HighPeak Energy Inc Stock

Good day and welcome to HighPeak Energy 2026 Second Quarter Earnings Conference Call. [Operator Instructions] The call is being recorded.

I would now like to turn the call over to Steven Tholen, CFO. Please go ahead.

Good morning, everyone, and welcome to HighPeak Energy's Second Quarter 2026 Earnings Call. Representing HighPeak today are President and CEO Michael Hollis; Executive Vice President, Daniel Silver; Senior Vice President Chris Munday; and I'm Steven Tholen, the Chief Financial Officer.

During today's call, we may refer to our August investor presentation and press release, which can be found on HighPeak's website. Today's call participants may make certain forward-looking statements relating to the company's financial condition, results of operations, expectations, plans, goals, assumptions, and future performance, so please refer to the cautionary information regarding forward-looking statements and related risks in the company's SEC filings, including the fact that actual results may differ materially from our expectations due to a variety of reasons, many of which are beyond our control.

We will also refer to certain non-GAAP financial measures on today's call, so please see the reconciliations in the earnings release and in our August investor presentation. I will now turn the call over to our President and CEO, Mike Hollis.

Good morning, everyone, and thank you for joining us today to discuss our second quarter 2026 results.

It was another strong quarter for HighPeak. Our team continued to do what they've consistently done, execute the development plan, operate efficiently, spend capital responsibly, and focus on creating long-term value for our shareholders. Production during the quarter was essentially flat with the first quarter and once again came in above the high end of our guidance range. That performance reflects the quality of our assets, and more importantly, the ability of our operations team to consistently deliver results.

From a capital spending perspective, the second quarter was expected to be our highest spending quarter of the year when we built our 2026 plan. During the quarter, we also chose to pull forward some completion activity that was originally scheduled later in the year. We saw an opportunity to lock in attractive frac pricing and continue working with a simul-frac crew that has been generating meaningful efficiency gains, faster cycle times, and lower costs.

When we see opportunities to improve returns and create additional value, we're going to take advantage of them. Advancing that work allowed us to do exactly that, while staying within the disciplined framework we've used throughout the year. As a result, we expect capital spending to decline meaningfully during the second half of 2026, which is consistent with our original plan and reflects the amount of development work completed during the first 6 months of the year.

On the cost side, our team continued to make solid progress. Drill, complete, and equip costs remained in line with expectations, and we continue to drive operational improvements across the field. Lease operating expense performance was particularly strong, with the first half unit LOE coming in approximately 13% below the midpoint of our full-year guidance. It's worth noting that these results include the impact of an expanded workover program that we intentionally pursued during the quarter.

As commodity prices improved, we identified opportunities to invest modest amounts of capital into low-cost, high-return workovers that brought meaningful production back online as well as enhanced the productivity capability of those wells, all while generating attractive economics. We'll discuss that program in more detail later because it highlights the, kind of, practical, return-focused decision-making that drives value at HighPeak.

Financially, stronger realized oil prices, combined with consistent production drove sequential growth in both adjusted EBITDA and free cash flow. We achieved those results despite absorbing approximately $55 million of net cash hedge losses during the quarter. Looking ahead, a larger percentage of our expected production remains exposed to spot pricing, which positions us to benefit if commodity prices remain supported by the ongoing uncertainty in the global supply market.

Bottom line, we are pleased with where the company stands today. Our priorities have not changed. We're going to continue developing our assets safely and efficiently, allocating capital with discipline, keeping a close eye on cost, and building a stronger business quarter-over-quarter. That's how we've operated for multiple years now, and that's how we'll continue creating value for our shareholders.

Turning to slide 5 and 6 of our investor presentation. These slides highlight the progress we've made against our 2026 development plan throughout the first half of the year. The operations team continues to execute at a high level across the board. On the drilling side, we kept driving efficiencies and drilled 17 of our planned 29 wells during the first 6 months of the year.

On the completion side, we completed 24 of our planned 33 wells for the year, reflecting the decision to pull forward a portion of our second half completion activity and take advantage of favorable market conditions. As we've discussed, the accelerated completion schedule allowed us to capitalize on attractive service costs and continue working with a high-performing simul-frac crew that has consistently delivered strong results.

Despite some additional fully expected frac-impacted oil volumes, production was supported in the quarter by the success of our workover program and the associated oil volumes from that work. We've already turned 20 wells to sales this year, which puts us in a strong position to achieve our full-year target of 37 turn-in-lines.

When we built our 2026 development plan, we expected roughly 60% of the year's capital to be spent in the first half. Because we elected to accelerate a portion of our completion activity, first half spending ultimately moved into the mid to upper 60% range of our annual budget. Now that wasn't unplanned spending, it was capital deployed against productive work that generated value and advanced our development program ahead of schedule.

The benefit of that strategy is that a significant amount of this year's development work is now behind us. We've put ourselves in a position to maintain strong production levels while materially reducing capital spending in the second half of the year. That's exactly the, kind of, setup we like. We get the benefit of the work completed earlier in the year, lower capital requirements going forward, and the opportunity to generate stronger free cash flow through the balance of 2026.

Most importantly, we're accomplishing that while staying disciplined, executing the plan, and continuing to focus on long-term value creation for our shareholders. Turning to the base production optimization. One of the best examples of value creation during the quarter was the successful work of our workover program. As commodity prices improved, we saw an opportunity to put additional capital to work in parts of the business where the returns were compelling and the risk was low.

Our team went well by well across the asset base and identified opportunities where a relatively small investment could bring meaningful production back online as well as enhance the productive capability of those wells. Again, all while generating attractive economics. We like these projects because they're straightforward, capital efficient, and pay back quickly. In many cases, we're investing a fraction of what it costs to drill a new well, while getting production back online in a much shorter timeframe.

From a returns perspective, these are some of the highest value opportunities we have available. The workover program is not a replacement for our development program, it's a complement to it. We're continuing to develop our inventory, but we're also making sure we maximize the value of every asset that we already own. That's just good wellfield management.

At HighPeak, we've always believed capital should go where it can generate the strongest returns, whether that's drilling a new well, completing a DUC, putting capital into a workover, we're going to evaluate every opportunity the same way. The goal is simple, invest wisely, increase production, generate more free cash flow, and create long-term value. This quarter's workover results are another example of our team's operational focus and disciplined approach to capital allocation.

We identified an opportunity, moved quickly to capture it, and delivered strong return on that investment. Now, looking ahead to the rest of 2026, we're in a good position. A large portion of our expected oil production is exposed to market pricing, which gives us a greater participation if commodity prices remain strong.

At the same time, we're not in the business of speculating. We're in the business of generating cash flow and protecting returns. That's why we continue to maintain a solid hedge position with the majority of our oil hedges sitting in the mid $60 per barrel range. Those hedges provide meaningful downside protection while still allowing us to benefit from a stronger price environment.

We take a practical and disciplined approach to risk management. During the quarter, we added a number of positions designed to reduce volatility and protect cash flow where we saw the opportunity to do so at attractive levels. Specifically, we added NYMEX WTI roll swaps to manage calendar spread exposure and Waha basis swaps to help reduce our exposure to fluctuations in West Texas natural gas pricing.

The objective is pretty simple. We want to protect the balance sheet, preserve cash flow, and maintain the financial flexibility to continue executing our development plan regardless of where commodity prices move in the near term. We believe that is the right approach for our shareholders. We want meaningful upside when markets are strong, but we also want to make sure that we're protecting the business during periods of volatility.

This approach positions HighPeak to continue generating value for shareholders in any market environment. Turning to our first half 2026 operational and financial scorecard. I think this slide tells a pretty simple story. Our team went out and executed. Across the board, we either met or exceeded the goals we set for ourselves while continuing to stay disciplined on cost, capital, and operations.

Production averaged 45,500 BOEs per day during the first 6 months of the year, exceeding the high end of our guidance range. That's a direct result of strong well performance, disciplined execution of our development program, and the ongoing work our team is doing to maximize the value of our existing production base.

On the cost side, the results were equally strong. Unit LOE averaged $7.56 per BOE, which came in approximately 13% below our guide level. That's not the result of a one-time event or simply getting lucky. It's the result of years of work focused on building more efficient operation through infrastructure improvements, electrification, field level optimization, and a culture that's constantly looking for ways to do things better. Most importantly, these cost savings are proving to be durable and sustainable.

Our development program also continued to perform exactly as planned. During the first half, again we drilled 17 operated wells, completed 24, and turned 20 wells to sales. As we discussed earlier, we made the decision to accelerate a portion of the completion activity into the second quarter to capture favorable service costs.

That decision allowed us to get more work done sooner, improve capital efficiency, and position the company for significantly lower capital spending during the second half of the year. From a capital standpoint, we invested $185.9 million during the first 6 months of 2026. Even with the accelerated completion program, we remained fully aligned with our full-year development budget.

We didn't spend more money. We simply chose to spend a portion of it earlier to capture efficiencies and create additional value. The combination of strong production, lower operating costs, and disciplined capital execution generated approximately $281 million of EBITDAX during the first half. Those results highlight the quality of our asset base, the strength of our operating model, and the cash-generating capability of the business.

At the end of the day, this is exactly the, kind of, performance we strive for. We delivered production above expectations, kept costs under control, executed the development plan, and maintained capital discipline. More importantly, we positioned the company to generate stronger free cash flow during the second half of the year as capital spending comes down while production remains strong.

That's the formula we're focused on. Consistent execution, efficient operations, disciplined capital allocation, and creating long-term value. As we wrap up today's prepared remarks, I'll leave you with a few final thoughts. HighPeak is exactly where we want to be. We built this year's plan with the understanding that commodity prices would remain volatile, and we managed the business accordingly.

The results we're delivering today reflect the strategy that was designed to generate strong returns and free cash flow across a range of market conditions, not just in the perfect environment. Our maintenance mode development program is doing exactly what it was intended to do. We're maintaining strong production, spending substantially less capital than we have in prior years, and generating increasing amounts of free cash flow. Just as important, we've preserved flexibility.

If the market conditions change, we have the ability to adapt while continuing to focus on a long-term value creation. We can't control commodity prices, interest rates, or geopolitical events, but we can control how we operate the business, and that's where our focus remains. We will continue allocating capital with discipline, protecting the balance sheet, driving operational efficiencies, and generating substantial free cash flow.

We've always believed that successful companies are built by making sound decisions quarter after quarter and year after year. And that's exactly what we're doing at HighPeak today. We have a high-quality asset base and a proven team and a development inventory that gives us confidence in the future of this company. Most importantly, we're committed to creating long-term value for the people who have invested alongside us.

Our strategy is straightforward. Operate efficiently, spend capital wisely, and generate strong returns and let the results speak for themselves. Before we close, I want to thank the employees. The results we discussed today are a direct reflection of their hard work, commitment, and focus on operating safely and efficiently every day. I'd also like to thank our shareholders for their continued support and confidence in HighPeak. We don't take that trust lightly and we are committed to earning it every day.

With that, operator, we're ready to open the call for questions.

[Operator Instructions] Our first question is coming from the line of Jeff Robertson of Water Tower Research.

Mike, can you talk a little bit about the impact on second quarter production from accelerating some of the completions into the quarter and what you would anticipate for the rest of the year just based on your schedule of additional wells to turn-in-line?

Absolutely, Jeff. No, great question. Obviously, with a smaller production base and as we move activity around, more specifically on the completion side of the business, you do affect existing production by stimulating wells in a certain area, kind of, refer to that as water-out or frac-impacted oil volumes. So as you can imagine, second quarter was going to be a more active, completion-intense quarter by design, and then we pulled 4 additional completions into that quarter.

So to your point, we watered-out or frac-impacted even more oil than we had initially anticipated. So when you look at our, kind of, maintenance mode program, you will have some lumpiness as we move that frac crew around and have breaks in the schedule. You'll see, if you were looking at daily volumes, you'll see some movement, but again, we guide on a yearly guide, and when you look at the first 6 months of the year, we are above that guided range pretty significantly.

And there's a lot of pieces that go into that. The actual well performance that we're seeing from our development program. And we talked a little earlier about the workover program. But the read-through there is that the budget is set. We just pulled forward some of that opportunity because we had a condition where we had a good frac crew at a good price in a good market, and they were very efficient and effective. So we went ahead and let them do a little more work.

But for the whole year, what that read-through is, obviously less capital would be spent in the second half of the year. The drilling rig toggle was a little tougher, right, because it's 1 rig, it's either an on or an off. So the plan is to continue to drill with that 1 rig throughout the entire year. And again, you can, kind of, see in the first 6 months, we drilled 1 additional well above what we had planned for the year, just because of the drilling efficiencies throughout the year.

So we would expect something similar for the second half of the year, maybe 1 additional well drilled. But the drilling portion of capital spend is fairly small, I think somewhere in the 30% range of a well's AFE. Now on the completion side, the read-through there is we will do the budgeted amount of completions throughout the year. We just performed 69% of that work in the first half of the year.

So think less water-out volumes as you go throughout the rest of the year, not like what we've had in the first half, as well as some impact from the workover program that we have. So we think volumes will stay strong throughout the -- I can speak last half of the year. And hopefully commodity prices are supportive as well, but at any reasonable oil price, we will generate significant free cash flow throughout the remainder of 2026.

Mike, I know it's way too early to talk about, or it's too early to talk about 2027 guidance, but can you just talk about the cadence in the second half of 2026 and maybe in the stress spilling over into the first part of 2027? And will the setup for next year from a production standpoint be somewhat similar to what you all were thinking when you came into 2026?

Absolutely, Jeff. So the original plan was to have somewhere in the 10-plus DUCs move into 2027 out of this year's program. Being able to drill 2 additional wells throughout the year, just because the rig is that much more efficient, just means 2 additional DUCs move into 2027.

The fact that we are only going to do the set number of completions we had in the budget, again, 2027 is set up to look a lot like 2026 as far as capital requirements as well as production volumes.

Just turning to the balance sheet, Mike. You had $146 million of cash at the end of the quarter, and scheduled amortization of the term loan at $30 million per quarter starts at the end of the third quarter. Can you talk a little bit about how you're thinking of liquidity on the balance sheet and paying down or amortizing the term loan and the free cash flow build? And would you -- would it be reasonable to expect that you amortize the term loan to the extent you can faster than the $30 million per quarter?

Jeff, great question. Obviously, we will amortize at $30 million a quarter. Now, in order to do more than that, what we have to manage in the future is we need enough cash that, obviously, at today's [ oil ] prices, we are going to generate much more than that $30 million a quarter to be able to meet the amortization and have a cash build.

However, we need to be a little careful with prepaying too much because you can't get that money back. It's not like a revolver where you can re-borrow it. So you'll see us be a little more cautious to paying down above the $30 million for the next quarter or so. But again, it all depends on what that free cash flow generation per quarter, which again, mainly driven by what the oil prices are for the quarter, which we can't guess right now.

But no, we will definitely do the $30 million a quarter, and we will have enough cash on hand to be able to weather any, kind of, variability over the next year or so, think 2027 and beyond.

One moment for the next question. Our next question is coming from the line of Nicholas Pope of ROTH Capital. Please go ahead.

Quick questions here. Looking at the workover load that you all had in 2Q, saw a bit of an uptick. You highlighted it that there's a lot of work to do there. Curious how to think about inventory or like what the running room is on those workovers and how those manifest themselves either in production or costs, where that necessarily shows up in the income statement, kind of, where you all expect to see the benefit and, kind of, how much like sight you have on the potential for more of those workovers.

Sure. Nick, I would love to tell you that wells never fail and operations are really easy. Now, our job is to always make home look very stable, easy, and, nothing to see here, but in the operations world, you always have things happen. So typically when we choose to do a workover, we won't take a well that's producing just fine and go take that production offline to go do this workover. Eventually, something will happen on that well to where you have to do an intervention.

Now, when you talk about the pace going forward, through the first half of this year, we've caught up most of what we had, kind of, banked as wells that we could go quickly pull forward. So on the go-forward basis, from more or less from now to into memorial, wells will need to be worked on.

When we have to be there to do the work, that's when we'll do the additional workover expense of the little mini-stimulations, the acid surfactants, all of those things, as well as lowering pumps, doing things to optimize the reservoir's capability of delivering into that wellbore.

But again, we can't really forecast with exact precision when a well is going to fail because we're always working on the other side of that equation to keep that well producing and keep our LOE costs down. So we're, kind of, on both sides of that equation, but I want you to hear the read-through is, there will always be opportunity for these workovers from now until the future.

The big answer for us and where it shows up on cost, it shows up in the LOE side because a lot of that work was something you were going to have to do to -- you had rods fail and you had to go pull rods and replace things. That's all on the LOE side. On the capital side, we capture if we're doing any, kind of, mini-stimulation that we think would increase reserves from that wellbore.

Hopefully that answers your question.

Yes. And then, kind of, further on some of the questions that Jeff had, talking about -- looking at the quarter, the gas weighting, obviously had a lot more gas volumes, had the negative gas prices during the quarter. I'm curious what y'all are seeing here in the second half of the year, both with pricing and being able to move that gas, and how much of that, kind of, that weighting, you know, somewhat transient with some of the work that got brought forward with that high gas volumes and your ability to manage that in the second half of the year?

Great setup for me there, Nick. I really appreciate that because I'm actually going to step back a little bit to tell you why the oil percentage went down to 64% from our guided range of 67% to 68%. A couple reasons, and you, kind of, saw this in fourth quarter of 2025, where we did a lot of stimulations in that quarter in high production areas, so think water-out, frac-impacted, we did the same thing in the second quarter.

So a lot of your high oil content wells, say a well making a couple of 300, 400 barrels a day, is going to be at a slightly higher oil cut than wells that are producing, say, 100. And that's important here in a second when I tell you some of the other things we did. So we watered-out a lot of high oil cut production. That brings down your oil percent for the quarter.

But offsetting that as well, we also worked over several, call it, kind of, 100 80 to 100-barrel-a-day older wells that have a higher gas cut. Not only did we get them back online, but we did the mini-stimulations that increased their production. So that was some of the offset that we had in 2020 -- I'm sorry, in second quarter, why our production remains flat in spite of those additional watered-out volumes.

But that will come at a slightly higher gas ratio than new wells that come on very oil rich. So that's why it was 64%. So what's the read-through for the rest of the year? Again, we feel comfortable with our 67% to 68% oil cut. Now that we're halfway through the year and we're -- I would probably lean a little closer to the 67% of the range is what I would expect to happen through the rest of the year.

Now, you had a couple other questions about the cost that we received. The entire industry got some pretty horrendous costs of gas in the second quarter, very high negative Waha differentials. And if you look at HighPeak compared to most of our peers, I think our negative $1.50 that we turned in for the second quarter is very respectable compared to all of our other public peers, and we'll be at, kind of, that top-tier portion of being negative. I guess that's a bad way to say it, but it is.

And looking forward, so what do things look like now? With Gulf Coast Express expansion happening, or online, Hugh Brinson, you've seen that Waha differential now closer to the minus $1 from what was minus $3 to $5 an Mcf. So what does that mean going forward -- the negative number that goes into your realized price is a lot smaller for the rest of this year.

So we will see much better realizations from our gas going forward. And we've taken some steps to help hedge some of that volatility because one thing the Permian operators are extremely good at is filling pipes, and pipes always late. So we will see tightness in the future in the late '27 into '28. So we need to prepare for that.

But as we sit right now for the next 12 months, gas takeaway is not an issue. We have not had 1 Mcf that we weren't -- wasn't able to put into a pipe, we just weren't getting paid for it. We had to pay for them to take it. Going forward, that will be much better in '26, at least through the first half of '27.

There are no more questions in the queue. That does conclude today's program. Thank you all for joining, and you may now disconnect.

Good day, and thank you for standing by. Welcome to HighPeak Energy's 2026 First Quarter Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Steven Tholen, Chief Financial Officer.

Thank you. Good morning, everyone, and welcome to HighPeak Energy's First Quarter 2026 Earnings Call. Representing HighPeak today are President and CEO, Michael Hollis; Executive Vice President, Ryan Hightower; Executive Vice President, Daniel Silver; Senior Vice President, Chris Mundy; and I'm Steven Tholen, the Chief Financial Officer.

During today's call, we may refer to our May investor presentation and press release, which can be found on HighPeak's website. Today's call participants may make certain forward-looking statements relating to the company's financial condition, results of operations, expectations, plans, goals, assumptions and future performance.

So please refer to the cautionary information regarding forward-looking statements and related risks in the company's SEC filings including the fact that actual results may differ materially from our expectations due to a variety of reasons, many of which are beyond our control. We will also refer to certain non-GAAP financial measures on today's call, so please see the reconciliations in the earnings release and in our May investor presentation.

I will now turn the call over to our President and CEO, Mike Hollis.

Thank you, Steve. Good morning, everyone, and thank you for joining us. We appreciate you taking the time to be with us today. I'm going to spend a few minutes walking through our first quarter results, how we're positioned today and how we're thinking about the rest of 2026.

And I'll tell you right up front, the business is doing exactly what we said it would do. We are executing, we're staying disciplined, and we're building a stronger company quarter-by-quarter. Let's start with the first quarter.

We're off to a very strong start this year, and I'm proud of the way our team has performed across the board. We outperformed expectations on every major operational metric. Production averaged approximately 46,000 BOEs per day, which came in about 7.5% above the midpoint of our guidance range, which includes the effects of Winter Storm Fern. And with quarter-to-date production coming in as strong as or stronger than Q1 production.

Now oil production specifically was up 10% quarter-over-quarter, which is a meaningful step-up and speaks to the quality of both our new wells and our base production. And that's important because it wasn't driven by just one thing. It was a balanced success.

We saw strong performance from the new wells we brought on during the quarter. And at the same time, we continue to optimize and improve our base production. That combination is what drives consistency in the business. It's a direct result of the operational work our team has been focused on over the last several quarters, dialing in execution, tightening processes and getting better in every aspect of the business.

Now let's talk about costs because this is where we really separated ourselves this quarter. Our operations team delivered exceptional cost performance. Lease operating expense per BOE came in more than 17% below our guided range and roughly 22% below the fourth quarter levels. That's a material improvement in a very short period of time.

And just as important, it wasn't just a per unit story. On an absolute dollar basis, our operating costs declined by approximately $7.4 million quarter-over-quarter. So we spent meaningfully less money while producing more barrels. That's exactly what operational efficiency should look like.

Now what drove that? Three primary areas. First, continued optimization of our chemical program, making sure we're using the right treatments in the right places at the right cost.

Second, more efficient use of field gas. Given the current dislocation between Waha pricing and Henry Hub, we're not making money on our gas at the moment. So, we're putting it to work in our own operations wherever we can. That's a practical economic decision and is paying off.

And third, continued electrification across our field operations. That's improving reliability, lowering costs and positioning us well for the long term. Now put it all together, this is a structurally more efficient business than it was just a few quarters ago.

Turning to our development program. We are exactly where we need to be. First quarter drilling and turn-in-line activity represents roughly 1/3 of our planned 2026 program. Capital spending came in right in line with expectations at about 29% of our full year budget. We exited the quarter with 18 wells in progress, and that puts us in a strong position to execute the remainder of the year. Now as a reminder, we've guided to deploying roughly 60% of our capital in the first half of the year, and we remain firmly on track with that plan. Execution is steady, predictable and controlled.

Now let's step back and talk about the bigger picture, capital discipline and efficiency because that's really the core of our strategy. As you know, we made a deliberate shift heading into 2026. We reduced our capital program by roughly 50% compared to last year. And we moved into what we are calling maintenance mode development strategy. And the goal is simple, hold production roughly flat while maximizing free cash flow. And the early results are very encouraging.

One key metric we track is net oil produced per dollar of capital invested. Quarter-over-quarter, that metric improved by more than 60%, moving from about 21,500 barrels per million of capital spent to approximately 35,400 barrels per million. That's a significant step change in efficiency. And again, it's coming from both sides of the business. Strong well performance on new capital and meaningful gains on the base asset.

Now let me spend a minute on that base optimization work because it's an important part of the story. During the quarter, we executed 16 targeted workover projects. These projects increased production from roughly 1,600 barrels of oil per day to about 2,600 barrels of oil per day. That's an add of about 1,000 barrels of oil per day, but importantly, an increase of 63% per well on average for those 16 wells with relatively low capital intensity.

That's exactly the type of work we want to be doing, especially in this current commodity price environment, where every incremental barrel we produce receives elevated spot pricing. These projects leverage infrastructure we already own, target opportunities we understand well, and they generate extremely high-margin barrels. This is what disciplined capital allocation looks like in practice.

Now let's talk about the broader environment and how we're thinking about it here at HighPeak. There's obviously a lot going on in the world right now. We've seen significant volatility in commodity prices, driven largely by geopolitical developments in the Middle East.

Near-term oil prices have moved meaningfully higher. But when we look at the market and more importantly, when we make decisions, we focus on the back end of the curve. And what we've seen there is a much more modest move, roughly a $10 to $12 increase from around $60 a barrel at the beginning of the year to the low $70s per barrel currently.

Now that's constructive, but it's not something that fundamentally changes our strategy. We are not going to chase short-term price signals. We're not going to accelerate activity just because spot pricing has moved. We are going to stay disciplined and develop this asset at the right pace. And that's one that reflects sustainable pricing, capital efficiency and long-term value creation.

Now with that said, this geopolitical situation, if it persists, we do believe there will be increasing pressure on the back end of the curve over time. And if that happens, it creates a meaningful long-term opportunity for HighPeak. More sustained pricing strength means higher incremental free cash flow for years to come and that's where real value gets created.

And importantly, we are positioned to benefit from that environment. We currently have approximately 40% average exposure to spot oil prices based on the midpoint of our production guided range and our current hedge book. Please note that current production is well above this level and giving even more exposure. That gives us meaningful upside to stronger pricing. And at the same time, we've protected the downside.

We've established a hedge floor in the mid-$60 per barrel range that provides a reliable base level of cash flow to fund our development program and service our debt. So, we've got both upside torque and downside protection, and you saw that show up in the first quarter.

Excluding changes in working capital, we generated over $21 million of free cash flow. That's up from a negative $42 million last quarter, and that only reflects less than one month of elevated oil prices. If prices remain higher for longer, that free cash flow number moves up materially as we move through the year and accelerates the time frame needed to strengthen our balance sheet. Again, our priority for that free cash flow is very clear. We are going to strengthen the balance sheet.

One additional item to touch on as we talk about strengthening the balance sheet, we recently put on an at-the-market or ATM program in place. This gives us the ability to issue up to $150 million of common stock.

Now just to be clear, there is no requirement for us to issue a single share under this program. This is about flexibility. It's a tool that allows us to be opportunistic if we see dislocations in the market. And if we do choose to access the ATM, the use of proceeds is very straightforward. It's about reducing debt, increasing liquidity and continuing to strengthen the balance sheet.

Now let me close with our focus for the year. Look, nothing has changed, and that's by design. Our priorities are clear. First, strengthen the balance sheet through sustained free cash flow generation, debt reduction and/or increasing liquidity. Second, preserve high-quality inventory by developing our inventory at a disciplined pace and continuing to optimize both new wells and our base production. Third, improve corporate efficiency, focusing on returns, not volumes and ultimately create long-term equity value and maximize net asset value.

We are allocating capital where it drives the highest returns, and we are building a more durable, more resilient business that is built to thrive across commodity cycles. Now stronger commodity prices are helpful, no question. But disciplined execution is what creates long-term value, and that's exactly what HighPeak is delivering.

With my comments now complete, operator, please open the call up for questions. Or some technical difficult there.

[Operator Instructions] Our first question today comes from Jeff Robertson with Water Tower Research.

Mike, given where you are with production and 60% of estimated '26 capital going or being spent in the first half of the year, can you share some color on production levels progression in the back half of the year? And with the inventory of DUCs that you might exit '26, any early color or preliminary color on 2027?

No, Jeff, great question. And as we laid out in our guidance last quarter, we were planning to spend roughly 60% of that budget in the first half of the year. And as we've kind of shown here in Q1, we were right along that. We did about 33% of the activity for the year and came in a little under 30% of the capital spend for the year. So as you look through 2026, the activity in Q2 will be very similar to what we had in Q1.

From a production standpoint, yes, we're running hot to our guide today and up through quarter-to-date even. And as you look through the latter half of the year, the additional work that we do in the first half, that is the wells that are going to be producing in the second half of the year. So I think what you'll see throughout 2026 is more of a flat production profile that looks very similar to what we've done to date this year.

And again, yes, it's a little hot to our guided range on the top -- above the top end of the guided range. And we hope between base optimization projects that we're working on and the great performance we've had from our new wells, and we're drilling very similar wells throughout the entire year, and that's what's going to be coming online that we will be in the upper portion of that production range that we guided to originally. But for the CapEx spend, the guided range is still very applicable, and I think we've demonstrated that in the first quarter.

If you think about 2027, Mike, would you plan from an activity standpoint, another year where it's weighted toward the first half of the year to, as you said, support -- to get the full benefit of production in the year, the wells are being drilled or as much of it as possible.

I don't know that we were detailed enough to make a brick as I like to call it from West Texas slang. But I think if you look into 2027, I would assume a very, very similar program to what we had in 2026. And there was one question I did not answer, which was how many DUCs we would exit the year at. We will exit with roughly nine to 10 DUCs in 2026 going into '27. So, we would be set up very similarly to do the exact program that we have in '26 and '27.

So again, if you're looking at kind of a CapEx spend in '27, I think what we have this year at the midpoint of about $270 million is where you need to be kind of coalescing for modeling purposes.

On your workover efforts, are you doing anything differently to try to identify wells that need some attention and therefore, justify the expense of going in and spending capital that turns into LOE expense results in the increased production that you highlighted on Slide 7.

No, that's a great question. And Jeff, we've got upwards to getting now close to 400 horizontal wells that are producing. So, as we go through all of our inventory of producing wells, we do have a list of wells that we think would be -- would benefit from this type of intervention more than others. However, if a well is producing fine and everything is good, you probably wouldn't go take that well off production and go do this type of intervention.

Typically, what we are looking for -- and again, we don't want to do too many at one time. We're pretty early in this process. So what we've done to date are wells that we were going to go touch and do work on for some reason or another, and they met the requirements and look like a good candidate. Those are the ones that we went and did. And I think that's how you can kind of assume we will do for this year, maybe even next year.

We need more time to watch the production increase that we have from these interventions and how that plays out over kind of a year, two-year time frame to really understand that before we would want to go and attack a well that's currently producing. And these are well interventions that we were going to have to do something, think of -- I'd like to call it a mini stimulation on the well, think surfactants, acid, more or less cleaning the wellbore out and reducing damage to the formation that happened over time. And we're seeing really good results.

I think as you look forward into two, three years from now, basin-wide, this is going to become one of the new knobs that we can turn in our industry to hopefully be able to extract a higher ultimate recovery from all of the wells in the basin. And you're hearing this kind of thematically across a lot of the other companies' releases that they are kind of experimenting with some of these things, too. So, I think this is something that's here to stay and will increase the total recovery of this area.

Brian or Mike, you had big working capital swings in the first quarter, which impacted free cash flow, as you noted in your remarks. Can you talk about how much of that activity was isolated to one quarter events and how we should think about that as you move forward through 2026?

Yes. Great question, Jeff. If you recall, for the bulk of the fourth quarter, we ran two rigs, and we also had a couple of really large simul-frac jobs. So, we did have a negative working capital swing of about $35 million in Q1. A lot of that is just that capital from the additional rig and a couple of those final frac jobs kind of working its way through the system. All that's behind us now. So, on a go-forward basis, it's more steady state. So, I wouldn't expect those large capital -- working capital swings on a go-forward basis throughout the rest of the year.

And just lastly, Brian or Steve, HighPeak had a big unrealized mark-to-market hedge gain in the first quarter, which obviously impacted reported earnings. Can you talk about how that gain would be treated as you move forward in 2026 in a potentially lower oil price environment than what ended the first quarter?

Yes, absolutely, Jeff. And I think you're referring to a large hedge loss in the first quarter. So, the way to think about it, total derivatives loss in the first quarter on paper was about $55 million. Only $17.4 million of that was actual cash loss. The rest of it, roughly $140 million, was a mark-to-market loss that was done as of March 31.

So the way to think about that, if prices kind of pull back to lower levels throughout the rest of the year, that mark-to-market loss is going to shrink and any potential cash hedge loss would shrink as well as we kind of progress throughout the year.

Our next question is from Nicholas Pope with ROTH Capital.

Curious to dig a little bit more on the workovers. I know you have this slide kind of talking about the benefits of that. It looks like the workover expense for the quarter was actually pretty low relative to kind of what the run rate was in 2025. And so just trying to understand, I guess, what the activity expectation is going forward?

I mean a lot of wells, obviously, that you're looking at to potentially augment with improved productivity with these workovers. But kind of looking at this expense line items, it didn't seem like you had as much work, and it was certainly helpful for the LOE line item for the quarter. Just maybe I'm trying to understand how that splits out. I guess, how much is going into capital expenses, how much is in this workover expense and what that should be going forward?

No. Great question, Nick. So let me step back to last year. And to kind of answer the question as to why overall LOE is down and LOE is kind of two buckets, right? It's your typical and day-to-day everyday LOE and then it's your workover expense. And think workover expense is repairing something on a well and just getting it back to the same kind of state that it was. That's the workover expense.

If you look back in the last year, kind of the latter half to three quarters of 2025, our workover expense started marching up throughout that year because we went and did a lot of those, getting the base production and the wells tip top shape, and we spent, call it, $1-ish or a little bit more per BOE doing that in 2025.

We only have so many wells, and there's always going to be some workover expense, make sure you don't read through that it's going to zero. But I think a reasonable run rate for workover expense, probably somewhere in the $0.75 to $1 range is extremely conservative. Obviously, we are much lower than that in Q1.

Now to answer your other question about the type of interventions, again, we touch a lot of wells all the time. Some are designated as expense work, basically getting the well back to its original state. Some are considered capital workovers where you're adding reserves and changing the value of the well after the fact.

So, to that, I would say, with all the work we did throughout the quarter, some of these were capital workovers and are in our capital spend for the quarter. And I think that screened very well for the amount of work we did on our D&C budget. The read-through there is we're shaving cost where we can on our traditional D&C budget enough that we're going to be able to slide some of these capital workovers in within the budget we currently have.

And on the expense side, again, we wanted to be very conservative with our early guide range. That's why you saw a fairly sizable workover program because we wanted to say, "Hey, we had to continue what we did in '25," this gives us plenty of money in the budget to do it. But I think you're looking at it exactly right. It's not like we just moved a lot of costs from the expense bucket to the capital bucket or you would have seen it show up there. Overall, total cost is coming down.

Got it. That makes sense. One other piece of this, and I don't know if it's connected or not. I mean it sounds like it might have been -- I guess, second half of last year, as you stepped out into -- I think it was further to the east, you had some of the issues with kind of finding the, I guess, where you had water encroachment in some of the newer extensional wells. I guess where does that stand? Are those wells -- I mean, are we just -- has that area just been kind of written off at this point? And are those wells just not really part of the existing production or any plan going forward?

Great question, Nick. A quarter or so ago, we had a slide that showed a red box right exactly where you're talking about. And yes, we encountered some extraneous water production in that area. We kind of talked about the impact it had on our inventory. So the only zone we carried inventory in that little red box was Wolfcamp A. And the quick answer is no, HighPeak is not going to drill another well in that little red box, and that equated to about 18 wells coming out of our inventory.

Now the existing wells that we do have there, we've got three of those wells producing today. We've done some interventions on those wells to reduce the amount of water coming in. So, they are very economic. They're just lower production because you're only producing from, call it, 4,000 feet of actual producing rock out of those wells.

So from an economic standpoint for a new well, no, we would not drill another one. But we will optimize the wells that we do have in that area. But absolutely, that had an effect with production kind of in the second half of 2025. And again, all of that kind of rolls through on a BOE basis for your LOE per BOE cost in the second half of the year as well.

Got it. And I think I've talked to you about this before, but just total, I guess, HighPeak water handling and disposal capacity relative to kind of where what you are seeing in terms of water volumes currently?

Yes. No, Great question. And again, we constantly highlight the infrastructure that HighPeak has put in place over the last five-plus years. And to your question there on the water system, if you look back a couple of years, we were running six rigs, three frac crews and looking to build to 75,000 to 100,000 barrels of oil a day.

Now with that, you need to be able to handle 400,000 barrels of water per day. So we put in very large pipes, very large pumps, several SWDs. So our SWD capacity is a little over 400,000 barrels of capacity today. Pipelines that are 24 inches in diameter, we can move around 400,000 barrels a day. And of course, we recycle almost 95% of what we use on the stimulation side.

But to give you an idea of where we sit today, we're producing roughly -- on a gross basis of oil that we produce, it's pretty close to 45,000 to 47,000 barrel gross of oil. So with that kind of 4:1, we're a little over 200 -- call it, 210,000, 220,000 barrels of water a day being produced across HighPeak. Some of that -- a little bit more than 4x is because you have some flowback from the new frac wells.

But we're about 45% to 50% utilized of capacity that HighPeak has. We take very little third-party water into our system. It's available. So for folks near and around us, we do have plenty of capacity for disposal. But the infrastructure was built for life of field and that stretches across our oil, gas, electrical recycle capability, all of that's built in place.

And I think you're seeing that on our LOE cost numbers. And then same thing on our CapEx numbers as we have built our -- all of our large central tank batteries, you're starting to see the cost per well go way down because today, when we drill a new well, -- all we have to do is add some metering equipment to tie it into an existing battery that's already there. So, both sides of the equation is what we've attacked, and we've been able to bring costs down across the board.

Thank you very much. This does conclude our question-and-answer session. We thank you very much for your participation in today's conference. You may now disconnect.

Good day, and thank you for standing by. Welcome to the HighPeak 2025 Fourth Quarter Earnings Conference Call. [Operator Instructions]. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steven Tholen, CFO. Please go ahead.

Good morning, everyone, and welcome to HighPeak Energy's earnings call. Representing HighPeak today are President and CEO, Michael Hollis; Executive Vice President, Ryan Hightower; Executive Vice President, Daniel Silver; Senior Vice President, Chris Munday, and I am Steven Tholen, the Chief Financial Officer. During today's call, we may refer to our March investor presentation and press release, which can be found on HighPeak's website.

Today's call participants may make certain forward-looking statements relating to the company's financial condition, results of operations, expectations, plans, goals, assumptions and future performance. So please refer to the cautionary information regarding forward-looking statements and related risks in the company's SEC filings, including the fact that actual results may differ materially from our expectations due to a variety of reasons, many of which are beyond our control. We will also refer to certain non-GAAP financial measures on today's call, so please see the reconciliations in the earnings release and in our March investor presentation.

I will now turn the call over to our President and CEO, Mike Hollis.

Thank you, Steve. Good morning, everyone, and thank you for joining us. I thought about kicking off things today by walking through our 2025 results and the execution of our business plan. But that feels like a whole different world today. I'm far more energized by what lies ahead than by revisiting what's already behind us and implemented. For anyone interested in a deeper look at the changes that brought us to this point, our prior quarter's investor presentation and earnings call transcript offer a comprehensive overview.

So with that, let's turn the page and talk about 2026. and how we're positioning the company to move forward with purpose, confidence and a whole lot of momentum. In today's fast-moving geopolitical and commodity landscape, we are approaching 2026 with focus and discipline. And our focus is clear: protect profitability, maximize cash flow and strengthen the foundation of our business, not pursue growth for its own sake. Over the past several quarters, we have taken a hard, honest look at every part of our business, and that work continues today. It has given us a firm handle grounded on financial discipline and operational excellence. This means a plan we can fully and confidently execute within cash flow, sustaining stable production with minimal capital intensity and driving further efficiency gains to expand margins.

Our top financial priority is strengthening the balance sheet. As commodity prices rise, incremental cash flow will be directed first, toward debt reduction and liquidity improvement. To support that objective, we're taking several decisive steps.

First, we rightsized our annual capital budget to ensure our development program stays within cash flow, even in a much softer price environment. Second, we expanded our hedging program to reduce exposure to volatility and secure pricing that supports continued investment and debt reduction. Third, we suspended our dividend, which will increase annual liquidity by an estimated $20 million to $25 million. The reality is, the market wasn't giving us credit for the dividend, and most of the investors we speak with regularly have shared that same perspective. We believe that capital is far better deployed, strengthening the balance sheet and building long-term value for our shareholders. We are positioning the company to thrive not just for the next couple of quarters, but for years to come.

Our 2026 development plan is intentionally conservative and built for durability. It is anchored around 1 drilling rig and roughly 1 completion crew, which positions us to drill about 30 wells and bring 36 to 38 wells online over the course of the year. We designed this pace of development with three clear objectives in mind. First, to ensure we operate fully within cash flow, covering every financial obligation, even if oil prices settle in the mid- to upper 50s. Second, to maximize free cash flow in a stronger commodity environment so we can accelerate debt reduction; and third, to maintain strict cost discipline across the organization. Given the recent strength in oil prices, this is an opportune time for us to lean into debt reduction and continue improving our financial footing.

Our 2026 program also reflects a balanced approach between investing in new wells and optimizing our existing base production. You can see that balance clearly in our capital allocation. Our capital budget is nearly 50% lower than last year, while unit lease operating expenses per BOE are modestly higher as we invest in targeted initiatives to enhance base production. The result is a development program built for capital efficiency, highlighted by an estimated 65% increase in production per dollar invested. And the early results are encouraging. Quarter-to-date, production is averaging more than 46,000 BOE per day, that is roughly 10% above the midpoint of our 2026 guidance range even after accounting for the impacts of winter storm Fern. Based on today's market environment, we believe production in the low to mid 40,000 BOE per day range represents a sustainable baseline for our '26 budget and our plans to reduce absolute debt.

Stepping back, it's important to recognize how the market is valuing companies like ours today. In the current environment, SMID-cap E&Ps are rewarded for durable free cash flow, balance sheet strength and meaningful high-quality inventory depth. What they are not rewarded for is headline production growth. Now there are a few realities shaping our industry right now. Core Permian inventory is becoming increasingly strategic. Tier 1 shale inventory is finite. Future wells will naturally move down the quality curve as inventory tightens and preserving and expanding high-quality inventory is what drives long-term value.

Now with that in mind, our guiding principle is straightforward. Return on capital employed matters more than production growth. Disciplined development today allows us to protect and preserve our Tier 1 inventory for a future time when our financial capacity and a strong sustained commodity environment align. So what are we doing to support this strategy? Our disciplined approach centers on several key priorities. First, we are protecting liquidity and reinforcing our financial cushion by eliminating the dividend and expanding our hedge position. Second, we are moderating drilling activity so the business remains cash flow neutral even if oil prices move down into the mid- to high 50s, while still positioning us to accelerate debt reduction if prices remain stronger. Third, we are investing in optimizing across our base production, generating incremental volumes and cash flow without the capital intensity that comes with drilling new wells. And finally, we've continued to delineate additional high-return inventory across our acreage, expanding the long-term opportunity set for the company.

Taken together, these actions position HighPeak to increase free cash flow, reduce leverage and potentially lower our cost of capital in the future, preserve premium inventory for periods of sustained stronger commodity prices, expand our strategic optionality, whether through drilling, production optimization or potential accretive M&A, increase long-term NAV realization for shareholders and ultimately, implementing these key priorities will strengthen the value of our equity.

Let me take a moment to talk about our capital allocation philosophy because it's the backbone of long-term shareholder value. Our approach, again, is straightforward and disciplined. We will protect the balance sheet. A strong financial position gives us the flexibility to navigate commodity cycles and act when appropriate and opportunities present themselves. We will prioritize high-return investments, every dollar we deploy must earn its place, whether it's drilling a new well, optimizing existing production, reducing debt or pursuing strategic opportunities. We will preserve premium inventory. Tier 1 drilling locations are finite across the industry and disciplined development today safeguards the long-term value of those assets. And finally, we will focus on generating sustainable free cash flow that strengthens the balance sheet, allows us to potentially lower our cost of capital in the future and ultimately supports a higher long-term equity valuation.

When you look at 2026 development plan through that lens, every decision from reducing activity levels, eliminating the dividend, expanding our hedging program, is designed to enhance the durability and long-term value of the business. Simply put, our goal isn't to grow the fastest. Growth should be the outcome of a well-executed financially solid plan. This does not happen overnight. HighPeak's goal is to build a resilient, valuable company that delivers for shareholders over the long haul.

A key part of our capital efficiency strategy in 2026 is the continued optimization of our existing production base. These efforts include targeted well workovers, artificial lift enhancements and other operational improvements designed to increase recoveries from wells already online. Projects like these typically generate strong returns on invested capital and allow us to unlock additional value from assets we already own. It's a practical high-return way to drive incremental volumes and cash flow without the capital intensity of new well drilling.

Let me now provide a quick operational update across our core development areas. At Flat Top, our results in the North Borden area, see Slide 6 of our presentation, continue to demonstrate strong performance in both the Lower Spraberry and Wolfcamp A. These wells are delivering outcomes comparable to what we see in our core Flat Top area, which reinforce the quality and consistency of this acreage. The Northern-most rove wells in our North Borden area is the only part of the field that will require minimal incremental infrastructure, and we expect that work to take place in tranches beginning in late 2026 and into 2027. Now in the core of the Flat Top area, we will continue developing Lower Spraberry and Wolfcamp A locations using the infrastructure already in place, driving corporate efficiency higher.

Now the Northeast Flat Top area, highlighted by the small red box, also on Slide 6 of our March investor deck, shows where 6 wells experienced anomalous water inflows. We completed remedial work on several of those wells and are seeing encouraging early results. Because of the presence of the water flows, our 2026 plan includes no new drilling in the Northeast Flat Top area. Instead, we are focused on maximizing value through the remediation and optimization of the existing producing wells. Importantly, the impact to our long-term inventory is minimal. Even if we chose not to drill any additional wells in this area, it would affect only 18 Wolfcamp A locations that we carry in inventory, as we do not carry any additional zones in inventory for this area.

We're also seeing encouraging progress in delineating the Middle Spraberry across both HighPeak and our offset operators. There are now 9 successful producers, and we expect that momentum to continue with roughly 6 additional delineation wells planned between HighPeak and offset operators in the first half of 2026. Our long-term objective for the Middle Spraberry is clear: convert more than 200 Middle Spraberry locations at Flat Top into fully delineated sub-$50 breakeven inventory.

At Signal Peak, we will continue developing our core area in the Wolfcamp A and Lower Spraberry, both of which continue to deliver strong consistent results. See Slide 7 of the presentation. Beyond those core zones, Signal Peak holds substantial upside. We've demonstrated Wolfcamp B performance across the field in two different landing zones with results, that closely track one another. The resource is clearly present across the acreage, and it's not going anywhere. We haven't drilled a Wolfcamp D well in roughly 3 years. However, during that time, the industry has made meaningful strides in optimizing deeper wells. We will continue to evaluate the development of the Wolfcamp D to determine when the economics fully support those wells competing for capital.

We also see additional long-term potential in the Middle Spraberry, Wolfcamp B and Wolfcamp C formations, which add further depth and optionality to our inventory overtime. Our drilling results and technical work continue to reinforce what we believe is one of the deepest premium inventories among SMID-cap operators. Today, HighPeak has more than 2,600 total drilling locations across the stack, Spraberry and Wolfcamp formations. At our current cadence of drilling, that includes more than 30 years of high-return inventory in the Wolfcamp A, Lower Spraberry and Middle Spraberry alone, over 100 total rig years of inventory across the full stack. This level of inventory depth meaningfully differentiates HighPeak from most of our peers.

One point that we believe the market continues to under-appreciate is the growing scarcity of Tier 1 shale inventory across the Permian Basin. The industry has spent the last decade or so developing its best rock. And the reality is, that premium locations are not infinite. As that inventory tightens across the basin, the strategic value of companies that still hold significant high-return drilling inventory will only increase. Our responsibility is to develop those locations with discipline, maximizing the long-term value for our shareholders. When we think about the value of this company, several key components standout.

First, our existing production base, a highly visible, reliable source of cash flow that underpins the business today and at current valuation levels, HighPeak is trading close to the PV-10 proved developed value. But the real long-term value lies with the untapped inventory. That inventory includes approximately 200-proved undeveloped locations in our core zones, more than 400 additional premium Wolfcamp A and Lower Spraberry locations, over 200 Middle Spraberry locations progressing toward the sub-$50 breakeven delineation and further upside potential in the Wolfcamp B, C and D zones. All of this is complemented by our continued focus on optimizing existing production, which enhances returns and strengthens the value of our asset base over time.

In closing, our focus in 2026 is on returns and resilience, not headline growth. We will apply strict capital and operational discipline to protect the bottom line. We will prioritize free cash flow generation. Any incremental free cash flow will first be directed toward reducing leverage and strengthening the balance sheet, positioning us for a lower cost of capital over time. We will remain precise and selective in how we deploy capital, concentrating on high-return inventory, base production optimization and disciplined delineation of additional premium locations. At our current development pace, our premium inventory alone represents decades of high-return drilling, even before accounting for the additional upside we continue to delineate across our acreage, and as Tier 1 shale inventory becomes increasingly scarce across the industry, the strategic value of remaining core drilling locations will only continue to rise. Ultimately, we are building a company designed to generate strong returns across commodity cycles, improve long-term NAV realization and strengthen our equity value, and it all starts with reinforcing our financial foundation.

Before I close, I want to recognize our employees. The progress we've discussed today is a direct result of their hard work, grit and professionalism. Day after day, they show up, tackle challenges and keep this company moving forward. Their commitment, both in the field and in the office, is the backbone of everything we're building. Again, I'm deeply grateful for what they do. With my comments now complete, operator, please open the call up for questions.

[Operator Instructions] Our first question comes from Noah Hungness with Bank of America.

I just wanted to start off here, Mike, if you could add any more color on some of your cost reduction and production optimization efforts that you've implemented over the last 6 months?

You bet. Noah. Thank you for the question. Obviously, it's what we do every day. So it's not like this was an initiative started a quarter ago. But to kind of walk through some of the cost reductions that we've seen both on the capital side and on the expense side. So we've done a lot of optimization on how we are drilling and completing these wells. Obviously, we get a little faster everyday drilling, a little faster completions. We've also optimized the completion chemical program, the perforation schemes, how we are landing these wells, as well as kind of structural changes to how we complete these wells like utilizing simul-frac today versus what we were doing in the first part of 2025. So there's a lot on the capital side being worked.

On the expense side, we're doing a lot of production -- base production optimization. So think lowering pumps, changing the type of artificial lift that we utilize, utilizing some chemical opportunities that we have for -- you hate to say restimulation, but being able to pump some things downhole that can increase production and your return from the wells as well as remove some of what they call, skin damage, that allows more of the fluid to flow into the well. So we have a program ongoing doing that. And overall, we've had lower commodity prices over the last couple of quarters, which, again, not that we don't do this every day, but we constantly rebid, reevaluate, look structurally at what we're doing with our infrastructure, how we treat the wells chemically and go out for bids very routinely. So we're seeing some cost savings on that front, not just how we're drilling the wells, but just the unit pieces that go into it and staying on top of that and making sure we're getting the best price for high fee.

That's helpful color. And then for my second question, could you maybe help us think about the split of TILs across your development area for '26? So what is the split for Lower Spraberry versus Wolfcamp A versus Middle Spraberry look like? And then also the different area -- development areas that you've helped to highlight this quarter. So North Borden versus your core Flat Top versus your core Signal Peak. If you could just give us any color there?

You bet. So the good news is what we are drilling for the foreseeable future will look almost identical to what we've done for the last 1.5 years, right? It's about 70% of the capital will be spent in Flat Top, the northern block. And again, that happens to be about the acreage split between the blocks between Flat Top and Signal Peak. So 30%, give or take, of the capital in Signal Peak, think 90-plus percent of that capital will be Wolfcamp A, Lower Spraberry co-development. The other 5% to 8% of capital will be Middle Spraberry and some of the Middle Spraberry will be codeveloped with A and Lower Spraberry as well, but it will be in the Middle Spraberry, not in just the A and Lower Spraberry.

Now the split between -- again, in the Northern Borden versus Flat Top core, almost 50-50 for the Flat Top area, that 70% will be almost 50-50 between North Borden and Flat Top central, I guess you'd call it. One point to make, as I said in the prepared remarks, we will not drill any wells like we did in 2025, in that little red box that's on Slide 6 of our presentation, there will be no drilling in that area in 2026.

And you're tilling a few more wells than you're drilling this year. Can we assume that the percentages you talked about on the drills is going to be pretty similar to the TILs this year?

Absolutely, because it was basically the same percentage of drills last year. So those TILs go into 2026. And you make a great point, we are completing, call it -- roughly 7 more wells than we're drilling this year. We brought into 2026 something close to 20-plus wells called operational DUCs. And then if you kind of math-out where we'll be at the end of the year, we should carry out into 2027, roughly 14 to 15 DUCs, again, setting us up very nicely in 2027 to be able to effectuate exactly the same plan that we have in 2026, again, for further strong reduction in absolute debt.

Our next question comes from Jeff Robertson with Water Tower Research.

Mike, on Slide 10 and 11, you show the production profile and CapEx and the capital intensity. Can you talk a little bit about where the company's corporate decline curve was at the beginning of 2026 and where you think it might be at the end of '26 and how that plays into the notion of increasing capital efficiency over time and de-levering the balance sheet in '26 and '27?

You bet, Jeff, and thank you for that question. I may step back a couple of years prior to that instead of starting just on '25 and '26 because it's really important. Again, building a company from absolute greenfield all through the drill bit and building up to close to 50,000 BOEs a day, we had to drill a lot of new wells with several rigs. So if you go all the way back to kind of the exit of 2024, corporate decline rate was, call it, mid-40%. So again, a pretty steep because you have a lot of new wells.

At the end of 2025, we were down to about 38% corporate decline because if you recall, we had slowed down at the kind of midpoint of '24 and into '25, we slowed way down. And then even midpoint of '25, we went down to 1 rig. So as you look forward into 2026, of course, you came into the year right at 38%, at our current cadence and what we assume we will continue to do for at least the foreseeable future, you can expect about 2% decline in corporate decline rate. So the 38% we came into the year with, we should exit the year into 2027 at 36% or so. And to your point, as your corporate decline goes down, the amount of CapEx needed for maintenance CapEx to hold your production flat also comes down by that kind of relation.

Does HighPeak's amortization on the term loan starts again in the third quarter. I think it's about $120 million a year. So if you were to be, let's just say, over the next 4 quarters, beginning late this year, $120 million a year is roughly $1 a share, with -- based on 125 million shares outstanding. Are you trying to position the company where you could accelerate the amortization of the term loan?

Absolutely. So Jeff, the great thing is the amortization is a set rate, right? It's $30 million a quarter. The great thing about where we sit with the term loan is, that we have the ability to pay down any amount on the term loan at par. So to your point, we can take any additional free cash flow that we're generating with this capitally efficient program in 2026 in the backdrop of commodity prices being higher today. And I think it's literally me, right? We're geared very heavily to oil price. And as you mentioned, where else could you find in the public world where you have such a high gearing to the debt level that we have.

To your point, in this environment, we will be able to pay down debt at a much accelerated rate. And for every $125 million we pay down, as you absolutely said correct, it should be roughly $1 per share. And in today's price environment, that's close to 20% increase in market value. By doing exactly the same thing in the next year, you should have similar results except you pay down more debt and there's kind of a snowball effect because we do have a high cost of capital, call it, 10-plus percent interest. And it would be reasonable to assume that later down the road, once we get the financial house in order, by staying very disciplined, we will have opportunities to hopefully lower that cost of capital going into the future.

And then lastly, on operations, Mike, is there anything structurally with respect to, say, water handling or anything else in the field that you're working on in 2026 that might offset some of the production optimization spending that you've outlined?

So there's -- the good thing is anything we do to optimize production increases the revenue that we have in, lowers all of the per BOE metrics that we have. Now on the water system, the great thing is the water system is there. It's paid for. It's been there for a while. We just utilize what we already have, which makes both on the capital side for recycled water for stimulations as well as disposal of any of the produced fluids very, very efficient. And when you look at the capital reduction or what we like to call the intensity of capital needed to produce a certain level of volumes of hydrocarbons continue to go down over the last couple of years.

If you go all the way back to 2023, HighPeak spent $1 billion. 2025 it was, call it, $500 million. 2026, half that number. Now I don't want anyone to think 2027 is going to be half of 2026. It will be slightly lower because we do have some infrastructure that we have planned and in the budget in 2026 that's not going to happen in 2027. So think $15 million, $20 million cheaper total CapEx in '27 to effectuate the exact plan that we have for '26. So the company will continue to get more efficient, and as you laid out earlier with the corporate decline dropping each year, that also helps accelerate that corporate efficiency.

[Operator Instructions] We have a follow-up question from Jeff Robertson with Water Tower Research.

Ryan, one question that came up on the November conference call was the distribution of shares by the HighPeak entities. Is there any update you can provide on the planned distributions in 2026 and 2027?

Yes. Jeff, good question. When we rolled into the 2026 calendar year and oil prices were kind of in the mid- to upper 50s at the time, we got with the majority investors in the partnership and ended up extending for an additional year, which will allow us to get into hopefully a healthier market environment for fund distribution timing. We do have the flexibility to do it throughout the calendar year or we could kind of go all the way through 2026 and start the distribution in early 2027.

[Operator Instructions] And I'm not showing any further questions at this time. So as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.

Good day, and thank you for standing by. Welcome to the HighPeak Energy Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steven Tholen, Chief Financial Officer. Please go ahead.

Good morning, everyone, and welcome to HighPeak Energy's Third Quarter 2025 Earnings Call. Representing HighPeak today are President and CEO, Michael Hollis; Executive Vice President, Ryan Hightower; Executive Vice President, Daniel Silver; Senior Vice President, Chris Munday; and I am Steven Tholen, the Chief Financial Officer.

During today's call, we may refer to our November investor presentation and our third quarter earnings release, which can be found on HighPeak's website. Today's call participants may make certain forward-looking statements relating to the company's financial condition, results of operations, expectations, plans, goals, assumptions and future performance. So please refer to the cautionary information regarding forward-looking statements and related risks in the company's SEC filings, including the fact that actual results may differ materially from our expectations due to a variety of reasons, many of which are beyond our control. We will also refer to certain non-GAAP financial measures on today's call, so please see the reconciliations in the earnings release and in our November investor presentation.

I will now turn the call over to our President and CEO, Mike Hollis.

Thank you, Steve. Good morning, everyone, and thank you for joining us today for HighPeak's third quarter conference call. I'm going to start today's call with a brief overview of our third quarter results and a quick update of our current development activity, after which and more importantly, I want to use this opportunity to give you a glimpse into our company road map looking forward. With that said, before we start talking about HighPeak's future, I'm proud to report that we delivered a solid third quarter results, which tracked our internal expectations.

Production levels were consistent with the second quarter despite our reduced level of development activity. We only ran 1 rig through the entirety of the third quarter, drilled 6 wells and turned in line only 9 wells. That's roughly 2/3 of our tills that we had in Q1 and Q2. Our CapEx was down 30% from Q2 as a result of our deliberate reduction of development activity and was spot on with our internal estimates. We held our LOE per BOE consistent with our first half 2025 levels. And as we discussed on last quarter's call, we successfully amended and extended our term loan, pushed out debt maturities until 2028 and materially increased our liquidity.

Now turning to current operations. Due to continued weakness in commodity prices and overall market volatility, we delayed picking our second rig back up until mid-October, a roughly 1.5-month delay from our original plan. Now we plan to run both rigs throughout the fourth quarter before making a determination as to what the appropriate level of activity should be for 2026, which will be heavily dependent on oil prices, D&C cost and overall market conditions. And we recently finished our second successful simul-frac completion on a 6-well pad with 15,000-foot average lateral lengths. This operation went smoothly with HighPeak recognizing cost savings per well of over $400,000 compared with our traditional zipper frac technique, and we were even able to increase some efficiencies compared to our first simul-frac job, more lateral footage completed per day.

We utilize continuous pumping operations and averaged over 4,700 feet of completed lateral footage per day. The operations team keeps delivering. We are very encouraged by the results that we've achieved to date utilizing the simul-frac ops, and we plan to tailor our 2026 development program to incorporate this completion technique more. Suffice it to say, HighPeak's operations and well performance are a well-oiled machine. That said, we will always find new innovative optimization opportunities. As we have always done, our operations department will maintain a laser focus on low-cost operations.

Now let's turn our focus to the future. I know you've all have heard from me and the other HighPeak senior team members on these calls in the past, but this is the first time I've had a chance to speak with you as the CEO, and I will very clearly lay out our vision for HighPeak moving forward. With our new Chairman of the Board and the entire team pulling in the same direction, we are moving forward with purpose and a sense of urgency. We're getting back to the basics, running a tight, disciplined operation built on focus, efficiency and sound business sense. Our assets are strong, our people are capable and our commitment to managing cash flow and capital is steadfast.

Now I won't sugarcoat it. Our debt is high, and the market has told us exactly what it thinks about that. For a while, we drifted without a clear long-term plan, and it showed. That changes now. We're rolling up our sleeves to strengthen the balance sheet and rebuild the trust the only way that works through steady, consistent results. We know talk doesn't cut it in this business, results do, and we will deliver. Now the first step in figuring out where you're heading is being very honest about where you stand and how you got there. Now we've done a lot of things right, and I want to tip my hat to the team for the hard work and follow through, but we also have some issues we need to face head on, no sense pretending otherwise. At the end of the day, the management, the Board and every one of us at HighPeak own the results we have delivered to date, the good, the bad and everything in between. It's ours to fix and to build upon.

So let's reflect on what we have done well over the past 5 years and also what needs improvement. You can refer to Page 6 of our investor presentation. So what have we done right over the past 5 years? Well, we've assembled a high-quality asset base in one of the most desired basins in the world composed of 2 highly contiguous acreage positions with oil-rich inventory, allowing for cost-effective extended lateral development and strong IRRs. We've done a great job operationally, maximizing efficiencies and developing a lean cost structure to drive enhanced economics. I would put our operational efficiency against any public company in the E&P space. We've also delineated a long runway of highly economic multi-bench oily inventory that is primed for full-scale capital-efficient development. These are all great attributes, and I want to commend the HighPeak employees, management and even our investors for believing in the team in this area.

But now let's look at some areas where we have misstepped and now need to improve. We are a controlled company, which has led to poor governance quality scores and high risk potential from the likes of ISS, Glass Lewis and some notable rating agencies. At times, we had a growth at all cost mentality even in the face of commodity price weakness. This ends now. This last view of cash management led us to overusing leverage and resulted in high cost of capital.

Finally, what we've heard loud and clear from our investors is that our short-term focus on the business has eroded market confidence. We own these weaknesses, plain and simple, and we have a plan to set them right. So what does that look like? Well, some of these fixes we can tackle right now, and we've already started. Others are going to take a little time and patience. This isn't something that happens overnight. We see it like climbing a set of stairs, one solid step leads to the next. The first one is already behind us. We have reset our governance and put the right structure in place. That gives us the footing to run this company the correct way with discipline, accountability and good old-fashioned business sense. We're not trying to reinvent the wheel here. Our focus is simple: Generate steady, sustainable cash flow; pay down our debt the smart way and keep our financial house in order. Lucky for us, we've got a solid asset base that gives us the horsepower to get it done.

And as we follow through step by step, I believe we will earn back the market's confidence the right way by doing exactly what we said we would do and sticking to our long-term plan.

Now let's talk a little bit more about each of these areas needing improvement. If you take a step back and look at any public company, there are 3 levels of control. First, you have the Board of Directors providing direction and oversight. Second, you have management team directing the day-to-day operations. And finally, you have the shareholders who bring accountability and real-time feedback to the organization. Previously, all 3 of these control groups were effectively consolidated or led by a single individual. Again, this has led to poor governance scores by proxy advisory firms and credit agencies. However, over the last few months, we have made key changes in each of these areas.

First, as most of you know, we've had a change at the top. Effective immediately, I have accepted the role of permanent President and CEO of HighPeak Energy. And I've got to say I'm proud of how this team has stepped up. Several folks in senior management have really grabbed the reins and leaned into the vision. It's been all hands on deck, and I couldn't ask for a stronger group to work alongside. We have made several changes to the senior management levels, and I want to congratulate several of these employees on their new roles and titles.

Second, we are pleased to welcome our new independent Chairman, Jason Edgeworth. It's been a genuine pleasure working alongside him. Jason brings strong leadership, clear perspective and a shared passion for the company's long-term success. I am confident with full alignment between the Board, management and shareholders; we will drive HighPeak forward with focus and alignment to shareholder value.

Third, unlike in recent past, we now have a fully independent Board committees in place consistent with best practices for noncontrolled companies. These include the Compensation Committee, the Nominating and Governance Committee and of course, the Audit Committee. This structure strengthens oversight and reinforces our commitment to transparency, accountability and integrity in everything we do. I want to emphasize again that both management and the board are completely aligned in our priorities. We share one clear goal, driving long-term success and sustainable value creation for HighPeak and its shareholders.

Now regarding the shareholders, there are some major changes planned. As you may know, HighPeak, the public company, is majority owned by 2 private equity partnerships, HighPeak Energy Partners I and HighPeak Energy Partners II. These 2 partnerships own and control over 75 million of our 125 million outstanding common shares. As was recently disclosed, these partnerships plan to begin methodically distributing shares over the next 2 years, with HighPeak II being distributed first in 2026 and HighPeak I in 2027. It is important to note, most of the limited partners have a long-term investment mindset. While we anticipate most of these shares will continue to be held by the limited partners, it will potentially provide an opportunity for some larger institutions and investors to be able to invest in HighPeak stock, which should assist our low float issue.

With all these changes, we plan to effectively split the 3 forms of control; management, the Board and the shareholder base into independent but fully aligned groups. Now continuing on the topic of accountability. Management will operate under clearly defined measurable goals, and our compensation will be directly tied to our performance against those objectives. We are in the process of finalizing our 2026 road map, which will outline these performance metrics and align our incentives with long-term value creation. You can expect this framework to be in place and active in early 2026.

Now let's talk a little more about sound business principles. As you know, commodity prices have a very direct effect on profitability. So despite improvements in operational efficiencies and cost structure, commodity prices are the single biggest factor in changes to our cash flow. So how are we going to navigate this volatile commodity market? In our slide deck, on Page 9, we have laid out a very simple yet common sense approach. And I want to point out that the oil price laid out on the slide are long-term pricing. Again, we are taking a long-term approach to capital discipline. All that to say, we will not have a knee-jerk reaction to very short-term swings in pricing. We will take a methodical and disciplined approach.

Let's start with the bear case scenario, which we are currently close to right now. In the event long-term oil prices are below $60 a barrel, our focus will be exclusively on operating within cash flow. This means on the CapEx front that we will be operating less than a 2-rig development program. This level of activity would lead to a moderate decline in overall production volumes, but this goes without saying there's absolutely no need to focus on growing production in an oversupplied or weak market. Again, we have a long-term view on value creation, and there is no reason to overdevelop or accelerate in drilling our high-value inventory in a low commodity price environment. Now as far as liquidity is concerned, in the face of sustained low oil price environment, anything is on the table. We will preserve liquidity.

Now moving to the base case scenario of long-term oil prices in the $60 to $70 a barrel range. Our focus will be on free cash flow generation and prudently paying down our debt. On the CapEx front, this would most likely equate to a 2-rig development program resulting in maintaining current production volumes. Now on the liquidity front, we would maintain our current dividend and use the additional free cash flow for a modest debt paydown strategy.

In a bull case scenario of $70-plus oil, our focus will still be on increased free cash flow generation and accelerated debt paydown. On the CapEx program, we would likely be 2 rigs or just slightly more, leading to moderate production growth. And on the liquidity front, it would allow us to accelerate debt paydown. But let me be clear, we would have to be in this bull case scenario for quite some time and reach a reasonable leverage ratio before we would ever consider additional shareholder value initiatives. We will get our financial house in order first. As I said earlier, these are basic business principles, but I wanted to lay them out in a very clear and concise manner. This will be the framework for our high-level road map for 2026 and beyond.

Now we have listened to our constituents, shareholders, creditors, rating agencies and peers in the industry. And we have compiled some of these comments that we've heard and hear often, and we've laid them out on Slide 10 of our company presentation. Now we're fully aware of the challenges in front of us from geographical positioning of our assets, to cost of capital, to questions surrounding the company's potential strategic options. Now the key question is how to begin to rebuild and sustain market confidence. We're not ignoring the realities of our situation. Instead, we're facing them head on. And I want to take a moment to address several of the most common concerns we often hear. I want to do that openly and directly.

Number one, Eastern Midland Basin is unproven. HighPeak has drilled over 350 horizontal wells and have produced over 90 million BOEs from those wells, and third-party organizations are now recognizing well performance, cost differences, i.e., profitability and inventory quality and scale. HighPeak's and offset operators' track records over the last several years have dispelled this comment.

Number two, you guys have a growth at all cost mentality. As I previously said, there were many times in our history that may have been the focus. But I think HighPeak has been consistent over the last couple of years in trying to maintain our current level of production and show the market that we are going to operate within cash flow.

Number three, HighPeak is overlevered. That is a true statement. We are overlevered for the size of company we are today, and this is one of our primary focuses moving forward. We are working to address this issue in a thoughtful and methodical way. Hopefully, you've gotten that sense through this call that operating within cash flow and paying down debt are absolutely top of our list and major areas of focus.

Number four, you're starting to have GOR issues as your percentage gas production is increasing. We have seen increases in gas and NGL production. However, this is primarily due to historical takeaway issues that have been solved. As our gas midstream partners increase their takeaway capacity, and we have connected all of our central tank batteries to our gathering system and our gatherers have lowered field-wide pressures, has allowed more oil and gas -- or more gas and liquids to flow to sales. I would also like to remind everybody that our percent oil production will fluctuate from quarter-to-quarter at times due to where our completion operations are taking place and the timing associated with turning online new pads. But at any reasonable cadence, our oil percentage should trend closer to 70%.

Number five, HighPeak has no float in their stock. Now I hear this one a lot. Typically, I own it in my personal account, but I can't own it in my fund. Now this has been a serious issue that we have faced for some time now, and we have done some things in the past that may have exacerbated the problem. However, we are working to fix this issue as it is extremely important moving forward. I've already discussed the methodical distribution plan for the 2 HighPeak partnerships. We are going to be measured and deliberate in how we solve this problem. It cannot be fixed overnight.

Number six, HighPeak has been for sale for years. HighPeak is a publicly traded company. And as such, we are always open to evaluating value-enhancing opportunities. That said, again, I want to be very clear, the Board and management are fully aligned and unwavering in our commitment to long-term strategy of operating within cash flow, exercising disciplined decision-making and maintaining measured controlled execution. Our focus remains on building sustainable value for our shareholders over the long term.

Final one, HighPeak is a controlled company, and there is no oversight. As I've highlighted earlier in the call today, we're very encouraged by the progress we've made over the last few months. We have established fully independent Board committees, appointed an independent chairman and put in place a clear plan starting in 2026 to transition away from being a controlled company. These steps strengthen oversight, enhance accountability and position HighPeak for long-term sustainable value creation.

Now in conclusion, our company is in the midst of a meaningful transformation, one centered on stronger governance and accountability and a long-term focus on creating value for our shareholders. We're allocating capital with discipline, managing costs with precision and maintaining relentless focus on efficiency. Our asset base gives us the flexibility to operate within cash flow, generate sustainable free cash, reduce debt and continue building value the right way. We are not in the business of chasing production for short-term gains. We are here to build a durable, well-run enterprise, one that applies sound business principles and puts every dollar to work where it drives the greatest return. Through disciplined execution, clear direction and a unified team; we're positioning this company to perform in any environment. We are proud of what we have built, confident in where we are headed and focused on delivering lasting value for our shareholders, employees and partners. Thank you.

And with my comments now complete, we'll open the call up for questions.

[Operator Instructions] Our first question comes from the line of Jeff Robertson with Water Tower Research.

Mike, can you talk in the context of your leverage plan, how you think that unfolds over 2026 under, say, your $65 scenario and how much flexibility that might give you or give the company to address the term loan?

Absolutely, Jeff. No, great question. Obviously, the free cash flow generation is going to be dictated mostly by the oil price that we garner from the market. HighPeak is doing all the things we can control from cost management to capital deployment. But again, as you've pointed out, in that kind of base case scenario, we can generate significant free cash flow. Our term loan debt that we have today, we can pay down debt at par with no penalty. So as we generate free cash flow in that scenario, look for us to do that again, which will reduce absolute debt as well as reduce our leverage ratio.

Now if you look further into the future, again, could be a year, could be more as we continue to delever the company and as we continue to progress and our production base ages, what you'll see is our corporate decline rate will come down, call it, 1.5% to 2% a year. Today, we sit kind of mid- to high 30% decline rate. That changes your credit profile and again, opens you up to potentially more normal way financing into the future. But again, Jeff, today and into the very near future, our goal is capital management and paying down debt.

How do hedges fit into those goals, Mike? I know you've got, I think, an average swap price on some of your production for '26 at about $63 a barrel.

Yes. And could you repeat that? Our speaker was cutting out a little bit there, Jeff, I'm sorry.

Sure. Just basically, how do you think about hedging in the context of managing cash flows in a $60, $65 per barrel price environment to work towards your leverage goals? I know you have some, I think, minimum requirements, but I'm just curious how you think about that as you go forward.

You bet. No, great question, Jeff. We want to be very -- what you will see from HighPeak is a much more systematic and methodical hedging program. Obviously, we do have some minimum requirements and we will continue to have to hedge a little bit into the future each quarter, but those are small pieces. Now we'll always be opportunistic if that opportunity were to come along. You'll notice that we layered on some gas hedges a couple of quarters back that were fantastic prices in the $4.43 range. We've also hedged some basis differentials. But I think what you'll see in the -- as prices continue to stay in this lower range, it will be very methodical and small slices that we will layer on. Again, you tend to see less when prices are low. And then when prices move up a little bit, I think you're going to see us layer on a little bit more. We want to protect our capital budget. We want to protect the dividend as it sits today, again, in this kind of base case $60 to $70 range.

But I think looking forward to think somewhere in the 55% to 65% hedged at these kind of prices are probably what you would see HighPeak move towards. Obviously, if we had a spike in commodity prices, you may see us push that above that hedge percentage going forward.

Our next question comes from the line of Noah Hungness with Bank of America.

Our next question comes from the line of Nicholas Pope with ROTH Capital.

Curious, as you kind of look at this plan and you look at the flex that you have with different -- at different oil kind of environments, you brought that second rig back. Curious if there's changes in how you're thinking about where kind of within the acreage footprint you're going to be drilling or what you're going to be drilling? And if the focus changes in those different scenarios, maybe between Flat Top, Single Peak or even in the different formations, like how much flexibility is there? And how much does the pricing affect what and where you're drilling these different scenarios?

No. Great question, Nick. The good thing is we're drilling Wolfcamp A, Lower Spraberry codeveloped. I think 5% to 10% that we will drill in the Middle Spraberry zone, whether we run 1.5 rigs or 2 rigs, that split will not change in what we drill. Now where we drill, if you look at the split of the capital deployment that we've had in the recent kind of year or so, it's about 70% up at Flat Top and 25%, 30% in Signal Peak. That also fits with what our inventory in each one of those zones are between Flat Top and Signal Peak. Returns are very similar between the 2 areas in all these zones. So again, we approach it as a co-development program and the split between Flat Top and Signal Peak is more based on the split of inventory, which is about 70-30.

Got it. That makes sense. As you kind of look at the base, I mean, the lease operating expenses have been, I mean, almost flat the last 6 quarters. I'm curious if there's opportunities for going back into wells, seeing an uptick in workovers, field maintenance type work as you're maybe shifting a little bit away from a more active drilling program, the field optimization kind of you talked about 350 wells that have been drilled in this Eastern extension of the Midland. Curious how that might change with kind of maybe a slower development program.

No. Great question, and we're ahead of you on that. So if you look at the last kind of 2 quarters, you'll see some expense workover spend that was a little higher than what it had been kind of Q1 of this year or Q4 of the previous year. So where we were normally running kind of $0.80 per BOE, somewhere in that range, we've been $1 or a little bit more in the last 2 quarters. So as we pulled back on that capital program, now there are some capital workovers that we have done as well, but think very, very high rate of return work. So we've gone into some of our wells and done some expense workovers and have seen some really good results from that. So again, while we've pulled back activity on the drilling complete side, we have gone back and optimized our production base. And we'll continue at a little bit lower pace going forward because we hit all of the large items that we had on our list in the last quarter or so. But there will be additional work every quarter that we will continue to focus on to keep that efficiency high.

And those expense workovers that you kind of highlighted, I know you break out somewhat, is that production optimization? Or is that kind of remediation type work? Is the -- what's the kind of mix of...

So the answer there, Nick, will be yes and yes. So usually, what you have is you'll have a well that may be struggling with a pump that's 2 years old. And again, the fact that we are able to get run lives of 2-plus years out of these pumps is almost unheard of in the Permian Basin. But for instance, when that will happen, we -- obviously, you would have an expense cost to go replace that or change the artificial lift. We'll take the opportunity at that point to go in, do a little bit of cleanout on the well, maybe a little bit of what I call small pump job, nothing like a frac job, a little asset and things like that to be able to optimize that production.

And then we typically lower where we pump the well from. So we will move down in the hole so that we can pull down the pressure we're pumping these wells at to a lower point, i.e., giving more drive from the reservoir into our well, and we're seeing great results from that. Some of these wells we're actually pumping deep into the curve, lowering our point that we're drawing that fluid from by as much as 250 to 300 feet. And with the reservoir we have with a little bit higher permeability, we're seeing great results from that. So you don't see it day 1. It takes time, but you're going to start seeing better and better recoveries from these wells.

[Operator Instructions] Our next question comes from the line of Jeff Robertson with Water Tower Research.

Just a follow-up, you said you're going to keep the second rig at least through the end of December. Can you just talk about how the carryover inventory will impact production at least in the first half or maybe first 3 quarters of 2026?

Yes, sir, absolutely. So we picked up the second rig October 15. Just kind of a rule of thumb for where we're at in the basin, we typically drill 2 wells a month per rig. So that will get us an additional 5 to 6 wells that we've drilled a little more than 2 per month now. So call it, 5 to 6 wells that we will have drilled in the fourth quarter in addition to the 1 rig program that will carry into 2026. Again, we're not talking about 2026 activity per se. Obviously, we laid out in the prepared remarks, a kind of high-level overview bear, base and bull case that will flow through our decisions on how we guide for 2026. Again, it's a little early. We'd like to see where oil prices kind of level out over the next month or so.

But to your point, bringing over those 5 wells because, again, anything you drill in the fourth quarter typically doesn't come online until the first quarter or early second quarter. So as we look into 2026, we will have somewhere in the range of 16 to 18 DUCs are wells in some form of completion that roll into 2026, again, supporting that kind of Q1 and Q2 production forecast.

Our next question comes from the line of Noah Hungness with Bank of America.

For my first question here, you guys yesterday filed an S-3. Could you maybe just talk about what the reasoning behind that was and if you had any plans with that moving forward?

Yes. Noah, this is Ryan. Great question. The sole reason for filing the S-3, our previous shelf registration statement that we had on file went stale and expired. So all we were doing was refreshing it. We have absolutely no intention of issuing any new shares anytime soon.

Great. And then given that we're kind of on the border here of your base and bear case. How long do you need to see prices kind of either sub-60 to drop activity or between that $60 to $70 to move into that base case? Is it a month? Is it a few weeks? Just how are you thinking about that?

So a couple of ways we're thinking about it, Noah. And obviously, there's -- it's a multivariate problem. Obviously, you can have a couple of days. You can even have a month. When you look at this year, we've probably averaged, I don't know, $63, $64 for the whole year. That would put you pretty squarely in between the bear and base case. Again, these aren't hard lines. There's going to be some squish between them. But if I look into 2026, even if you were in the bear case, something less than 2 rigs, again, remember, you pick up, it's kind of like -- they call it a dip switch, on or off, right? So you pick a rig up, it's on, lay it down, it's off. So in order to get something that's less than 2 kind of infers something more than 1, so call it 1.5. The way you would do that is drill with 2 rigs for a portion of the year and then lay it down.

Now kind of when I answered the question for Jeff on timing, when you drill these wells and when you bring them on are important for production throughout the quarters of the year. So in reality, I would foresee if we drill -- and with Board approval, obviously, if we chose to do more than 1 rig and we're in kind of the 1.5 to 1.7 rigs for next year based on whatever the oil prices look like toward the end of the year, we would most likely have that second rig going for the first portion of the year. So you may see us keep the second rig for some months into 2026. And then it would be determined by kind of oil price and long-term outlook as well as just the whole macro environment that we're in. It's very volatile right now. So I want to make sure that we keep that kind of long-term prudent look of what's going on in the market.

Got you. And just one more question. Could you maybe add some details around the distribution plan for '26 just regarding HighPeak Energy Partners II. Is this going to be just a single drop down to the LPs in one go? And then just a rough idea on timing within the year, if you could give that.

Yes. Noah, this is Ryan again. Really good question. At this point, I don't think we're prepared to lay out the exact plan, but the plan, like Mike said during his prepared remarks, is to be very methodical, which most likely translates to us slowly metering them out to the different LPs throughout the calendar year. Again, most of the limited partners have a very long-term investment mindset here. So it's nothing that causes us any concern from any kind of share overhang. We don't expect anybody to rush to sell by any means, especially at current share prices. But we will be very strategic and methodical about it. And it will most likely start early in the year, but will last throughout the calendar year.

And I'm currently showing no further questions at this time. This does conclude today's call. Thank you all for your participation, and you may now disconnect.