HighPeak Energy Inc

The following discussion and analysis should be read in conjunction with the other sections of this Annual Report, including but not limited to“Items 1 and 2. Business and Properties—Regulation of the Crude Oil and Natural Gas Industry.”Historical financial statements and related notes included elsewhere in this Annual Report. This discussion contains“forward-looking statements”* reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward*-looking statements due to a number of factors. Factors that could cause or contribute to such differences include, but are not limited to, market prices for crude oil and natural gas, capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in this Annual Report. Please read Cautionary Statement Concerning Forward-Looking Statements. Also, please read the risk factors and other cautionary statements described under“Part I, Item 1A. Risk Factors.”* We assume no obligation to update any of these forward*-looking statements, except as required by applicable law. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 6, 2024 for a discussion of the Company’s 2023 results of operations compared with the Company’s 2022 results of operations.

Overview

HighPeak Energy, Inc., a Delaware corporation, was formed in October 2019, 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. The Company’s assets are located primarily in Howard and Borden Counties, Texas, and to a lesser extent Scurry and Mitchell Counties, which lie within the northeastern part of the crude oil-rich Midland Basin. As of December 31, 2024, the assets consisted of two highly contiguous leasehold positions of approximately 154,368 gross (141,907 net) acres, approximately 64% of which were held by production, with an average working interest of 92%. 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. We operate approximately 97% of the net acreage across the Company’s assets and more than 90% of the net operated acreage provides for horizontal wells with lateral lengths of 10,000 feet or greater. For the year ended December 31, 2024, approximately 88% and 12% of sales volumes from the assets were attributable to liquids (both crude oil and NGL) and natural gas, respectively. As of December 31, 2024, HighPeak Energy was developing its properties using two (2) drilling rigs and one (1) frac crew and expects to average two (2) drilling rigs and approximately one (1) frac crew during 2025 under our current development plan.

The markets for the commodities produced by our industry strengthened in 2021 and continued to remain strong through 2023 and into 2024, although the market has decreased from 2022 levels overall, as a result of increased demand outpacing increased supply for each of the commodities we produce. Prices for the commodities produced by our industry improved from historic lows in 2020, with crude oil and natural gas prices reaching their highest average annual price since 2014 in 2022 before cooling off slightly in 2023. However, commodity markets, unavailability or high cost of drilling rigs, equipment, supplies, personnel, frac crews and oilfield services or supply constraints remain subject to heightened levels of uncertainty as a result of the war in Ukraine, the conflict between Israel and Hamas, elevated interest rates and associated policies of the Federal Reserve, which could adversely affect HighPeak Energy’s ability to execute on its capital plan. Despite continuing impacts of these and other factors and future uncertainty, we expect to maintain our ability to sustain strong operational performance and financial stability while maximizing returns, improving leverage metrics, and increasing the value of our Midland Basin assets. Additionally, the impact of inflation as well as elevated interest rates continue to have a negative impact on our cash flows and results of operations.

Recent Events

Share Repurchase Program. In February 2024, the Company’s board of directors approved a common stock repurchase program to acquire up to $75.0 million of the Company’s outstanding common stock, excluding excise taxes and other expenses, which was subject to being suspended from time to time, modified, extended or discontinued by the board of directors at any time. The common stock repurchase program expired on December 31, 2024 (the “2024 Repurchase Program”). On March 6, 2025, the Company’s board of directors extended the program from its original expiration on December 31, 2024 and extended the program through December 31, 2025 (the “Repurchase Extension”). The Repurchase Extension did not alter any of the original terms of the 2024 Repurchase Program nor did it change the total amount provided for under the original 2024 Repurchase Program. HighPeak’s management the authority to repurchase shares opportunistically in the open market from time to time, through block trades, in privately negotiated transactions or by such other means which comply with applicable state and federal laws. This is the Company’s second authorization for a stock repurchase program since its founding.

The Company intends to fund the repurchases from available working capital, cash provided from operations and borrowings under its Senior Credit Facility Agreement. The timing, number and value of shares repurchased under the program will be at the discretion of management and the Board of Directors and will depend on a number of factors, including general market and economic conditions, business conditions, the trading price of the Company’s common stock, the nature of other investment opportunities available to the Company and compliance with the Company’s debt and other agreements. The stock repurchase program does not obligate HighPeak to acquire any particular dollar amount or number of shares of its common stock and the stock repurchase program may be suspended from time to time, modified, extended or discontinued by the Company’s Board of Directors. The stock repurchase program authority will expire December 31, 2025.

***Dividends and dividend equivalents.***In February, May, August and November 2024, the Board declared a quarterly dividend of $0.04 per share of common stock outstanding which resulted in a total of $5.1 million, $5.0 million, $5.0 million and $5.0 million, respectively, in dividends being paid on March 25, 2024, June 25, 2024, September 25, 2024 and December 23, 2024, respectively. In addition, under the terms of the LTIP, the Company paid a dividend equivalent per share to all vested stock option holders of $530,000 in March 2024, $538,000 in June 2024, $534,000 in September 2024 and $531,000 in December 2024. In addition, the Company accrued an additional combined $84,000 in March 2024, $84,000 in June 2024, $86,000 in September 2024 and $86,000 in December 2024 in dividends on the restricted stock issued to directors, management directors and certain employees that will be payable upon vesting, assuming no forfeitures.

***Acquisitions.***During the year ended December 31, 2024, the Company incurred a total of $14.8 million in acquisition costs related to lease extensions and to acquire additional crude oil and natural gas leases covering additional contiguous bolt-on undeveloped acreage to its Flat Top and Signal Peak operating areas.

Crude oil sales contract. In September 2024, the Company entered into an amended and restated crude oil marketing contract with DK Trading & Supply, LLC (“Delek”) as the purchaser and DKL Permian Gathering, LLC (“DKL”) as the gatherer and transporter. The contract includes the Company’s current and future crude oil production from the majority of its horizontal wells in Flat Top and Signal Peak where DKL is continually constructing a crude oil gathering system and custody transfer meters to most of the Company’s central tank batteries. The contract contains a minimum volume commitment commencing May 2024 that totals $138.7 million based on the gross piped barrels delivered of 23,500 Bopd for the first ten years of the contract at a certain amount per barrel escalating throughout the term of the contract. However, the Company generally has the ability under the contract to cumulatively bank dollars based on excess volumes delivered to offset the minimum volume commitment. For the period from May 1, 2024 to December 31, 2024, the Company has delivered approximately 31,196 Bopd under the contract. The remaining monetary commitment as of December 31, 2024, if the Company never delivers any additional volumes under the agreement, is approximately $130.3 million.

***Crude Oil and Natural Gas Industry Considerations.***Since mid-2020, crude oil prices have improved, with demand steadily increasing. In addition, sanctions and import bans on Russia have been implemented by various countries in response to the war in Ukraine, further impacting global crude oil supply. As a result of crude oil and natural gas supply constraints, there have been significant increases in European energy costs, which have resulted in inflationary pressures throughout Europe, increasing prospects of recession in many countries throughout the continent. In April 2023, OPEC announced production cuts of around 1.16 million Bopd. On June 4, 2023, OPEC agreed to extend these previously announced production cuts through the end of 2024. On July 3, 2023, Saudi Arabia announced it was extending voluntary cuts through August 2023. However, as a result of current global supply and demand imbalances, crude oil and natural gas prices remain strong, although down from the prior year. In addition, the war between Russia and Ukraine and ongoing conflict between Israel and Hamas and other tensions in the Middle East have resulted in global supply chain disruptions, which has led to significant cost inflation. Such impacts may also be exacerbated by recent developments in the Israel-Hamas conflict. Specifically, the Company’s 2023 and 2024 capital program has been and continues to be impacted by higher prices for steel, diesel, chemicals and services, among other items.

Global crude oil price levels and inflationary pressures will ultimately depend on various factors that are beyond the Company’s control, such as (i) general economic conditions and increasing expectations that the world may be heading into a global recession, (ii) the ability of OPEC and other crude oil producing nations to manage the global crude oil supply, (iii) the impact of sanctions and import bans on production from Russia and any resulting impact on production from the Israel-Hamas conflict, (iv) the timing and supply impact of any Iranian or Venezuelan sanction relief on their ability to export crude oil, (v) the global supply chain constraints associated with manufacturing and distribution delays, (vi) oilfield service demand and cost inflation, and (vii) political stability of crude oil consuming countries. The Company continues to assess and monitor the impact of these factors and consequences on the Company and its operations.

Outlook

HighPeak Energy’s financial position and future prospects, including its revenues, operating results, profitability, liquidity, future growth and the value of its assets, depend heavily on prevailing commodity prices. The crude oil and natural gas industry is cyclical and commodity prices are highly volatile and subject to a high degree of uncertainty. For example, during the period from January 1, 2021 through December 31, 2024, the calendar month average NYMEX WTI crude oil price per Bbl ranged from a low of $52.10 to a high of $114.34, and the last trading day NYMEX natural gas price per MMBtu ranged from a low of $1.58 to a high of $9.35.

The markets for the commodities produced by our industry strengthened in 2021 and continued to remain strong through 2024 and into 2025, although the market has decreased from 2022 levels overall, as a result of increased demand outpacing increased supply for each of the commodities we produce. Prices for the commodities produced by our industry improved from historic lows in 2020, with crude oil and natural gas prices reaching their highest average annual price since 2014. However, there are many factors beyond the Company’s control, including commodity markets, unavailability or high cost of drilling rigs, equipment, supplies, personnel, frac crews and oilfield services or supply constraints remain subject to heightened levels of uncertainty as a result of the conflicts between Russia and Ukraine and between Israel and Hamas, elevated interest rates and associated policies of the Federal Reserve, which could adversely affect HighPeak Energy. For additional information on the risks, see “Part I, Item 1A. Risk Factors.”

Given the dynamic nature of this situation, the Company is maintaining flexibility in its capital plan as indicated by its plan to maintain a two (2) drilling rig program for 2025. The Company will continue to evaluate drilling and completion activity on an economic basis, with future activity levels assessed monthly. Despite continuing impacts of the factors listed above and future uncertainty, we are focused on maintaining our ability to sustain strong operational performance and financial stability while maximizing returns, improving leverage metrics, and increasing the value of our Midland Basin assets.

Strategic Alternatives

On January 23, 2023, the Company announced the intention of its Board to initiate a process to evaluate certain strategic alternatives to maximize shareholder value, including a potential sale of the Company. Texas Capital Securities and Wells Fargo Securities, LLC have been retained as a financial advisors with respect to this strategic alternatives process. To date, however, this process has been exploratory in nature and accordingly remains in preliminary stages, with our discussions to date with prospective counterparties generally excluding substantive discussions regarding potential valuation, structure or other key transaction terms. The Company has not set a timetable for the conclusion of this review, nor has it made any decisions related to any further actions or potential strategic alternatives at this time. There can be no assurance that the review will progress beyond this exploratory phase or result in any transaction or other strategic change or outcome. The Company does not intend to comment further regarding the strategic alternatives process unless and until our Board has approved a specific course of action or we have otherwise determined that further disclosure is appropriate or required by law.

Financial and Operating Performance

The Company’s financial and operating performance for the year ended December 31, 2024 included the following highlights:

Partially offset by:

Derivative Financial Instruments

***Derivative financial instrument exposure.***As of December 31, 2024, the Company was a party to the following open crude oil derivative financial instruments.

The estimated fair value of the outstanding open derivative financial instruments as of December 31, 2024 was a net asset of $2.2 million which is included in current assets and current liabilities on the Company’s consolidated balance sheet as of December 31, 2024. During the year ended December 31, 2024, the Company recognized a net derivative loss of $46.5 million, including a $32.2 million mark-to-market loss and $14.3 million in net monthly settlement payments.

Natural gas derivative instruments. In February 2025, the Company entered into the following natural gas derivative instruments, specifically HH fixed price swaps at $4.43 per MMBtu for 30,000 MMBtu per day for March 2025 through February 2026.

Operations and Drilling Highlights

Average daily crude oil, NGL and natural gas sales volumes are as follows:

The Company's liquids production was 88% of total production on a Boe basis for the year ended December 31, 2024.

Costs incurred are as follows (in thousands):

Development/service and exploration/extension drilling activity is as follows: