Highpeak Energy Inc

NASDAQ:HPK

Earnings Call Analysis

HighPeak Energy Reports Strong Q3 Performance

HighPeak Energy has experienced a record-breaking and transformational quarter, marked by significant achievements and strategic advancements. The production surged over 100%, hitting an average of over 52,000 barrels of oil equivalent per day (BOE/d), which, coupled with tight cost control measures, resulted in a remarkable 44% quarter-over-quarter increase in EBITDAX to over $1 billion on an annual run rate. The company successfully transitioned from capital outspending to generating substantial free cash flow, exceeding $75 million in the third quarter. HighPeak intends to finance future developments from its operating cash flow, aiming to generate positive free cash flow this quarter and throughout 2024. Debt restructuring was also a focal point; net leverage has reduced to below one turn, liquidity now stands at over $220 million, and debt maturities have been extended to September 2026, allowing for rapid debt reduction. HighPeak has differentiated its asset quality through increased margins per BOE by almost $10, compared to peers, with expectations of margin expansion alongside projected production growth. With the commissioning of 41 additional wells in the latter half of 2023, and operational efficiencies driving down both CapEx and OpEx, the company is on a steadfast path to maintaining disciplined growth and enhancing shareholder returns, while sharply focusing on debt reduction.

Continuous Development and Optimized Operations

HighPeak is actively operating three drilling rigs, aiming to bring approximately 41 wells into production during the latter half of 2023, which should help the company achieve its targeted exit production volume. This operational strategy is expected to contribute meaningfully to production volumes in the latter half of 2024, reinforcing the company's confidence in meeting and potentially exceeding the guided production goals.

Promising Prospects and Geographical Expansion

Recently, HighPeak has commenced drilling its inaugural Wolfcamp A well in Scurry County, indicative of its growth-oriented strategy and commitment to expanding its operational footprint. Results from this venture are anticipated in late Q1 or early Q2. The company's impressive track record in its Flat Top area and surrounding locations underscores its potential to generate significant free cash flow for an extended period.

Cost Management and Margins Enhancement

HighPeak is witnessing a stabilization in rig and frac costs, allowing the company to make more informed financial projections. By leveraging infrastructure improvements such as dual fuel implementation, local sand usage, and recycling, HighPeak is mitigating potential future cost inflations. This, along with the upcoming implementation of an electrical build-out and solar farm, is projected to reduce lifting costs, thus improving margins next year.

Strong Financial Discipline and Cash Flow

Through prudent management and financial discipline, HighPeak has generated over $75 million in free cash flow in the most recent quarter. To bolster shareholder value, the company is prioritizing capital discipline by reducing debt and enhancing capital returns. Furthermore, HighPeak successfully executed a transformative debt refinancing, structuring a flexible term loan that affords multiple corporate benefits, evidencing the company's robust capital structure and substantial EBITDAX run rate of over $1 billion.

Investment Proposition and Growth Outlook

HighPeak continues to present itself as an attractive investment opportunity, backed by a premium oil-weighted asset base in the Permian Basin. The company is focused on consistently generating free cash flow, offering greater financial flexibility for further debt reduction, dividend increases, and potential share buyback programs, particularly if its share price does not align with its asset valuation.

Effective Cost Control and Operational Efficiencies

HighPeak is reaping the benefits of reduced industrial material costs and smart contracts, resulting in lower operational expenses. The company's strategy includes utilizing a more efficient rig fleet, locally sourced sand, and recycled water, which is expected to affect its capital expenditure favorably against industry peers. Additionally, with ongoing initiatives to minimize lease operating expenses (LOE), HighPeak has also mentioned disappointment in the delayed inauguration of its solar farm, but projects an improvement in this area, estimating operational costs in the vicinity of $7.50 per BOE going forward.

Maximizing Returns and Strategizing Capital Allocation

Approaching capital return as a multifaceted goal, HighPeak is undertaking initiatives like amortizing debt and employing a cash sweep mechanism to optimize balance sheet cash. The combined approach of repurchasing stock to support the share price and possibly increasing dividends underscores the company's strategy to return value to shareholders, all while maintaining a downward trajectory of its debt. This financial strength is anticipated to be more pronounced by midyear 2024, paving the way for these shareholder-friendly measures, especially while the company perceives undervaluation in the market.

Guidance Confirmation and Investment in Growth

HighPeak reaffirms its guidance with an exit rate of 57,000 barrels per day, articulating a stable production outlook with potential upside. The projected drilling and completion of new wells is set to sustain production growth into the first quarter. With careful analysis of capital discipline, HighPeak is considering further investment in drilling operations and another rig addition once debt-to-EBITDAX is reduced below 0.75. The company's strategic planning allows it to retain ample free cash flow to meet its 2024 objectives, hinging on a cost of roughly $200 million per rig and a solid operational plan.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the HighPeak Energy 2023 Third Quarter Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your first speaker today, Steven Tholen, CFO.

[Steven Tholen, executive]

Good morning, everyone, and welcome to HighPeak Energy's third quarter 2023 earnings call. Representing HighPeak today are Chairman and CEO, Jack Hightower; President, Michael Hollis; Vice President of Business Development, Ryan Hightower; and I'm Steven Tholen, the Chief Financial Officer.

During today's call, we will make reference 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 Chairman and CEO, Jack Hightower.

[Jack Hightower, executive]

Thank you, Steve, and good morning, ladies and gentlemen, and I want to thank you for joining our third quarter earnings call today. My prepared remarks will begin on Slide 4 of our presentation. Historically, I always start off saying it's an exciting time to talk about HighPeak, and there's no question that this is an exciting -- but beyond that exciting time, this is a transformational quarter for HighPeak Energy. It's perhaps our best quarter in the history of the company today.

Our production averaged over 52,000 BOE a day for the quarter, our third quarter EBITDAX translates to over $1 billion on an annual run rate, we transitioned from a historical capital outspend to generating a material amount of positive free cash flow, and we secured necessary capital and liquidity needed to accomplish our long-term strategic plan. We definitely are substantially a different company today than where we were just a few short months ago, and we'll further discuss these points in greater detail as we go through the presentation.

So if you'll turn to Slide 5 in the presentation, this will start the amazing, exciting time at HighPeak. Looking at this slide, we achieved 3 major company milestones during the third quarter and not only position us to achieve our primary goals, but also these are transforming us into a completely different-looking company. All 3 of these milestones were in accordance with our internal projections and our expectations.

First and primary is we average over 50,000 barrels a day, which continues not only to highlight the high quality of our asset base but also establishes a new level of scale for HighPeak. Thinking about increasing our production as much as we did, starting at 42,000 barrels a day average, that 25% increase compared to our second quarter average and over 100% increase compared to our third quarter '22 average. That is phenomenal growth when we only had 2 rigs running. Prior to that, we had 6 rigs running, but the last quarter, we had 2 rigs running.

Second, in conjunction with our increase in production, our third quarter EBITDAX increased 44% compared to our second quarter and equates to over $1 billion on an annual run rate, again, translates to a new level of scale for the company.

Third, we reached a milestone of generating significant free cash flow during the third quarter of over $75 million. This is a major achievement for the company and illustrates the quality of our asset base and our strong financial health. At current prices and our third 3-rig cadence, we expect to generate positive free cash flow this quarter and throughout 2024. I can't emphasize that enough, that we're going to continue our strategy of responsible growth while maintaining capital discipline.

In accordance with our updated development program, we averaged 2 rigs and 1 frac crew during the quarter. We recently introduced both a third rig and a second frac crew into the field after the quarter. We plan to maintain the 3-rig program throughout the remainder of the year, and the second frac crew is currently completing a handful of DUCs that we generated during the third quarter. We will use -- this third frac crew will be used intermittently while we are running through rigs.

As we previously said, from here forward, we intend to finance our development program through cash flow from operations, generate additional free cash flow, reduce our outstanding debt and increase our return to shareholders. At the end of the quarter, we still had a considerable number of wells in progress, which will continue to support our production profile as these wells are turned online.

We ended the quarter with a little under a one turn of leverage, which is a significant improvement over the past 3 months. If commodity prices continue to stay in the current range, we expect to exit this year at well below 1x net debt to EBITDAX and continue that progress into 2024.

Pro forma with the closing of our super priority revolving credit facility, our liquidity is greater than $220 million. Our recent debt refinancing should provide all the capital we need to accomplish our objectives. In addition, on a go-forward basis as we generate additional free cash flow we expect our liquidity to continue to increase and our net debt to decrease.

Now going to Slide 6. This is a very enticing slide. And by evidence on the charts on this slide, we have demonstrated a track record of delivering consistent organic production and cash flow growth through the drill bit. Very few companies have grown the way we've grown through the drill bit. Over the past year, our quarterly production average has grown over 100%, which has also translated into significant cash flow growth through the same time frame despite declining oil prices.

We continue to exemplify our high-quality asset base through our consistent growth in production, our high oil and liquids content, and our sustained peer-leading margins, all of which are reflected on this slide. It's also a true testament to the high quality of our reservoirs that our current production level continues to be supported by a small number of producing wells.

And it's worth noting that we've been able to achieve this level of growth while maintaining a very reasonable amount of leverage, which is now back below one turn. The result of the aforementioned attributes is the transition to free cash flow generation, which we expect to maintain going forward without sacrificing our measured production growth expectations.

Now I'm going to turn the call over to Mike Hollis to discuss the next few slides on our operational efficiencies. Mike?

[Michael Hollis, executive]

Thanks, Jack. Now turning to Slide 7. As Jack mentioned earlier on the call, we have continued to sustain our peer-leading EBITDAX margin. You may notice that this slide looks a little different this quarter for a couple of reasons. HighPeak is now an accelerated filer, therefore several in our peer group are releasing their data at the same time or later than we are. Not to mention there has been some major consolidation since last quarter, so as a result, we've added a few large peers to the group.

The new chart on the left shows second quarter results as well as the third quarter results, which are the blue boxes, for HighPeak and for the peers that have already announced. Please note that HighPeak has continued to maintain its high oil cut and its peer-leading margins. This oil cut gives HighPeak a higher gearing or leverage to oil price. So with that higher gearing and our laser focus on reducing our operating cost, HighPeak's margin spread has expanded even further this quarter above our peer group average.

From this chart, you'll see that HighPeak's margin growth quarter-over-quarter is much higher than any of the peers shown as indicated by the larger move from second quarter, the circle, to third quarter, the box. And as you know, Q3 average oil prices increased by approximately $8.50 per barrel compared to the second quarter.

With that said, during the same period, HighPeak's margin per BOE increased by almost $10 per BOE, much more than any of our peers. We expect our margins to continue to expand with our forecasted production growth and as we realize additional benefits of our LOE cost cutting initiatives.

I want to drive home again that not all BOEs are created equal. HighPeak's margin was approximately 60% higher than our peer average during the second quarter. Although we do not have all the third quarter margin numbers available for our peers yet, it would be safe to say HighPeak's margin will expand further from the pack in Q3 driven, again, mainly by our high oil cut.

But applying only the second quarter factor of 60% to our third quarter production level of 52,700 BOEs a day would equate to the economic equivalent production level of our peer group at approximately 85,000 BOE a day. Said another way, our average peer would have to have produced 85,000 BOEs a day with their product mix to have the same EBITDAX that HighPeak generated.

Now turning to Slide 8. HighPeak is currently running 3 drilling rigs, focusing on the Wolfcamp A and Lower Spraberry development. We will turn in line approximately 41 wells in the second half of 2023, giving confidence that we will hit our guided exit production volume. The addition of the third rig will add meaningful volumes in the second half of 2024.

We continue to be encouraged by our strong well results to the north and the east in our Flat Top area. That's the northern block of our acreage. With the strong Wolfcamp A and Lower Spraberry results from the Conrad pad in eastern Borden County, it's the light blue wells, and the strong Wolfcamp A results from our neighbors south and east of us in Mitchell County, that's the Oasis and Luxor pad, you can see the gray well touching the southern edge of our Scurry County acreage.

And in response to these strong well results, HighPeak has just spud our first Wolfcamp A well in Scurry County. Details will be forthcoming late Q1, early Q2. We are also encouraged by some Middle Spraberry results directly west of our Flat Top block. We plan to keep an eye on these wells to determine if they will compete for capital in the future. But it's easy to see HighPeak's large runway of inventory in the Wolfcamp A and Lower Spraberry. And when you add in the other zones, we will be able to generate significant free cash flow for decades.

We are beginning to see rig rates and frac costs beginning to roll over. It's too early to say what costs will do in 2024, but with our electrical infrastructure, recycling of produced fluid, dual fuel implementation and our use of local wet sand, these will all help insulate HighPeak from any future potential cost inflations. And looking into 2024, HighPeak's electrical build-out and solar farm will provide reduced lifting cost and significant protection from high spot pricing during peak summer months.

It stands to reason that the solar panels gather a significant amount of sunlight during the peak demand hours. And this summer, we saw unhedged power spike roughly 5x the normal cost levels. This fixed solar low-cost power will reduce our lifting costs and further increase our margins next year. We continue the efficient build-out of our oil and gas midstream pipelines, again ensuring HighPeak receives the highest realized prices for our products.

Our dedication to financial discipline and prudent management is reflected in the generation of over $75 million of free cash flow last quarter, which demonstrates our strong financial health and stability. We maintain a keen focus on capital discipline, reducing our debt and ensuring continued return of capital to our stakeholders. I want to extend my heartfelt gratitude to our remarkable team of employees who have been the driving force behind our success.

And with my comments now complete, I'll turn the call back over to Jack.

[Jack Hightower, executive]

Thanks, Mike. If you'll turn to Slide 9, this is one of the major accomplishments in the third quarter, and that's our debt restructuring. We successfully completed a transformative debt refinancing. In fact, to our knowledge, this unparalleled transaction is the largest privately-arranged financing for a public energy company. This financing included a very diverse and sophisticated energy lender group, and they did a tremendous amount of due diligence and analysis.

Many, many people had internal engineering and almost every external engineering firm in the United States studied our assets, and that clearly demonstrates a high level of confidence not only in our team, but in our unique asset base and with the upside opportunity that we have as a company. We're extremely pleased with the investor group and the structure of the new term loan facility.

The unique structure of our term loan provides the company with multiple benefits, including streamlining our capital structure and extending all debt maturities to September of '26; securing our financial position by providing financial certainty, especially during an ever-changing banking market environment by removing the risk associated with standard borrowing-based redeterminations that are associated with the reserve-based loans and commercial bank availability; and it also provides the company with flexibility to pay down debt with a 1.5-year note call and being able to pay down debt, without penalty, utilizing free cash flow, which will allow for rapid deleveraging.

We also recently closed our $100 million super priority revolving credit facility, which provides the company with additional sources of liquidity and flexibility for working capital purposes. Due to this transformative debt refinancing, we are stronger, more resilient and more equipped to seize opportunities in this dynamic energy market.

Turning to Slide 10. Now that our debt refinancing is behind us, the company's capital structure is in great shape. Our current EBITDAX run rate is greater than $1 billion. Our net debt level is already below one turn as we discussed earlier. It will continue to decrease as we generate additional free cash flow and pay down debt.

Don't want any misunderstanding. Our goal is to pay down debt and only stay with capital discipline, to not overextend and to stay within our free cash flow. The pro forma of our new revolving credit facility, we have over $220 million of liquidity. This provides all the capital that we currently need to accomplish our long-term strategic plan.

As you can see on this slide, our financial statistics have improved significantly over the past 3 months. And assuming that commodity prices stay in their current range, we anticipate continued improvement over the coming quarters. I'd also like to point out based on our third quarter EBITDAX run rate that our stock price is currently trading at approximately a 3x multiple which, in my opinion, is relatively cheap compared to our SMID cap peer universe, considering our asset quality, drilling inventory, return on investment metrics, financial strength and growth profile.

And as you can see from some of the recent transactions in E&P, a lot of times, analysts and even we and the inside companies have a difficult time differentiating between the multiples and the value of one asset group versus another asset group. But there's no doubt that a lot of these new transactions have traded at much higher multiples, which you would expect with good assets. Given these things, it should be no surprise that, in my opinion, our current share price does not reflect the true underlying value of the company's assets.

So now if you'll turn to Slide 11, I'll wrap up what's happening with HighPeak. We continue to check all the investment criteria boxes. We have a prime oil-weighted Permian Basin asset base that has now achieved significant scale as illustrated by our current production of over 50,000 barrels a day and an EBITDAX run rate of over $1 billion. We've streamlined our capital structure and pushed out all of our debt maturities until 2026.

Our financial metrics have improved significantly over the past quarter, and we have line of sight to further near-term enhancement. We've derisked our contiguous acreage position in our core development zones and have a long runway of Tier 1 inventory to develop with exciting additional opportunities. We've transitioned from a historical capital outspend mode while rapidly growing our business into a business that generates material free cash flow that will continue into the future.

And when you start thinking about 2024, what are our objectives there? Well, they're clear and they're defined. We will remain focused on responsible growth while maintaining capital discipline. Again, from this point, we expect to fund our development program through operational cash flow. We will also be keenly focused on continuing to build on the success of our improved well performance while lowering our costs on both CapEx and OpEx on both sides of that equation.

We expect the consistent generation of free cash flow will provide us with ultimate optionality, including the continued reduction of debt, which is a very important feature in our new term loan facility. In addition to the debt reduction, we expect to be positioned to materially increase return of capital to our shareholders.

This increase of return of capital can be accomplished in many ways. One, which we've talked about before, an outright sale of the company. It's no secret that we're in the midst of a very active M&A market cycle. In my opinion, we should see this theme continue in 2024, especially for companies like HighPeak that has such quality assets and a lot of remaining resources left to be recovered.

We may also increase our current dividend in next year's business. We may consider instituting a share buyback program, especially if there continues to be a significant dislocation in our share price compared to the true value of our asset base. In addition to debt reduction and return of capital to shareholders, we expect to continue, and if you look back and reflect, to continue the company's performance of growing reserves and production.

I don't think anybody has had the growth that we've had over the last 3 years. And if commodity prices justify, we remain positioned to further increase our drilling program, which will allow us to continue to pull additional value forward for our investors. But hold that thought. Make sure you realize as a function of commodity prices that allow us to justify to increase our drilling program, we are going to maintain positive free cash flow and be financially disciplined.

So these are the important reasons that I remain confident in our ability to create additional value for our shareholders, and I'm very excited about the opportunities that lie ahead for HighPeak. So my comments are complete now, and we'll open up the call for questions from our analysts.

[Operator]

[Operator Instructions] Our first question is from John White with ROTH MKM Capital.

[John White, analyst]

You want to make any comments about well downtime due to wells that are offsetting frac operations in the fourth quarter?

[Jack Hightower, executive]

Yes. Mike, why don't you answer that question?

[Michael Hollis, executive]

Absolutely. Yes, John, nothing different than normal blocking and tackling. Obviously, the wells closest to whatever you're stimulating, we tend to shut in and protect as well as to make sure that we get a good frac on the wells that we are stimulating currently. But no change in what we have.

Obviously, when you go from 1 frac crew and you pick up one -- again, the second frac crew we have is just to pick up a few of the DUCs that we had generated over the last several months. So we don't see a very material change. Obviously, all said, wells will be affected for a short period of time, but nothing material.

[John White, analyst]

Yes. I'm sure you've learned a lot with it, and I think a lot of the financial community has, too. Companies are reporting the tight oil field service market has loosened to a certain extent. Are you seeing that as well?

[Michael Hollis, executive]

Absolutely. So obviously, oil field tubulars kind of rolled over about a quarter or so ago. They've more or less flattened out. So we're getting the benefit as we work through some of the inventory we had. So what you're seeing for all of the tubular goods and casing that we run in the ground today, it's the newer lower pricing that you're seeing in today's market.

Again, we don't have a lot of long-term contracts on drilling rigs or frac crews, virtually none, so we [ rise ] spots. So coming out of COVID, we got penalized when prices came up. But again, today, where prices are starting to roll over, we're seeing rig rates dropping again, not large drops, a couple of thousand dollars a day. And then on the pumping side, for the dollar per pumping hour, we're starting to see those roll over getting kind of the mid-single digits to lower than 10% is what we're seeing into 2024.

But again, that's all going to be predicated on how active the market is. We're also kind of insulated from some of those calls just due to some of the planning we have had in the past. A very local wet sand mine that sits right next to our 2 acreage blocks, we have that access to the sand, reducing our transportation costs. So you will see that going forward in the future. Again, we are a little exposed to diesel prices with transportation, but diesel prices have been pretty flat over the last couple of quarters.

So no, as we look forward into 2024, again, no one has a crystal ball, but I would say pricing would be kind of flat. And again, as we've reduced our activity, we've been able to high-grade rig fleets, frac crews and get a little higher utilization percentage of their local sand, our recycled water as well as being able to have rigs on electricity high-line power instead of utilizing diesel.

So you're going to see a little bit higher weighted change in our CapEx than what you may see with some of the other folks, our peer group, based just on service costs with some of the initiatives we put in place over the last couple of years.

[Operator]

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

[Jeffrey Robertson, analyst]

Mike, to follow up on the cost, can you give an estimate for the net cost currently to run 1 frac crew and 1 rig for 1 year?

[Michael Hollis, executive]

You bet. Jeff, obviously, HighPeak's a little different than some of our peers back to the West and in the same part of the basin. And what I mean by that is a rig at HighPeak generates more completed lateral foot per year than a lot of our peers. So although our $1 per foot DC&E is $150 to $200 a foot cheaper than our peers, we can spend more money with 1 rig because it drills more footage that we can complete. So with all of that said, basically, a rig and a frac through is about $200 million a year is a very good number for you.

[Jeffrey Robertson, analyst]

Operating costs came down in the quarter. You outlined some of the things that you all had been working on over the last couple of years to continue to drive not only capital cost savings, but also OpEx. Can you just talk about where you are there and where you think things might directionally go in 2024?

[Michael Hollis, executive]

You bet. So you see LOE coming down quarter-over-quarter. We've got a lot of initiatives that we put in place, of course, increased production over time. That helps with some of the fixed cost dilution, optimization of our artificial lift and some of our chemical and treating programs being optimized as well as designing some more upgrades into our produced water infrastructure.

And then, of course, the energizing of our solar farm kind of call it, second quarter this year, again, that's probably one of the biggest disappointments is how long it's taken us to get our solar farm up and running. We've had some governmental issues and delays and a little bit of that has been associated with the Inflation Reduction Act, but it's all starting and going. We're actually doing a ribbon cutting this Friday.

So when that comes online, that will reduce some of our energy cost as well as some of -- as I mentioned in the prepared remarks, some of the floating price that we paid for electricity. Because you can't hedge 100% of it, you got to kind of do it in blocks. So we'll always have a small percentage kind of 3% to 5% that floats. And now we will be able to have that during the peak of the summer, the highest demand, these solar panels will be generating their 10 megawatts of power, and that is a low fixed cost.

So again, when we look into next year, we will see a lower dollar per BOE for HighPeak, and we're estimating somewhere in the $7.50 range, and we hope to be able to beat that. But one thing to note that is a little different here, when you have a really high oil mix like we do, we talk about it on the margin side. It's a great thing for our margins. But when you look at some of the other metrics like LOE, we don't have a lot of low value BOEs that we get to spread our cost over.

So if you looked at some of our peers and with their mix of product, again, if we had a similar economic kind of mix, again, we'd be in that 85,000 BOE a day range to generate the same kind of EBITDAX. And if we did that and looked like our peers with that mix, our LOE would be in the $5 range, amongst the best of any of our peer group.

So again, we've got some more distance to go, and we've got some things in place that are going to continue to drive it down, but somewhere in that $7.50 range kind of average next year, I think, is a really good number for you.

[Jeffrey Robertson, analyst]

Jack, you talked about capital return to shareholders. And I know that the term loan has, I think, a $30 million per quarter amortization feature that begins at the end of the first quarter of next year. Can you talk about how you think about the best outcome for shareholders in terms of maybe paying down more of the term loan, if you have the opportunity, in your cash flow and weighing that against the dividend and potentially share repurchases?

[Jack Hightower, executive]

Yes. Jeff, it's hard to differentiate between the 3. We look it more as a basket, and we think that we can accomplish pieces of all of that. And so definitely, we will be retiring debt through the amortization. We also have a cash sweep opportunity. And so when we're building cash sitting on our balance sheet, we might as well get good utilization of that cash, and 2 ways to do that is to support our share price by having a stock repurchase and then also returning more capital back to the shareholders by increasing our dividend.

So it's a combination of things that we're going to balance as we go forward, recognizing that our debt is going to be going down, and we're going to be so healthy within the midyear of 2024 from a financial perspective, it gives us that luxury to do that, especially when we're not trading for a price that we feel like is fair in the marketplace.

[Operator]

Our next call comes from Nicholas Pope with Seaport Research.

[Nicholas Pope, analyst]

There's been a lot of moving parts the last few months. I want to make -- you talked about guidance on production. I just want to make sure I'm clear on where -- what your expectation is right now for, I guess, exit rate or fourth quarter, what the expectation is right now for production here in the near term?

[Jack Hightower, executive]

Yes. Nick, we're not changing our guidance. As Mike mentioned, with the wells to be completed in the fourth quarter and with the momentum we have right now in increasing our production, we fully expect to accomplish our exit rate that we provided in prior guidance of 57,000 barrels a day. Now those numbers could change on the upside. I don't think they'll change on the downside simply because of having lumpy production and how many wells are being fracked and what wells have to go offline, it's very hard to predict that as we go forward.

But undoubtedly, we're going to hit the 57,000 barrel a day exit and then production will continue increasing into the first quarter. And of course, adding the third rig, and we may even add another rig once we get down to less than 0.75 debt-to-EBITDAX, 3/4 of a turn. We can increase drilling, but we're going to do that with very much adherence to capital discipline and not get out over our skis, so to speak.

[Nicholas Pope, analyst]

Got it. That's great. I appreciate that. And then looking at kind of the progression of working capital for you over the last few quarters, obviously, it got very negative lead into the refinance. It looks like really kind of brought that back into balance here this quarter with everything completed.

Is this kind of the run rate you're expecting with working capital going forward? Because you have this big cash number for CapEx relative to kind of the accrued number. Just trying to get a sense of what those -- what that movement might look like here in the near term, and what the kind of plan is.

[Jack Hightower, executive]

Well, if you'll think back, looking back, we had 6 rigs running. We had a real substantial decline in oil prices. And so a lot of things hit us there that were out of our control. But now we know where we have oil prices, we have a considerable amount of our production hedged, we know that it costs us roughly $200 million a rig. So if you take $600 million to $700 million of capital and you're already at 52,000 barrels a day at over $1 billion run rate, you have plenty of free cash flow to do all those things that we said we were potentially going to do as objectives in 2024.

So unless we have a precipitous decline in oil prices, and if you recall in the past, we never obligate ourselves, we can drop a rig in 30 days if we want to. So we're going to maintain capital discipline and maintain control over our working capital and not ever get ourselves back in that position again now that we have grown the company. We've reached a plateau of growth that we didn't have in the second quarter of last year. We were only making 20-something thousand barrels a day, and now we're up to 52,000 barrels a day. So this has truly been a transformational quarter for the company.

[Operator]

Thank you. I am showing no further questions at this time. This does conclude our question-and-answer session. Thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Have a good day.