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This is a Z4 Energy Research post quarterly call note. HighPeak (NASDAQ:HPK ) reported a 1Q22 "miss" on an unusually high amount of shut ins for offset frac activity. The company reaffirmed its 2022 pro forma guidance calling for annual growth of more than 275% and established a 2023 volume range the midpoint of which points to more than 90% growth next year. Going into the call one of the things we wanted most to see was evidence of successful delineation in the less well-known Signal Peak play, a play where they recently announced a large contiguous bolt on acquisition. We got more data on Signal Peak with this call than in any prior presentation. Before moving on, to see our prior writings for Seeking Alpha on HighPeak please see our initial piece in October 2021 here and subsequent updates in February and March.

Z4 1Q22 Quick Table (www.zmansenergybrain.com)

Note: The multiples in the table above are as of the 5/16/22 close (just before the 1Q22 release). For current multiples please see the cheat sheet at the bottom of this piece.

First quarter volumes of 12 MBOEpd were below the expectations of the two analysts following the name who publish numbers (17 MBOEpd) and below the prior quarter's record 14.9 MBOEpd, sharply impacted by offset well curtailments for completion of their crop of 27 wells in the quarter. Management estimated the offset frac shut in impact on total production at 6 to 7 MBOEpd in the quarter. As management noted on the call, they don't manage for quarterly results and operations are ahead of their 2022 game plan. In addition, volumes acquired during the quarter at Flat Top of 2.5 MBOEpd were only included for six days of the quarter.

Fast forward to mid-May and management indicated trailing seven-day legacy production is running 25 MBOEpd (roughly double the 1Q22 average). Legacy production plus the expected 3Q22 closing Hannathon acquisition (previously announced west side Signal Peak acquisition) is running over 28 MBOEpd. For reference we note the consensus of two is at 25.9 MBOEpd for the second quarter. The company had another 36 gross wells in various stages of drilling or completion at quarter end, and while the company expects shut ins to be less of an issue as they grow and time progresses, it's reasonable to expect near-term lumpiness. We're not big quarterly numbers guys either and are much more focused on things like high realizations, falling operating costs (see below) and rising cash margins. Despite the sequential dip in volumes, they still recorded a peer high unhedged cash margin of 74% of NYMEX oil flat with the prior quarter.

Volumes: Unchanged from the previously announced pro forma range of 32 to 37.5 MBOEpd as is their expected exit rate, on by then a 6-rig program, for a range of 47 to 53 MBOEpd at the close of 2022. For purposes of our 2022 model, we have moved our estimates to the lower end of the range given the slower start and strong finish required to meet the midpoint of guidance.

Capex: Also unchanged from the previously announced range of $825 to $900 mm. This guidance is pro forma the Hannathon acquisition set for 3Q22. This pays for 95 to 115 gross wells with a drilling and completion wedge of $790 to $860 mm which given their high 88% working interest implies a per well net cost of approximately $8.5 mm. Management continues to take a number of steps to mitigate inflation which we'll run through below in the 2023 guidance section.

EBITDAX: Unchanged vs. prior range of $600 to $800 mm. This is not a pro forma figure, but Hannathon was previously seen as a full-year $117 mm EBITDAX estimate. They anticipate being free cash flow positive in the second half of this year, and importantly, they see a 2022 EBITDAX exit rate range of $1.1 to $1.3 B (that's billion with a B).

Volume: Given the rapid scale up of the program HighPeak established 2023 guidance well ahead of the typical 3Q or 4Q time frame for normal analyst spoon feed. The 2023 plan calls for an average rate of 62 to 72 MBOEpd (up 93% on mid relative to the midpoint of 2022 guidance). Furthermore, as is their now their habit, they've established a strong end of 2023 exit rate in a range 75 to 85 MBOEpd.

Program: The 2023 average and exit rate guidance is predicated upon HPK maintaining a six-rig program with 150 to 175 gross wells being turned in line over the course of the year. They expect to be able to drill 20 to 24 rigs per rig per year.

Given it's just May 2022 it's more than a little early for management to really guide to next year's capex, especially with tightening rig and frac spread markets, supply chain issues, and the tight labor market. However, management has been proactive in taking several steps to reduce water, sand, and drilling power costs (the last of which will also exert downward pressure on LOE). We have taken what we see conservative assumptions for next year and are using a net of savings 15% inflation rate for next year. This is purely a Z4 estimate and not blessed by management in our conversation with them last week, but we feel we are in a constructive ballpark with a midpoint D&C budget of approximately $1.4 B.

They see substantial FCF generation in 2023 and we don't disagree. On our $80 oil base case we get preliminary EBITDAX of $1.5 B and at our $100 Stretch case we get EBITDAX of $1.9 B yielding excess cash flow approaching $0.5 B.

Operations Update: Pro Forma acreage is now over 91,000 net, up 45% from YE21. They put locations in a range of 1,200 (conservative count with what they know now) rising to 2,000 should zones and spacing work out to their maximum potential.

HighPeak is currently running four rigs on the newly expanded and now well delineated Flat Top position and continues to focus on the Lower Spraberry and Wolfcamp A. We do expect to see a Wolfcamp D test later this year given strong recent results of private offset operator Bayswater immediately south of their position.

In the arena of inflation mitigation, the company has a good relationship with their rig companies, and while they don't have long-term contracts or options their sense is they can extend their rig contracts at below leading-edge market rates. They also brought their 60 MW electric substation online in May tying them to grid power and allowing for a gradual transition to electric powered rigs while also allowing for an LOE reduction of as much as $2/BOE as they rely less on rented generators. Their solar farm will come online in 3Q22 further reducing their power costs. Helping to offset capex inflation the company is also using 70% recycled water now and will begin using local wet sand in June (they estimate this last item alone will shave well costs by $0.3 mm).

Signal Peak Update: We see positive updates here as key for the story gaining further credibility with the sell and buyside.

HighPeak is running one rig now at Signal Peak and will be running two after the Hannathon acquisition closes bringing them to their six-rig total company run rate. With the 1Q22 press release, presentation, and conference call management offered the first really concrete support for their move into and expansion of Signal Peak. They noted in the release that they "recently brought online one Wolfcamp A (WC A) well, one Lower Spraberry (LS) well and three Wolfcamp D (WC D) wells in Signal Peak, the performance of which are meeting or exceeding management’s expectations." Delving a little deeper:

Street Coverage: Despite the oily, high growth, high margin, low debt nature of the story, the company has not yet attracted a broad coverage base and has only three sell-side analysts in print. In June they'll attend a Louisiana conference sponsored by those analysts. Beyond those three we know that a number of other upstream analysts are lurking and modeling and asking questions. We expect the: 1) Materialization of promised rapid growth, 2) the early establishment of 2023 guidance, 3) the positive results at Signal Peak, 4) the ongoing positive macro for oil, and 5) the still relative inexpensiveness of the story will turn interest and intent to numbers in print soon.

Hedges: Unlike so many of their peers HPK is not encumbered by a lot of underwater hedge coverage.

Balance Sheet: Net debt to annualized 1Q22 EBTIDAX of 0.8x and not expected to move above 1.0x. The company is in the process of a credit facility redetermination, and we would expect a positive outcome by mid-June.

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Disclosure: I/we have a beneficial long position in the shares of HPK either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.