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<h2>KEY POINTS</h2>
<ul>
<li>HighPeak’s expected 2022 growth trajectory puts the company on pace to deliver significant EBITDAX and reserve value growth this year. Our EBITDAX estimates incorporating the midpoints of management’s FY22 and 2022 exit rate production guidance are ~$700 million and ~$1.1 billion, respectively.</li>
<li>HighPeak’s 2022 capital program is dedicated to multi-well pad development in the Wolfcamp A and Lower Spraberry formations at its Flat Top area and delineating the Wolfcamp A, Lower Spraberry, and Wolfcamp D formations across the Signal Peak acreage.</li>
<li>Superior single well economics at the Flat Top area could drive substantial reserve value gains in 2022. The blended average of type curves for 12,500-foot laterals in the Wolfcamp A and Lower Spraberry at Flat Top, prepared by HighPeak’s third-party reserve engineering firm, generate PV-10 value of $16 million ($80/bbl flat oil) and payout in ~0.6 years from first production. The addition of ~100 wells to the proved developed reserve category in 2022 could drive the PV-10 value of proved developed reserves to $3.4-3.8 billion by management’s estimates based on pricing of $110/bbl oil and $3.75/MMBtu natural gas. For context, proved developed value was $815 million using $72/bbl for oil and $3.75/MMBtu for natural gas as of December 31, 2021.</li>
<li>HighPeak’s $750-800 million 2022 capital program is predicated on running four drilling rigs and two frac crews. Approximately 75% of the drilling budget is devoted to Flat Top and ~25% to Signal Peak.</li>
<li>Growing EBITDAX and a solid balance sheet provide capacity to fund the capital program. We estimate that December 31, 2021 pro forma liquidity was $274 million. Based on the $775 million midpoint of FY22 estimated capital expenditures, we estimate current liquidity is adequate to fill a funding gap of ~$165 million.</li>
</ul>
<p>COMPANY OVERVIEW</p>
<p>HighPeak Energy is a growth-oriented independent exploration and production company headquartered in Fort Worth, Texas. The company’s assets are concentrated in the northeastern portion of the Midland Basin in Texas where it owns ~72,500 net acres, including recently announced acquisitions. Proved reserves at year-end 2021, totaled 64.2 MMBOE (45% developed / 81% oil). 4Q21 production averaged 14.9 MBOE/d. Management’s latest FY22 production guidance is 27.0-32.5 MBOE/d with an estimated 2022 exit rate of 40-45 MBOE/d. The midpoints of the full year and exit rate production guidance for 2022 imply growth rates of 220% and 357%, respectively from the FY21 average of 9.3 MBOE/d. Our prior HighPeak content can be found&nbsp;here. HighPeak’s corporate homepage is&nbsp;www.highpeakenergy.com.</p>
<h2>2022—KICKING INTO GEAR</h2>
<h2>Asset Base Update</h2>
<p>HighPeak owns working interests in ~72,500 net acres in the northeast portion of the Midland Basin (see Figure 1). That figure includes ~9,500 net acres added in the Flat Top area through series of acquisitions this year. The acquisitions also bring ~2.5 MBOE of associated production, ~40 horizontal drilling locations, three saltwater disposal wells, and infield produced fluid pipelines and rights to local non-potable water sourcing of ~35 Mb/d. Aggregate consideration for the acquisitions is $4 million and up to 7.73 million shares of common stock. HighPeak operates ~90% of its acreage position, giving management control of the development schedule. Approximately 98% of the net operated acreage can be developed with horizontal wells having lateral lengths exceeding 10,000 feet.</p>
<p>Figure 1: Flat Top and Signal Peak Acreage Positions</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/721/original/image_2547335821648512239539.png?1648512244" class="editor-image img-responsive"></figure>
<p>The Flat Top area has been delineated in the Wolfcamp A and Lower Spraberry formations and is being developed with multi-well pads. Three of the four currently operating rigs are working in Flat Top. Single well economics at Flat Top generate excellent returns (see Figure 2). Using a blended average of Flat Top Wolfcamp A and Lower Spraberry type curves prepared by HighPeak’s third-party reserve engineer, Cawley, Gillespie, &amp; Associates, a flat $80/bbl oil price and an average 12,500-foot lateral, the wells deliver a PV-10 value of $16 million and an IRR exceeding 160%. Such wells pay out in about 0.6 years from first production. The economics underpin HighPeak’s strong EBITDAX growth profile and could put the company in position to generate free cash flow as early as 4Q22 or in 2023.</p>
<p>Figure 2: Flat Top Single Well Economics&nbsp;(1)</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/722/original/image_54913756931648512269237.png?1648512270" class="editor-image img-responsive" data-smartkarma-image-id="265722"></figure>
<p>HighPeak is still delineating the Signal Peak acreage block, concentrating on the Wolfcamp A, Lower Spraberry, and Wolfcamp D formations (see Figure 1). Management plans to maintain an average of one rig in Signal Peak in 2022. Company activity is methodically moving west to east across the block. Early performance from a two-well Wolfcamp A and Lower Spraberry is very encouraging. A pair of 15,000-foot Wolfcamp D tests are drilling in the central portion of the block. Those two wells will provide important reservoir data spanning 30,000 feet of north-to-south lateral. HighPeak is also participating in four gross non-operated wells being drilled by others in the Signal Peak area. Management expects data from the Wolfcamp A and Lower Spraberry testing along with new completions in the Wolfcamp D to guide it full-field development and infrastructure plans for Signal Peak.</p>
<h2>Proved Reserves</h2>
<p>HighPeak increased proved reserves 185% in 2021, ending the year with 64.2 MMBOE. Figures 3 and 4 detail the year-end reserve profile and changes to proved reserves. The PV-10 value on December 31, 2021 was ~$1.3 billion using SEC pricing methodology. The SEC pricing was $66.56/bbl for oil, $3.598/MMBtu for natural gas and realized pricing of $29.76/bbl for NGLs. Management also provided a PV-10 estimate of ~$1.5 billion, based on flat prices $72/bbl for oil, $3.75/MMBtu for natural gas, and $32.18/bbl for NGLs as of the same date. Management released its flat pricing PV-10 value on February 22, 2022.</p>
<p>Proved reserve growth in 2021 was driven by the capital program which utilized an average of ~1.5 development rigs for much of the year. A third rig was put to work in October. The capital program added ~45 MMBOE of proved reserves through extensions and discoveries. Proved developed reserves expanded 177% while proved undeveloped reserves expanded 191% during the year. HighPeak has laid out a four-rig capital program for 2022. The fourth rig was put into service in January 2022. With four rigs operating throughout the year, proved reserves could increase sharply again in 2022.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/723/original/image_47805117841648512290472.png?1648512292" class="editor-image img-responsive"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/725/original/image_23845715061648512312992.png?1648512315" class="editor-image img-responsive" data-smartkarma-image-id="265725"></figure>
<h2>Capital Program Could Drive Proved Developed Reserve Value</h2>
<p>Management expects ~100 additional producing wells to contribute significant production and reserve value growth in 2022. For illustrative purposes, Figure 5 shows management’s calculations for a potential year-end 2022 PV-10 estimate for proved developed reserves. Based on the estimated impact of an added ~100 wells to the proved developed categories and a price deck incorporating $110/bbl for oil and $3.75/MMBtu for natural gas, management pegs a potential year-end 2022 PV-10 range of $3.4-3.8 billion. By comparison, the corresponding December 31, 2021 value was $815 million (using flat prices of $72/bbl for oil and $3.75/MMBtu for natural gas). On March 25, 2022, the 18-month NYMEX strip was $96.54/bbl for oil and $5.10/MMBtu for natural gas. What’s clear is that the combination of strong expected reserve growth with an asset base made up of ~81% oil (~92% liquids) exposes HighPeak’s reserve value to significant upside in a strong oil-price environment.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/726/original/image_57256155871648512342237.png?1648512345" class="editor-image img-responsive" data-smartkarma-image-id="265726"></figure>
<h2>2022 Growth Profile</h2>
<p>HighPeak outlined its 2022 capital program and operating guidance in a press release issued February 22, 2022 (see Figure 6). The midpoint of FY22E production guidance implies gains of 220% and 100% from FY21 and 4Q21, respectively. The midpoint of the exit rate range implies gains of 357% and 186% from FY21 and 4Q21, respectively. Drilling capital will be split roughly along the lines of 75% in Flat Top and 25% in Signal Peak.</p>
<p>The FY22 production profile will be driven by the timing of new well completions and the impact that drilling and completion activity has on offset wells. HighPeak entered 1Q22 with 27 gross (23.0 net) horizontal wells in various stages of drilling and completion. Most of those wells were expected to be turned inline in late 1Q22 or early 2Q22. Consequently, 2Q22 output could be a step-change from 1Q22 driven by the contribution of new wells. Management expects to complete an average of eight wells per month from 2Q22 on.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/727/original/image_56429091081648512362798.png?1648512365" class="editor-image img-responsive" data-smartkarma-image-id="265727"></figure>
<h2>Focused on Margin Maximization</h2>
<p>HighPeak’s peer leading margins are supported by its oil-weighted production mix (see Figure 7). Oil represented 88% of 4Q21 volumes and total liquids represented 95% of output. The 4Q21 unhedged production netback was $60.25/BOE.</p>
<p>Lease operating expenses averaged $8.34/BOE during 4Q21. Management expects FY22E lease operating expenses to decline to $5.00-5.50/BOE. Rising production volumes and the positive impact of the company’s electrical upgrades at Flat Top, increased produced water handling capacity, and enlarged oil and gas gathering systems are all anticipated to put downward pressure on costs.</p>
<p>Construction is complete on a new high-voltage substation that will be interconnected with the ERCOT transmission grid. The high-voltage facility has an initial capacity of up to 60 megavolt amperes and was designed for future expansion. Management expects the substation will be commissioned and powered up in 2Q22. A medium-voltage distribution system and 13-megawatt direct current solar photovoltaic facility located on ~80 acres of company-owned land is expected to be put into service in 3Q22. Upgraded electric facilities will provide lower-cost reliable power for field operations and help HighPeak meet its ESG and sustainability goals.</p>
<p>In May 2021, HighPeak signed new separate agreements to improve crude oil and natural gas gathering and marketing arrangements in Flat Top. Phase 1 of an expanded low-pressure natural gas gathering system went into service in 4Q21. Phase I of a new crude oil gathering system is expected to come online in 2Q22 and will put more barrels into pipelines, reducing truck traffic and costs.</p>
<p>Management is also taking steps to positively influence capital costs. During 4Q21, HighPeak recycled 58% of frac fluids and has increased access to non-potable water sources. The company now has capacity to meet 100% of the stimulation fluid needs for one frac crew operating in Flat Top with recycled and non-potable water. Management expects to begin sourcing sand for completion activity in 3Q22 from a local sand mine. Water management and sand sourcing agreements could help mitigate some capital cost inflation in the company’s development program.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/728/original/image_35784987891648512386650.png?1648512389" class="editor-image img-responsive" data-smartkarma-image-id="265728"></figure>
<h2>EBITDAX Projections</h2>
<p>Figure 8 outlines our summary earnings and cash flow model. HighPeak generated $72 million of EBITDAX in 4Q21 and $164 million for the full year. 4Q21 production averaged 14.9 MBOE/d (88% oil). As mentioned earlier, 2Q22 production could post a sharp increase over 1Q22 driven by the timing of new well completions. We have not made any changes to our model since our&nbsp;<a href="https://www.watertowerresearch.com/content/fy22e-outlook-update" target="_blank" rel="noopener">February 24 update</a>. Based on the midpoint of HighPeak’s 2022 exit production rate guidance, we estimate EBITDAX could be annualizing at ~$1.1 billion. The shares are valued at 3.7x and 2.1x our FY22 and annualized 2022 exit rate estimates, respectively (see Figure 9).</p>
<p>Figure 8: Summary Model</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/729/original/image_921377197101648512413164.png?1648512415" class="editor-image img-responsive" data-smartkarma-image-id="265729"></figure>
<p>Figure 9: Implied Valuation</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/730/original/image_985229647111648512430524.png?1648512432" class="editor-image img-responsive" data-smartkarma-image-id="265730"></figure>
<h2>Capitalization and Liquidity</h2>
<p>HighPeak’s balance sheet is strong and provides ample capacity to fund the 2022 capital program. As of December 31, 2021, HighPeak had $100 million of outstanding borrowings on its RBL facility and $34.9 million of cash. In February, the company issued $225 million principal amount of 10.00% senior unsecured notes due 2024. A portion of the $203.9 million of net proceeds was used to fully repay the RBL. Following the issuance, outstanding commitments on the RBL were reduced to $138.8 million. Pro forma for the 2024 notes issuance and acquisitions announced on February 22, 2022, we estimate HighPeak’s liquidity was ~$274 million as of December 31, 2021.</p>
<p>Figure 10: Capitalization and Liquidity</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/265/731/original/image_747792084121648512462064.png?1648512464" class="editor-image img-responsive" data-smartkarma-image-id="265731"></figure>
<h2>DISCLOSURES</h2>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Jeff Robertson, who is the writer of this report, covers the Natural Resources sector for WTR. Mr. Robertson and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY POINTS

HighPeak’s expected 2022 growth trajectory puts the company on pace to deliver significant EBITDAX and reserve value growth this year. Our EBITDAX estimates incorporating the midpoints of management’s FY22 and 2022 exit rate production guidance are ~$700 million and ~$1.1 billion, respectively.
HighPeak’s 2022 capital program is dedicated to multi-well pad development in the Wolfcamp A and Lower Spraberry formations at its Flat Top area and delineating the Wolfcamp A, Lower Spraberry, and Wolfcamp D formations across the Signal Peak acreage.
Superior single well economics at the Flat Top area could drive substantial reserve value gains in 2022. The blended average of type curves for 12,500-foot laterals in the Wolfcamp A and Lower Spraberry at Flat Top, prepared by HighPeak’s third-party reserve engineering firm, generate PV-10 value of $16 million ($80/bbl flat oil) and payout in ~0.6 years from first production. The addition of ~100 wells to the proved developed reserve category in 2022 could drive the PV-10 value of proved developed reserves to $3.4-3.8 billion by management’s estimates based on pricing of $110/bbl oil and $3.75/MMBtu natural gas. For context, proved developed value was $815 million using $72/bbl for oil and $3.75/MMBtu for natural gas as of December 31, 2021.
HighPeak’s $750-800 million 2022 capital program is predicated on running four drilling rigs and two frac crews. Approximately 75% of the drilling budget is devoted to Flat Top and ~25% to Signal Peak.
Growing EBITDAX and a solid balance sheet provide capacity to fund the capital program. We estimate that December 31, 2021 pro forma liquidity was $274 million. Based on the $775 million midpoint of FY22 estimated capital expenditures, we estimate current liquidity is adequate to fill a funding gap of ~$165 million.

COMPANY OVERVIEW
HighPeak Energy is a growth-oriented independent exploration and production company headquartered in Fort Worth, Texas. The company’s assets are concentrated in the northeastern portion of the Midland Basin in Texas where it owns ~72,500 net acres, including recently announced acquisitions. Proved reserves at year-end 2021, totaled 64.2 MMBOE (45% developed / 81% oil). 4Q21 production averaged 14.9 MBOE/d. Management’s latest FY22 production guidance is 27.0-32.5 MBOE/d with an estimated 2022 exit rate of 40-45 MBOE/d. The midpoints of the full year and exit rate production guidance for 2022 imply growth rates of 220% and 357%, respectively from the FY21 average of 9.3 MBOE/d. Our prior HighPeak content can be found&nbsp;here. HighPeak’s corporate homepage is&nbsp;www.highpeakenergy.com.
2022—KICKING INTO GEAR
Asset Base Update
HighPeak owns working interests in ~72,500 net acres in the northeast portion of the Midland Basin (see Figure 1). That figure includes ~9,500 net acres added in the Flat Top area through series of acquisitions this year. The acquisitions also bring ~2.5 MBOE of associated production, ~40 horizontal drilling locations, three saltwater disposal wells, and infield produced fluid pipelines and rights to local non-potable water sourcing of ~35 Mb/d. Aggregate consideration for the acquisitions is $4 million and up to 7.73 million shares of common stock. HighPeak operates ~90% of its acreage position, giving management control of the development schedule. Approximately 98% of the net operated acreage can be developed with horizontal wells having lateral lengths exceeding 10,000 feet.
Figure 1: Flat Top and Signal Peak Acreage Positions

The Flat Top area has been delineated in the Wolfcamp A and Lower Spraberry formations and is being developed with multi-well pads. Three of the four currently operating rigs are working in Flat Top. Single well economics at Flat Top generate excellent returns (see Figure 2). Using a blended average of Flat Top Wolfcamp A and Lower Spraberry type curves prepared by HighPeak’s third-party reserve engineer, Cawley, Gillespie, &amp; Associates, a flat $80/bbl oil price and an average 12,500-foot lateral, the wells deliver a PV-10 value of $16 million and an IRR exceeding 160%. Such wells pay out in about 0.6 years from first production. The economics underpin HighPeak’s strong EBITDAX growth profile and could put the company in position to generate free cash flow as early as 4Q22 or in 2023.
Figure 2: Flat Top Single Well Economics&nbsp;(1)

HighPeak is still delineating the Signal Peak acreage block, concentrating on the Wolfcamp A, Lower Spraberry, and Wolfcamp D formations (see Figure 1). Management plans to maintain an average of one rig in Signal Peak in 2022. Company activity is methodically moving west to east across the block. Early performance from a two-well Wolfcamp A and Lower Spraberry is very encouraging. A pair of 15,000-foot Wolfcamp D tests are drilling in the central portion of the block. Those two wells will provide important reservoir data spanning 30,000 feet of north-to-south lateral. HighPeak is also participating in four gross non-operated wells being drilled by others in the Signal Peak area. Management expects data from the Wolfcamp A and Lower Spraberry testing along with new completions in the Wolfcamp D to guide it full-field development and infrastructure plans for Signal Peak.
Proved Reserves
HighPeak increased proved reserves 185% in 2021, ending the year with 64.2 MMBOE. Figures 3 and 4 detail the year-end reserve profile and changes to proved reserves. The PV-10 value on December 31, 2021 was ~$1.3 billion using SEC pricing methodology. The SEC pricing was $66.56/bbl for oil, $3.598/MMBtu for natural gas and realized pricing of $29.76/bbl for NGLs. Management also provided a PV-10 estimate of ~$1.5 billion, based on flat prices $72/bbl for oil, $3.75/MMBtu for natural gas, and $32.18/bbl for NGLs as of the same date. Management released its flat pricing PV-10 value on February 22, 2022.
Proved reserve growth in 2021 was driven by the capital program which utilized an average of ~1.5 development rigs for much of the year. A third rig was put to work in October. The capital program added ~45 MMBOE of proved reserves through extensions and discoveries. Proved developed reserves expanded 177% while proved undeveloped reserves expanded 191% during the year. HighPeak has laid out a four-rig capital program for 2022. The fourth rig was put into service in January 2022. With four rigs operating throughout the year, proved reserves could increase sharply again in 2022.


Capital Program Could Drive Proved Developed Reserve Value
Management expects ~100 additional producing wells to contribute significant production and reserve value growth in 2022. For illustrative purposes, Figure 5 shows management’s calculations for a potential year-end 2022 PV-10 estimate for proved developed reserves. Based on the estimated impact of an added ~100 wells to the proved developed categories and a price deck incorporating $110/bbl for oil and $3.75/MMBtu for natural gas, management pegs a potential year-end 2022 PV-10 range of $3.4-3.8 billion. By comparison, the corresponding December 31, 2021 value was $815 million (using flat prices of $72/bbl for oil and $3.75/MMBtu for natural gas). On March 25, 2022, the 18-month NYMEX strip was $96.54/bbl for oil and $5.10/MMBtu for natural gas. What’s clear is that the combination of strong expected reserve growth with an asset base made up of ~81% oil (~92% liquids) exposes HighPeak’s reserve value to significant upside in a strong oil-price environment.

2022 Growth Profile
HighPeak outlined its 2022 capital program and operating guidance in a press release issued February 22, 2022 (see Figure 6). The midpoint of FY22E production guidance implies gains of 220% and 100% from FY21 and 4Q21, respectively. The midpoint of the exit rate range implies gains of 357% and 186% from FY21 and 4Q21, respectively. Drilling capital will be split roughly along the lines of 75% in Flat Top and 25% in Signal Peak.
The FY22 production profile will be driven by the timing of new well completions and the impact that drilling and completion activity has on offset wells. HighPeak entered 1Q22 with 27 gross (23.0 net) horizontal wells in various stages of drilling and completion. Most of those wells were expected to be turned inline in late 1Q22 or early 2Q22. Consequently, 2Q22 output could be a step-change from 1Q22 driven by the contribution of new wells. Management expects to complete an average of eight wells per month from 2Q22 on.

Focused on Margin Maximization
HighPeak’s peer leading margins are supported by its oil-weighted production mix (see Figure 7). Oil represented 88% of 4Q21 volumes and total liquids represented 95% of output. The 4Q21 unhedged production netback was $60.25/BOE.
Lease operating expenses averaged $8.34/BOE during 4Q21. Management expects FY22E lease operating expenses to decline to $5.00-5.50/BOE. Rising production volumes and the positive impact of the company’s electrical upgrades at Flat Top, increased produced water handling capacity, and enlarged oil and gas gathering systems are all anticipated to put downward pressure on costs.
Construction is complete on a new high-voltage substation that will be interconnected with the ERCOT transmission grid. The high-voltage facility has an initial capacity of up to 60 megavolt amperes and was designed for future expansion. Management expects the substation will be commissioned and powered up in 2Q22. A medium-voltage distribution system and 13-megawatt direct current solar photovoltaic facility located on ~80 acres of company-owned land is expected to be put into service in 3Q22. Upgraded electric facilities will provide lower-cost reliable power for field operations and help HighPeak meet its ESG and sustainability goals.
In May 2021, HighPeak signed new separate agreements to improve crude oil and natural gas gathering and marketing arrangements in Flat Top. Phase 1 of an expanded low-pressure natural gas gathering system went into service in 4Q21. Phase I of a new crude oil gathering system is expected to come online in 2Q22 and will put more barrels into pipelines, reducing truck traffic and costs.
Management is also taking steps to positively influence capital costs. During 4Q21, HighPeak recycled 58% of frac fluids and has increased access to non-potable water sources. The company now has capacity to meet 100% of the stimulation fluid needs for one frac crew operating in Flat Top with recycled and non-potable water. Management expects to begin sourcing sand for completion activity in 3Q22 from a local sand mine. Water management and sand sourcing agreements could help mitigate some capital cost inflation in the company’s development program.

EBITDAX Projections
Figure 8 outlines our summary earnings and cash flow model. HighPeak generated $72 million of EBITDAX in 4Q21 and $164 million for the full year. 4Q21 production averaged 14.9 MBOE/d (88% oil). As mentioned earlier, 2Q22 production could post a sharp increase over 1Q22 driven by the timing of new well completions. We have not made any changes to our model since our&nbsp;February 24 update. Based on the midpoint of HighPeak’s 2022 exit production rate guidance, we estimate EBITDAX could be annualizing at ~$1.1 billion. The shares are valued at 3.7x and 2.1x our FY22 and annualized 2022 exit rate estimates, respectively (see Figure 9).
Figure 8: Summary Model

Figure 9: Implied Valuation

Capitalization and Liquidity
HighPeak’s balance sheet is strong and provides ample capacity to fund the 2022 capital program. As of December 31, 2021, HighPeak had $100 million of outstanding borrowings on its RBL facility and $34.9 million of cash. In February, the company issued $225 million principal amount of 10.00% senior unsecured notes due 2024. A portion of the $203.9 million of net proceeds was used to fully repay the RBL. Following the issuance, outstanding commitments on the RBL were reduced to $138.8 million. Pro forma for the 2024 notes issuance and acquisitions announced on February 22, 2022, we estimate HighPeak’s liquidity was ~$274 million as of December 31, 2021.
Figure 10: Capitalization and Liquidity

DISCLOSURES
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HPK Update Note - Converting Growth into Value

HighPeak Energy Inc

HPK Update Note - Converting Growth into Value