HighPeak Energy, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview HighPeak Energy, Inc. together with its subsidiaries (collectively, “HighPeak Energy,” the “Company” or the “Successor”) was formed in October 2019 solely for the purpose of combining the businesses of Pure Acquisition Corp. (“Pure”) and HPK Energy, LP (“HPK LP”). HPK LP was formed in August 2019 for the purpose combining the assets of HighPeak Energy, LP (“HighPeak I”) and HighPeak Energy II, LP (“HighPeak II”) into one entity given the proximity of both companies’ properties and the fact that both companies owned working interest in a significant number of the same wells and thus combining working interests would ease the administrative burden on the companies significantly. HighPeak I was formed in June 2014 for the purpose of acquiring, exploring and developing oil and natural gas properties, although it had no activity until late 2017. Beginning in 2017, HighPeak I began acquiring its assets through an organic leasing campaign and a series of acquisitions consisting primarily of leasehold acreage and existing vertical producing wells. The Company’s assets are located primarily in Howard County, Texas, which lies within the northern part of the oil-rich Midland Basin. As of September 30, 2020, the assets consisted of a highly contiguous leasehold position of approximately 60,541 gross (51,343 net) acres, approximately 21% of which were held by production, with an average operated working interest of 85%. Approximately 97% of the operated acreage provides for horizontal wells with lateral lengths of 10,000 feet or greater. For the year ended December 31, 2019, approximately 86% and 14% of production from the assets were attributable to oil and natural gas, respectively. As of December 31, 2019, HPK LP was drilling with two (2) rigs, and as of September 30, 2020, the Company was drilling with one (1) rig. We are the operator on approximately 93% of the net acreage across the assets. Further, as of December 31, 2019, there were approximately 97 gross (50.2 net) producing wells, including 4 gross (3.5 net) horizontal wells, with total production of 949 Boe/d in December 2019. As of December 31, 2019, of the 11,497 MBoe of proved reserves of the assets, 43% were developed, 93% of which were liquids. The financial results as presented in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” consist of the historical results of HighPeak I for the nine months ended September 30, 2019, HPK LP for the period from January 1, 2020 through August 21, 2020 and July 1, 2020 through August 21, 2020 and the Company from August 22, 2020 through September 30, 2020. At the closing of the HighPeak business combination on August 21, 2020, the Company’s “predecessor” for accounting purposes was HPK LP for the period from October 1, 2019 through August 21, 2020, and HighPeak I from January 1, 2017 through September 30, 2019 (collectively the “Predecessors”). Outlook HighPeak Energy’s financial position and future prospects, including its revenues, operating results, profitability, liquidity, future growth and the value of its assets, depend primarily on prevailing commodity prices. The oil and natural gas industry is cyclical and commodity prices are highly volatile. For example, during the period from January 1, 2018 through March 31, 2020, the NYMEX WTI crude oil price per Bbl ranged from a low of $16.55 to a high of $70.98, and the NYMEX natural gas price per MMBtu ranged from a low of $1.74 to a high of $4.09. The high, low and average prices for NYMEX WTI and NYMEX Henry Hub are monthly contract prices. During April 2020, NYMEX WTI crude oil and NYMEX natural gas prices averaged $16.55 per Bbl and $1.74 per MMBtu, respectively. Due to the absence of any debt, HPK LP has not historically entered into any hedges. HighPeak Energy intends to evaluate and potentially enter into hedging arrangements to protect its capital expenditure budget and to protect any future debt facility borrowing base, if any. Impact of the COVID-19 Pandemic and 2020 Plan Changes The COVID-19 pandemic has resulted in a severe worldwide economic downturn, significantly disrupting the demand for oil throughout the world, and has created significant volatility, uncertainty and turmoil in the oil and gas industry. The decrease in demand for oil combined with pressures on the global supply-demand balance for oil and related products, resulted in oil prices declining significantly beginning in late February 2020. The length of this demand disruption is unknown, and there is significant uncertainty regarding the long-term impact to global oil demand, which will ultimately depend on various factors and consequences beyond the Company's control, such as the duration and scope of the pandemic, the length and severity of the worldwide economic downturn, the ability of OPEC, Russia and other oil producing nations to manage the global oil supply, additional actions by businesses and governments in response to the pandemic, the economic downturn and the decrease in oil demand, the speed and effectiveness of responses to combat the virus, and the time necessary to balance oil supply and demand to restore oil pricing. In response to these developments, the Company has implemented measures to mitigate the impact of the COVID-19 pandemic on its employees, operations and financial position. These measures include, but are not limited to, the following: Employee Safety. The Company has taken steps to keep its employees safe in light of the COVID-19 pandemic by implementing preventative measures and developing response plans intended to minimize unnecessary risk of exposure and infection among its employees. The Company has also modified certain business practices (including those related to non-operational employee work locations, such as a significant reduction in physical participation in meetings, events and conferences) to conform to government restrictions and best practices encouraged by the Center for Disease Control and Prevention, and other governmental and regulatory authorities. 27 HIGHPEAK ENERGY, INC. Expense Management. With the reduction in revenue, the Company has implemented, and will continue to evaluate other cost saving initiatives, including: • Continuing to optimize drilling, completion and operational efficiencies, resulting in lower operating costs per unit of production. • Reducing annual general and administrative and other overhead related costs through various cost reduction efforts across the organization. Balance Sheet, Cash Flow and Liquidity. The Company has taken the following actions to strengthen its financial position and increase liquidity: • Reduced its 2020 capital budget. • Maintained a debt free balance sheet and pursuing increased liquidity by adding a credit facility with a modest borrowing base at attractive interest rates. • Poised to use derivative positions to reduce the effects of oil price volatility on its net cash provided by operating activities. The Company continues to assess the global impacts of the COVID-19 pandemic and may modify its plans as the health and economic impacts of COVID-19 continue to evolve. Financial and Operating Performance The Company's financial and operating performance for the period from August 22, 2020 through September 30, 2020 plus the period from July 1, 2020 through August 21, 2020 of its Predecessors included the following highlights: • Net loss attributable to common stockholders for the period from August 22, 2020 through September 30, 2020 was $11.5 million ($0.13 per diluted share) plus the net loss of the Company’s Predecessor for the period from July 1, 2020 through August 21, 2020 of $56,000 compared with a net loss of the Company’s Predecessors of $1.0 million for three months ended September 30, 2019. The primary components of the $10.6 million decrease in earnings attributable to common stockholders include: • a $14.5 million increase in stock-based compensation expense related to stock options that were granted in August 2020 upon the Company’s going public whereby approximately 75% of the stock options vested immediately causing a charge to earnings; • a $2.8 million increase in depletion, depreciation and amortization expense due to a 574% increase in overall sales volumes, partially offset by a 35% decrease in the depletion, depreciation and amortization rate from $27.82 to $18.18 per Boe, both as a result of increased proved reserves due to the Company’s successful horizontal drilling program in the Permian Basin; • a $1.1 million increase in production costs, including taxes, primarily attributable to the 574% increase in sales volumes as a result of the Company’s successful horizontal drilling program in the Permian Basin partially offset by 22% lower taxes on a dollar per Boe basis due to lower overall realized prices of 23%; and • a $542,000 increase in general and administrative costs associated with our increased activity surrounding drilling and completion operations as well as increased costs associated with being a public company starting on August 22, 2020; partially offset by: • a $6.0 million increase in oil and gas revenues due to a 574% increase in daily sales volumes due to the Company’s successful horizontal drilling program in the Permian Basin and the fact the Company brought back on-line the majority of its production during the third quarter of 2020 after it being curtailed in April 2020 due to the COVID-19 related price downturn, partially offset by a 23% decrease in average realized commodity prices per Boe; and • a $2.3 million increase in the Company's income tax benefit due to the decrease in earnings during the three months ended June 30, 2020, compared with the same period in 2019. • During the period from August 22, 2020 through September 30, 2020, average daily sales volumes totaled 3,200 Boe/d and during the period from July 1, 2020 through August 21, 2020, average sales volumes totaled 1,369 Boe/d for an overall average for the three months ended September 30, 2020 of 2,165 Boe/d, an increase of 574% over the same period in 2019, due to the Company's successful horizontal drilling program in the Permian Basin and the fact that the Company brought back on-line the majority of its production during the third quarter of 2020 after it being curtailed in April 2020 due to the COVID-19 related price downturn. • Weighted average realized oil prices per Bbl decreased during the three months ended September 30, 2020 to $39.19 ($38.55 during the period from August 22, 2020 through September 30, 2020 and $40.43 during the period from July 1, 2020 through August 21, 2020), compared with $53.42 for the same period in 2019. Weighted average gas prices per Mcf increased to $1.89 during the three months ended September 30, 2020 ($2.30 during the period from August 22, 2020 through September 30, 2020 and $1.64 during the period from July 1, 2020 through August 21, 2020) compared with $1.34 during the same period in 2019. • Cash provided by operating activities totaled $1.2 million for the period from August 22, 2020 through September 30, 2020. 28 HIGHPEAK ENERGY, INC. • The Company raised $93.8 million of capital, net of offering costs, related to the HighPeak business combination that closed on August 21, 2020 while maintaining a balance sheet with no outstanding debt. This capital gives the Company flexibility in the short term to recommence its development program whereby we have added one drilling rig that is currently drilling a salt water disposal well in our development area and we have two completion crews currently working to frac eight (8) of our twelve (12) uncompleted wells that were drilled but not fully completed when operations were shut down earlier this year due primarily to the COVID-19 pandemic. We are also using this capital to finish completing our four (4) additional uncompleted wells. Fourth Quarter 2020 Outlook The fourth quarter is likely to continue to offer a high degree of uncertainty and market disruption. The extent to which the Company's future results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond the Company's control, such as the duration and scope of the pandemic, the length and severity of the worldwide economic recovery, additional actions by businesses, OPEC and other cooperating countries, and governments in response to the pandemic, economic downturn and decline in oil demand, the speed and effectiveness of responses to combat the virus, and the time necessary to balance oil supply and demand. For additional information on the risks posed by the COVID-19 pandemic, see “Item 1A. Risk Factors” contained elsewhere in this Report. Operations and Drilling Highlights Average daily oil, NGL and gas sales volumes are as follows: Successor Predecessors Combined August 22, 2020 through September 30, 2020 January 1, 2020 through August 21, 2020 Nine Months Ended September 30, 2020 Oil (Bbls) 3,104 1,240 1,512 NGL (Bbls) 44 61 59 Gas (Mcf) 312 409 395 Total (Boe) 3,200 1,369 1,636 The Company's liquids production was 96 percent of total production on a Boe basis for the nine months ended September 30, 2020. Costs incurred are as follows (in thousands): Successor Predecessors Combined August 22, 2020 through September 30, 2020 January 1, 2020 through August 21, 2020 Nine Months Ended September 30, 2020 Unproved property acquisition costs $ 704 $ 2,753 $ 3,457 Proved acquisition costs - 585 585 Total acquisitions 704 3,338 4,042 Development costs 1,654 933 2,587 Exploration costs 14,651 48,173 62,824 Total finding and development costs 17,009 52,444 69,453 Asset retirement obligations 29 98 127 Total costs incurred $ 17,038 $ 52,542 $ 69,580 Development and exploration/extension drilling activity is as follows: Nine Months Ended September 30, 2020 Development / Service Exploration/ Extension Beginning wells in progress - 13 Well spud 1 6 Successful wells - (9 ) Ending wells in progress 1 10 29 HIGHPEAK ENERGY, INC. The Company currently plans to operate one (1) drilling rig and an average of one (1) frac fleet in the Permian Basin during the last three months of 2020. However, the scope, duration and magnitude of the direct and indirect effects of the COVID-19 pandemic are continuing to evolve and in ways that are difficult or impossible to anticipate. Given the dynamic nature of this situation, the Company is maintaining flexibility in its capital plan and will continue to evaluate drilling and completion activity on an economic basis, with future activity levels assessed monthly. During the nine months ended September 30, 2020, the Company successfully completed nine horizontal wells in the northern portion of our acreage, six of which are in the Wolfcamp A and three of which are in the Lower Spraberry formations. Of the ten exploration/extension wells in progress as of September 30, 2020, six are in the Wolfcamp A and four are in the Lower Spraberry formations. The one development/service well in progress as of September 30, 2020 is a salt-water disposal well being drilled near the center of our main production area to lower costs of handling the produced water from our producing wells. Results of Operations Factors Affecting the Comparability of the Predecessors Historical Financial Resul ts The comparability of the predecessors results of operations among the periods presented, and for future periods, is impacted by the following factors: ● The historical financial statements included herein are the financial statements of HighPeak I from January 1, 2019 to September 30, 2019, and the financial statements of HPK LP for the period from August 28, 2019 (Inception) through December 31, 2019 and for the period beginning January 1, 2020 and ending on August 21, 2020, as the Predecessors for financial reporting purposes, on a stand-alone basis, and as such, do not include financial information regarding the HighPeak II assets for all periods; ● As a corporation, under the Code, HighPeak Energy is subject to U.S. federal income taxes at a statutory rate of 21% of pretax earnings. This is a significant change from the Predecessors’ historical results because they were treated as partnerships for U.S. federal income tax purposes and, as such, the partners of the Predecessors reported their share of the Company’s income or loss on their respective income tax returns; ● Our assets will incur certain additional general and administrative expenses related to being owned by a publicly traded company, that were not previously incurred in HPK LP’s cost structure, including, but not limited to, Securities Exchange Act of 1934, as amended (the “Exchange Act”), reporting expenses; expenses associated with Sarbanes-Oxley Act compliance; expenses associated with being listed on a national securities exchange; incremental independent auditor fees; incremental legal fees; investor relations expenses; registrar and transfer agent fees; incremental director and officer liability insurance costs; and independent director compensation; ● The Predecessors have completed acquisitions during the periods presented, including primarily the acquisition of undeveloped acreage for approximately $2.8 million, $6.3 million and $40.2 million during the period beginning January 1, 2020 and ending on August 21, 2020 and the years ended December 31, 2019 and 2018, respectively, and to a lesser extent producing properties and proved undeveloped reserves of approximately $585,000, $4.6 million and $881,000 during the period beginning January 1, 2020 and ending on August 21, 2020 and the years ended December 31, 2019 and 2018, respectively; and ● During the period beginning January 1, 2020 and ending on August 21, 2020, HPK LP recognized a charge to expense of $76.5 million related to the termination of the Grenadier Acquisition. Three Months Ended September 30, 2020 Compared with Three Months Ended September 30, 2019 Oil and natural gas revenues. Average daily sales volumes are as follows: Three Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 July 1, 2020 through August 21, 2020 Three Months Ended September 30, 2019 Period to Period % Change Oil (Bbls) 3,104 1,240 289 609 % NGL (Bbls) 44 61 - 100 % Natural Gas (Mcf) 312 409 194 89 % Total (Boe) 3,200 1,369 321 574 % The increase in average daily Boe sales volumes for the three months ended September 30, 2020, compared with the same period in 2019 was due to the Company's successful Wolfcamp A and Lower Spraberry horizontal drilling program and the fact that the Company brought back on-line the majority of its production during the third quarter of 2020 after production was curtailed in April 2020 due to the COVID-19 related price downturn. 30 HIGHPEAK ENERGY, INC. The oil, NGL and natural gas prices that the Company reports are based on the market prices received for each commodity. The weighted average prices are as follows: Three Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 July 1, 2020 through August 21, 2020 Three Months Ended September 30, 2019 Period to Period % Change Oil per Bbl $ 38.55 $ 40.43 $ 53.42 (27 )% NGL per Bbl $ 16.43 $ 4.91 $ n/a 100 % Natural Gas per Mcf $ 2.30 $ 2.04 $ 1.34 61 % Total per Boe $ 37.77 $ 37.30 $ 48.84 (23 )% Oil and natural gas production costs. Oil and gas production costs in total and per Boe are as follows (in thousands, except percentages and per Boe amounts): Three Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 July 1, 2020 through August 21, 2020 Three Months Ended September 30, 2019 Period to Period % Change Lease operating expenses $ 670 $ 667 $ 536 149 % Lease operating expenses per Boe $ 5.24 $ 9.38 $ 18.14 (63 )% The increase in lease operating expenses can be attributed to the fact that we had 11 producing horizontal wells during the three months ended September 30, 2020 compared to only two (2) wells during the same period in 2019. Likewise, the decrease in lease operating expense per Boe for the three months ended September 30, 2020, compared with the same period in 2019, was primarily attributable to the increased well count as well. Production and ad valorem taxes. Production and ad valorem taxes are as follows (in thousands, except percentages): Three Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 July 1, 2020 through August 21, 2020 Three Months Ended September 30, 2019 Period to Period % Change Production and ad valorem taxes $ 257 $ 164 $ 80 426 % In general, production taxes and ad valorem taxes are directly related to commodity price changes; however, Texas ad valorem taxes are based upon prior year commodity prices, whereas production taxes are based upon current year commodity prices. 31 HIGHPEAK ENERGY, INC. Production and ad valorem taxes per Boe are as follows: Three Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 July 1, 2020 through August 21, 2020 Three Months Ended September 30, 2019 Period to Period % Change Production taxes per Boe $ 1.75 $ 1.71 $ 2.13 (18 )% Ad valorem taxes per Boe $ 0.26 $ 0.59 $ 0.58 (38 )% The decrease in production taxes per Boe for the three months ended September 30, 2020, compared with the same period in 2019, was primarily due to the decrease in oil prices. The decrease in ad valorem taxes per Boe for the three months ended September 30, 2020, compared with the same period in 2019, was primarily due to a large number of wells that have come on production during 2020 that will have no ad valorem tax this year as 2021 will be the first year that they will be assessed ad valorem taxes. In Texas, ad valorem taxes are based on a valuation of the wells on January 1 of a given year. Depletion, depreciation and amortization expense. Depletion, depreciation and amortization (“DD&A”) expense and DD&A expense per Boe are as follows (in thousands, except percentages and per Boe amounts): Three Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 July 1, 2020 through August 21, 2020 Three Months Ended September 30, 2019 Period to Period % Change DD&A expense $ 2,327 $ 1,294 $ 822 341 % DD&A expense per Boe $ 18.18 $ 18.17 $ 27.82 (35 )% The increase in DD&A was primarily due to the increased production associated with our successful horizontal drilling program. Also, the decrease in DD&A per Boe was primarily due to additions of proved reserves attributable to the Company's successful Wolfcamp/Spraberry horizontal drilling program. 32 HIGHPEAK ENERGY, INC. General and administrative expense. General and administrative expense and general and administrative expense per Boe as well as stock-based compensation expense are as follows (in thousands, except percentages and per Boe amounts): Three Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 July 1, 2020 through August 21, 2020 Three Months Ended September 30, 2019 Period to Period % Change General and administrative expense $ 816 $ 567 $ 841 64 % General and administrative expense per Boe $ 6.38 $ 7.96 $ 28.46 (76 )% Stock-based compensation expense $ 14,508 $ - $ - 100 % The increase in general and administrative expense for the three months ended September 30, 2020, compared with the same period in 2019, is primarily due to the increase in operational activity at the Company with our drilling program that we implemented in late 2019 and resumed in September 2020 in addition to additional administrative costs incurred related to being a public company also beginning in August 2020. The decrease in general and administrative expenses per Boe during the three months ended September 30, 2020 can also be attributed to our successful drilling program in the Permian Basin and the fact that the Company brought back on-line the majority of its production during the third quarter of 2020 after production was curtailed in April 2020 due to the COVID-19 related price downturn. The increase in noncash stock-based compensation expense is due to stock options being granted to officers and employees upon completion of the initial public offering. Approximately 75 percent of the stock options granted vested immediately. Income tax benefit. Three Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 July 1, 2020 through August 21, 2020 Three Months Ended September 30, 2019 Period to Period % Change Income tax benefit $ 2,309 $ - $ - 100 % Effective income tax rate 16.7 % - - 16.7 % The change in income tax benefit during the three months ended September 30, 2020, compared with the same period in 2019, was due to the fact that the Predecessors were treated as partnerships for U.S. federal income tax purposes and, as such, the partners of the Predecessors reported their share of the Company’s income or loss on their respective income tax returns. In contrast, HighPeak Energy is a corporation and is subject to U.S. federal income taxes on any income or loss following the business combination on August 21, 2020. The effective income tax rate differs from the statutory rate primarily due to permanent differences between GAAP income and taxable income. See Note 12 of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information. 33 HIGHPEAK ENERGY, INC. Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019 Oil and natural gas revenues. Average daily sales volumes are as follows: Nine Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 January 1, 2020 through August 21, 2020 Nine Months Ended September 30, 2019 YTD to YTD % Change Oil (Bbls) 3,104 1,007 291 351 % NGL (Bbls) 44 86 - 100 % Natural Gas (Mcf) 312 373 216 69 % Total (BOE) 3,200 1,154 327 344 % The increase in average daily Boe sales volumes for the nine months ended September 30, 2020, compared with the same period in 2019 was due to the Company's successful Wolfcamp A and Lower Spraberry horizontal drilling program and the fact that the Company brought back on-line the majority of its production during the third quarter of 2020 after production was curtailed in April 2020 due to the COVID-19 related price downturn. The oil, NGL and natural gas prices that the Company reports are based on the market prices received for each commodity. The weighted average prices are as follows: Nine Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 January 1, 2020 through August 21, 2020 Nine Months Ended September 30, 2019 YTD to YTD % Change Oil per Bbl $ 38.55 $ 34.26 $ 52.33 (28 )% NGL per Bbl $ 16.43 $ 9.31 $ n/a 100 % Natural Gas per Mcf $ 2.30 $ 0.52 $ 1.75 (24 )% Total per Boe $ 37.77 $ 30.44 $ 47.71 (25 )% Oil and natural gas production costs. Oil and natural gas production costs in total and per Boe are as follows (in thousands, except percentages and per Boe amounts): Nine Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 January 1, 2020 through August 21, 2020 Nine Months Ended September 30, 2019 YTD to YTD % Change Lease operating expenses $ 670 $ 4,870 $ 1,794 209 % Lease operating expenses per Boe $ 5.24 $ 18.03 $ 20.11 (67 )% The increase in lease operating expenses can be attributed to the fact that we had eleven (11) producing horizontal wells during the nine months ended September 30, 2020 compared with only two (2) wells during the same period in 2019. Likewise, the decrease in lease operating expense per Boe for the nine months ended September 30, 2020, compared with the same period in 2019, was primarily attributable to the increased production. 34 HIGHPEAK ENERGY, INC. Production and ad valorem taxes. Production and ad valorem taxes are as follows (in thousands, except percentages): Nine Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 January 1, 2020 through August 21, 2020 Nine Months Ended September 30, 2019 YTD to YTD % Change Production and ad valorem taxes $ 257 $ 566 $ 261 215 % In general, production taxes and ad valorem taxes are directly related to commodity price changes; however, Texas ad valorem taxes are based upon prior year commodity prices, whereas production taxes are based upon current year commodity prices. Production and ad valorem taxes per Boe are as follows: Nine Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 January 1, 2020 through August 21, 2020 Nine Months Ended September 30, 2019 YTD to YTD % Change Production taxes per Boe $ 1.75 $ 1.42 $ 2.21 (25 )% Ad valorem taxes per Boe $ 0.26 $ 0.68 $ 0.72 (48 )% The decrease in production taxes per Boe for the nine months ended September 30, 2020, compared with the same period in 2019, was primarily due to the decrease in oil prices. The decrease in ad valorem taxes per Boe for the nine months ended September 30, 2020, compared with the same period in 2019, was primarily due to a large number of wells that have come on production during 2020 that will have no ad valorem tax this year as 2021 will be the first year that they will be assessed ad valorem taxes. In Texas, ad valorem taxes are based on a wells valuation on January 1 of a given year. Depletion, depreciation and amortization expense. DD&A expense and DD&A expense per Boe are as follows (in thousands, except percentages and per Boe amounts): Nine Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 January 1, 2020 through August 21, 2020 Nine Months Ended September 30, 2019 YTD to YTD % Change DD&A expense $ 2,327 $ 6,385 $ 2,523 228 % DD&A expense per Boe $ 18.18 $ 23.64 $ 29.78 (34 )% The increase in DD&A was primarily due to the increased production associated with our successful horizontal drilling program. Also, the decrease in DD&A per Boe was primarily due to additions of proved reserves attributable to the Company's successful Wolfcamp/Spraberry horizontal drilling program. 35 HIGHPEAK ENERGY, INC. General and administrative expense. General and administrative expense and general and administrative expense per Boe as well as stock-based compensation expense are as follows (in thousands, except percentages and per Boe amounts): Nine Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 January 1, 2020 through August 21, 2020 Nine Months Ended September 30, 2019 YTD to YTD % Change General and administrative expense $ 816 $ 4,840 $ 2,523 124 % General and administrative expense per Boe $ 6.38 $ 17.92 $ 28.28 (67 )% Stock-based compensation expense $ 14,508 $ - $ - 100 % The increase in general and administrative expense for the nine months ended September 30, 2020, compared with the same period in 2019, is primarily due to the increase in operational activity at the Company with our drilling program that we implemented in late 2019 and resumed in September 2020 in addition to additional administrative costs incurred related to being a public company also beginning in August 2020. The decrease in general and administrative expenses per Boe during the nine months ended September 30, 2020 can also be attributed to our successful drilling program in the Permian Basin and the fact that the Company brought back on-line the majority of its production during the third quarter of 2020 after production was curtailed in April 2020 due to the COVID-19 related price downturn. The increase in noncash stock-based compensation expense is due to stock options being granted to officers and employees upon completion of the initial public offering. Approximately 75 percent of the stock options granted vested immediately. Income tax benefit. Nine Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 January 1, 2020 through August 21, 2020 Nine Months Ended September 30, 2019 YTD to YTD % Change Income tax benefit $ 2,309 $ - $ - 100 % Effective income tax rate 16.7 % - - 16.7 % The change in income tax benefit during the nine months ended September 30, 2020, compared with the same period in 2019, was due to the fact that the Predecessors were treated as partnerships for U.S. federal income tax purposes and, as such, the partners of the Predecessors reported their share of the Company’s income or loss on their respective income tax returns. In contrast, HighPeak Energy is a corporation and is subject to U.S. federal income taxes on any income or loss following the business combination on August 21, 2020. The effective income tax rate differs from the statutory rate primarily due to permanent differences between GAAP income. See Note 12 of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information. Liquidity and Capital Resources Liquidity. In response to the COVID-19 pandemic, the Company has taken steps to reduce, defer or cancel certain planned capital expenditures and reduce its overall cost structure commensurate with its expected level of activities. The Company's primary sources of short-term liquidity are (i) cash and cash equivalents, (ii) net cash provided by operating activities, and on an opportunistic basis, (iii) issuances of debt or equity securities and (iv) other sources, such as sales of nonstrategic assets. As of September 30, 2020, the Company had no outstanding borrowings. The Company is currently negotiating a credit facility to provide the Company with a future source of liquidity. While the Company is confident it will enter into a credit facility in the near future, there can be no assurance that it will close. The Company also had unrestricted cash on hand of $54.9 million as of September 30, 2020. 36 HIGHPEAK ENERGY, INC. The Company's primary needs for cash are for (i) capital expenditures, (ii) acquisitions of oil and gas properties, (iii) payments of contractual obligations, and (iv) working capital obligations. Funding for these cash needs may be provided by any combination of the Company's sources of liquidity. Although the Company expects that its sources of funding will be adequate to fund its revised 2020 planned capital expenditures and provide adequate liquidity to fund other needs, no assurance can be given that such funding sources will be adequate to meet the Company's future needs. 2020 capital budget. In response to the uncertainty around the duration and overall impact to the Company caused by the COVID-19 pandemic, the Company has reduced its capital budget for the remainder of 2020 after the HighPeak business combination to approximately $66 million. The Company's capital expenditures for the nine months ended September 30, 2020 were $69.5 million. Capital resources. Cash flows from operating, investing and financing activities are summarized below. Nine Months Ended September 30, 2020 Successor Predecessors August 22, 2020 through September 30, 2020 January 1, 2020 through August 21, 2020 Nine Months Ended September 30, 2019 YTD to YTD Change Net cash provided by (used in) operating activities $ 1,154 $ (4,102 ) $ 1,848 $ (4,796 ) Net cash used in investing activities $ (42,033 ) $ (67,886 ) $ (18,684 ) $ (91,235 ) Net cash provided by financing activities $ 93,810 $ 51,220 $ 19,934 $ 130,096 Operating activities. The decrease in net cash flow provided by operating activities for the nine months ended September 30, 2020, compared with the same period in 2019, was primarily due to a decrease in accounts payable and accrued liabilities primarily related the relatively high amount of accrued expenses related to the business combinations that the Predecessor was working on at the end of 2019, an increase in accounts receivable from the increased oil and gas revenues related to increased production volumes in September 2020 versus 2019 partially offset by a decrease in joint interest billing receivables, and an increase in inventory due to the purchase of oilfield materials and supplies that will be needed with our current development program. These decreases in net cash flow provided by operating activities were partially offset by an increase in cash flow from the statement of operations related primarily to the increased revenues associated with increased production volumes as a result of our successful horizontal drilling program. Investing activities. The increase in net cash used in investing activities for the nine months ended September 30, 2020, compared with the same period in 2019, was primarily due to increases in additions to oil and gas properties as the Company began a development drilling program with two rigs in late-2019 and continued through March 2020 at which time it paused its development drilling program. The Company recommenced its development drilling program with one rig in September 2020. The Company also funded an extension payment of $15.0 million related to an acquisition in 2020 that was terminated and funded notes receivable to Pure of $7.5 million related to the HighPeak business combination. Partially offsetting these increases in cash used in investing activities was a decrease in the amount of acquisitions of oil and gas properties during the nine months ended September 30, 2020 compared with the same period in 2019. Financing activities. The Company's significant financing activities are as follows: • 2020: The Company (i) received $93.8 million from the aforementioned business combination, net of issuance fees, (ii) received $54.0 million in capital contributions from its partners prior to the closing of the aforementioned business combination, and (iii) made distributions to its partners totaling $2.8 million prior to the closing of the aforementioned business combination. • 2019: The Company’s Predecessors received $19.9 million in capital contributions from its partners. Contractual obligations. The Company's contractual obligations include leases (primarily related to contracted drilling rigs, equipment and office facilities), capital funding obligations and other liabilities. Other joint owners in the properties operated by the Company could incur portions of the costs represented by these commitments. N ew Accounting Pronouncements The effects of new accounting pronouncements are discussed in Note 2 of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements." 37 HIGHPEAK ENERGY, INC.