Description

Synopsis - 

High Peak Energy is a former SPAC (Pure Acquisition - IPO in November 2017) operating in Howard County in the Permian Basin, which hasn't re-rated with the rise in WTI due to constrained liquidity since 90% of the float is held by insiders. This resulted in less than $100M in liquidity on HPK stock, but the setup has recently changed with an additional $50M raised through a public offering on August 16th. Further, High Peak's warrants are compelling with a duration of almost 4 years and with about $25M in additional float ($2.5 * ~20M warrants). High Peak represents one of the most compelling growth stories in the Permian, with excellent cash operating margins at >$50 BOE in Q2 2021 and about a decade of drilling inventory in Howard County. The SPAC deal and resulting lack of attention creates an interesting setup. Further, High Peak currently has no net debt producing best-in-class Permian EBITDAX conversion to FCF. Note that I am by no means as experienced in O&G as others on VIC, but wanted to point this out since I spend a lot of time scouting opportunistic warrants.

High Peak currently trades at <3X 2022 run rate EBITDAX at $75 WTI, has a compelling acreage position with over 51,000 acres, >400 net locations, 80% operated, with an ~90% oil cut. The company has hedged about 50% of their production at ~$60 WTI for the rest of this year and ~30% in 1H 2022. Further, the company has a borrowing base of about $125M representing capacity to add a third rig sooner should WTI cross above $80. Management has stated that IRR's are approaching 200% IRR on current wells at $75 WTI and announced that they are acquiring an adjacent 1,400 MBoe / d in Q3 2021.

Background - 

HighPeak is led by Jack Hightower who was involved with Celero Energy I and II, and Bluestem Energy, all of which were acquired resulting in significant value creation. High Peak was initially acquired by Pure Acquisition in November 2019 along with adjacent peer Grenadier II, but the deal was cancelled in April 2020 and re-proposed in May 2020. This time, however, only with the High Peak's sponsor properties and with several "goodies" to incentivize investors not to redeem. Although WTI was under $30 at the time, High Peak utilized the typical SPAC playbook of overpromising - putting exit 2021 production at 47 MBoe / D whereas today's guidance is around 14 MBoe / D. Part of this is due to moderate production growth fueled by a one rig program which has been recently upped to two. The SPAC presentation modeled 3 rigs running in August 2020, which was admittedly a stretch and the sponsor was strapped for cash at a time where credit markets were not favorable to the industry. HighPeak was only able to raise ~$90M with the addition of another warrant, CVR, and 60 cents per share - which is nearly out of the money today and barely dilutive at current prices, but essentially represents a put option at $12.5 and trades under ticker HPKER. The addition of the unique CVR highlights management's urgency to raise capital in 2020 while being able to simultaneously utilize their SPAC Pure Acquisition.

Comparable Valuations - 

Grenadier II is adjacent to HighPeak in Howard County, and was previously going to be acquired by HighPeak in November 2019 for about $625M in total consideration (valuing warrants at $1.5 each). Since the deal broke, Grenadier was acquired by Surge Energy in January 2021 for $420M in cash. The first deal was negotiated at ~$55 WTI and the second at roughly ~$45 WTI. Grenadier had production in January 2021 of about ~9k Boepd with a ~75% oil cut, about 18K net acres and 120 economic drilling locations. Valuing based on acreage, comping these figures to HPK would put the stock at $13 - $19 at $55 WTI in a sale process. Note that tendering the warrants above the market valuation today would make a less than 5% impact on the valuation given that there are 10.2M warrants outstanding and 92.7M shares outstanding, and the CVRs expire in Q1 2023. Valuing based on net locations instead, HighPeak would be worth $15 - $22.

More recently in May 2021, Sabalo's Howard County assets were acquired by Laredo for 2.5M shares and $625M in cash at a valuation of ~$715M at the time and ~$850M today. Sabalo's position is very similar to Grenadier's with 21k net acres and 120 operated locations. Using Saballo's position as a comp (which has ~83% oil cut) HighPeak would be worth somewhere around $22 - $26 a share at ~$60 WTI.

Figure 1: Illustration showcasing the proximity of Sabalo and Grenadier assets

Given WTI at $80 today and HPK's relatively low hedge profile due to rapid production growth anticipated in 2022 and <50% of production hedged, there's a clear bull case to $30 with continued execution given the same-county comparables outlined above. Note that High Peak has similar run rate EOY 2021 production as both comps. As an aside, at $55 WTI at the time of the HighPeak - Grenadier transaction, HighPeak was valued at around $1.2B ($13 per share) after triangulating it's contribution to the SPAC valuation. Note that there has been continued opportunity prove-out and >$150M in sunk costs invested in expanding production, so that figure should be closer to $15 today at $55 WTI (as was in November 2019).

Resources: 

HighPeak - Grenadier:

https://www.oilgasequity.com/exit-encap-backed-grenadier-ii-announces-deal-to-sell-to-pure-acquisition-spac/

https://www.sec.gov/Archives/edgar/data/0001726293/000143774919023638/ex_166022.htm

Surge - Grenadier: 

https://www.encapinvestments.com/news/surge-energy-announces-significant-acquisition-grenadier-energy-partners-iis-midland-basin

Laredo - Sabalo:

https://www.hartenergy.com/exclusives/permian-producer-laredo-petroleum-strikes-715-million-deal-sabalo-partner-193984

Summary - 

All in all, High Peak represents one of the few public oil growth plays and has a highly aligned, and experienced management team. The warrants are highly compelling as they trade at ~40-50% implied volatility at $2.5 and aren't highly dilutive as mentioned earlier and would expedite High Peak's drilling program. The warrants are ~3x return at $20 and ~7x return at $30, but there is still an opportunity for small funds / PA in HighPeak equity with some recent days with volume above $500k. Insiders are highly aligned and Jack Hightower personally bought ~$2M on the open market a few months ago and openly has said on conference calls that he believes HPK is undervalued given recent transactions. From a sourcing side, HighPeak also doesn't screen well on fundamental metrics given the weight on growth vs. PDP-10, SPAC transaction, and (only until recently) lack of profitability.

Catalyst

Continued production growth and execution with two rig program in 2022 causing EBITDAX to cross $400M

Warrant tender offer or cash conversion at $18 per HPK share (latter more likely given reinvestment into production)

Acquisition after 1H 2023 once CVRs expire.