oil Delivery Commitments. In May 2021, the Company entered into a crude oil marketing contract with Lion as the purchaser and DKL Permian Gathering, LLC (“DKL”) as the gatherer and transporter. The contract includes the Company’s current and future crude oil production from its horizontal wells in Flat Top where DKL will construct an oil gathering system and custody transfer meters to all the Company’s central tank batteries. The contract contains a minimum volume commitment commencing October 2021 based on the gross barrels delivered at the Company’s central tank battery facilities and is 5,000 Bopd for the first year, 7,500 Bopd for the second year and 10,000 Bopd for the remaining eight years of the contract. However, the Company has the ability under the contract to cumulatively bank excess volumes delivered to offset future minimum volume commitments. The monetary commitment as of June 30, 2021, if the Company never delivers any volumes under the agreement, is approximately $25.4 million.
Natural gas purchasing replacement contract. In May 2021, the Company entered into a replacement natural gas purchase contract with WTG Gas Processing, L.P. (“WTG”) as the gatherer, processor and purchaser of the Company’s current and future gross natural gas production in Flat Top. The replacement contract provides the Company with improved natural gas and NGL pricing and requires WTG to expand its current low-pressure gathering system, which eliminates the need for in-field compression in Flat Top to accommodate the Company’s increased natural gas production volumes based on the current plan of development. In exchange for the improved pricing terms and expansion of the gathering system, the Company will provide WTG with certain aid-in-construction payments. The replacement contract does not contain any minimum volume commitments.
Power contracts. In June 2021, the Company entered into a contract with Priority Power Management, LLC (“Priority Power”) whereby Priority Power will develop an electric high-voltage (“EHV”) substation, medium voltage distribution systems and a 13-megawatt direct current solar photovoltaic facility located on approximately 80 acres of land owned by the Company north of Big Spring, Texas in Howard County to provide for the Company’s electrical power needs in its Flat Top operating area including powering drilling rigs and day-to-day operations. The EHV substation will be interconnected with the ERCOT transmission grid via the local electric utility, have an initial capacity of up to 50 megavolt amperes and be designed for future expansion capability. The solar generation facility will be interconnected with the medium voltage distribution system that will be energized from the new EHV substation. Priority Power will develop, finance, engineer, construct, operate and maintain the project facilities.
Also in June 2021, the Company entered into a contract with Oncor Electric Delivery Company, LLC (“Oncor”) to construct certain facilities to deliver electricity to the aforementioned substation. In conjunction with this contract, the Company issued a $1.9 million letter of credit to Oncor until such time as the Company’s load meets or exceeds 12 megawatts as measured during any fifteen (15) minute interval on or before May 20, 2023.
NOTE 10.11. Related Party Transactions
HPK LP Business Combination. Effective October 1, 2019, HighPeak I and HighPeak Energy II, LP (“HighPeak II”) contributed cash and wholly owned subsidiaries, HighPeak Energy Assets, LLC, HighPeak Assets II and HighPeak Energy Holdings, LLC to HPK LP in return for limited partnership interest in HPK LP. Subsequent to the HPK LP business combination referenced in the preceding sentence and in 2019, HighPeak I contributed an additional $805,000 and HighPeak II contributed an additional $25.8 million in cash to HPK LP. During the period from January 1, 2020 through August 21, 2020, HighPeak II contributed an additional $54.0 million in cash to HPK LP. Also, during the period from January 1, 2020 through August 21, 2020, HPK LP made distributions to HighPeak I and HighPeak II of $2.8 million in total. Therefore, just prior to the HighPeak business combination which closed on August 21, 2020, HighPeak I and HighPeak II owned approximately 51.9% and 48.1% of HPK LP, respectively.
HIGHPEAK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
Since HighPeak I is the predecessor to HPK LP, its consolidated statement of operations and consolidated statement of cash flows for the three and nine months ended September 30, 2019 have been included in the accompanying financial statements for comparative purposes. However, HighPeak II’s results of operations are significant and as such HighPeak II’s consolidated statement of operations is shown below for additional comparative and informational purposes (in thousands).
Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | |||||||
Operating Revenues: | ||||||||
Crude oil sales | $ | 513 | $ | 719 | ||||
Natural gas and natural gas liquid sales | 42 | 223 | ||||||
Total operating revenues | 555 | 942 | ||||||
Operating costs and expenses: | ||||||||
Oil and natural gas production | 488 | 1,190 | ||||||
Production and ad valorem taxes | 35 | 59 | ||||||
Exploration and abandonment | 48 | 756 | ||||||
Depletion, depreciation and amortization | 445 | 650 | ||||||
Accretion of discount on asset retirement obligations | 30 | 86 | ||||||
General and administrative | 964 | 2,891 | ||||||
Abandoned project | 1,122 | 1,122 | ||||||
Total operating costs and expenses | 3,132 | 6,754 | ||||||
Loss from operations | (2,577 | ) | (5,812 | ) | ||||
Interest income | 107 | 107 | ||||||
Net loss | $ | (2,470 | ) | $ | (5,705 | ) |
HIGHPEAK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
HighPeak Business Combination. On August 21, 2020, the Company completed the HighPeak business combination between the Company, Pure, HPK LP, HighPeak I, and HighPeak II. HighPeak I and HighPeak II contributed their partnership interests in HPK LP to the Company in return for 76,383,054 shares of publicly traded common stock of the Company. The table below shows the construction of the beginning balance sheet of the Company on August 22, 2020 upon the closing of the HighPeak business combination.
(a) | (b) | (c) | (d) | (e) | (f) | |||||||||||||||||||||||
HPK LP | Pure | HighPeak Employees, Inc. | Issuance of HighPeak Energy Common Stock | Cash Offering Costs | Deferred Tax Liability | Beginning Balance Sheet on August 22, 2020 | ||||||||||||||||||||||
Cash and cash equivalents | $ | 1,943 | $ | 1 | $ | 99 | $ | 92,554 | $ | (8,383 | ) | $ | - | $ | 86,214 | |||||||||||||
Accounts receivable | 3,001 | - | 26 | - | - | - | 3,027 | |||||||||||||||||||||
Total current assets | 4,944 | 1 | 125 | 92,554 | (8,383 | ) | - | 89,241 | ||||||||||||||||||||
Total oil and gas properties, net | 452,039 | - | - | - | - | - | 452,039 | |||||||||||||||||||||
Other property and equipment, net | 436 | - | - | - | - | - | 436 | |||||||||||||||||||||
Total assets | $ | 457,419 | $ | 1 | $ | 125 | $ | 92,554 | $ | (8,383 | ) | $ | - | $ | 541,716 | |||||||||||||
Current liabilities | $ | 35,794 | $ | 2,025 | $ | 77 | $ | (9,538 | ) | $ | - | $ | - | $ | 28,358 | |||||||||||||
Deferred income tax liability | - | - | - | - | - | 40,500 | 40,500 | |||||||||||||||||||||
Notes payable (receivable) | (11,675 | ) | 11,675 | - | - | - | - | - | ||||||||||||||||||||
Asset retirement obligations | 2,398 | - | - | - | - | - | 2,398 | |||||||||||||||||||||
Partners' capital | 521,682 | - | - | (521,682 | ) | - | - | - | ||||||||||||||||||||
Common stock | - | - | - | 9 | - | - | 9 | |||||||||||||||||||||
Additional paid-in capital | - | (13,699 | ) | 48 | 623,765 | (8,383 | ) | (40,500 | ) | 561,231 | ||||||||||||||||||
Accumulated deficit | (90,780 | ) | - | - | - | - | - | (90,780 | ) | |||||||||||||||||||
Total stockholders' equity/partner's capital | 430,902 | (13,699 | ) | 48 | 102,092 | (8,383 | ) | (40,500 | ) | 470,460 | ||||||||||||||||||
Total liabilities and stockholders' equity/partners' capital | $ | 457,419 | $ | 1 | $ | 125 | $ | 92,554 | $ | (8,383 | ) | $ | - | $ | 541,716 |
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HIGHPEAK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
Pursuant to the Business Combination Agreement, among other things, (a) MergerSub merged with and into Pure, with Pure surviving as a wholly owned subsidiary of the Company, (b) each outstanding share of Pure’s Class A Common Stock and Pure’s Class B Common Stock (other than certain shares of Pure’s Class B Common Stock that were surrendered for cancellation by Pure’s Sponsor) were converted into the right to receive (A) one share of HighPeak Energy common stock (and cash in lieu of fractional shares), and (B) solely with respect to each outstanding share of Pure’s Class A Common Stock, (i) a cash amount, without interest, equal to $0.62, which represented the amount by which the per-share redemption value of Pure’s Class A Common Stock that exceeded $10.00 per share at the closing, without interest, in each case, totaling approximately $767,902, (ii) one CVR for each one whole share of HighPeak Energy common stock (excluding fractional shares) issued to holders of Pure’s Class A Common Stock pursuant to clause (A), representing the right to receive additional shares of HighPeak Energy common stock (or such other specified consideration as is specified with respect to certain events) under certain circumstances, if necessary, to satisfy a 10% preferred simple annual return, subject to a floor downside per-share price of $4.00, as measured at the applicable maturity, which will occur on a date to be specified and which may be any date occurring during the period beginning on (and including) August 21, 2022 and ending on (and including) February 21, 2023, or in certain circumstances after the occurrence of certain change of control events with respect to the Company’s business, including certain mergers, consolidations and asset sales (with an equivalent number of shares of HighPeak Energy common stock held by HighPeak I and HighPeak II being collectively forfeited) and (iii) one warrant to purchase HighPeak Energy common stock for each one whole share of HighPeak Energy common stock (excluding fractional shares) issued to holders of Pure’s Class A Common Stock pursuant to clause (A), (c) the HPK Contributors (A) contributed their limited partner interests in HPK LP to the Company in exchange for HighPeak Energy common stock and the general partner interests in HPK LP to a wholly owned subsidiary of the Company in exchange for no consideration, and (B) contributed the outstanding Sponsor Loans (as defined in the Business Combination Agreement) in exchange for HighPeak Energy common stock and such Sponsor Loans were cancelled in connection with the closing of the HighPeak business combination and (d) following the consummation of the foregoing transactions, the Company caused HPK LP to merge with and into the Surviving Corporation (as successor to Pure) and all interests in HPK LP were cancelled in exchange for no consideration.
HighPeak I and HighPeak II collectively received 76,383,054 shares of HighPeak Energy common stock pursuant to the Business Combination Agreement. Further, certain of the Company’s executive officers and directors received the consideration provided by the HighPeak business combination through their ownership of Pure’s Class A Common Stock. Steven W. Tholen, the Company’s Chief Financial Officer received 5,000 shares of HighPeak Energy common stock, 5,000 CVRs and 5,000 warrants in exchange for shares of Pure’s Class A Common Stock owned by him prior to the HighPeak business combination. Michael L. Hollis, the Company’s President and member of the Company’s board of directors (the “Board”), received 16,802 shares of HighPeak Energy common stock, 16,802 CVRs and 20,382 warrants in exchange for shares of Pure’s Class A Common Stock and Pure’s warrants, respectively, owned by him prior to the HighPeak business combination. Further, Rodney L. Woodard, the Chief Operating Officer of the Company, received 14,000 shares of HighPeak Energy common stock, 14,000 CVRs and 14,000 warrants in exchange for shares of Pure’s Class A Common Stock and Pure’s warrants, respectively, owned by him prior to the HighPeak business combination.
Contingent Value Rights. At the closing of the HighPeak business combination, the Company entered into the Contingent Value Rights Agreement (the “CVR Agreement”) by and among, the Company, Pure’s Sponsor, HighPeak I, HighPeak II (together with Pure’s Sponsor and HighPeak I, the “CVR Sponsors”) and Continental Stock Transfer & Trust Company, in its capacity as Rights Agent (the “Rights Agent”). The CVR Agreement provides for, among other things, the CVRs, which represent contractual rights to receive a contingent payment (in the form of additional shares of HighPeak Energy common stock, or as otherwise specified in the CVR Agreement) in certain circumstances that were issued to the holders of shares of Pure’s Class A Common Stock that participated in the HighPeak business combination and certain qualified institutional buyers and accredited investors, including certain affiliates and officers of the Company, that purchased forward purchase units of the Company pursuant to the Forward Purchase Agreement Amendment (as defined below). Pursuant to the CVR Agreement, holders of CVRs in whose name a CVR is registered in the CVR registrar maintained by the Rights Agent at any date of determination are being provided with a significant valuation protection through the opportunity to obtain additional contingent consideration in the form of additional shares of HighPeak Energy common stock if the trading price of HighPeak Energy’s common stock is below the price that would provide the holders of CVRs with a 10% preferred simple annual return (based on a $10.00 per share price at the closing of the HighPeak business combination), subject to a floor downside per-share price of $4.00 (the “Preferred Returns”), either at (i) the date to be specified by the CVR Sponsors, which may be any date occurring during the period beginning on (and including) August 21, 2022 and ending on (and including) February 21, 2023, or (ii) in certain circumstances, the occurrence of certain change of control events with respect to the Company’s business, including certain mergers, consolidation and asset sales. If any additional shares of HighPeak Energy common stock are issued to Qualifying CVR Holders (as defined in the CVR Agreement) pursuant to the CVR Agreement, the CVR Sponsors will collectively forfeit an equivalent number of shares they own that are currently in escrow to the Company for cancellation. The Preferred Returns could entitle a Qualifying CVR Holder to receive up to 2.125 shares of HighPeak Energy common stock per CVR. Following the closing, the CVR Sponsors collectively placed the shares in escrow, which equaled the maximum number of additional shares of HighPeak Energy common stock issuable pursuant to the CVR Agreement, which such shares will be released either to the Company for cancellation in connection with the satisfaction of any Preferred Returns or back to the CVR Sponsors, collectively, as applicable, following the maturity date under the CVR Agreement.
HIGHPEAK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
Stockholders’ Agreement.At the closing of the HighPeak business combination, Pure’s Sponsor, HighPeak I, HighPeak II, HighPeak III and Jack Hightower (collectively, with each of their respective affiliates and permitted transferees, the “Principal Stockholder Group”), on the one hand, and the Company, on the other hand, entered into a Stockholders’ Agreement (the “Stockholders’ Agreement”), which governs certain rights and obligations following the HighPeak business combination. Under the Stockholders’ Agreement, the Principal Stockholder Group will be entitled, based on its percentage ownership of the total amount of HighPeak Energy common stock issued and outstanding immediately following the closing (the “Original Shares”) and provided that the Original Shares constitute not less than the percentage of the then outstanding total voting securities of the Company set forth below, to nominate a number of directors for appointment to the Board as follows:
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If at any time the Principal Stockholder Group owns less than 5% of the Original Shares or the Original Shares constitute less than 7.5% of the Company’s then-outstanding voting securities, it will cease to have any rights to designate individuals for nomination to the Board.
For so long as the Principal Stockholder Group has the right to designate at least one director for nomination under the Stockholders’ Agreement, the Company will take all Necessary Action (as defined therein) to ensure that the number of directors serving on the Board shall not exceed seven (7). For so long as the Principal Stockholder Group owns a number of shares of HighPeak Energy common stock equal to at least (i) 20% of the Original Shares and (ii) 7.5% of the then-outstanding voting securities of the Company, the Company and the Principal Stockholder Group shall have the right to have a representative appointed to serve on each committee of the Board (other than the audit committee) for which any such representative is eligible pursuant to applicable laws and the Nasdaq. For so long as the Principal Stockholder Group has the right to designate one or more individuals for nomination to the Board, the Principal Stockholder Group shall have the right to appoint one (1) non-voting observer to the Board.
The Stockholders’ Agreement also includes customary restrictions on the transfer of equity securities to certain persons acquiring beneficial ownership. Pursuant to the Stockholders’ Agreement, the Principal Stockholder Group will agree not to transfer, directly or indirectly, any equity securities of the Company for a period of 180 days after the Closing, subject to certain customary exceptions. The Stockholders’ Agreement will terminate as to each stockholder upon the time at which the Principal Stockholder Group no longer has the right to designate an individual for nomination to the Board under the Stockholders’ Agreement and as to a member of the Principal Stockholder Group that no longer owns any of the Original Shares.
HIGHPEAK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
Registration Rights Agreement. At the closing of the HighPeak business combination, the Company entered into the Registration Rights Agreement (the “Registration Rights Agreement”), by and among the Principal Stockholder Group and certain other security holders named therein, pursuant to which the Company will be obligated, subject to the terms thereof and in the manner contemplated thereby, to register for resale under the Securities Act of 1933, as amended (the “Securities Act”) all or any portion of the shares of HighPeak Energy common stock that the holders named thereto hold as of the date of such agreement and that they may acquire thereafter, including upon the conversion, exchange or redemption of any other security therefor (the “Registrable Securities”). The Company has agreed to file and cause to become effective a registration statement covering the Registrable Securities held by such holder making a demand for registration, provided that no fewer than the amount of Registrable Securities representing the lesser of (i) $25 million or (ii) all Registrable Securities owned by such holder, as applicable, are covered under the holder’s demand for registration. The holders can submit a request beginning immediately after the HighPeak business combination. Under the Registration Rights Agreement, the holders also have “piggyback” registration rights exercisable at any time that allow them to include the shares of HighPeak Energy common stock that they own in certain registrations initiated by the Company, provided that such holder elects to include its Registrable Securities in an amount not less than $5 million. Subject to customary exceptions, holders will also have the right to request one or more underwritten offerings of Registrable Securities, provided, that, they hold at least $5 million in Registrable Securities and each such offering include a number of Registrable Securities equal to the lesser of (i) $25 million and (ii) all of the Registrable Securities owned by such holders as of the date of the request. In the event that the sale of registered securities under a registration statement would require disclosure of certain material non-public information not otherwise required to be disclosed, the Company may postpone the effectiveness of the applicable registration statement or require the suspension of sales thereunder. The Company may not delay or suspend a registration statement on more than two (2) occasions for more than sixty (60) consecutive calendar days or more than ninety (90) total calendar days, in each case, during any twelve (12) month period.
Forward Purchases. In connection with the closing of the HighPeak business combination, the Company also issued shares of HighPeak Energy common stock, warrants and CVRs (the “Forward Purchases”) to certain qualified institutional buyers and accredited investors (the “Forward Purchase Investors”) pursuant to that certain Amended & Restated Forward Purchase Agreement, dated as of July 24, 2020 (the “Forward Purchase Agreement Amendment”), by and among the Company, each party designated as a purchaser therein (including purchasers that subsequently joined prior to the closing of the HighPeak business combination as parties thereto), HighPeak Energy Partners, LP, and, solely for the limited purposes specified therein, Pure.
Prior to the closing of the HighPeak business combination, and subsequent to the Company’s entry into the Forward Purchase Agreement Amendment, an aggregate of 8,976,875 forward purchase units (with each forward purchase unit consisting of one share of HighPeak Energy common stock, one warrant and one CVR), for aggregate consideration of approximately $89.8 million in a private placement pursuant to the Assignment and Joinder agreements under and pursuant to the Forward Purchase Agreement Amendment. The proceeds from the Forward Purchases were used to fund a portion of the minimum equity consideration condition to closing required to effect the HighPeak business combination pursuant to the Business Combination Agreement.
General and Administrative Expenses. The general partner of HPK LP utilized HighPeak Energy Management, LLC (the “Management Company”) to provide services and assistance to conduct, direct and exercise full control over the activities of HPK LP per its Partnership Agreement. However, the Management Company is funded via payments from the parent companies of HighPeak I and HighPeak II pursuant to their respective Limited Partnership Agreements, as amended. Therefore, HPK LP reimbursesreimbursed the parent companies of HighPeak I and HighPeak II for actual costs incurred by the Management Company. During the period from January 1,six months ended June 30, 2020, through August 21, 2020, HPK LP paid $2.4$3.8 million each to the parent companies of HighPeak I and HighPeak II of which $645,000 and $4.7$4.1 million is included in general and administrative expenses in the accompanying results of operations for the period from July 1, 2020 through August 21, 2020 and from January 1, 2020 through August 21, 2020, respectively. six months ended June 30, 2020. Effective upon closing of the HighPeak business combination, the Management Company will is no longer bebeing paid by the Company as all costs directly attributable to the Company will beare paid by the Company going forward.
NOTE 11.12. Major Customers
Lion Oil Trading and Transportation, LLC purchased(“Lion”) accounted for approximately 97%95% of the Company’s crude oil, natural gas and natural gas liquidsrevenues during the period from August 22, 2020 through Septembersix months ended June 30, 2020. Lion Oil Trading and Transportation, LLC and 2021. Enlink Crude Purchasing, LLC purchasedand Lion accounted for approximately 49%76% and 44%16%, respectively, of the Company’s crude oil, natural gas and natural gas liquidsrevenues during the period from January 1, 2020 through August 21,six months ended June 30, 2020. Based on the current demand for oil and natural gas and the availability of other purchasers, management believes the loss of these major purchasers would not have a material adverse effect on our financial condition and results of operations because crude oil and natural gas are fungible products with well-established markets and numerous purchasers.
NOTE 13. Income Taxes
The Company’s income tax expense attributable to income from operations consisted of the following (in thousands):
Six Months Ended June 30, 2021 | ||||
Current tax expense | $ | 0 | ||
Deferred tax expense | 2,535 | |||
Income tax expense | $ | 2,535 |
HIGHPEAK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
NOTE 12. Income Taxes
On March 27, 2020, President Trump signed into lawThe reconciliation between the Coronavirus Aid, Reliefincome tax expense computed by multiplying pre-tax income by the U.S. federal statutory rate and Economic Security Act ("CARES Act"). The CARES Act, among other things, includes provisions relating to refundable payrollthe reported amounts of income tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company continues to examine how the CARES Act may impact its business, results of operations, financial condition and liquidity.
Income tax benefit and effective tax rate areexpense is as follows (in thousands, except rates)rate):
August 22, 2020 through September 30, 2020 | ||||
Current tax benefit | $ | (2,306 | ) | |
Deferred tax benefit | (3 | ) | ||
Income tax benefit | $ | (2,309 | ) | |
Effective income tax rate | 16.7 | % |
Six Months Ended June 30, 2021 | ||||
Income tax expense at U.S. federal statutory rate | $ | 2,735 | ||
Limited tax benefit due to stock-based compensation | (81 | ) | ||
Other | (119 | ) | ||
Income tax expense | $ | 2,535 | ||
Effective income tax rate | 19.5 | % |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities were as follows as of SeptemberJune 30, 2021 and December 31, 2020 (in(in thousands):
September 30, 2020 | June 30, 2021 | December 31, 2020 | ||||||||||
Deferred tax assets: | ||||||||||||
Net operating loss carryforwards | $ | 16,770 | $ | 9,725 | ||||||||
Stock-based compensation | $ | 2,951 | 3,419 | 3,124 | ||||||||
Unrecognized derivative losses | 2,637 | 0 | ||||||||||
Other | 107 | 31 | ||||||||||
Less: Valuation allowance | - | 0 | 0 | |||||||||
Net deferred tax assets | 2,951 | 22,933 | 12,880 | |||||||||
Deferred tax liabilities: | ||||||||||||
Oil and natural gas properties, principally due to differences in basis and depreciation and the deduction of intangible drilling costs for tax purposes | (43,447 | ) | (64,365 | ) | (51,778 | ) | ||||||
Net deferred tax liabilities | $ | (40,496 | ) | $ | (41,432 | ) | $ | (38,898 | ) |
The effective income tax rate differs from the U.S. statutory rate of 21 percent primarily due to permanent differences between GAAP income and taxable income. Periods prior to August 22, 2020 are not shown because the Predecessors were treated as partnerships for U.S. federal income tax purposes and therefore do not record a provision for U.S. federal income tax because the partners of the Predecessors report their share of the Predecessors’ income or loss on their respective income tax returns. The Predecessors are required to file tax returns on Form 1065 with the IRS. The 2017 through 20192020 tax years remain open to examination.
As required by ASC Topic 740, “Income Taxes,” (“ASC 740”) the Company uses reasonable judgments and makes estimates and assumptions related to evaluating the probability of uncertain tax positions. The Company bases its estimates and assumptions on the potential liability related to an assessment of whether the income tax position will “more likely than not” be sustained in an income tax audit. Based on that analysis, the Company believes the Company has not taken any material uncertain tax positions, and therefore has not recorded an income tax liability related to uncertain tax positions. However, if actual results materially differ, the Company’s effective income tax rate and cash flows could be affected in the period of discovery or resolution. The Company also reviews the estimates and assumptions used in evaluating the probability of realizing the future benefits of the Company’s deferred tax assets and records a valuation allowance when the Company believes that a portion or all of the deferred tax assets may not be realized. If the Company is unable to realize the expected future benefits of its deferred tax assets, the Company is required to provide a valuation allowance. The Company uses its past history and experience, overall profitability, future management plans, tax planning strategies, and current economic information to evaluate the amount of valuation allowance to record. As of SeptemberJune 30, 2021 and December 31, 2020, the Company has not recorded a valuation allowance for deferred tax assets arising from its operations because the Company believes they meet the “more likely than not” criteria as defined by the recognition and measurement provisions of ASC 740. However, the Company may not realize the $3.0$22.9 million and $12.9 million in deferred tax assets it has as of SeptemberJune 30, 2021 and December 31, 2020,respectively, if the estimates and assumptions used in evaluating the probability of realizing the future benefits of the Company's deferred tax assets change, which would affect the Company’s effective income tax rate and cash flows in the period of discovery or resolution.
The Company is also subject to Texas Margin Tax. The Company realized no Texas Margin Tax in the accompanying condensed consolidated and combined financial statements as we do not anticipate owing any Texas Margin Tax for any periods.2021.
HIGHPEAK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
NOTE 13. 14.Earnings (Loss) Per Share
The componentsCompany uses the two-class method of calculating earnings per share because certain of the Company’s stock-based awards qualify as participating securities.
The Company’s basic and diluted net income (loss)earnings per share attributable to common stockholders areis computed as follows(i) net income as reported, (ii) less participating basic earnings (iii) divided by weighted average basic common shares outstanding. The Company’s diluted earnings per share attributable to common stockholders is computed as (i) basic earnings attributable to common stockholders, (ii) plus reallocation of participating earnings (iii) divided by weighted average diluted common shares outstanding.
The following table reconciles the Company’s earnings from operations and earnings attributable to common stockholders to the basic and diluted earnings used to determine the Company’s earnings per share amounts for the three and six months ended June 30, 2021 under the two-class method (in thousands):
Successor | ||||
August 22, through September 30, 2020 | ||||
Net income (loss) attributable to common stockholders | $ | (11,516 | ) | |
Participating share-based earnings (a) | - | |||
Basic and diluted net income (loss) attributable to common stockholders | $ | (11,516 | ) | |
Basic weighted average shares outstanding | 91,592 | |||
Dilution attributable to stock-based compensation awards | - | |||
Diluted weighted average shares outstanding | 91,592 |
Three | Six | |||||||
Months Ended | Months Ended | |||||||
June 30, | June 30, | |||||||
2021 | 2021 | |||||||
Net income as reported | $ | 5,743 | $ | 10,487 | ||||
Participating basic earnings (a) | (407 | ) | (743 | ) | ||||
Basic earnings attributable to common stockholders | 5,336 | 9,744 | ||||||
Reallocation of participating earnings | 0 | 1 | ||||||
Diluted net income attributable to common stockholders | $ | 5,336 | $ | 9,745 | ||||
Basic weighted average shares outstanding | 92,676 | 92,634 | ||||||
Dilutive warrants and unvested stock options | 0 | 196 | ||||||
Diluted weighted average shares outstanding | 92,676 | 92,830 |
(a) | Unvested restricted stock awards represent participating securities because they participate in nonforfeitable dividends with the common equity holders of the Company. Vested stock options represent participating securities because they participate in dividend equivalents with the common equity holders of the Company. Participating earnings represent the distributed and undistributed earnings of the Company attributable to the participating securities. |
The calculation for weighted average shares reflects shares outstanding over the reporting period based on the actual number of days the shares were outstanding.
NOTE 14. S15. Stockholders’tockholders’ Equity (Successor)
At SeptemberJune 30, 2021 and December 31, 2020, the Company has 91,592,354had 92,728,781 and 91,967,565 shares of common stock outstanding, 10,538,188respectively, 9,500,174 and 10,225,472 warrants outstanding, respectively, with an exercise price of $11.50 per share that expire on August 21, 2025 and 10,209,300 and 10,209,300CVRs outstanding, respectively that give the holders a right to receive up to 2.125 shares of HighPeak Energy common stock per CVR in order to satisfy the Preferred Returns (with an equivalent number of shares of Company common stock held by HighPeak I and HighPeak II being collectively forfeited in connection therewith). As such, HighPeak I and HighPeak II have placed a total of 21,694,763 shares of common stock of the Company in escrow.
NOTE 15. Partners’16. Partners’ Capital (Predecessors)(Predecessor)
Allocation of partner’spartner’s net profits and losses. Net income or loss and net gain or loss on investments of the PredecessorsPredecessor for the period are allocated among its partners in proportion to the relative capital contributions made to the Predecessors.Predecessor. The PredecessorsPredecessor realized a net loss of $85.0 million for the period from January 1, 2020 through August 21,six months ended June 30, 2020.
Partner’Partner’ss distributions. The proceeds distributable by the PredecessorsPredecessor (which shall include all proceeds attributable to the disposition of investments, net of expenses) is distributable in accordance with their respective Partnership Agreements. As of August 21, 2020, the Predecessor had made distributions of $2.8 million prior to closing of the HighPeak business combination.
NOTE 16.17. Subsequent Events
TheWTG aid-in-construction.In July 2021, the Company continuespaid $3.9 million to monitorWTG related to an aid-in-construction payment pursuant to the impact of the COVID-19 pandemic on all aspects of its business, including the disruptionaforementioned replacement natural gas purchase contract for WTG to oil demandconstruct a low-pressure natural gas gathering system throughout the world. The length of this demand disruption is unknown, and there is significant uncertainty regarding the long-term impact to global oil demand, which has negatively impacted the Company's results of operations and led to a significant reduction in the Company's 2020 capital activities.Company’s Flat Top area.
Acquisitions. In July 2021, the Company signed multiple unrelated purchase and sale agreements to effect certain bolt-on acquisitions from various third parties. In the aggregate, the assets being acquired represent approximately 6,200 net acres and working interests in producing properties and salt-water disposal wells. The Company granted 62,500 sharesexpects to close these acquisitions later in the third quarter of 2021.
Dividends and dividend equivalents. In July 2021, the board of directors of the Company approved a quarterly dividend of $0.025 and a special dividend of $0.075 per share of common stock to its outside board members (12,500 shares to each board member)outstanding which resulted in November 2020 that were fully vested upon grant as compensation for their services toa total of $9.3 million in dividends being paid on July 26, 2021. In addition, under the Company forterms of the first year of their terms. Directors elected to have a portion of their annual retainer paid in cash. Compensation expense related to these awards will be recognized during the fourth quarter of 2020 at the closing stock price on the date of grant.
In October 2020,LTIP, the Company paid G4 Companies, LLC, a company wholly owned bydividend equivalent per share to all vested stock option holders of $705,000 in July 2021 and will accrue a directordividend equivalent per share to all unvested stock option holders which is payable upon vesting of the Company, $1.5 million for the designup to an additional $125,000 in each of a full scale model for a water recycle August 2021 and purification treatment facility that the Company plans to construct in our development area to handle produced water in an environmentally friendly manner. Phase I and II water testing has already been completed to ascertain the viability of such a system. The timing of the construction of the facility is still under review and consideration.August 2022, assuming no forfeitures.
HIGHPEAK ENERGY, INC.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to assist you in understanding our business and results of operations together with our present financial condition. This section should be read in conjunction with our historical consolidated and combined financial statements and related notes. This discussion contains certain “forward‑looking statements” reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. These forward-looking statements involve risks and uncertainties and actual results and the timing of events may differ materially from those contained in these forward‑looking statements due to a number of factors. Factors that could cause or contribute to such differences include, but are not limited to, market prices for oil, NGL and natural gas, capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties. Please read “Cautionary StatementRegarding Forward‑Looking Statements.” We assume no obligation to update any of these forward‑looking statements, except as required by applicable law.
Overview
HighPeak Energy, Inc. together with its subsidiaries (collectively, “HighPeak Energy,” the “Company” or the “Successor”), a Delaware corporation, was formed in October 2019 solely for the purpose of combining the businesses of Pure Acquisition Corp. (“Pure”) and HPK Energy, LP, (“HPK LP”).referred to herein as the “HighPeak business combination,” which was completed on August 21, 2020. HPK LP was formed in August 2019 for the purpose combining the assets of HighPeak Energy, LP (“HighPeak I”)I and HighPeak Energy II LP (“HighPeak II”) into one entity given the proximity of both companies’ properties and the fact that both companies owned working interest in a significant number of the same wells and thus combining working interests would ease the administrative burden on the companies significantly.entity. HighPeak I was formed in June 2014 for the purpose of acquiring, exploring and developing oil and natural gas properties, although it had no activity until late 2017. Beginning in late 2017, HighPeak I began acquiring its assets through an organic leasing campaign and a series of acquisitions consisting primarily of leasehold acreage and existing vertical producing wells.
The Company’s assets are located primarily in Howard County, Texas, which lies within the northernnortheastern part of the oil-rich Midland Basin. As of SeptemberJune 30, 2020,2021, the assets consisted of atwo highly contiguous leasehold positionpositions of approximately 60,54158,771 gross (51,343(51,875 net) acres, approximately 21%59% of which were held by production, with an average operated working interest of 85%88%. Our acreage is composed of two core areas, Flat Top to the north and Signal Peak to the south. Approximately 97% of the operated acreage provides for horizontal wells with lateral lengths of 10,000 feet or greater. For the yearsix months ended December 31, 2019,June 30, 2021, approximately 86%96% and 14%4% of production from the assets were attributable to liquids (both oil and NGL) and natural gas, respectively. As of December 31, 2019, HPK LP was drilling with two (2) rigs, and as of SeptemberJune 30, 2020, the Company2021, HighPeak Energy was drilling with one (1) rig. We are the operator on approximately 93%95% of the net acreage across theour assets. Further, as of December 31, 2019,June 30, 2021, there were approximately 97123 gross (50.2(69.8 net) producing wells, including 434 gross (3.5(32.0 net) horizontal wells, with total productionsales volumes averaging 8,783 Boe/d during the second quarter of 949 Boe/d2021. In addition, as of June 30, 2021, the Company was in December 2019. Asthe process of December 31, 2019,drilling one (1) well and was in various stages of the 11,497 MBoe of proved reserves of the assets, 43% were developed, 93% of which were liquids.completing ten (10) wells.
The financial results as presented in this section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” consist of the historical results of HighPeak Ithe Company for the ninethree and six months ended SeptemberJune 30, 2019,2021 and HPK LP for the period from January 1, 2020 through August 21, 2020three and July 1, 2020 through August 21, 2020 and the Company from August 22, 2020 through Septembersix months ended June 30, 2020. At the closingClosing of the HighPeak business combination on August 21, 2020, the Company’s “predecessor”“predecessors” for accounting purposes waswere HPK LP for the period from October 1, 2019 through August 21, 2020 and HighPeak I from January 1, 2017 through September 30, 2019 (collectively, the “Predecessors”).
Outlook
HighPeak Energy’s financial position and future prospects, including its revenues, operating results, profitability, liquidity, future growth and the value of its assets, depend primarily on prevailing commodity prices. The oil and natural gas industry is cyclical and commodity prices are highly volatile. For example, during the period from January 1, 2018 through March 31, 2020,June 30, 2021, the calendar month average NYMEX WTI crude oil price per Bbl ranged from a low of $16.55$16.70 in April 2020 to a high of $70.98,$71.35 in June 2021, and the last trading day NYMEX natural gas price per MMBtu ranged from a low of $1.74$1.50 to a high of $4.09. The high, low and average prices for NYMEX WTI and NYMEX Henry Hub are monthly contract prices. During April 2020, NYMEX WTI crude oil and NYMEX natural gas prices averaged $16.55 per Bbl and $1.74 per MMBtu, respectively.$4.72. Due to the absence of any debt, HPK LPthe Company has not historically entered into any hedges. With the addition of the Revolving Credit Facility in December 2020, HighPeak Energy intends to evaluate and potentially enterentered into hedging arrangements to protect its capital expenditure budget and to protect any future debt facility borrowing base, if any.
Impact of the COVID-19 Pandemic and 2020 Plan Changes
The COVID-19 pandemic has resulted in a severe worldwide economic downturn, significantly disrupting the demand for oil throughout the world, and has created significant volatility, uncertainty and turmoil in the oil and gas industry. The decreasesecond quarter of 2021, prior to borrowing under the Revolving Credit Facility late in demand for oil combined with pressures on the global supply-demand balance for oil and related products, resulted in oil prices declining significantly beginning in late February 2020. The lengthsecond quarter of this demand disruption is unknown, and there is significant uncertainty regarding the long-term impact to global oil demand, which will ultimately depend on various factors and consequences beyond the Company's control, such as the duration and scope of the pandemic, the length and severity of the worldwide economic downturn, the ability of OPEC, Russia and other oil producing nations to manage the global oil supply, additional actions by businesses and governments in response to the pandemic, the economic downturn and the decrease in oil demand, the speed and effectiveness of responses to combat the virus, and the time necessary to balance oil supply and demand to restore oil pricing. In response to these developments, the Company has implemented measures to mitigate the impact of the COVID-19 pandemic on its employees, operations and financial position. These measures include, but are not limited to, the following:
Employee Safety. The Company has taken steps to keep its employees safe in light of the COVID-19 pandemic by implementing preventativemeasures and developing response plans intended to minimize unnecessary risk of exposure and infection among its employees. The Company has also modified certain business practices (including those related to non-operational employee work locations, such as a significant reduction in physical participation in meetings, events and conferences) to conform to government restrictions and best practices encouraged by the Center for Disease Control and Prevention, and other governmental and regulatory authorities.
HIGHPEAK ENERGY, INC.
Expense Management. With the reduction in revenue, the Company has implemented, and will continue to evaluate other cost saving initiatives,including:
Continuing to optimize drilling, completion and operational efficiencies, resulting in lower operating costs per unit of production.
Reducing annual general and administrative and other overhead related costs through various cost reduction efforts across the organization.
Balance Sheet, Cash Flow and Liquidity. The Company has taken the following actions to strengthen its financial position and increase liquidity:
Reduced its 2020 capital budget.
Maintained a debt free balance sheet and pursuing increased liquidity by adding a credit facility with a modest borrowing base at attractive interest rates.
Poised to use derivative positions to reduce the effects of oil price volatility on its net cash provided by operating activities.
The Company continues to assess the global impacts of the COVID-19 pandemic and may modify its plans as the health and economic impacts of COVID-19 continue to evolve.2021.
Financial and Operating Performance
The Company's financial and operating performance for the period from August 22, 2020 through Septemberthree months ended June 30, 2020 plus the period from July 1, 2020 through August 21, 2020 of its Predecessors2021 included the following highlights:
• | Net income was $5.7 million ($0.06 per diluted share) compared with a net loss of the Company’s Predecessor of $4.1 million for three months ended June 30, 2021 and 2020, respectively. The primary components of the $9.9 million increase in net income include: |
Net loss attributable to common stockholders for the period from August 22, 2020 through September 30, 2020 was $11.5 million ($0.13 per diluted share) plus the net loss of the Company’s Predecessor for the period from July 1, 2020 through August 21, 2020 of $56,000 compared with a net loss of the Company’s Predecessors of $1.0 million for three months ended September 30, 2019. The primary components of the $10.6 million decrease in earnings attributable to common stockholders include:
• | a $47.3 million increase in oil, NGL and natural gas revenues due to a 1,059% increase in daily sales volumes resulting from the Company’s successful horizontal drilling program coupled with the fact that the Company shut-in the majority of its production starting in the second quarter of 2020 due to the impact COVID-19 had on global energy prices, in addition to a 341% increase in average realized commodity prices per Boe, excluding the effects of derivatives; |
a $14.5 million increase in stock-based compensation expense related to stock options that were granted in August 2020 upon the Company’s going public whereby approximately 75% of the stock options vested immediately causing a charge to earnings;
a $2.8 million increase in depletion, depreciation and amortization expense due to a 574% increase in overall sales volumes, partially offset by a 35% decrease in the depletion, depreciation and amortization rate from $27.82 to $18.18 per Boe, both as a result of increased proved reserves due to the Company’s successful horizontal drilling program in the Permian Basin;
a $1.1 million increase in production costs, including taxes, primarily attributable to the 574% increase in sales volumes as a result of the Company’s successful horizontal drilling program in the Permian Basin partially offset by 22% lower taxes on a dollar per Boe basis due to lower overall realized prices of 23%; and
a $542,000 increase in general and administrative costs associated with our increased activity surrounding drilling and completion operations as well as increased costs associated with being a public company starting on August 22, 2020;
partially offset by:
• | a $15.1 million increase in depletion, depreciation and amortization expense due to the 1,059% increase in overall sales volumes, plus a 16% decrease in the depletion, depreciation and amortization rate from $25.15 to $21.09 per Boe, primarily as a result of increased proved reserves due to recently completed successful extension wells; |
• | a $13.6 million increase in the Company's net derivative loss as a result of its crude oil commodity contracts entered into during the second quarter of 2021 and the continued increase of crude oil prices thereafter; |
• | a $2.9 million increase in the Company's oil and natural gas production costs due to the Company’s successful horizontal development program coupled with the fact that the Company shut-in the majority of its production starting in the second quarter of 2020 due to the impact COVID-19 had on global energy prices; |
• | a $2.4 million increase in production and ad valorem taxes due partially to an increase in production taxes per Boe from $0.64 to $2.87, or 348%, due to higher overall realized prices excluding the effects of derivatives of 341% partially offset by a decrease in ad valorem taxes per Boe from $0.73 to $0.31, or 58%, primarily because 2021 ad valorem taxes were based on 2020 prices, which were much lower due to the impact COVID-19 had on global energy prices. Ad valorem taxes in Texas are based on valuations as of January 1 of a given year based on pricing data for the previous year; |
• | a $1.4 million increase in the Company’s income tax expense due to the net income realized during the three months ended June 30, 2021 and the fact that the Predecessor was a pass through entity for income tax purposes and did not recognize any tax expense or benefit on their financial statements; |
• | a $1.0 million increase in stock-based compensation expense related to stock options that were granted in August 2020 upon the Company’s going public and restricted stock issued to outside directors during the three months ended June 30, 2021; |
• | a $462,000 increase in exploration and abandonment expenses primarily as a result of increased geologic and geophysical data expenses plus exploration general and administrative expenses being classified as a part of exploration and abandonment expense that are now identifiable and not merely a component of administration fees paid to a management company; |
• | During the three months ended June 30 2021, average daily sales volumes totaled 8,783 Boe/d, compared with 758 Boe/d during the same period in 2020, an increase of 1,059% over the same period in 2020, due to the Company's successful horizontal drilling program in the Permian Basin and due to the fact that the Company shut-in the majority of its production starting in the second quarter of 2020 due to the impact COVID-19 had on global energy prices. |
• | Weighted average realized oil prices per Bbl, excluding the effects of derivatives, increased during the three months ended June 30, 2021 to $64.93, compared with $15.61 for the same period in 2020. Weighted average NGL prices per Bbl increased during the three months ended June 30, 2021 to $26.77, compared with $4.55 for the same period in 2020. Weighted average natural gas prices per Mcf increased to $2.81 during the three months ended June 30, 2021, compared with ($0.03) during the same period in 2020. |
• | Cash provided by operating activities totaled $35.9 million for the three months ended June 30, 2021, compared with cash used in operating activities of $4.8 million for the three months ended June 30, 2020. |
Recent Events
Revolving Credit Facility. The Company entered into its Revolving Credit Facility in December 2020 which was amended and restated in June 2021, and as of June 30, 2021, had $14.0 million drawn on the Revolving Credit Facility. In connection with the First Amendment, the Company’s borrowing base and elected commitments were increased to $125.0 million and a $6.0 million increase in oil and gas revenues due to a 574% increase in daily sales volumes duesyndicate of banks was added to the facility at various levels of participation and commitment.
Exercises of Warrants and Options. During the six months ended June 30, 2021, the Company received cash of $9.1 million related to the exercise of 788,009 of its $11.50 warrants and $1.6 million cash related to the exercise of 154,268 of stock options by employees of the Company.
Crude oil marketing contract. In May 2021, the Company entered into a crude oil marketing contract with Lion Oil Trading and Transportation, LLC (“Lion”) as the purchaser and DKL Permian Gathering, LLC (“DKL”) as the gatherer and transporter. The contract includes the Company’s successfulcurrent and future crude oil production from its horizontal drilling programwells in Flat Top where DKL will construct an oil gathering system and custody transfer meters to all the Permian BasinCompany’s central tank batteries. This system will reduce the Company’s cost to transport its crude oil to market and significantly reduce the trucking traffic in and around our development at Flat Top. The contract contains a minimum volume commitment commencing October 2021 based on the gross barrels delivered at the Company’s central tank battery facilities and is 5,000 Bopd for the first year, 7,500 Bopd for the second year and 10,000 Bopd for the remaining eight years of the contract. However, the Company has the ability under the contract to cumulatively bank excess volumes delivered to offset future minimum volume commitments. The monetary commitment as of June 30, 2021, if the Company never delivers any volumes under the agreement, is approximately $25.4 million. The Company believes it will meet its minimum volume commitments based on the Company’s current gross production levels and the factcurrent Flat Top development plan.
Natural gas purchasing replacement contract. In May 2021, the Company brought back on-lineentered into a replacement gas purchase contract with WTG Gas Processing, L.P. (“WTG”) as the majoritygatherer, processor and purchaser of the Company’s current and future gross natural gas production in Flat Top. The replacement contract provides the Company with improved natural gas and NGL pricing and requires WTG to expand its current low-pressure gathering system, which eliminates the need for in-field compression in Flat Top to accommodate the Company’s increased natural gas production volumes based on the current plan of development. In exchange for the improved pricing terms and expansion of the gathering system, the Company will provide WTG with certain aid-in-construction payments. The replacement contract does not contain minimum volume commitments. Once operational, the expanded natural gas gathering system will reduce flaring and the emission of greenhouse gases.
Power contracts. In June 2021, the Company entered into a contract with Priority Power Management, LLC (“Priority Power”) whereby Priority Power will develop an electric high-voltage (“EHV”) substation, medium voltage distribution systems and a 13-megawatt direct current solar photovoltaic facility located on approximately 80 acres of land owned by the Company north of Big Spring, Texas in Howard County to provide for the Company’s electrical power needs in its Flat Top operating area including powering drilling rigs and day-to-day operations. The EHV substation will be interconnected with the ERCOT transmission grid via the local electric utility, have an initial capacity of up to 50 megavolt amperes and be designed for future expansion capability. The solar generation facility will be interconnected with the medium voltage distribution system that will be energized from the new EHV substation. Priority Power will develop, finance, engineer, construct, operate and maintain the project facilities. Over the life of the contract, approximately 263 million kilowatt-hours of clean and reliable solar energy will be delivered to the Company, resulting in an estimated reduction of over 100,000 metric tons of CO2 emissions according to the Environmental Protection Agency.
Also in June 2021, the Company entered into a contract with Oncor Electric Delivery Company, LLC (“Oncor”) to construct certain facilities to deliver electricity to the aforementioned substation. In conjunction with this contract, the Company issued a $1.9 million letter of credit to Oncor until such time as the Company’s load meets or exceeds 12 megawatts as measured during any fifteen (15) minute interval on or before May 20, 2023. The Company anticipates being able to meet this requirement once the system is operational and be able to terminate the letter of credit.
WTG aid-in-construction.In July 2021, the Company paid $3.9 million to WTG related to an aid-in-construction payment pursuant to the aforementioned replacement natural gas purchase contract for WTG to construct a low-pressure natural gas gathering system throughout the Company’s Flat Top area.
Acquisitions. In July 2021, the Company signed multiple unrelated purchase and sale agreements to effect certain bolt-on acquisitions from various third parties. In the aggregate, the assets being acquired represent approximately 6,200 net acres and working interests in producing properties and salt-water disposal wells that are estimated to average approximately 1,400 Boe/d for the remainder of 2021. The Company expects to close these acquisitions later in the third quarter of 2020 after it2021.
Dividends and dividend equivalents. In July 2021, the board of directors of the Company approved a quarterly dividend of $0.025 and a special dividend of $0.075 per share of common stock outstanding which resulted in a total of $9.3 million in dividends being curtailedpaid on July 26, 2021. In addition, under the terms of the LTIP, the Company will also pay a dividend equivalent per share to all vested stock option holders and accrue a dividend equivalent per share to all unvested stock option holders payable upon vesting, which equates to a total payment of $705,000 in April 2020 dueJuly 2021 and up to an additional $125,000 in each of August 2021 and August 2022, assuming no forfeitures.
COVID-19. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial and commodity markets. In addition, the pandemic has resulted in travel restrictions, business closures and the institution of quarantining and other restrictions on movement in many communities. As a result, there has been a significant reduction in demand for and prices of oil and natural gas, which has adversely affected our business. There continues to be uncertainty around the extent and duration of disruption, including any resurgence, and we expect that the longer the period of such disruption continues, the greater the adverse impact will be on our business. The degree to which the COVID-19 pandemic or any other public health crisis adversely impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions taken by governmental authorities and third parties in response to the COVID-19 related price downturn, partially offset by a 23% decrease in average realized commodity prices per Boe;pandemic, its impact on the U.S. and
a $2.3 million increase in world economies, the Company's income tax benefit dueU.S. capital markets and market conditions, and how quickly and to the decrease in earnings during the three months ended June 30, 2020, compared with the same period in 2019.
During the period from August 22, 2020 through September 30, 2020, average daily sales volumes totaled 3,200 Boe/dwhat extent normal economic and during the period from July 1, 2020 through August 21, 2020, average sales volumes totaled 1,369 Boe/d for an overall average for the three months ended September 30, 2020 of 2,165 Boe/d, an increase of 574% over the same period in 2019, due to the Company's successful horizontal drilling program in the Permian Basin and the fact that the Company brought back on-line the majority of its production during the third quarter of 2020 after it being curtailed in April 2020 due to the COVID-19 related price downturn.
Weighted average realized oil prices per Bbl decreased during the three months ended September 30, 2020 to $39.19 ($38.55 during the period from August 22, 2020 through September 30, 2020 and $40.43 during the period from July 1, 2020 through August 21, 2020), compared with $53.42 for the same period in 2019. Weighted average gas prices per Mcf increased to $1.89 during the three months ended September 30, 2020 ($2.30 during the period from August 22, 2020 through September 30, 2020 and $1.64 during the period from July 1, 2020 through August 21, 2020) compared with $1.34 during the same period in 2019.
Cash provided by operating activities totaled $1.2 million for the period from August 22, 2020 through September 30, 2020.conditions can resume.
HIGHPEAK ENERGY, INC.Derivative Financial Instruments
The Company raised $93.8 million of capital, net of offering costs, related to the HighPeak business combination that closed on August 21, 2020 while maintaining a balance sheet with no outstanding debt. This capital gives the Company flexibility in the short term to recommence its development program whereby we have added one drilling rig that is currently drilling a salt water disposal well in our development area and we have two completion crews currently working to frac eight (8) of our twelve (12) uncompleted wells that were drilled but not fully completed when operations were shut down earlier this year due primarily to the COVID-19 pandemic. We are also using this capital to finish completing our four (4) additional uncompleted wells.
FourthDerivative financial instrument exposure. Quarter 2020 OutlookAs of June 30, 2021, the Company was a party to the following open derivative financial instruments.
2021 | 2022 | |||||||||||||||||||||||
Third Quarter | Fourth Quarter | Total | First Quarter | Second Quarter | Total | |||||||||||||||||||
Oil Price Swaps | ||||||||||||||||||||||||
Volume (Bbls) | 460,000 | 460,000 | 920,000 | 450,000 | 302,500 | 752,500 | ||||||||||||||||||
Price per Bbl | $ | 61.91 | $ | 61.91 | $ | 61.91 | $ | 61.91 | $ | 62.16 | $ | 61.95 |
The fourth quarter is likely to continue to offer a high degree of uncertainty and market disruption. The extent to which the Company's future results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond the Company's control, such as the duration and scopeestimated fair value of the pandemic, the length and severityoutstanding open derivative financial instruments as of the worldwide economic recovery, additional actions by businesses, OPEC and other cooperating countries, and governmentsJune 30, 2021 was $12.6 million which is included in response to the pandemic, economic downturn and decline in oil demand, the speed and effectiveness of responses to combat the virus, and the time necessary to balance oil supply and demand. For additional informationcurrent liabilities on the risks posed byCompany’s balance sheet as of June 30, 2021. During the COVID-19 pandemic, see “Item 1A. Risk Factors” contained elsewherethree months ended June 30, 2021, the Company recognized a derivative loss of $13.6 million, including the aforementioned $12.6 million mark-to-market liability plus $1.0 million in this Report.payments related to monthly settlements.
Operations and Drilling Highlights
Average daily oil, NGL and natural gas sales volumes are as follows:
Successor | Predecessors | Combined | ||||||||||
August 22, 2020 through September 30, 2020 | January 1, 2020 through August 21, 2020 | Nine Months Ended September 30, 2020 | ||||||||||
Oil (Bbls) | 3,104 | 1,240 | 1,512 | |||||||||
NGL (Bbls) | 44 | 61 | 59 | |||||||||
Gas (Mcf) | 312 | 409 | 395 | |||||||||
Total (Boe) | 3,200 | 1,369 | 1,636 |
Six Months Ended June 30, 2021 | ||||
Oil (Bbls) | 6,352 | |||
NGL (Bbls) | 399 | |||
Natural Gas (Mcf) | 1,771 | |||
Total (Boe) | 7,046 |
The Company's liquids production was 96 percent of total production on a Boe basis for the ninesix months ended SeptemberJune 30, 2020.2021.
Costs incurred are as follows (in thousands):
Successor | Predecessors | Combined | ||||||||||||||
August 22, 2020 through September 30, 2020 | January 1, 2020 through August 21, 2020 | Nine Months Ended September 30, 2020 | Six Months Ended June 30, 2021 | |||||||||||||
Unproved property acquisition costs | $ | 704 | $ | 2,753 | $ | 3,457 | $ | 2,070 | ||||||||
Proved acquisition costs | - | 585 | 585 | - | ||||||||||||
Total acquisitions | 704 | 3,338 | 4,042 | 2,070 | ||||||||||||
Development costs | 1,654 | 933 | 2,587 | 14,349 | ||||||||||||
Exploration costs | 14,651 | 48,173 | 62,824 | 75,610 | ||||||||||||
Total finding and development costs | 17,009 | 52,444 | 69,453 | 92,029 | ||||||||||||
Asset retirement obligations | 29 | 98 | 127 | 600 | ||||||||||||
Total costs incurred | $ | 17,038 | $ | 52,542 | $ | 69,580 | $ | 92,629 |
DevelopmentThe following table sets forth the total number of horizontal wells drilled and exploration/extension drilling activity is as follows:completed during the six months ended June 30, 2021:
Nine Months Ended September 30, 2020 | ||||||||
Development/ Service | Exploration/ Extension | |||||||
Beginning wells in progress | - | 13 | ||||||
Well spud | 1 | 6 | ||||||
Successful wells | - | (9 | ) | |||||
Ending wells in progress | 1 | 10 |
Drilled | Completed | |||||||||||||||
Gross | Net | Gross | Net | |||||||||||||
Flat Top area | 12 | 12.0 | 14 | 13.2 | ||||||||||||
Signal Peak area | 2 | 1.4 | 2 | 1.4 | ||||||||||||
Total | 14 | 13.4 | 16 | 14.6 |
HIGHPEAK ENERGY, INC.
The Company currently plans to operate one (1)two (2) drilling rigrigs and an average of one (1) frac fleet in the Permian Basin during the last three monthsremainder of 2020.2021. However, the scope, duration and magnitude of the direct and indirect effects of the COVID-19 pandemic are continuing to evolve and in ways that are difficult or impossible to anticipate. Given the dynamic nature of this situation, the Company is maintaining flexibility in its capital plan and will continue to evaluate drilling and completion activity on an economic basis, with future activity levels assessed monthly.
During the ninesix months ended SeptemberJune 30, 2020,2021, the Company successfully completed nineand placed on production fourteen (14) horizontal wells in the northern portion of our acreage, sixFlat Top area, ten (10) of which are in the Wolfcamp A and threefour (4) of which are in the Lower Spraberry formations. Of the ten exploration/extensionformations and two (2) horizontal wells in progressthe Signal Peak area, one (1) of which was in the Wolfcamp D and one (1) of which was in the Wolfcamp C formations in the Signal Peak area. The Company had six (6) wells in various stages of completion as of SeptemberJune 30, 2020, six2021, four (4) of which are in the Wolfcamp A and fourtwo (2) of which are in the Lower Spraberry formations. Theformations located in the Flat Top area. As of June 30, 2021, the Company was in the process of drilling one development/service well in progress as of September 30, 2020 is a(1) horizontal salt-water disposal well being drilled nearin the center of our main production area to lower costs of handlingEllenburger formation in the produced water from our producing wells.Flat Top area.
Results of Operations
Factors Affecting the Comparability of the PredecessorsPredecessor Historical Financial ResulResultsts
The comparability of the predecessorsPredecessor results of operations among the periods presented, and for future periods, is impacted by the following factors:
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| As a corporation under the Code, HighPeak Energy is subject to U.S. federal income taxes at a statutory rate of 21% of pretax earnings. This is a significant change from the |
| Our assets will incur certain additional general and administrative expenses related to being owned by a publicly traded company that were not previously incurred in HPK LP’s cost structure, including, but not limited to, Securities Exchange Act of 1934, as amended (the “Exchange Act”), reporting expenses; expenses associated with Sarbanes-Oxley Act compliance; expenses associated with |
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| During the |
Three Months Ended September 30, 2020 Compared with Three Months Ended September 30, 2019
Oil, NGL and natural gas revenues.
Average daily sales volumes are as follows:
Three Months Ended September 30, 2020 | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||
Successor | Predecessors | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||
August 22, 2020 through September 30, 2020 | July 1, 2020 through August 21, 2020 | Three Months Ended September 30, 2019 | Period to Period % Change | Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||
Oil (Bbls) | 3,104 | 1,240 | 289 | 609 | % | 7,951 | 660 | 1,105 | % | 6,352 | 940 | 576 | % | |||||||||||||||||||||||||||
NGL (Bbls) | 44 | 61 | - | 100 | % | 502 | 52 | 865 | % | 399 | 93 | 329 | % | |||||||||||||||||||||||||||
Natural Gas (Mcf) | 312 | 409 | 194 | 89 | % | 1,973 | 280 | 605 | % | 1,771 | 363 | 388 | % | |||||||||||||||||||||||||||
Total (Boe) | 3,200 | 1,369 | 321 | 574 | % | 8,783 | 758 | 1,059 | % | 7,046 | 1,093 | 545 | % |
The increase in average daily Boe sales volumes for the three and six months ended SeptemberJune 30, 2020,2021, compared with the same periodperiods in 20192020 was due to the Company's successful Wolfcamp A and Lower Spraberry horizontal drilling program andcoupled with the fact that the Company brought back on-lineshut-in the majority of its production duringstarting in the thirdsecond quarter of 2020 after production was curtailed in April 2020 due to the impact COVID-19 related price downturn.
HIGHPEAK ENERGY, INC.had on global energy prices.
The oil, NGL and natural gas prices that the Company reports are based on the market prices received for each commodity. The weighted average realized prices, excluding the effects of derivatives, are as follows:
Three Months Ended September 30, 2020 | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||
Successor | Predecessors | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||
August 22, 2020 through September 30, 2020 | July 1, 2020 through August 21, 2020 | Three Months Ended September 30, 2019 | Period to Period % Change | Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||
Oil per Bbl | $ | 38.55 | $ | 40.43 | $ | 53.42 | (27 | )% | $ | 64.93 | $ | 15.61 | 316 | % | $ | 62.50 | $ | 31.93 | 96 | % | ||||||||||||||||||||
NGL per Bbl | $ | 16.43 | $ | 4.91 | $ | n/a | 100 | % | $ | 26.77 | $ | 4.55 | 488 | % | $ | 27.16 | $ | 10.13 | 168 | % | ||||||||||||||||||||
Natural Gas per Mcf | $ | 2.30 | $ | 2.04 | $ | 1.34 | 61 | % | ||||||||||||||||||||||||||||||||
Gas per Mcf | $ | 2.81 | $ | (0.03 | ) | 9,467 | % | $ | 2.55 | $ | 0.03 | 8,400 | % | |||||||||||||||||||||||||||
Total per Boe | $ | 37.77 | $ | 37.30 | $ | 48.84 | (23 | )% | $ | 60.40 | $ | 13.68 | 341 | % | $ | 58.01 | $ | 27.99 | 107 | % |
Oil and natural gas production costs.
Oil and natural gas production costs in total and per Boe are as follows (in thousands, except percentages and per Boe amounts):
Three Months Ended September 30, 2020 | ||||||||||||||||
Successor | Predecessors | |||||||||||||||
August 22, 2020 through September 30, 2020 | July 1, 2020 through August 21, 2020 | Three Months Ended September 30, 2019 | Period to Period % Change | |||||||||||||
Lease operating expenses | $ | 670 | $ | 667 | $ | 536 | 149 | % | ||||||||
Lease operating expenses per Boe | $ | 5.24 | $ | 9.38 | $ | 18.14 | (63 | )% |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||
Oil and natural gas production costs | $ | 4,692 | $ | 1,814 | 159 | % | $ | 6,919 | $ | 4,203 | 65 | % | ||||||||||||
Oil and natural gas production costs per Boe | $ | 5.87 | $ | 26.28 | (78 | )% | $ | 5.43 | $ | 21.13 | (74 | )% |
The increase in lease operating expensesoil and natural gas production costs can primarily be attributed to the Company's successful horizontal drilling program bringing on a significant number of newly completed producing wells coupled with the fact that we had 11 producing horizontal wells during the three months ended September 30,Company shut-in the majority of its production starting in the second quarter of 2020 compared to only two (2) wells during the same period in 2019. Likewise, the decrease in lease operating expense per Boe for the three months ended September 30, 2020, compared with the same period in 2019, was primarily attributabledue to the increased well count as well.impact COVID-19 had on global energy prices.
Production and ad valorem taxes.
Production and ad valorem taxes are as follows (in thousands, except percentages):
Three Months Ended September 30, 2020 | ||||||||||||||||
Successor | Predecessors | |||||||||||||||
August 22, 2020 through September 30, 2020 | July 1, 2020 through August 21, 2020 | Three Months Ended September 30, 2019 | Period to Period % Change | |||||||||||||
Production and ad valorem taxes | $ | 257 | $ | 164 | $ | 80 | 426 | % |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||
Production and ad valorem taxes | $ | 2,543 | $ | 94 | 2,605 | % | $ | 4,207 | $ | 402 | 947 | % |
In general, production taxes and ad valorem taxes are directly related to commodity sales volumes and price changes; however, Texas ad valorem taxes are based upon an asset valuation assessed by the state as of January 1 of that particular year based on prior year commodity prices, whereas production taxes are based upon current year sales revenues at current commodity prices.
HIGHPEAK ENERGY, INC.
Production and ad valorem taxes per Boe are as follows:
Three Months Ended September 30, 2020 | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||
Successor | Predecessors | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||
August 22, 2020 through September 30, 2020 | July 1, 2020 through August 21, 2020 | Three Months Ended September 30, 2019 | Period to Period % Change | Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||
Production taxes per Boe | $ | 1.75 | $ | 1.71 | $ | 2.13 | (18 | )% | $ | 2.87 | $ | 0.64 | 348 | % | $ | 2.74 | $ | 1.31 | 109 | % | ||||||||||||||||||||
Ad valorem taxes per Boe | $ | 0.26 | $ | 0.59 | $ | 0.58 | (38 | )% | $ | 0.31 | $ | 0.73 | (58 | )% | $ | 0.56 | $ | 0.71 | (21 | )% |
The decreaseincrease in production taxes per Boe for the three and six months ended SeptemberJune 30, 2020,2021, compared with the same periodperiods in 2019,2020, was primarily due to the decrease332% and 104% increases in oil prices.realized prices, respectively. The decrease in ad valorem taxes per Boe for the three and six months ended SeptemberJune 30, 2020,2021, compared with the same periodperiods in 2019,2020, was primarily due to a large number of wells that have come on production during 2020 that2021 which will have nonot incur ad valorem tax this year as 2021until 2022 which will be the first year that they will be assessed ad valorem taxes. In Texas,taxes coupled with the fact that the Company shut-in the majority of its production starting in the second quarter of 2020 due to the impact COVID-19 had on global energy prices which significantly impacted the sale volumes negatively during 2020 increasing the ad valorem taxes are based on a valuation of the wells on January 1 of a given year.per Boe.
Exploration and abandonments expense.
Exploration and abandonment expense details are as follows (in thousands, except percentages):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||
Geologic and geophysical data costs | $ | 320 | $ | - | 100 | % | $ | 320 | $ | 3 | 10,567 | % | ||||||||||||
Geologic and geophysical personnel costs | 143 | - | 100 | % | 285 | - | 100 | % | ||||||||||||||||
Plugging and abandonment expense | - | 1 | (100 | )% | - | 1 | (100 | )% | ||||||||||||||||
Abandoned leasehold costs | - | - | - | % | 49 | - | 100 | % | ||||||||||||||||
Exploration and abandonments expense | $ | 463 | $ | 1 | 46,200 | % | $ | 654 | $ | 4 | 16,250 | % |
The increase in exploration and abandonment expenses are the result of increased geologic and geophysical data expenses plus exploration general and administrative expenses that are being classified as a part of exploration and abandonment expense which are now identifiable and not merely a component of administration fees paid to a management company.
Depletion, depreciation and amortization expense.
Depletion, depreciation and amortization (“DD&A”) expense and DD&A expense per Boe are as follows (in thousands, except percentages and per Boe amounts):
Three Months Ended September 30, 2020 | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||
Successor | Predecessors | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||
August 22, 2020 through September 30, 2020 | July 1, 2020 through August 21, 2020 | Three Months Ended September 30, 2019 | Period to Period % Change | Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||
DD&A expense | $ | 2,327 | $ | 1,294 | $ | 822 | 341 | % | $ | 16,857 | $ | 1,735 | 872 | % | $ | 29,820 | $ | 5,091 | 486 | % | ||||||||||||||||||||
DD&A expense per Boe | $ | 18.18 | $ | 18.17 | $ | 27.82 | (35 | )% | $ | 21.09 | $ | 25.15 | (16 | )% | $ | 23.38 | $ | 25.59 | (9 | )% |
The increase in DD&A was primarily due to the increased production associated with our successful horizontal drilling program.program plus the fact that the majority of our production was shut-in during the second quarter of 2020 due to COVID-19 and the effect it had on global demand and limited amounts of storage. Also, the decrease in DD&A per Boe was primarily due to additionsthe result of the Company’s successful horizontal drilling program and the addition of proved reserves attributablerelated to the Company's successful Wolfcamp/Spraberry horizontal drilling program.
HIGHPEAK ENERGY, INC.recently completed extension wells.
General and administrative expense.
General and administrative expense and general and administrative expense per Boe as well as stock-based compensation expense are as follows (in thousands, except percentages and per Boe amounts):
Three Months Ended September 30, 2020 | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||
Successor | Predecessors | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||
August 22, 2020 through September 30, 2020 | July 1, 2020 through August 21, 2020 | Three Months Ended September 30, 2019 | Period to Period % Change |
Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||
General and administrative expense | $ | 816 | $ | 567 | $ | 841 | 64 | % | $ | 1,617 | $ | 1,412 | 15 | % | $ | 3,376 | $ | 4,273 | (21 | )% | ||||||||||||||||||||
General and administrative expense per Boe | $ | 6.38 | $ | 7.96 | $ | 28.46 | (76 | )% | $ | 2.02 | $ | 20.45 | (90 | )% | $ | 2.65 | $ | 21.48 | (88 | )% | ||||||||||||||||||||
Stock-based compensation expense | $ | 14,508 | $ | - | $ | - | 100 | % | ||||||||||||||||||||||||||||||||
Stock based compensation expense | $ | 1,023 | $ | - | 100 | % | $ | 1,989 | $ | - | 100 | % |
The increase in general and administrative expense for the three months ended SeptemberJune 30, 2020, compared with the same period in 2019,2021 is primarily due toas a result of the increase in operational activity at the Company with our drilling program that we implemented in late 2019 and resumed in September 2020 in addition to additionalincreased administrative costs incurred related toassociated with being a public company, also beginningpartially offset by more general and administrative costs being allocated to drilling and completion operations and construction projects and producing properties due to increased activity and well count in August 2020.the 2021 period compared with 2020, no business combination charges in 2021 compared with 2020 and lower exploration general and administrative expenses that are classified as exploration and abandonment expense which are now identifiable and not included as a component of administration fees paid to a management company. The decrease in general and administrative expenses per Boe duringexpense for the threesix months ended SeptemberJune 30, 2021, compared with the same periods in 2020, can also be attributedis primarily a result of more general and administrative costs being allocated to our successful drilling program in the Permian Basin and the fact that the Company brought back on-line the majority of its production during the third quarter of 2020 after production was curtailed in April 2020completion operations and construction projects and producing properties due to the COVID-19 related price downturn.increased activity and well count, no business combination charges in 2021 and lower exploration general and administrative expenses that are being classified as a part of exploration and abandonment expense which are now identifiable and not included as a component of administration fees paid to a management company.
The increase in noncash stock-based compensation expense is due to stock optionsoption awards being granted to officers and employees upon completion of the initial public offering. Approximately 75 percentbusiness combination and restricted stock awards granted to outside directors during the three months ended June 30, 2021.
Interest expense.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||
Interest expense | $ | 152 | $ | - | 100 | % | $ | 206 | $ | - | 100 | % |
The increase in interest expense can be attributed to the fact that we entered into our Revolving Credit Facility in December 2020 and began drawing on it late in the second quarter of 2021. Interest expense for the stock options granted vested immediately.three and six months ended June 30, 2021 includes interest expense of $78,000 and $78,000, respectively, commitment fees of $26,000 and $51,000, respectively and amortization of debt issuance costs of $48,000 and $77,000, respectively.
Derivative gain (loss), net.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||
Noncash derivative loss | $ | (12,558 | ) | $ | - | 100 | % | $ | (12,558 | ) | $ | - | 100 | % | ||||||||||
Cash payments on settled derivative instruments | (1,038 | ) | - | 100 | % | (1,038 | ) | - | 100 | % | ||||||||||||||
Derivative loss, net | $ | (13,596 | ) | $ | - | 100 | % | $ | (13,596 | ) | $ | - | 100 | % |
The Company primarily utilizes commodity swap contracts, collar contracts, collar contracts with short puts and basis swap contracts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company’s annual capital budget and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. The Company may also, from time to time, utilize interest rate contracts to reduce the effect of interest rate volatility on the Company’s indebtedness. The above mark-to-market loss and cash settlements relate to crude oil derivative swap contracts.
Income tax benefit.expense.
Three Months Ended September 30, 2020 | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||
Successor | Predecessors | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||
August 22, 2020 through September 30, 2020 | July 1, 2020 through August 21, 2020 | Three Months Ended September 30, 2019 | Period to Period % Change | Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||
Income tax benefit | $ | 2,309 | $ | - | $ | - | 100 | % | ||||||||||||||||||||||||||||||||
Income tax expense | $ | 1,420 | $ | - | 100 | % | $ | 2,535 | $ | - | 100 | % | ||||||||||||||||||||||||||||
Effective income tax rate | 16.7 | % | - | - | 16.7 | % | 19.8 | % | 0.0 | % | 100 | % | 19.5 | % | 0.0 | % | 100 | % |
The change in income tax benefitexpense during the three and six months ended SeptemberJune 30, 2020,2021, compared with the same period in 2019,2020, was due to the fact that the Predecessors werePredecessor was treated as partnershipsa partnership for U.S. federal income tax purposes and, as such, the partners of the PredecessorsPredecessor reported their share of the Company’s income or loss on their respective income tax returns. In contrast, HighPeak Energy is a corporation and is subject to U.S. federal income taxes on any income or loss following the business combination on August 21, 2020. The effective income tax rate differs from the statutory rate primarily due to permanent differences between GAAP income and taxable income. See Note 1213 of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information.
HIGHPEAK ENERGY, INC.
Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019
OilCondensed Consolidated and natural gas revenues.
Average daily sales volumes are as follows:
Nine Months Ended September 30, 2020 | ||||||||||||||||
Successor | Predecessors | |||||||||||||||
August 22, 2020 through September 30, 2020 | January 1, 2020 through August 21, 2020 | Nine Months Ended September 30, 2019 | YTD to YTD % Change | |||||||||||||
Oil (Bbls) | 3,104 | 1,007 | 291 | 351 | % | |||||||||||
NGL (Bbls) | 44 | 86 | - | 100 | % | |||||||||||
Natural Gas (Mcf) | 312 | 373 | 216 | 69 | % | |||||||||||
Total (BOE) | 3,200 | 1,154 | 327 | 344 | % |
The increase in average daily Boe sales volumes for the nine months ended September 30, 2020, compared with the same period in 2019 was due to the Company's successful Wolfcamp A and Lower Spraberry horizontal drilling program and the fact that the Company brought back on-line the majority of its production during the third quarter of 2020 after production was curtailed in April 2020 due to the COVID-19 related price downturn.
The oil, NGL and natural gas prices that the Company reports are based on the market prices received for each commodity. The weighted average prices are as follows:
Nine Months Ended September 30, 2020 | ||||||||||||||||
Successor | Predecessors | |||||||||||||||
August 22, 2020 through September 30, 2020 | January 1, 2020 through August 21, 2020 | Nine Months Ended September 30, 2019 | YTD to YTD % Change | |||||||||||||
Oil per Bbl | $ | 38.55 | $ | 34.26 | $ | 52.33 | (28 | )% | ||||||||
NGL per Bbl | $ | 16.43 | $ | 9.31 | $ | n/a | 100 | % | ||||||||
Natural Gas per Mcf | $ | 2.30 | $ | 0.52 | $ | 1.75 | (24 | )% | ||||||||
Total per Boe | $ | 37.77 | $ | 30.44 | $ | 47.71 | (25 | )% |
Oil and natural gas production costs.
Oil and natural gas production costs in total and per Boe are as follows (in thousands, except percentages and per Boe amounts):
Nine Months Ended September 30, 2020 | ||||||||||||||||
Successor | Predecessors | |||||||||||||||
August 22, 2020 through September 30, 2020 | January 1, 2020 through August 21, 2020 | Nine Months Ended September 30, 2019 | YTD to YTD % Change | |||||||||||||
Lease operating expenses | $ | 670 | $ | 4,870 | $ | 1,794 | 209 | % | ||||||||
Lease operating expenses per Boe | $ | 5.24 | $ | 18.03 | $ | 20.11 | (67 | )% |
The increase in lease operating expenses can be attributed to the fact that we had eleven (11) producing horizontal wells during the nine months ended September 30, 2020 compared with only two (2) wells during the same period in 2019. Likewise, the decrease in lease operating expense per Boe for the nine months ended September 30, 2020, compared with the same period in 2019, was primarily attributable to the increased production.
HIGHPEAK ENERGY, INC.
Production and ad valorem taxes.
Production and ad valorem taxes are as follows (in thousands, except percentages):
Nine Months Ended September 30, 2020 | ||||||||||||||||
Successor | Predecessors | |||||||||||||||
August 22, 2020 through September 30, 2020 | January 1, 2020 through August 21, 2020 | Nine Months Ended September 30, 2019 | YTD to YTD % Change | |||||||||||||
Production and ad valorem taxes | $ | 257 | $ | 566 | $ | 261 | 215 | % |
In general, production taxes and ad valorem taxes are directly related to commodity price changes; however, Texas ad valorem taxes are based upon prior year commodity prices, whereas production taxes are based upon current year commodity prices.
Production and ad valorem taxes per Boe are as follows:
Nine Months Ended September 30, 2020 | ||||||||||||||||
Successor | Predecessors | |||||||||||||||
August 22, 2020 through September 30, 2020 | January 1, 2020 through August 21, 2020 | Nine Months Ended September 30, 2019 | YTD to YTD % Change | |||||||||||||
Production taxes per Boe | $ | 1.75 | $ | 1.42 | $ | 2.21 | (25 | )% | ||||||||
Ad valorem taxes per Boe | $ | 0.26 | $ | 0.68 | $ | 0.72 | (48 | )% |
The decrease in production taxes per Boe for the nine months ended September 30, 2020, compared with the same period in 2019, was primarily due to the decrease in oil prices. The decrease in ad valorem taxes per Boe for the nine months ended September 30, 2020, compared with the same period in 2019, was primarily due to a large number of wells that have come on production during 2020 that will have no ad valorem tax this year as 2021 will be the first year that they will be assessed ad valorem taxes. In Texas, ad valorem taxes are based on a wells valuation on January 1 of a given year.
Depletion, depreciation and amortization expense.
DD&A expense and DD&A expense per Boe are as follows (in thousands, except percentages and per Boe amounts):
Nine Months Ended September 30, 2020 | ||||||||||||||||
Successor | Predecessors | |||||||||||||||
August 22, 2020 through September 30, 2020 | January 1, 2020 through August 21, 2020 | Nine Months Ended September 30, 2019 | YTD to YTD % Change | |||||||||||||
DD&A expense | $ | 2,327 | $ | 6,385 | $ | 2,523 | 228 | % | ||||||||
DD&A expense per Boe | $ | 18.18 | $ | 23.64 | $ | 29.78 | (34 | )% |
The increase in DD&A was primarily due to the increased production associated with our successful horizontal drilling program. Also, the decrease in DD&A per Boe was primarily due to additions of proved reserves attributable to the Company's successful Wolfcamp/Spraberry horizontal drilling program.
HIGHPEAK ENERGY, INC.
General and administrative expense.
General and administrative expense and general and administrative expense per Boe as well as stock-based compensation expense are as follows (in thousands, except percentages and per Boe amounts):
Nine Months Ended September 30, 2020 | ||||||||||||||||
Successor | Predecessors | |||||||||||||||
August 22, 2020 through September 30, 2020 | January 1, 2020 through August 21, 2020 | Nine Months Ended September 30, 2019 | YTD to YTD % Change | |||||||||||||
General and administrative expense | $ | 816 | $ | 4,840 | $ | 2,523 | 124 | % | ||||||||
General and administrative expense per Boe | $ | 6.38 | $ | 17.92 | $ | 28.28 | (67 | )% | ||||||||
Stock-based compensation expense | $ | 14,508 | $ | - | $ | - | 100 | % |
The increase in general and administrative expense for the nine months ended September 30, 2020, compared with the same period in 2019, is primarily due to the increase in operational activity at the Company with our drilling program that we implemented in late 2019 and resumed in September 2020 in addition to additional administrative costs incurred related to being a public company also beginning in August 2020. The decrease in general and administrative expenses per Boe during the nine months ended September 30, 2020 can also be attributed to our successful drilling program in the Permian Basin and the fact that the Company brought back on-line the majority of its production during the third quarter of 2020 after production was curtailed in April 2020 due to the COVID-19 related price downturn.
The increase in noncash stock-based compensation expense is due to stock options being granted to officers and employees upon completion of the initial public offering. Approximately 75 percent of the stock options granted vested immediately.
Income tax benefit.
Nine Months Ended September 30, 2020 | ||||||||||||||||
Successor | Predecessors | |||||||||||||||
August 22, 2020 through September 30, 2020 | January 1, 2020 through August 21, 2020 | Nine Months Ended September 30, 2019 | YTD to YTD % Change | |||||||||||||
Income tax benefit | $ | 2,309 | $ | - | $ | - | 100 | % | ||||||||
Effective income tax rate | 16.7 | % | - | - | 16.7 | % |
The change in income tax benefit during the nine months ended September 30, 2020, compared with the same period in 2019, was due to the fact that the Predecessors were treated as partnerships for U.S. federal income tax purposes and, as such, the partners of the Predecessors reported their share of the Company’s income or loss on their respective income tax returns. In contrast, HighPeak Energy is a corporation and is subject to U.S. federal income taxes on any income or loss following the business combination on August 21, 2020. The effective income tax rate differs from the statutory rate primarily due to permanent differences between GAAP income. See Note 12 of Notes to ConsolidatedCombined Financial Statements included in "Item 1. Financial Statements"(Unaudited)" for additional information.
Liquidity and Capital Resources
Liquidity. Liquidity. In response to the COVID-19 pandemic and commensurate decrease in oil, NGL and natural gas prices, the Company has takentook steps during 2020 to reduce, defer or cancel certain planned capital expenditures, shut-in the majority of its production andreduce its overall cost structure commensurate with its expected level of activities. During July 2020, the Company began putting its wells back on production based on the recovery of oil and natural gas prices. Subsequent to the Closing of the HighPeak business combination, the Company began completing the twelve (12) wells that were drilled but not yet completed when operations were shut down early in 2020. The Company also began running one (1) drilling rig in September 2020. The Company drilled and completed a salt-water disposal well near the center of our current northern acreage operating area and completed phase one of a water disposal infrastructure system to recycle or dispose the water that we anticipate producing with the development drilling planned in 2021 and beyond. Also, in late December 2020, the Company entered into a Revolving Credit Facility with an initial borrowing base of $40.0 million; however, the Company elected to reduce the aggregate elected commitments to $20.0 million. In June 2021, the Company increased its borrowing base and commitments under its Revolving Credit Facility to $125.0 million and added a syndicate of banks at various levels of participation and commitments. The Revolving Credit Facility remained undrawn until the second quarter of 2021. Associated with the Revolving Credit Facility, the Company was required to enter into commodity hedging instruments, which it did in the second quarter, to protect against price fluctuations on a portion of its proved developed producing reserves commencing prior to drawing on the Revolving Credit Facility. See Note 5 of the Notes to Consolidated and Combined Financial Statements included in “Item 1. Condensed Consolidated and Combined Financial Statements (Unaudited)” for additional information regarding these commodity derivative contracts.
The Company's primary sources of short-term liquidity are (i) cash and cash equivalents, (ii) net cash provided by operating activities, and(iii) borrowings from our Revolving Credit Facility, (iv) on an opportunistic basis, (iii) issuances of debt or equity securities and (iv)(v) other sources, such as sales of nonstrategic assets.
As of SeptemberJune 30, 2020,2021, the Company had no outstanding borrowings. The Company is currently negotiating a credit facility$14.0 million in borrowings and approximately $109.1 million available to provide the Company with a future source of liquidity. While the Company is confident it will enter into a credit facility in the near future, there can be no assurance that it will close.borrow under its Revolving Credit Facility. The Company also had unrestricted cash on hand of $54.9$12.8 million as of SeptemberJune 30, 2020.2021.
HIGHPEAK ENERGY, INC.Under our Credit Agreement, borrowing in the form of Eurodollar loans accrue interest based on LIBOR. The use of LIBOR as a global reference rate is expected to be discontinued after 2021. Our Credit Agreement specifies that if LIBOR is no longer a widely used benchmark rate, or if it is no longer used for determining interest rates for loans in the United States, a replacement interest rate that fairly reflects the cost to the lenders of funding loans shall be established by the Administrative Agent, as defined in the Credit Agreement, in consultation with us. We currently do not expect the transition from LIBOR to have a material impact on interest expense or borrowing activities under the Credit Agreement, or to otherwise have a material adverse impact on our business. See Note 2 of Notes to Consolidated Financial Statements included in "Item 1. Condensed Consolidated and Combined Financial Statements (Unaudited)" for discussion of FASB ASU 2020-04 and ASU 2021-01, which provide guidance related to reference rate reform.
The Company's primary needs for cash are for (i) capital expenditures, (ii) acquisitions of oil and natural gas properties, (iii) payments of contractual obligations, and (iv) working capital obligations. Funding for these cash needs may be provided by any combination of the Company's sources of liquidity. Although the Company expects that its sources of funding will be adequate to fund its revised 20202021 planned capital expenditures and provide adequate liquidity to fund other needs, no assurance can be given that such funding sources will be adequate to meet the Company's future needs.
20202021 capital budget. budget. In response to Upon increasing its commitments under the uncertainty around the duration and overall impact toRevolving Credit Facility, the Company caused by the COVID-19 pandemic, theCompany has reducedupdated its capital budget for the remainder of 2020 after the HighPeak business combination2021 to approximately $66 million.$210 to $225 million for drilling, completion, facilities and equipping oil wells plus $35 to $45 million for field infrastructure buildout and other costs. HighPeak Energy expects to fund its forecasted capital expenditures with cash on its balance sheet, cash generated by operations, through borrowings under its Revolving Credit Facility and, on an opportunistic basis, proceeds from the issuance of debt or equity securities. The Company's capital expenditures for the ninesix months ended SeptemberJune 30, 20202021 were $69.5$92.0 million.
Capital resources. resources. Cash flows from operating, investing and financing activities are summarized below.below (in thousands).
Nine Months Ended September 30, 2020 | Six Months Ended June 30, | |||||||||||||||||||||||||||
Successor | Predecessors | 2021 | 2020 | % Change | ||||||||||||||||||||||||
August 22, 2020 through September 30, 2020 | January 1, 2020 through August 21, 2020 | Nine Months Ended September 30, 2019 | YTD to YTD Change | Successor | Predecessor | |||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | 1,154 | $ | (4,102 | ) | $ | 1,848 | $ | (4,796 | ) | $ | 47,280 | $ | (4,812 | ) | 1,083 | % | |||||||||||
Net cash used in investing activities | $ | (42,033 | ) | $ | (67,886 | ) | $ | (18,684 | ) | $ | (91,235 | ) | $ | (76,867 | ) | $ | (65,619 | ) | (17 | )% | ||||||||
Net cash provided by financing activities | $ | 93,810 | $ | 51,220 | $ | 19,934 | $ | 130,096 | $ | 22,877 | $ | 54,000 | (58 | )% |
Operating activities. activities. The decreaseincrease in net cash flow provided by operating activities for the ninesix months ended SeptemberJune 30, 2020,2021, compared with the sameperiod in 2019,2020, was primarily due to a decrease in accounts payable and accrued liabilities primarily related the relatively high amount of accrued expenses related to the business combinations that the Predecessor was working on at the end of 2019, an increase in accounts receivable from the increased oil and gas revenues related to increased production volumes in September 2020 versus 2019 partially offset by a decrease in joint interest billing receivables, and an increase in inventory due to the purchase of oilfield materials and supplies that will be needed with our current development program. These decreases in net cash flow provided by operating activities were partially offset by an increase in cash flow from the statement of operations related primarily to the increasedhigher revenues associated with increased production volumes as a result of our successful horizontal drilling program.program coupled with the fact that the Company shut-in the majority of its production starting in the second quarter of 2020 due to the impact COVID-19 had on global energy prices, and increased realized prices. Partially offsetting this increase was a greater accounts receivable balance resulting from the higher oil, NGL and natural gas revenues related to increased sales volumes and realized prices in the current period.
Investing activities. The increase in net cash used in investing activities for the ninesix months ended SeptemberJune 30, 2020,2021, compared with the same period in2019,2020, was primarily due to increases in additions to oil and natural gas properties ascompared with the six months ended June 30, 2020 when the Company began a developmentshut down drilling program with two rigsoperations during the second quarter of 2020 due to COVID-19 and the impact it had on global energy prices and decreases in late-2019oil and continued through March 2020 at which time it paused its development drilling program. The Company recommenced its development drilling program with one rig in September 2020. Thenatural gas acquisition costs. During the prior year period, the Company also funded an extension payment of $15.0 million related to an acquisition in 2020 that was terminated and funded notes receivable to Pure of $7.5$5.9 million related to the HighPeak business combination. Partially offsetting these increases in cash used in investing activities was a decrease in the amount of acquisitions of oil and gas properties during the nine months ended September 30, 2020 compared with the same period in 2019.
Financing activities. The Company's significant financing activities are as follows:
2020: The Company (i) received $93.8 million from the aforementioned business combination, net of issuance fees, (ii) received $54.0 million in capital contributions from its partners prior to the closing of the aforementioned business combination, and (iii) made distributions to its partners totaling $2.8 million prior to the closing of the aforementioned business combination.
• | 2021: The Company borrowed $14.0 million on its Revolving Credit Facility and received $9.1 million from the exercise of 788,009 of the Company’s $11.50 warrants and $1.6 million from the exercise of 154,268 of stock options by employees of the Company. These cash inflows were partially offset by the Company incurring $1.8 million in debt issuance costs associated with the amended and restated Revolving Credit Facility in June 2021. | |
• | 2020: The Company’s Predecessors received $54.0 million in capital contributions from its partners. |
2019: The Company’s Predecessors received $19.9 million in capital contributions from its partners.
Contractual obligations. The Company's contractual obligations include leases (primarily related to contracted drillingrigs, equipment and office facilities), capital funding obligations, volume commitments, aid-in-construction obligations and other liabilities. Other joint owners in the properties operated by the Company could incur portions of the costs represented by these commitments.
New Accounting Pronouncements
Non-GAAP Financial Measures
EBITDAX represents net income (loss) before interest expense, interest income, income taxes, depletion, depreciation, and amortization, accretion of discount on asset retirement obligations, exploration and abandonment expense, non-cash stock-based compensation expense, derivative gains and losses net of settlements, gains and losses on divestitures and certain other items. EBITDAX excludes certain items that we believe affect the comparability of operating results and can exclude items that are generally non-recurring in nature or whose timing and/or amount cannot be reasonably estimated. EBITDAX is a non-GAAP measure that we believe provides useful additional information to investors and analysis, as a performance measure, for analysis of our ability to internally generate funds for exploration, development, acquisitions, and to service debt. We are also subject to financial covenants under our Credit Agreement based on EBITDAX ratios as further described in Note 7 of Notes to Consolidated Financial Statements included in “Item 1. Condensed Consolidated and Combined Financial Statements (Unaudited).” In addition, EBITDAX is widely used by professional research analysis and others in the valuation, comparison, and investment recommendations of companies in the oil and gas exploration and production industry, and many investors use the published research of industry research analysts in making investment decisions. EBITDAX should not be considered in isolation or as a substitute for net income (loss), income (loss) from operations, net cash provided by operating activities, or other profitability or liquidity measures prepared under GAAP. Because EBITDAX excludes some, but not all items that affect net income (loss) and may vary among companies, the EBITDAX amounts presented may not be comparable to similar metrics of other companies. Our Revolving Credit Facility provides a material source of liquidity for us. Under the terms of our Credit Agreement, if we failed to comply with the covenants that establish a maximum permitted ratio of total debt, as defined in the Credit Agreement, to EBITDAX, we would be in default, an event that would prevent us from borrowing under our Revolving Credit Facility and would therefore materially limit a significant source of our liquidity. In addition, if we are in default under our Revolving Credit Facility and are unable to obtain a waiver of that default from our lenders, lenders under that facility would be entitled to exercise all of their remedies for default.
The following table provides a reconciliation of our net income (loss) (GAAP) to EBITDAX (non-GAAP) for the periods presented (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||
Net income (loss) | $ | 5,743 | $ | (4,147 | ) | $ | 10,487 | $ | (84,978 | ) | ||||||
Interest expense | 152 | - | 206 | - | ||||||||||||
Interest income | - | - | (1 | ) | - | |||||||||||
Income tax expense | 1,420 | - | 2,535 | - | ||||||||||||
Depletion, depreciation and amortization | 16,857 | 1,735 | 29,820 | 5,091 | ||||||||||||
Accretion of discount | 37 | 35 | 72 | 69 | ||||||||||||
Exploration and abandonment expense | 463 | 1 | 654 | 4 | ||||||||||||
Stock-based compensation | 1,023 | - | 1,989 | - | ||||||||||||
Derivative-related noncash activity | 12,558 | - | 12,558 | - | ||||||||||||
Other expense | 127 | - | 127 | 76,503 | ||||||||||||
EBITDAX | $ | 38,380 | $ | (2,376 | ) | $ | 58,447 | $ | (3,311 | ) |
New Accounting Pronouncements
Our historical condensed consolidated and combined financial statements and related notes to condensed consolidated and combined financial statements contain information that is pertinent to our management’s discussion and analysis of financial condition and results of operations. Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that our management make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. However, the accounting principles used by us generally do not change our reported cash flows or liquidity. Interpretation of the existing rules must be done, and judgments made on how the specifics of a given rule apply to us.
In management’s opinion, the more significant reporting areas impacted by management’s judgments and estimates are the choice of accounting method for oil and natural gas activities, oil and natural gas reserve estimation, asset retirement obligations, impairment of long-lived assets, valuation of stock-based compensation, valuation of business combinations, accounting and valuation of nonmonetary transactions, litigation and environmental contingencies, valuation of financial derivative instruments, uncertain tax positions and income taxes.
Management’s judgments and estimates in all the areas listed above are based on information available from both internal and external sources, including engineers, geologists and historical experience in similar matters. Actual results could differ from the estimates as additional information becomes known.
There have been no material changes in our critical accounting policies and procedures during the six months ended June 30, 2021. See our disclosure of critical accounting policies in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 15, 2021.
New accounting pronouncements issued but not yet adopted. The effects of new accounting pronouncements are discussed in Note 2 of Notes to Condensed Consolidated and Combined Financial Statements included in "Item 1. Condensed Consolidated and Combined Financial Statements.Statements (Unaudited)."
HIGHPEAK ENERGY, INC.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s major market risk exposure is in the pricing that it receives for productionits sales of oil, NGL and natural gas and NGLs.gas. Pricing for oil, NGL and natural gas and NGLs has been volatile and unpredictable for several years, and HighPeak Energy expects this volatility to continue in the future.
During the period from January 1, 2018 through SeptemberJune 30, 2020,2021, the calendar month average NYMEX WTI crude oil price per Bbl ranged from a low of $16.55$16.70 in April 2020 to a high of $70.98,$71.35 in June of 2021, and the last trading day NYMEX natural gas price per MMBtu ranged from a low of $1.74$1.50 to a high of $4.09. The high, low and average prices for NYMEX WTI and NYMEX Henry Hub are monthly contract prices. During April 2020, NYMEX WTI crude oil and NYMEX natural gas prices averaged $16.55 per Bbl and $1.74 per MMBtu, respectively.$4.72. A $1.00 per barrel increase (decrease) in the weighted average oil price for the ninesix months ended SeptemberJune 30, 20202021 would have increased (decreased) the Company’s revenues by approximately $476,000$2.4 million on an annualized basis and a $0.10 per Mcf increase (decrease) in the weighted average natural gas price for the ninesix months ended SeptemberJune 30, 20202021 would have increased (decreased) the Company’s revenues by approximately $13,000$64,000 on an annualized basis.
Due to this volatility, the Company may beginbegan to use, commodity derivative instruments, such as swaps, collars puts and swaps,puts, to hedge price risk associated with a portion of anticipated production. These hedging instruments allow the Company to reduce, but not eliminate, the potential effects of the variability in cash flow from operations due to fluctuations in oil and natural gas prices and provide increased certainty of cash flows for its drilling program. These instruments provide only partial price protection against declines in oil and natural gas prices and may partially limit the Company’s potential gains from future increases in prices. The Company may enterhas entered into hedging arrangements to protect its capital expenditure budget and to protect aits Revolving Credit Facility borrowing base. The Company does not enter into any financialcommodity derivative instruments, including derivatives, for speculative or trading purposes.
The average forward prices based on June 30, 2021 market quotes were as follows:
Remainder of 2021 | Year Ending December 31, 2022 | |||||||
Average forward NYMEX oil price per Bbl | $ | 71.13 | $ | 65.70 | ||||
Average forward NYMEX natural gas price per MMBtu | $ | 3.66 | $ | 3.17 |
The average forward purchase prices based on August 5, 2021 market quotes were as follows:
Remainder of 2021 | Year Ending December 31, 2022 | |||||||
Average forward NYMEX oil price per Bbl | $ | 68.11 | $ | 64.28 | ||||
Average forward NYMEX natural gas price per MMBtu | $ | 4.20 | $ | 3.58 |
Counterparty and Customer Credit Risk. The Company’s derivative contracts if any, expose it to credit risk in the event of nonperformance by counterparties. It is anticipated that if the Company enters into any commodity contracts, theThe Company’s collateral for the outstanding borrowings under any debt facility the Company may enter into may be used asRevolving Credit Facility is also collateral for the Company’s commodity derivatives. The Company evaluates the credit standing of its counterparties as it deems appropriate. It is anticipated that any counterpartiesCounterparties to HighPeak Energy’s derivative contracts would have investment grade ratings.
The Company’s principal exposures toprimary concentration of credit riskrisks are throughassociated with (i) the collection of receivables resulting from the sale of oil and natural gas production due to the concentration of its oil and natural gas receivables with a few significant customers.customers and (ii) the risk of a counterparty’s failure to meet its obligations under derivative contracts with the Company. The inability or failure of the Company’s significant customers and/or counterparties to meet their obligations to the Company or their insolvency or liquidation may adversely affect the Company’s financial results. However, the Company believes the credit quality of its customers is high.
HIGHPEAK ENERGY, INC.
The average forward prices based on September 30, 2020 market quotes were as follows:
Fourth Quarter 2020 | Year Ending December 31, 2021 | |||||||
Average forward NYMEX oil price per Bbl | $ | 40.73 | $ | 42.46 | ||||
Average forward NYMEX gas price per MMBtu | $ | 2.82 | $ | 2.92 |
|
Fourth Quarter 2020 | Year Ending December 31, 2021 | |||||||
Average forward NYMEX oil price per Bbl | $ | 41.78 | $ | 42.92 | ||||
Average forward NYMEX gas price per MMBtu | $ | 2.95 | $ | 2.96 |
Credit risk. The Company's primary concentration of credit risks are associated with (i) the collection of receivables resulting from the sale of oiland natural gas production and (ii) the risk of a counterparty's failure to meet its obligations under derivative contracts with the Company.
The Company monitors exposure to customers and/or counterparties primarily by reviewing credit ratings, financial criteria and payment history. Where appropriate, the Company obtains assurances of payment, such as a guarantee by the parent company of the customer and/or counterparty or other credit support. The Company's oil and natural gas is sold to various purchasers who must be prequalified under the Company's credit risk policies and procedures. Historically, the Company's credit losses on oil, NGL and natural gas receivables have not been material.
The Company uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments. Although the Company does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Company's credit risk policies and procedures.
The Company will enterentered into International Swap Dealers Association Master Agreements ("ISDA Agreements") with each of its derivative counterparties. The terms of the ISDA Agreements provide the Company and the counterparties with right of set off upon the occurrence of defined acts of default by either the Company or a counterparty to a derivative contract, whereby the party not in default may set off all derivative liabilities owed to the defaulting party against all derivative asset receivables from the defaulting party.
HIGHPEAK ENERGY, INC.
ITEM 4.CONTROLS AND PROCEDURES
Prior toEvaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the HighPeak business combination,Exchange Act, HighPeak Energy was a wholly owned subsidiary of Pure with no operations formed to behas evaluated, under the Surviving Corporation in connectionsupervision and with the participation of the Company’s management, including HighPeak business combination. As a result, previously existing internalEnergy’s principal executive officer and principal financial officer, the effectiveness of the design and operation of its disclosure controls are no longer applicable or comprehensive enoughand procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the assessment dateend of the fiscal period covered by this Report. Based on that evaluation, HighPeak Energy’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective, as of the Company's operations priorend of the period covered by this Report, in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including that such information is accumulated and communicated to the HighPeak business combination were insignificant comparedCompany’s management, including the principal executive officer and principal financial officer, to those ofallow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in the consolidated entity post-business combination. The design and implementation of internal controls over financial reporting for the Company's post-business combination has required and will continue to require significant time and resources from management and other personnel. Because of this, the design and ongoing development of HighPeak Energy’s framework for implementation and evaluation ofCompany’s internal control over financial reporting is(as defined in its preliminary stages. As a result, management was unable, without incurring unreasonable effort or expense, to conduct an assessment onRule 13a-15(f) under the effectiveness of HighPeak Energy’s disclosure controls and procedures as of SeptemberExchange Act) that occurred during the six months ended June 30, 2020.
The design and implementation of internal control over financial reporting for the Company post-business combination has required and will continue to require significant time and resources from management and other personnel. We were engaged in the process of the design and implementation of our internal control over financial reporting in a manner commensurate with the scale of our operations post-business combination. During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting2021 that hashave materially affected or isare reasonably likely to materially affect ourthe Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
TheFrom time to time, the Company ismay be a party to various proceedings and claims incidental to its business. While many of these matters involve inherent uncertainty, the Company believes that the amount of the liability, if any, ultimately incurred with respect to these proceedings and claims will not have a material adverse effect on the Company's consolidated financial position as a whole or on its liquidity, capital resources or future annual results of operations.
ITEM 1A.RISK FACTORS
In addition to the information set forth in this report, the risks that are discussed in the Registration Statement,Company’s Annual Report on Form 10-K for the year ended December 31, 2020, under the headings "Risk Factors,” “Business and Properties,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk” should be carefully considered, as such risks could materially affect the Company's business, financial condition or future results. There has been no material change in the Company's risk factors that were described in the Registration Statement.Company’s Annual Report on Form 10-K.
These risks are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may have a material adverse effect on the Company's business, financial condition or future results.
The recent COVID-19 pandemic and other pandemic outbreaks could negatively impact our business and results of operations.
The Company may face additional risks related to the recent outbreak of COVID-19, which has been declared a “pandemic” by the World Health Organization. International, federal, state and local public health and governmental authorities have taken extraordinary and wide-ranging actions to contain and combat the outbreak and spread of COVID-19 in regions across the United States and the world, including mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. To the extent the COVID-19 outbreak continues or worsens, governments may impose additional similar restrictions. The full impact of the COVID-19 outbreak is unknown and rapidly evolving. The outbreak and any preventative or protective actions that the Company or its customers may take in respect to this virus may result in a period of disruption, including the Company’s financial reporting capabilities. Any resulting impact cannot be reasonably estimated at this time but may materially affect the business and the Company’s financial condition and results of operations. The extent to which the COVID-19 outbreak impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.
HIGHPEAK ENERGY, INC.
ITEM 6.EXHIBITS
10.2 | |
10.3 | |
10.4 | |
10.5 | |
10.6+ | |
10.7+ | |
10.8* | |
16.1 | |
31.1* | |
31.2* | |
32.1** | |
32.2** | |
101.INS** | Inline XBRL Instance Document |
101.SCH** | Inline XBRL Taxonomy Extension Schema Document |
101.CAL** | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF** | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB** | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE** | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
_________________
* | Filed herewith. |
** | Furnished herewith. |
+ | Certain schedules, annexes or exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K but will be furnished supplementally to the SEC upon request. |
HIGHPEAK ENERGY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereto duly authorized.
HIGHPEAK ENERGY, INC. | ||
| By: | /s/ Steven Tholen |
Steven Tholen | ||
Chief Financial Officer | ||
| By: | /s/ Keith Forbes |
Keith Forbes | ||
| ||
Vice President and Chief Accounting Officer |