HighPeak Energy Faces Challenges With Refinancing Of 2024 Notes

HighPeak Energy (NASDAQ:HPK) is attempting to refinance its 2024 unsecured notes with a new unsecured notes due 2028. However, the refinancing process has not been smooth, and HighPeak is still evaluating the potential financing arrangements.

I had previously believed that there was a high chance of HighPeak doing an equity offering to help refinance its notes. Although HighPeak is trying to refinance with new notes, I still believe there is a significant chance of either warrants being included in the refinancing package, or that HighPeak does an equity offering to help reduce the amount of notes it needs to issue.

I estimate HighPeak’s value at approximately $14 per share if it can avoid dilution (other than warrants) in refinancing its 2024 notes. However, there is also a significant risk that it will need to issue a large amount of equity to reduce its leverage (and the amount of new notes it needs to issue), and that scenario would drop HighPeak’s price into the single-digits.

Notes And Potential Pricing

HighPeak announced that it intended to offer $575 million in unsecured notes due 2028 to repay its $225 million in 10% unsecured notes due February 2024 and its $250 million in 10.625% unsecured notes due November 2024.

It later announced that it received an extension of one month (to the end of July) for its obligations to deal with its 2024 notes, as it was still evaluating multiple prospective financing arrangements.

I believe that HighPeak is facing challenges with high borrowing costs. It previously issued $250 million in 10.625% unsecured notes due November 2024 in Q4 2022, and still had to offer an original issue discount despite the high interest rate. It issued those notes at 92 cents on the dollar, resulting in a yield-to-maturity of nearly 15%.

HighPeak is now attempting to issue five-year notes, so I’d expect that the market may be pricing in a yield-to-maturity in the mid-to-high teens. That would mean that the 2028 notes would end up with a 12% to 13% interest rate along with a significant original issue discount (such as 88 cents on the dollar).

That may still not be enough to get a deal done, so HighPeak may have to do an equity offering to lower its leverage (and needed bond offering amount) or include warrants as a sweetener for the bond refinancing package. Something such as 10 million warrants with an exercise price of $15 and a five-year term could be enough in conjunction with a 12% to 13% interest rate and pricing the notes at 88 cents on the dollar. The effective yield-to-maturity in that case (including the estimated value of the warrants) would be around 17%.

Notes On Valuation

I’ve reduced HighPeak’s estimated value to approximately $14 per share in a long-term $75 WTI oil and $3.75 NYMEX gas environment. This estimated value assumes that HighPeak can get its refinancing done with interest rates and note pricing similar to what I discussed above.

The reduction in HighPeak’s estimated value is largely due to the significant chance of increased net debt and interest costs related to the refinancing. If HighPeak sells $575 million in unsecured notes due 2028 at 88 cents on the dollar, its net debt would increase by $69 million from the original issue discount alone. A 12.5% interest rate on those notes would result in approximately $72 million per year in note interest, compared to $49 million per year for the 2024 notes that are being refinanced.

I believe that HighPeak will be able to deal with its 2024 notes in some manner. Jack Hightower owns (indirectly or directly) most of HighPeak’s equity and thus is likely to do everything possible to avoid a bankruptcy scenario.

However, there is also a decent chance that HighPeak will be forced to do an equity offering to reduce its leverage and the amount of new bonds it needs to issue as part of the refinancing. The cost (interest and discount) of issuing $575 million in new bonds could be prohibitive, but the price for $375 million in new bonds (after raising $200 million through an equity offering) may be more palatable. An equity offering of that size is likely to drop HighPeak’s share price into the single-digits though.

It should also be noted that oil and gas companies with bond yields similar to HighPeak’s bond yields tend to have market caps that are less than their net debt. That would point to a single-digit share price for HighPeak as well.

Conclusion

HighPeak’s refinancing of its 2024 bonds is not going smoothly, likely due to refinancing proposals that involve high interest costs and significant original issuer discounts.

HighPeak is still quite likely to take care of its 2024 notes soon, but it may be forced to do a large equity offering to reduce the necessary size of its new bond offering.

I estimate HighPeak’s value at $14 per share in a long-term $75 WTI oil scenario if it can refinance its 2024 bonds with new 2028 bonds and avoid significant dilution, while continuing its prior development plans. However, if a large equity offering is needed, HighPeak’s share price will likely drop into the single-digits.