Is High Peak Energy Stock A Buy?

Highpeak Energy Inc (NASDAQ:HPK) is a Fort Worth, Texas-based natural gas and oil company that claims to be completely independent. Of course, it’s still a public company that’s beholden to its shareholders. The company recently merged with Pure Acquisition, an oil and gas exploration and production SPAC.

So, is High Peak Energy stock a buy?

Pure Acquisition Corp certainly thought so. The firm completed its merger to bring HighPeak public in the third quarter of 2020. This listed it on the Nasdaq exchange and bet that the lowered price of oil and subsequent company pricing would represent a deal for bullish oil investors.

The SPAC’s share price was sent skyrocketing on the news. Of course, there’s a lot of SPAC-related fatigued on the market these days after several high-priced mergers that sent investors on a roller-coaster ride.

However, OPEC recently raised its 2021 oil demand growth forecast.  And vaccine rollouts have the organization hopeful of a quick economic recovery, especially in the travel sector. Should oil demand continue rising, today’s overstocks could become tomorrow’s profits, and oil drillers can get back on their feet.

This leads to the question for investors: is High Peak Energy stock a buy? 

High Peak Production Soars Above 7,800 Barrels

HighPeak Energy is an oil drilling company that works directly on oil and gas reserves. The company’s fourth quarter average production was 3,332 barrels equivalent per day. By mid-March 2021, the company was producing 7,800 barrels equivalent per day.

This is a tiny fraction of the 11.3 million barrels per day of U.S. crude oil production in 2020, according to the Energy Information Administration (EIA). In fact, the company’s production accounts for less than 3 percent of the U.S. oil market, and a portion of that is also natural gas.

The company’s production stream includes 89 percent oil and 5 percent natural gas, for a total of 94 percent liquids. Its oil rigs are continuing to be optimized for maximum efficiency, and that will ultimately help the company’s bottom line.

As it continues to grow alongside the economic recovery, it needs a moat to protect it from the competition.

Does High Peak Have A Competitive Advantage?

HighPeak Energy’s only moat is the high-cost barrier to entry.

The company isn’t anywhere near the top five oil drilling companies, which include Nabors Industries Ltd (NBR), Helmerich & Payne Inc, Patterson-UTI Energy Inc, Precision Drilling Corporation, and Pioneer Energy Services Corp.

When it comes to investment dollars, many investors are largely ignoring oil to focus on commodities related to electric vehicles, including copper and lithium. The restrictions on global travel have led to a virtually unprecedented inventory of oil. Indeed, the barrel price of U.S. oil plummeted below zero for the first time in history from COVID-19.

And a new Biden administration is pushing harder on environmentally friendly initiatives. Fracking and oil drilling are under serious threat in this country, and that creates an overlooked market for oil drillers.

Impressively, High Peak has no debt and entered 2021 with approximately $20 million in cash on hand. It has about $50 million in available credit, and that gives this $700 million company a runway to make it through the year while surviving any oil pricing volatility. Plus, it has plenty of room to grow with the economy recovering.

High Peak Revenues Way Up

Few companies in the oil industry grew revenues in 2020, as the pandemic dropped crude oil prices below zero for the first time in history. This created shockwaves throughout the supply chain, and oil drillers like High Peak were left high and dry for the bulk of the following 12 months.

Meanwhile, Saudi Arabia and Russia engaged in a heated oil trade war, and U.S. oil production was cut. OPEC limited oil exports, and the EIA expects U.S. crude oil production to reach back up to an average 11.9 million barrels per day in 2022.

This compares to 17.05 million barrels per day production average in 2019 and highlights just how stunted the sector’s growth opportunities are moving forward. Even with people wanting to travel more than ever, it’s a slow road to full recovery.

Despite the problems, HighPeak revenues grew in 2020, bringing in $24.62 million in revenues. This compares to $8.11 million in revenues in 2019, which is over 300 percent of a year-over-year increase. Of course, operating costs also increased alongside it, bringing earnings down dramatically.

What Rate Are High Peak Earnings Growing?

HighPeak Energy’s earnings aren’t growing. In fact, the company lost money in the two years leading up to going public. In 2019, it reported a net loss of -$11.57 million, and the loss gap widened to -$101.46 million in 2020.

However, it has high hopes for 2021. The company expects up to $150 million in capital investment, which includes up to $125 million for drill, equipment, and facilities costs. It will operate the same 20-24 wells it did the prior year, but it anticipates over 480 percent production increase from 2020.

Should oil prices continue to increase while it increases production, investors could have a great year ahead. Although negative in April 2020, the prices of WTI and brent crude oil hovered around $60.00 one year later. And with OPEC expecting demand to increase through 2022, this could be great news for HighPeak.

The company’s profitability will ultimately be determined by how the management team steers it through the next few years of economic recovery. Speaking of the top brass, how good is executive team?

High Peak Management Quality

Jack Hightower is the Chairman and Chief Executive Officer of HighPeak Energy. He has 50 years of oil industry experience, leading companies like Bluestem Energy Partners, LP, Celero Energy II, LP, and Pure Resources. This gives him valuable market insight that could keep the company in the green moving forward.

He’s joined by President Michael Hollis, who formerly served as COO of Diamondback Energy and sits on the Board of Directors for Viper Energy Partners. Rodney Woodard is the company’s COO, And Chief Financial Officer Steven Tholen rounds out the C-suite.

The company’s combined experience in the oil industry means they should have the competency to grow the company over the next decade. Nothing is guaranteed, but the company is facing some headwinds.

High Peak Dependent On Oil Prices

The biggest problem facing HighPeak energy is that its price is entirely dependent on the price of oil.

As an oil driller, the company is at high risk of having its growth stunted by Biden environmental policies. And countries like Russia and Saudi Arabia are muscling in on America’s global oil market.

Is High Peak Stock a Buy? Conclusion

HighPeak Energy is a Texas-based oil and gas drilling company. It produces a small fraction of the country’s oil supply, and it went public in late 2020 through a reverse SPAC merger. It operates about two dozen drilling operations and makes the bulk of its profit from crude oil.

OPEC has high hopes for the demand of oil rising over the next two years. This will lead to the price continuing to increase from the historically low negative value. The company plans to increase its production by up to 500 percent, and this combined with a price increase could lead to a big windfall for investors.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.