Middle Spraberry Development Will Open New Production Opportunities

Key Takeaways

• Focus on refining corporate efficiency and reducing infrastructure spending is poised to increase free cash flow and benefit margins and earnings.
  
• Expansion in Middle Spraberry could boost production output, enhance well performance, and drive future revenue growth.
  
• Heavy reliance on SEC guideline prices and high-interest expenses could challenge HighPeak Energy's financial stability, complicating revenue objectives and cash flow management.

Catalysts

Operates as an independent crude oil and natural gas exploration and production company.

• HighPeak's focus on improving corporate efficiency, including plans to lower its capital budget by over 20% in 2025 and potentially another 30% in 2026 by reducing infrastructure spending, is expected to increase free cash flow. This will benefit net margins and overall earnings.
  
• The expansion and successful delineation of new acreage, specifically in the Middle Spraberry zone, with potential untapped reserves, are anticipated to boost future revenue through increased production rates.
  
• HighPeak's ability to sustain and improve well performance across its acreage, coupled with additional Middle Spraberry development, is likely to enhance production output and efficiency, positively impacting revenue and earnings.
  
• The company's efforts to transition to a more traditional capital structure, lowering interest expenses through refinancing its high-cost term loan, could significantly increase levered free cash flow and net margins.
  
• Strategic infrastructure investments intended to optimize resource management and facility connectivity are expected to reduce operational expenses in the long term, further enhancing net margins and earnings.

HighPeak Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HighPeak Energy's revenue will decrease by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.0% today to 25.4% in 3 years time.
• Analysts expect earnings to reach $234.6 million (and earnings per share of $1.84) by about April 2028, up from $85.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, down from 13.9x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.4x.
• Analysts expect the number of shares outstanding to decline by 1.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.14%, as per the Simply Wall St company report.

HighPeak Energy Future Earnings Per Share Growth

Risks

• HighPeak Energy is maintaining flat production volumes while navigating volatile external market conditions, which might affect future revenue stability and profitability.
  
• The company relies on SEC guideline prices favorable to year-end valuation, yet a reduction in these prices could materially impact their perceived financial health by potentially decreasing revenue and earnings.
  
• Despite achieving significant production and reserve gains, the company faces high-interest expenses due to an expensive term loan with a 13% interest rate, which could negatively impact net margins and overall profitability until they are able to refinance.
  
• A potential 2025 decrease in CapEx may lead to less immediate growth in drilling and production initiatives, potentially undermining revenue objectives.
  
• The company's capitalization strategy relies heavily on non-recurring infrastructure spending reduction and refinancing plans, which if unrealized, could negatively affect their free cash flow and leverage management goals.

Valuation

• The analysts have a consensus price target of $18.167 for HighPeak Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $31.5, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $922.0 million, earnings will come to $234.6 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 8.1%.
• Given the current share price of $9.44, the analyst price target of $18.17 is 48.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.