With Weld County expressing its support for the oil and gas industry, HighPoint Resources’ (HPR) development plans should not be hampered by new regulations in Colorado. I believe that HighPoint was trading at a bit of a discount due to the potential for regulatory issues before, but that should not be the case anymore.
HighPoint does have some other potential challenges with its projected leverage coming in at around 2.0x now at current strip prices, with 2.0x or under considered the target range for upstream companies these days. Leverage remains something to monitor for HighPoint, although it doesn’t have any debt maturities until 2022 at least.
Notes On Regulatory Issues
Colorado Senate Bill 19-181 was signed into law in April, resulting in local governments being given more power to regulate oil and gas development, as well as making the environment and the protection of public health and safety key priorities when looking at oil and gas projects.
HighPoint has indicated that it believes that its ability to develop its acreage position (located in rural parts of Weld County) should not be affected by new regulations. Weld County has expressed support for the oil and gas industry (which is very important for its economy), so I’d agree with the belief that HighPoint should not be constrained by regulatory issues.
2019 Outlook At $55 WTI Oil
HighPoint reiterated its 2019 guidance, which calls for it to average around 35,000 BOEPD (63% oil) in 2019. This results in a projection for HighPoint to deliver around $476 million in oil and gas revenue if WTI oil averages around $55 during 2019. In this scenario, HighPoint’s hedges add $24 million in value, bringing its projected revenues up to $500 million after hedges.
|Barrels/Mcf||$ Per Unit||$ Million|
HighPoint has maintained its expectations for roughly $365 million in capital expenditures, resulting in a projection for $560 million in cash expenditures in 2019. Thus, HighPoint is expected to have around $60 million in cash burn at current strip prices. HighPoint has been largely protected from the recent drop in oil prices by its hedges. Around 89% of its projected Q2 2019 oil production is hedged.
|$ Million||$ Million|
|Lease Operating Expense||$37|
|Gathering, Transportation and Processing||$11|
The cash burn does come in conjunction with production growth, though. It looks like strip prices for 2020 are close to HighPoint’s breakeven point, so I’d expect its cash burn to be minimal for 2020 if it goes for close to flat production growth then.
Notes On Valuation
With $55 WTI oil in 2019, HighPoint’s projected leverage at the end of 2019 would be around 2.0x its unhedged EBITDAX. This appears to be an acceptable level of leverage still, although at the high end of the range that upstream producers are targeting these days. HighPoint’s next debt maturity is its $350 million in 7% unsecured notes due in October 2022, so it has a bit of time before it needs to deal with that. HighPoint also retains a substantial amount of liquidity, with $449 million in liquidity at the end of Q1 2019.
Source: HighPoint Resources
Given the easing of the regulatory threat, I believe that HighPoint should be valued at a higher multiple than its current 3.1x unhedged EBITDAX (based on $55 WTI oil). A 3.5x unhedged EBITDAX multiple would make it worth approximately $2.35 per share instead, while a 4.0x multiple would make it worth around $3.10 per share.
The potential for regulations to threaten HighPoint’s ability to carry out its development plans appears to be minimised with Weld County’s stance in support of the oil and gas industry. This leaves HighPoint looking a bit undervalued, with a 3.5x to 4.0x unhedged EBITDAX multiple resulting in its shares being worth around $2.35 to $3.10 instead.
While the regulatory situation looks fine for HighPoint, the oil price environment is now just okay for HighPoint. Its leverage is around 2.0x at $55 WTI oil in 2019, while oil futures are around HighPoint’s breakeven point. Thus, it is a bit vulnerable if oil prices drop further, although it looks to have over 50% of its 2020 oil production hedged at $59+ WTI oil, so that should help.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.