Despite pulling all the right strings from an operational point of view, HighPoint Resources [stock_market_widget type="inline" template="generic" color="default" assets="HPR" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] stock kept falling this year and lost more than 53% of its value. That’s because all the improvements the company delivers in the form of higher production is offset by weak oil prices.
A similar story unfolded last quarter as HighPoint delivered mixed results that saw the company miss Wall Street’s top-line estimate by a whisker while delivering a better-than-anticipated bottom line. Though there were some positive takeaways from the quarter, HighPoint’s fortunes depend on the direction oil prices take, and that’s holding the stock back.
The Biggest Problem HighPoint Is Facing
HighPoint Resources delivered production sales volumes of 2.84 million barrels of oil equivalent during the quarter, an increase of 18% as compared to the prior-year period’s output. The company also reported that its oil production sales volumes increased 16% annually to 1.75 million barrels during the quarter, and accounted for 62% of the total output.
The massive increase in HighPoint’s output was a key reason why the company was able to lower its losses despite weak energy prices. The company said that it witnessed combined realized prices of $37.48 per barrel of oil equivalent during the quarter after the effects of hedging, down 5% from the year-ago period.
Still, it managed to lower its net loss to just $1.9 million as compared to a bigger loss of $46.9 million a year ago. However, on an adjusted basis, the net loss increased to $15 million as compared to $3.2 million in the prior-year period.
That’s because if we exclude the effect of hedging, HighPoint’s combined average realized price actually fell 17% year over year to $37.83 per BOE. The company witnessed a 15% decline in the price of oil, which accounted for nearly two-thirds of its total output. So the increase in oil production that HighPoint delivered was negated by the pricing environment.
Moreover, HighPoint witnessed a jump in its costs during the quarter. The company’s lease operating expenses shot up 20% year over year during the quarter to $3.79 per BOE, while gathering, transportation, and processing expenses increased a whopping 45% year over year. These higher expenses and the weak oil pricing scenario combined together to hurt HighPoint’s performance last quarter.
But this is not the only reason why investors seem to be shunning the stock.
The Balance Sheet Is Another Issue
HighPoint Resources said that its net debt at the end of the second quarter stood at almost $759 million. This is massive considering that the company had only $16 million in cash and cash equivalents at the end of the quarter, the debt level is alarming and restricts HighPoint’s ability to keep growing in a depressed oil pricing environment.
If the oil price downturn continues, the company will have to take on more debt to boost output. But that would be a dangerous thing to do given the current debt levels. As such, HighPoint might be forced to reduce its guidance going forward and it might not be able to deliver strong production growth in light of the current oil pricing scenario.
