HighPeak Energy, Inc. [HPK] Filings

10-Q 1 hpe20230930_10q.htm FORM 10-Q hpe20230930_10q.htm

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 September 30, 2023

☐	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: 001-3946

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. 3rd St., Suite 1000	76102
Fort Worth, Texas	(Zip Code)
(Address of principal executive offices and zip code)

(817) 850-9200

(Registrant's telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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 Common Stock

HPKEW

The Nasdaq Stock Market LLC

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 2, 2023, there were 128,420,923 shares of common stock, par value $0.0001 per share, issued and outstanding.

HIGHPEAK ENERGY, INC.

TABLE OF CONTENTS

		Page
Definitions of Certain Terms and Conventions Used Herein		1
Cautionary Statement Concerning Forward-Looking Statements		4
PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	5
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations	6
	Condensed Consolidated Statements of Changes in Stockholders’ Equity	7
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	41
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 5.	Other Information	44
Item 6.	Exhibits	45
Signatures		46

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:

	•	*“10.000% Senior Notes*” means the $225.0 million aggregate principal amount of our 10.000% Senior Notes due 2024, which were issued pursuant to an indenture in February 2022.
	•	*“10.625% Senior Notes*” means the $250.0 million aggregate principal amount of our 10.625% Senior Notes due 2024, $225.0 million of which were issued pursuant to an indenture in November 2022 and $25.0 million of which were issued pursuant to an indenture in December 2022.
	•	*“3-D seismic*” means three-dimensional seismic data which is geophysical data that depicts the subsurface strata in three dimensions. 3-D seismic data typically provides a more detailed and accurate interpretation of the subsurface strata than two-dimensional data.
	•	*“Alamo Acquisitions*” means the acquisitions of certain crude oil and natural gas properties in Borden County, Texas, collectively, from (i) Alamo Borden County II, LLC (“Alamo II”), Alamo Borden County III, LLC (“Alamo III”) and Alamo Borden County IV, LLC (“Alamo IV”) pursuant to that certain Purchase and Sale Agreement dated February 15, 2022 by and among HighPeak Energy, HighPeak Energy Assets, LLC (together with HighPeak Energy, the “HighPeak Parties”), Alamo II, Alamo III, and Alamo IV and (ii) Alamo Borden County 1, LLC (“Alamo I”) pursuant to that certain Purchase and Sale Agreement dated June 3, 2022 by and among the HighPeak Parties and Alamo I.
	•	*“ASC*” means Accounting Standards Codification.
	•	*“ASU*” means Accounting Standards Update.
	•	*“Basin*” means a large natural depression on the earth’s surface in which sediments generally brought by water accumulate.
	•	*“Bbl*” means a standard barrel containing 42 United States gallons.
	•	*“Bcf*” means one billion cubic feet.
	•	*“Boe*” means a barrel of crude oil equivalent and is a standard convention used to express crude oil and natural gas volumes on a comparable crude oil equivalent basis. Natural gas equivalents are determined under the relative energy content method by using the ratio of six thousand cubic feet of natural gas to one Bbl of crude oil or NGL.
	•	*“Boepd*” means Boe per day.
	•	*“Bopd*” means one barrel of crude oil per day.
	•	*“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 degree Fahrenheit.
	•	*“Collateral Agency Agreement*” means the Company’s Collateral Agency Agreement, dated as of September 12, 2023, by and between HighPeak Energy, Inc., Texas Capital Bank, as collateral agent, Chambers Energy Management, LP, as term representative, and Mercuria Energy Trading SA, as first-out representative.
	•	*“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 crude oil and natural gas, or in the case of a dry hole, the reporting of abandonment to the appropriate agency.
	•	*“DD&A*” means depletion, depreciation and amortization.
	•	*“Development costs*” Costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing the crude oil and natural gas. For a complete definition of development costs, refer to the SEC’s Regulation S-X, Rule 4-10(a)(7).
	•	*“Development project*” A development project is the means by which petroleum resources are brought to the status of economically producible. As examples, the development of a single reservoir or field, an incremental development in a producing field or the integrated development of a group of several fields and associated facilities with a common ownership may constitute a development project.
	•	*“Development well*” A well drilled within the proved area of a crude oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
	•	*“Differential*” An adjustment to the price of crude oil, NGL or natural gas from an established spot market price to reflect differences in the quality and/or location of crude oil, NGL or natural gas.
	•	*“Dry hole” or “dry well*” A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.
	•	*“Economically producible*” The term economically producible, as it relates to a resource, means a resource which generates revenue that exceeds, or is reasonably expected to exceed, the costs of the operation.
	•	*“Eighth Amendment*” means the Eighth Amendment to Prior Credit Agreement, dated as of March 14, 2023, by and among HighPeak Energy, Inc., as Borrower, Wells Fargo Bank, National Association, as administrative agent, the guarantors party thereto and the lenders party thereto.
	•	*“EUR” or “Estimated ultimate recovery*” The sum of reserves remaining as of a given date and cumulative production as of that date.
	•	*“Exploratory well*” An exploratory well is a well drilled to find a new field, to find a new reservoir in a field previously found to be productive of crude oil or natural gas in another reservoir. Generally, an exploratory well is any well that is not a development well, an extension well, a service well or a stratigraphic test well as those items are defined by the SEC.
	•	*“Extension well*” An extension well is a well drilled to extend the limits of a known reservoir.
	•	*“FASB*” Financial Accounting Standards Board.
	•	*“Field*” An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations.
	•	*“Fifth Amendment*” means the Fifth Amendment to Prior Credit Agreement, dated as of October 14, 2022, by and among HighPeak Energy, Inc., as Borrower, Fifth Third Bank, National Association, as the existing administrative agent, Wells Fargo Bank, National Association, as the new administrative agent, the guarantors party thereto and the lenders party thereto.
	•	*“Formation*” A layer of rock which has distinct characteristics that differs from nearby rocks.
	•	*“Fourth Amendment*” means the Fourth Amendment to Prior Credit Agreement, dated as of June 27, 2022, among HighPeak Energy, Inc., as Borrower, Fifth Third Bank, National Association, as administrative agent, and the guarantors party thereto and lenders party thereto.
	•	*“GAAP*” means accounting principles generally accepted in the United States of America.
	•	*“Gross wells*” means the total wells in which a working interest is owned.

	•	*“Hannathon Acquisition*” means the acquisition of various crude oil and natural gas properties largely contiguous to the Company’s Signal Peak operating area in Howard County, Texas pursuant to that certain Purchase and Sale Agreement dated as of April 26, 2022, with Hannathon Petroleum, LLC and certain other third-party private sellers set forth therein.
	•	*“Held by production*” Acreage covered by a mineral lease that perpetuates a company’s right to operate a property as long as the property produces a minimum paying quantity of crude oil or natural gas.
	•	*“HH*” means Henry Hub, a distribution hub in Louisiana that serves as the delivery location for natural gas futures contracts on the NYMEX.
	•	*“HighPeak Energy” or the “Company*” means HighPeak Energy, Inc. and its subsidiaries.
	•	*“Horizontal drilling*” A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled at a right angle within a specified interval.
	•	*“Hydraulic fracturing*” is the technique of stimulating the production of hydrocarbons from tight formations. The Company routinely utilizes hydraulic fracturing techniques in its drilling and completion programs. The process involves the injection of water, sand, and chemicals under pressure into the formation to fracture the surrounding rock and stimulate production.
	•	*“Lease operating expenses*” The expenses of lifting crude oil or natural gas from a producing formation to the surface, constituting part of the current operating expenses of a working interest including labor, superintendence, supplies, repairs, short-lived assets, maintenance, allocated overhead costs, workover, marketing and transportation costs, insurance and other expenses incidental to production, but excluding lease acquisition or drilling or completion expenses.
	•	*“MBbl*” means one thousand Bbls.
	•	*“MBoe*” means one thousand Boes.
	•	*“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 acres*” The percentage of total acres an owner has out of a particular number of gross acres or a specified tract. As an example. an owner who has 50% interest in 100 gross acres owns 50 net acres.
	•	*“Net production*” Production that is owned by us, less royalties and production due others.
	•	*“NGL*” means natural gas liquids, which are the heavier hydrocarbon liquids that are separated from the natural gas stream; such liquids include ethane, propane, isobutane, normal butane and gasoline.
	•	*“Ninth Amendment*” means the Ninth Amendment to Prior Credit Agreement, dated as of July 12, 2023, by and among HighPeak Energy, Inc., as Borrower, Wells Fargo Bank, National Association, as administrative agent, the guarantors party thereto and the lenders party thereto.
	•	*“NYMEX*” means the New York Mercantile Exchange.
	•	*“OPEC*” means the Organization of Petroleum Exporting Countries.
	•	*“Operator*” The individual or company responsible for the exploration and/or production of a crude oil or natural gas well or lease.
	•	*“Plugging*” A downhole tool that is set inside the casing to isolate the lower part of the wellbore.
	•	*“Pooling*” The bringing together of small tracts or fractional mineral interests in one or more tracts to form a drilling and production unit for a well under applicable spacing rules.
	•	*“Predecessor*” refers to HPK LP for the period from January 1, 2020 to August 20, 2020.
	•	*“Prior 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, Wells Fargo Bank, National Association, as administrative agent, and the Lenders party thereto.
	•	*“Production costs*” Costs incurred to operate and maintain wells and related equipment and facilities, including depreciation and applicable operating costs of support equipment and facilities and other costs of operating and maintaining those wells and related equipment and facilities. For a complete definition of production costs, refer to the SEC’s Regulation S-X, Rule 4-10(a)(20).
	•	*“Productive well*” A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes.
	•	*“Proration unit*” A unit that can be effectively and efficiently drained by one well, as allocated by a governmental agency having regulatory jurisdiction.
	•	*“Prospect*” A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons.
	•	*“Proved developed nonproducing reserves” or “PDNP*” means proved reserves that are developed nonproducing reserves.
	•	*“Proved developed producing reserves” or “PDP*” means proved reserves that are developed producing reserves.
	•	*“Proved developed reserves*” means 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 and can be subdivided into PDP and PDNP reserves.
	•	*“Proved reserves*” Those quantities of crude oil and natural gas, which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
		(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 crude 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 crude oil elevation and the potential exists for an associated natural gas cap, proved crude 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.

	•	*“Proved undeveloped reserves” or “PUD*” means proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for completion. Undrilled locations can be classified as PUDs only if a development plan has been adopted indicating that such locations are scheduled to be drilled within five (5) years, unless specific circumstances justify a longer time.
	•	*“PV-10*” When used with respect to crude oil and natural gas reserves, PV-10 means the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development and abandonment costs, using prices and costs in effect at the determination date, before income taxes, and without giving effect to non-property related expenses, discounted to a present value using an annual discount rate of 10%. PV-10 is not a financial measure calculated in accordance with GAAP and generally differs from standardized measure, the most directly comparable GAAP financial measure, because it does not include the effects of income taxes on future net revenues. Neither PV-10 nor standardized measure represents an estimate of the fair market value of our crude oil and natural gas properties. We and others in the industry use PV-10 as a measure to compare the relative size and value of proved reserves held by companies without regard to the specific tax characteristics of such entities.
	•	*“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 or enhancing existing reservoirs in an attempt to establish or increase existing production.
	•	*“Reserves*” Reserves are estimated remaining quantities of crude 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 crude 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 crude oil and/or natural gas that is confined by impermeable rock or water barriers and is separate from other reservoirs.
	•	*“Resources*” Quantities of crude 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 a crude 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.
	•	*“Senior Credit Facility Agreement*” means the Company’s Credit Agreement, dated as of November 1, 2023, among HighPeak Energy, Inc., as Borrower, Fifth Third Bank, National Association, as administrative agent and collateral agent, and the Lenders party thereto.
	•	*“Service well*” A well drilled or completed for the purpose of supporting production in an existing field. Specific purposes of service wells include natural gas injection, water injection, steam injection, air injection, salt-water disposal, water supply for injection, observation, or injection for in-situ combustion.
	•	*“Seventh Amendment*” means the Seventh Amendment to Prior Credit Agreement, dated as of December 9, 2022, by and among HighPeak Energy, Inc., as Borrower, Wells Fargo Bank, National Association, as administrative agent, the guarantors party thereto and the lenders party thereto.
	•	*“Sixth Amendment*” means the Sixth Amendment to Prior Credit Agreement, dated as of October 31, 2022, by and among HighPeak Energy, Inc., as Borrower, Wells Fargo Bank, National Association, as administrative agent, the guarantors party thereto and the lenders party thereto.
	•	*“Spacing*” The distance between wells producing from the same reservoir. Spacing is often expressed in terms of acres, e.g., 100-acre spacing, the distance between horizontal wellbores, e.g., 880-foot spacing or the number of wells per section, e.g., 6-well spacing. It is often established by regulatory agencies and/or the operator to optimize recovery of hydrocarbons.
	•	*“Spot market price*” The cash market price without reduction for expected quality, transportation and demand adjustments.
	•	*“Standardized measure*” The present value (discounted at an annual rate of 10 percent) of estimated future net revenues to be generated from the production of proved reserves net of estimated income taxes associated with such net revenues, as determined in accordance with FASB guidelines as well as the rules and regulations of the SEC, without giving effect to non-property related expenses such as indirect general and administrative expenses, and debt service or to DD&A. Standardized measure does not give effect to derivative transactions.
	•	*“Stratigraphic test well*” A drilling effort, geologically directed, to obtain information pertaining to a specific geologic condition. Such wells customarily are drilled without the intent of being completed for hydrocarbon production. The classification also includes tests identified as core tests and all types of expendable holes related to hydrocarbon exploration. Stratigraphic tests are classified as “exploratory type” if not drilled in a known area or “development type” if drilled in a known area.
	•	*“Term Loan Credit Agreement*” means the Company’s Term Loan Credit Agreement, dated as of September 12, 2023, by and between HighPeak Energy, Inc., as borrower, Texas Capital Bank, as administrative agent, Chambers Energy Management, LP, as collateral agent, and the lenders from time-to-time party thereto.
	•	*“Third Amendment*” means the Third Amendment to Prior Credit Agreement, dated as of February 9, 2022, among HighPeak Energy, Inc., as Borrower, Fifth Third Bank, National Association, as administrative agent, and the lenders party thereto.
	•	*“Undeveloped acreage*” Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of crude oil and natural gas regardless of whether such acreage contains proved reserves.
	•	*“Unit*” The joining of all or substantially all interests in a reservoir or field, rather than a single tract, to provide for development and operation without regard to separate property interests. Also, the area covered by a unitization agreement.
	•	*“U.S.*” means the United States.
	•	*“warrants*” means warrants to purchase one share of HighPeak Energy common stock at a price of $11.50 per share.
	•	*“Wellbore*” The hole drilled by the bit that is equipped for crude oil and natural gas production on a completed well. Also called well or borehole.
	•	*“Working interes*t” The right granted to the lessee of a property to explore for and to produce and own crude oil, natural gas or other minerals. The working interest owners bear the exploration, development and operating costs on either a cash, penalty or carried basis.
	•	*“Workover*” Operations on a producing well to restore or increase production.
	•	*“WTI*” means West Texas Intermediate, a light sweet blend of crude oil produced from fields in western Texas and is a grade of crude oil used as a benchmark in crude oil pricing.
	•	With respect to information on the working interest in wells and acreage, “*net” wells and acres are determined by multiplying “gross*” wells and acres by the Company’s working interest in such wells or acres. Unless otherwise specified, wells and acreage statistics quoted herein represent gross wells or acres.
	•	All currency amounts are expressed in U.S. dollars.

The terms “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 Quarterly 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:

	●	our ability to refinance or pay, when due, the principal of, interest or other amounts due in respect of our indebtedness;
	●	our liquidity, cash flow and access to capital;
	●	the supply and demand for and market prices of crude oil, NGL, natural gas and other products or services, and the associated impact of our hedging policies relating thereto;
	●	capital expenditures and other contractual obligations, including our obligations under our Term Loan Credit Agreement and Senior Credit Facility Agreement;
	●	the results of our ongoing strategic alternatives review process;
	●	political instability or armed conflict in crude oil or natural gas producing regions, such as the ongoing war between Russia and Ukraine and the Israel-Hamas conflict;
	●	the integration of acquisitions, including the Alamo Acquisitions and the Hannathon Acquisition;
	●	the availability of capital resources;
	●	production and reserve levels;
	●	drilling and completion risks;
	●	inflation rates and the impacts of associated monetary policy responses, including increased interest rates and resulting pressures on economic growth;
	●	economic and competitive conditions;
	●	the impacts of the transition to an anticipated three-rig development program for the remainder of 2023;
	●	weather conditions;
	●	the length, scope and severity of the ongoing coronavirus disease (“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 availability of goods and services and supply chain issues;
	●	legislative, regulatory or policy changes;
	●	regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, to drive the substitution of renewable forms of energy for crude oil and natural gas, which may over time reduce demand for crude oil, NGL and natural gas, including as a result of the Inflation Reduction Act of 2022 (“IRA 2022”) or otherwise;
	●	cyber-attacks;
	●	occurrence of property acquisitions or divestitures;
	●	the securities or capital markets and our ability to access such markets on attractive terms or at all, 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 for the year ended December 31, 2022 filed with the SEC on March 6, 2023 (“Annual Report”) our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2023, filed with the SEC on May 10, 2023, June 30, 2023, filed with the SEC on August 7, 2023, and this Quarterly Report, under “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Part II, Item 1A. Risk Factors” and “Part I, Item 3. Quantitative and Qualitative Disclosures about Market Risk.”

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 crude 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 crude oil, NGL and natural gas that are ultimately recovered.

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

HighPeak Energy, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share data)

	September 30, 2023			December 31, 2022
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	151,807		$	30,504
Accounts receivable		125,982			96,596
Inventory		15,130			13,275
Derivative instruments		3,247			17
Prepaid expenses		1,726			4,133
Total current assets		297,892			144,525
Crude oil and natural gas properties, using the successful efforts method of accounting:
Proved properties		3,151,619			2,270,236
Unproved properties		79,961			114,665
Accumulated depletion, depreciation and amortization		(551,373	)		(259,962	)
Total crude oil and natural gas properties, net		2,680,207			2,124,939
Other property and equipment, net		3,539			3,587
Other noncurrent assets		7,229			6,431
Total assets	$	2,988,867		$	2,279,482
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	90,000		$	—
Accrued capital expenditures		60,573			91,842
Accounts payable – trade		50,341			105,565
Revenues and royalties payable		34,086			15,623
Other accrued liabilities		30,457			15,600
Derivative instruments		27,776			16,702
Accrued interest		869			13,152
Operating leases		517			343
Advances from joint interest owners		28			7,302
Total current liabilities		294,647			266,129
Noncurrent liabilities:
Long-term debt, net		1,057,803			704,349
Deferred income taxes		169,414			131,164
Asset retirement obligations		8,022			7,502
Derivative instruments		3,743			691
Operating leases		136			—
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, none issued and outstanding at September 30, 2023 and December 31, 2022		—			—
Common stock, $0.0001 par value, 600,000,000 shares authorized, 128,220,923 and 113,165,027 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively		13			11
Additional paid-in capital		1,183,262			1,008,896
Retained earnings		271,827			160,740
Total stockholders’ equity		1,455,102			1,169,647
Total liabilities and stockholders’ equity	$	2,988,867		$	2,279,482

The accompanying notes are an integral part of these condensed consolidated financial statements.

HighPeak Energy, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Operating revenues:
Crude oil sales	$	338,372		$	189,441		$	790,458		$	467,305
NGL and natural gas sales		7,214			14,673			19,682			30,466
Total operating revenues		345,586			204,114			810,140			497,771
Operating costs and expenses:
Crude oil and natural gas production		39,820			19,707			107,696			45,748
Production and ad valorem taxes		18,839			10,526			44,395			25,833
Exploration and abandonments		1,728			290			4,372			683
Depletion, depreciation and amortization		117,420			42,624			291,562			94,531
Accretion of discount		122			125			360			245
General and administrative		6,934			1,877			11,952			5,833
Stock-based compensation		14,057			10,655			22,095			29,210
Total operating costs and expenses		198,920			85,804			482,432			202,083
Other expense		540			—			8,042			—
Income from operations		146,126			118,310			319,666			295,688
Interest and other income		730			1			923			253
Interest expense		(37,022	)		(14,608	)		(103,278	)		(29,142	)
Gain (loss) on derivative instruments, net		(29,655	)		35,798			(30,898	)		(42,487	)
Loss on extinguishment of debt		(27,300	)		—			(27,300	)		—
Income before income taxes		52,879			139,501			159,113			224,312
Provision for income taxes		14,100			31,597			38,251			55,357
Net income	$	38,779		$	107,904		$	120,862		$	168,955
Earnings per share:
Basic net income	$	0.28		$	0.90		$	0.94		$	1.48
Diluted net income	$	0.28		$	0.85		$	0.90		$	1.40

Weighted average shares outstanding:
Basic		123,159			108,681			115,164			102,614
Diluted		127,006			115,118			120,531			109,144

Dividends declared per share	$	0.025		$	0.025		$	0.075		$	0.075

The accompanying notes are an integral part of these condensed consolidated financial statements.

HighPeak Energy, Inc.

Condensed Consolidated Statements of Changes in Stockholders' Equity

(in thousands)

(Unaudited)

Three and Nine Months Ended September 30, 2023
	Shares Outstanding		Common Stock		Additional Paid-in-Capital			Retained Earnings			Total Stockholders' Equity
Balance, December 31, 2022		113,165	$	11	$	1,008,896		$	160,740		$	1,169,647
Dividends declared ($0.025 per share)		—		—		—			(2,829	)		(2,829	)
Dividend equivalents declared on outstanding stock options ($0.025 per share)		—		—		—			(288	)		(288	)
Exercise of warrants		—		—		2			—			2
Stock-based compensation costs:
Shares issued upon options being exercised		12		—		148			—			148
Compensation costs included in net income		—		—		4,054			—			4,054
Net income		—		—		—			50,257			50,257
Balance, March 31, 2023		113,177		11		1,013,100			207,880			1,220,991
Dividends declared ($0.025 per share)		—		—		—			(2,830	)		(2,830	)
Dividend equivalents declared on outstanding stock options ($0.025 per share)		—		—		—			(287	)		(287	)
Exercise of warrants		150		—		1,726			—			1,726
Stock-based compensation costs:
Restricted shares issued to outside directors		59		—		—			—			—
Compensation costs included in net income		—		—		3,984			—			3,984
Net income		—		—		—			31,826			31,826
Balance, June 30, 2023		113,386		11		1,018,810			236,589			1,255,410
Dividends declared ($0.025 per share)		—		—		—			(3,205	)		(3,205	)
Dividend equivalents declared on outstanding stock options ($0.025 per share)		—		—		—			(336	)		(336	)
Stock issued in public offering		14,835		2		155,766			—			155,768
Stock issuance costs		—		—		(5,371	)		—			(5,371	)
Stock-based compensation costs:
Compensation costs included in net income		—		—		14,057			—			14,057
Net income		—		—		—			38,779			38,779
Balance, September 30, 2023		128,221	$	13	$	1,183,262		$	271,827		$	1,455,102

Three and Nine Months Ended September 30, 2022
	Shares Outstanding		Common Stock		Additional Paid-in-Capital			Retained Earnings (Accumulated Deficit)			Total Stockholders' Equity
Balance, December 31, 2021		96,774	$	10	$	617,489		$	(64,436	)	$	553,063
Dividends declared ($0.025 per share)		—		—		—			(2,434	)		(2,434	)
Dividend equivalents declared on outstanding stock options ($0.025 per share)		—		—		—			(250	)		(250	)
Stock issued for acquisition		6,960		—		156,599			—			156,599
Stock issuance costs		—		—		(55	)		—			(55	)
Exercise of warrants		69		—		779			—			779
Stock-based compensation costs:
Shares issued upon options being exercised		8		—		75			—			75
Compensation costs included in net loss		—		—		2,614			—			2,614
Net loss		—		—		—			(16,510	)		(16,510	)
Balance, March 31, 2022		103,811		10		777,501			(83,630	)		693,881
Dividends declared ($0.025 per share)		—		—		—			(2,630	)		(2,630	)
Dividend equivalents declared on outstanding stock options ($0.025 per share)		—		—		—			(249	)		(249	)
Stock issued for acquisitions		3,894		1		108,382			—			108,383
Stock issuance costs		—		—		(3	)		—			(3	)
Exercise of warrants		897		—		6,971			—			6,971
Stock-based compensation costs:
Shares issued upon options being exercised		4		—		45			—			45
Restricted shares issued to outside directors		21		—		—			—			—
Restricted shares issued to employees		600		—		—			—			—
Compensation costs included in net income		—		—		16,429			—			16,429
Net income		—		—		—			77,561			77,561
Balance, June 30, 2022		109,227		11		909,325			(8,948	)		900,388
Dividends declared ($0.025 per share)		—		—		—			(2,730	)		(2,730	)
Dividend equivalents declared on outstanding stock options ($0.025 per share)		—		—		—			(270	)		(270	)
Stock issued in private placement		3,933		—		85,000			—			85,000
Stock issuance costs		—		—		(232	)		—			(232	)
Exercise of warrants		3		—		30			—			30
Stock-based compensation costs:
Compensation costs included in net income		—		—		10,655			—			10,655
Net income		—		—		—			107,904			107,904
Balance, September 30, 2022		113,163	$	11	$	1,004,778		$	95,956		$	1,100,745

The accompanying notes are an integral part of these condensed consolidated financial statements.

HighPeak Energy, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	120,862		$	168,955
Adjustments to reconcile net income to net cash provided by operations:
Provision for deferred income taxes		38,251			55,357
Loss on extinguishment of debt		27,300			—
Loss on derivative instruments, net		30,898			42,487
Cash paid on settlement of derivative instruments		(21,032	)		(64,143	)
Amortization of debt issuance costs		9,352			3,261
Amortization of discounts on long-term debt		12,660			4,609
Stock-based compensation expense		22,095			29,210
Accretion expense		360			245
Depletion, depreciation and amortization expense		291,562			94,531
Exploration and abandonment expense		3,747			134
Changes in operating assets and liabilities:
Accounts receivable		(29,385	)		(43,822	)
Prepaid expenses, inventory and other assets		(1,628	)		(7,148	)
Accounts payable, accrued liabilities and other current liabilities		16,700			19,130
Net cash provided by operating activities		521,742			302,806
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to crude oil and natural gas properties		(840,663	)		(725,107	)
Changes in working capital associated with crude oil and natural gas property additions		(86,468	)		142,299
Acquisitions of crude oil and natural gas properties		(9,602	)		(258,385	)
Deposit and other costs related to pending acquisitions		(409	)		—
Other property additions		(103	)		(2,158	)
Net cash used in investing activities		(937,245	)		(843,351	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Term Loan Credit Agreement, net of discount		1,170,000			—
Borrowings under Prior Credit Agreement		255,000			450,000
Proceeds from issuance of 10.000% Senior Notes, net of discount		—			210,179
Repayments under Prior Credit Agreement		(525,000	)		(195,000	)
Repayments of 10.000% Senior Notes and 10.625% Senior Notes		(475,000	)		—
Premium on extinguishment of debt		(4,457	)		—
Proceeds from issuance of common stock		155,768			85,000
Proceeds from exercises of warrants		1,728			7,780
Proceeds from exercises of stock options		148			120
Debt issuance costs		(26,401	)		(9,221	)
Stock offering costs		(5,371	)		(290	)
Dividends paid		(8,706	)		(7,636	)
Dividend equivalents paid		(903	)		(908	)
Net cash provided by financing activities		536,806			540,024
Net increase (decrease) in cash and cash equivalents		121,303			(521	)
Cash and cash equivalents, beginning of period		30,504			34,869
Cash and cash equivalents, end of period	$	151,807		$	34,348

Supplemental cash flow information:
Cash paid for interest	$	93,549		$	18,318
Cash paid for income taxes		—			—
Supplemental disclosure of non-cash transactions:
Stock issued for acquisition	$	—		$	264,982
Additions to asset retirement obligations		241			3,748

The accompanying notes are an integral part of these condensed consolidated financial statements.

HIGHPEAK ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. Organization and Nature of Operations

HighPeak Energy, Inc. ("HighPeak Energy" or the "Company,") is a Delaware corporation, formed in October 2019. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 6, 2023, for further information regarding the formation of the Company.

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. The Company is an independent crude oil and natural gas exploration and production company that explores for, develops and produces crude oil, NGL and natural gas in the Permian Basin in West Texas, more specifically, the Midland Basin primarily in Howard and Borden Counties. Our acreage is composed of two core areas, Flat Top primarily in the northern portion of Howard County extending into southern Borden County, southwest Scurry County and northwest Mitchell County and Signal Peak in the southern portion of Howard County.

NOTE 2. Basis of Presentation and Summary of Significant Accounting Policies

Presentation. In the opinion of management, the unaudited interim condensed consolidated financial statements of the Company as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022 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 three and nine months ended September 30, 2023 are not 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 SEC. These unaudited interim condensed consolidated financial statements should be read together with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications had an immaterial effect on the previously reported total assets, total liabilities, stockholders’ equity, results of operations or cash flows.

The accompanying unaudited interim condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. During the three months ended September 30, 2023, the Company was successful in refinancing its current and long-term debt, specifically extending all near term maturities to late 2026, which is further discussed in Note 7. This debt refinancing also allowed the Company to eliminate its working capital deficits. As a result of the effectiveness and implementation of the refinancing, there is no longer substantial doubt about the Company’s ability to continue as a going concern.

Principles of consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries since their acquisition or formation. 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 consolidated financial statements in conformity 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 crude oil and natural gas properties is determined using estimates of proved crude oil, NGL and natural gas reserves and evaluations for impairment of proved and unproved crude oil and natural gas properties, in part, is determined using estimates of proved and risk adjusted probable and possible crude 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 crude oil and natural gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves, commodity price outlooks and future undiscounted and discounted net cash flows. In addition, evaluations for impairment of unproved crude oil and natural gas properties on a project-by-project basis are also subject to numerous uncertainties including, among others, estimates of future recoverable reserves, results of exploration activities, commodity price outlooks, planned future sales or expirations of all or a portion of such projects. Other items subject to such estimates and assumptions include, but are not limited to, the carrying value of crude 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 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. As of September 30, 2023 and December 31, 2022, the Company’s accounts receivables primarily consist of amounts due from the sale of crude oil, NGL and natural gas of $116.3 million and $81.6 million, respectively, and are based on estimates of sales volumes and realized prices the Company anticipates it will receive, joint interest receivables of $6.5 million and $2.2 million, respectively, current U.S. federal income tax receivables of $3.2 million and $3.2 million, respectively, zero and $4.9 million, respectively, related to receivables from electric power infrastructure installed throughout Flat Top by the Company that it was reimbursed for, and receivables related to settlements of derivative contracts of zero and $4.7 million, respectively. The Company’s share of crude 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’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.

The Company adopted ASU 2016-13 and the subsequent applicable modifications to the rule on January 1, 2023. Accounts receivable are stated at amounts due from purchasers or joint interest owners, net of an allowance for expected losses as estimated by the Company when collection is doubtful. For receivables from joint interest owners, the Company typically has the ability to withhold future revenue disbursements to recover any non-payment of joint interest billings. Accounts receivable from purchasers or joint interest owners outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for each type of receivable by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the debtor’s current ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole. The Company writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for expected losses. As of September 30, 2023 and December 31, 2022, the Company had no allowance for credit losses related to accounts receivable.

Concentration of credit risk. The Company is subject to credit risk resulting from the concentration of its crude oil and natural gas receivables with significant purchasers. For the nine months ended September 30, 2023 and the year ended December 31, 2022, sales to the Company’s two largest purchasers accounted for approximately 96% and 94%, respectively, of the Company’s total crude oil, NGL and natural gas sales revenues. The Company generally does not require collateral and does not believe the loss of these particular purchasers would materially impact its operating results, as crude oil and natural gas are fungible products with well-established markets and numerous purchasers in various regions.

Inventory. Inventory is comprised primarily of crude oil and natural gas drilling and completion or repair items such as pumps, tubing, casing, vessels, operating supplies and ordinary maintenance materials and parts. The materials and supplies inventory is primarily acquired for use in future drilling and completion or repair operations and is carried at the lower of cost or 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 consolidated balance sheet and as charges to other expense in the consolidated statements of operations. The Company’s materials and supplies inventory as of September 30, 2023 and December 31, 2022 is $15.1 million and $13.3 million, respectively, and the Company has not recognized any valuation allowance to date.

Prepaid expenses. Prepaid expenses are comprised primarily of prepaid insurance costs that will be amortized over the life of the policies, caliche that will be used on future locations and roads in our development areas, tubulars and proppant that the Company has prepaid the suppliers to guarantee their availability when needed for our current drilling program, a deposit on a small property acquisition that is expected to close in the fourth quarter of 2023, prepaid agency fees and software maintenance fees that will be amortized over the life of the contracts. Prepaid expenses as of September 30, 2023 and December 31, 2022 are $1.7 million and $4.1 million, respectively.

Crude oil and natural gas properties. The Company utilizes the successful efforts method of accounting for its crude 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 6 for additional information.

The capitalized costs of proved properties are depleted using the unit-of-production method based on proved reserves for leasehold costs and proved developed reserves for drilling, completion and other crude oil and natural gas property costs. Costs of unproved leasehold costs are excluded from depletion until proved reserves are established or, if unsuccessful, impairment is determined.

Proceeds from the sales of individual properties are credited to proved or unproved crude oil and natural gas properties, as the case may be, 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 crude 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.

Unproved crude oil and natural gas properties are periodically assessed for impairment on a project-by-project basis. These impairment assessments are affected by the estimates of future recoverable reserves, 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 $847,000 and $696,000 as of September 30, 2023 and December 31, 2022, respectively, are as follows (in thousands):

	September 30, 2023		December 31, 2022
Land	$	2,139	$	2,139
Transportation equipment		648		691
Buildings		534		544
Leasehold improvements		213		206
Field equipment		4		6
Furniture and fixtures		1		1
Total other property and equipment, net	$	3,539	$	3,587

Other property and equipment are depreciated over their estimated useful life on a straight-line basis. Land is not depreciated. Transportation equipment is generally depreciated over five years, buildings are generally depreciated over forty years, field equipment is generally depreciated over seven years and furniture and fixtures is generally depreciated over five 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.

Aid-in-construction assets. As of September 30, 2023 and December 31, 2022, the Company had aid-in-construction assets totaling $5.6 million and $6.1 million, respectively, included in other noncurrent assets. The Company is receiving and will continue to receive payments based on gross system throughput, including any third-party natural gas that is potentially tied into the Flat Top gathering system in the future. The contract calls for future aid-in-construction fundings if expansions of the system are necessary as determined in the sole discretion of the Company.

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 generally not recorded as lease right-of-use assets and liabilities. See Note 10 for additional information.

Current liabilities. Current maturities of long-term debt, accounts payable, accrued liabilities and derivative liabilities included in current liabilities as of September 30, 2023 and December 31, 2022 totaled approximately $294.6 million and $266.1 million, respectively, including current maturities of long-term debt, accrued capital expenditures, trade accounts payable, revenues and royalties payable, derivative liabilities and accruals for operating and general and administrative expenses, interest expense, operating leases, dividends and dividend equivalents and other miscellaneous items.

Debt issuance costs and original issue discount. The Company has paid a total of $46.1 million in debt issuance costs, $26.4 million of which was incurred during the nine months ended September 30, 2023 primarily related to the completion of the Term Loan Credit Agreement and amendments to the Prior Credit Agreement. Amortization based on the straight-line method over the terms of the Term Loan Credit Agreement, Prior Credit Agreement, 10.000% Senior Notes and 10.625% Senior Notes which approximates the effective interest method was $9.4 million and $3.3 million during the nine months ended September 30, 2023 and 2022, respectively. In addition, the Company realized a total of $64.8 million in original issue discounts on the issuance of its Term Loan Credit Agreement, 10.000% Senior Notes and 10.625% Senior Notes that is being amortized over the life of the agreements which approximates the effective interest method and was $12.7 million and $4.6 million during the nine months ended September 30, 2023 and 2022, respectively. All unamortized debt issuance costs and discounts as of the termination of the Prior Credit Agreement and redemption of the 10.000% Senior Notes and 10.625% Senior Notes during September 2023 were charged to expense and included in loss on extinguishment of debt in the accompanying consolidated financial statements. See Note 7 for more information. As of September 30, 2023 and December 31, 2022, the remaining net debt issuance costs and discounts related to the Term Loan Credit Agreement are netted against the outstanding long-term debt on the accompanying consolidated balance sheets in accordance with GAAP.

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 8 for additional information.

Revenue recognition. The Company follows FASB ASC 606, “Revenue from Contracts with Customers,” (“ASC 606”) whereby the Company recognizes revenues from the sales of crude oil, NGL and natural gas to its purchasers and presents them disaggregated on the Company’s consolidated statements of operations.

The Company enters into contracts with purchasers to sell its crude oil, NGL and natural gas production. Revenue on these contracts is recognized in accordance with the five-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 crude 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 crude oil and natural gas marketing contracts is typically received from the purchaser one to two months after the date of sale. As of September 30, 2023 and December 31, 2022, the Company had receivables related to contracts with purchasers of approximately $116.3 million and $81.6 million, respectively.

Crude Oil Contracts. The Company’s crude oil marketing contracts transfer physical custody and title at or near the wellhead, which is generally when control of the crude oil has been transferred to the purchaser. The crude oil produced is sold under contracts using market-based pricing which is then adjusted for the differentials based upon delivery location and crude oil quality. Since the differentials are incurred after the transfer of control of the crude oil, the differentials are included in crude oil sales on the consolidated statements of operations as they represent part of the transaction price of the contract.

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 or (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 NGL products are extracted. The NGL products and remaining residue natural gas are then sold by the purchaser. Under 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. Since control of the natural gas transfers upstream of the transportation and processing activities, revenue is recognized as the net amount received from the purchaser.

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), 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 the Company’s derivatives are accounted for as non-hedge derivatives and are recorded at estimated fair value in the 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 or 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 the deferred tax assets will not be realized. The Company has not established a valuation allowance as of September 30, 2023 and December 31, 2022.

Tax benefits from an uncertain tax positions are recognized 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 13 for additional information.

Tax-related interest charges are recorded as interest expense and any tax-related penalties as other expense in the consolidated statements of operations of which there have been none to date.

The Company is also subject to Texas Margin Tax. The Company realized no current Texas Margin Tax in the accompanying consolidated 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 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 stock 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 restricted stock awarded to outside directors, employee members of the Board and certain other employees 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 one operating segment, which is crude 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.

Recently adopted accounting pronouncements. In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses”. This update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investment in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company adopted this update effective January 1, 2023. The adoption of this update did not have a material impact on the Company’s financial position, results of operations or liquidity since it does not have a history of credit losses.

New accounting pronouncements not yet adopted. The Company considers the applicability and the impact of all ASUs. ASUs were assessed and determined to be either not applicable, the effects of adoption are not expected to be material or are clarifications of ASUs previously disclosed.

NOTE 3. Acquisitions

Hannathon Acquisition. In June 2022, the Company closed the Hannathon Acquisition for total net consideration of $337.2 million after normal and customary closing adjustments, including 3,522,117 shares of HighPeak Energy common stock valued at $97.2 million at closing to acquire various crude oil and natural gas properties largely contiguous to its Signal Peak operating area in Howard County, including associated producing properties, water system infrastructure and in-field fluid gathering pipelines. The Hannathon Acquisition was accounted for as an asset acquisition as substantially all of the gross assets acquired are concentrated in a group of similar identifiable assets. The consideration paid was allocated to the individual assets acquired and liabilities assumed based on their relative fair values. All transaction costs associated with the Hannathon Acquisition were capitalized.

Alamo Acquisitions. In March and June 2022, the Company closed the Alamo Acquisitions in two separate deals for total net consideration of $156.1 million and $11.0 million, respectively, after normal and customary closing adjustments, including 6,960,000 and 371,517 shares of HighPeak Energy common stock valued at $156.6 million and $11.2 million, respectively, at closing to acquire various crude oil and natural gas properties contiguous to its Flat Top operating area in Borden county, including associated producing properties, water system infrastructure and in-field fluid gathering pipelines. The Alamo Acquisitions were accounted for as asset acquisitions as substantially all of the gross assets acquired are concentrated in a group of similar identifiable assets. The consideration paid was allocated to the individual assets acquired and liabilities assumed based on their relative fair values. All transaction costs associated with the Alamo Acquisitions were capitalized.

Other acquisitions. During the nine months ended September 30, 2023 and 2022, the Company incurred a total of $9.6 million and $19.2 million, respectively, in acquisition costs to acquire various undeveloped crude oil and natural gas properties contiguous to its Flat Top and Signal Peak operating areas.

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 liability. The fair values are therefore, determined using model-based techniques, including discounted cash flow models.

Assets and liabilities measured at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 are as follows (in thousands):

	As of September 30, 2023
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
Assets:
Commodity price derivatives – current	$	—	$	3,247		$	—	$	3,247
Commodity price derivatives – noncurrent		—		1,030			—		1,030
Total assets		—		4,277			—		4,277
Liabilities:
Commodity price derivatives – current		—		27,776			—		27,776
Commodity price derivatives – noncurrent		—		3,743			—		3,743
Total liabilities		—		31,519			—		31,519
Total recurring fair value measurements	$	—	$	(27,242	)	$	—	$	(27,242	)

	As of December 31, 2022
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
Assets:
Commodity price derivatives– current	$	—	$	17		$	—	$	17
Liabilities:
Commodity price derivatives – current		—		16,702			—		16,702
Commodity price derivatives – noncurrent		—		691			—		691
Total liabilities		—		17,393			—		17,393
Total recurring fair value measurements	$	—	$	(17,376	)	$	—	$	(17,376	)

Commodity price derivatives. The Company’s commodity price derivatives are currently made up of crude oil swap contracts and deferred premium collars and deferred premium put options. The Company measures derivatives using an industry-standard pricing model that is provided by the counterparties. 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 estimates and 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 crude 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 or unproved crude oil and natural gas properties for the periods presented in the accompanying consolidated financial statements.

Financial instruments not carried at fair value. Carrying values and fair values of financial instruments that are not carried at fair value in the consolidating balance sheets are as follows (in thousands):

	As of September 30, 2023				As of December 31, 2022
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value
Liabilities:
Long-term debt:
10.625% Senior Notes (a)	$	—	$	—	$	250,000	$	250,000
10.000% Senior Notes (a)	$	—	$	—	$	225,000	$	225,000

(a)

Fair value is determined using Level 2 inputs. The Company’s senior unsecured notes are quoted, but not actively traded, on major exchanges; therefore, fair value is based on periodic values as quoted on major exchanges. See Note 7 for additional information.

The Company has other financial instruments consisting primarily of cash and cash equivalents, accounts receivable, accounts payable, long-term debt (specifically the Term Loan Credit Agreement, Senior Credit Facility Agreement and the Prior Credit Agreement), and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities.

NOTE 5. Derivative Financial Instruments

The Company primarily utilizes commodity swap contracts, deferred premium put options and deferred premium collars to (i) reduce the effect of price volatility on the commodities the Company produces and sells, (ii) support the Company’s capital budgeting and expenditure plans, (iii) protect the Company’s commitments under the Term Loan Credit Agreement and Senior Credit Facility Agreement and (iv) support the payment of contractual obligations.

The following table summarizes the effect of derivative instruments on the Company’s consolidated statements of operations (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022

Noncash gain (loss) on derivative instruments, net	$	(15,883	)	$	38,098		$	(9,866	)	$	21,656
Cash paid on settlement of derivative instruments, net		(13,772	)		(2,300	)		(21,032	)		(64,143	)
Gain (loss) on derivative instruments, net	$	(29,655	)	$	35,798		$	(30,898	)	$	(42,487	)

Crude oil production derivatives. The Company sells its crude oil production at the lease and the sales contracts governing such crude oil production are tied directly to, or are correlated with, NYMEX WTI crude oil prices. As such, the Company uses NYMEX WTI derivative contracts to manage future crude oil price volatility.

The Company’s outstanding crude oil derivative instruments as of September 30, 2023 and the weighted average crude oil prices and premiums payable per barrel for those contracts are as follows:

						Swaps		Deferred Premium Collars & Deferred Premium Puts
Settlement Month	Settlement Year	Type of Contract	Bbls Per Day		Index	Price		Floor or Strike Price		Ceiling Price		Deferred Premium Payable
Crude Oil:
Oct - Dec	2023	Swap		11,300	WTI	$	77.84	$	—	$	—	$	—
Oct - Dec	2023	Collar		5,000	WTI	$	—	$	75.50	$	100.00	$	0.35
Oct - Dec	2023	Put		19,000	WTI	$	—	$	69.46	$	—	$	5.00
Jan - Mar	2024	Swap		4,000	WTI	$	84.00	$	—	$	—	$	—
Jan - Mar	2024	Collar		6,000	WTI	$	—	$	80.00	$	100.00	$	3.50
Jan - Mar	2024

HighPeak Energy, Inc. [HPK] Filings
HighPeak Energy, Inc. [HPKEW] Filings
10-Q	[2023-11-06]
10-Q	[2023-08-07]
10-Q	[2023-05-10]
10-K	[2023-03-06]
10-Q	[2022-11-14]
10-Q	[2022-08-08]
10-Q	[2022-05-16]
10-K	[2022-03-07]
10-Q	[2021-11-08]
S-1	[2021-08-16]
10-Q	[2021-08-09]
10-Q	[2021-05-17]
10-K	[2021-03-15]
10-Q	[2020-11-12]
S-1	[2020-09-18]

HighPeak Energy, Inc. [HPK] Filings

HighPeak Energy, Inc. [HPKEW] Filings