Headwater Exploration Inc. press release

HEADWATER EXPLORATION INC. ANNOUNCES 2022 RESERVES, YEAR END 2022 OPERATING AND FINANCIAL RESULTS, OPERATIONS UPDATE AND DECLARES QUARTERLY DIVIDEND

2023-03-09

TSX - Toronto Stock Exchange · Oil · Natural Gas · Natural Gas Liquids · Canada

Canada NewsWire

CALGARY, AB , March 9, 2023 /CNW/ - Headwater Exploration Inc. (the " Company " or " Headwater ") (TSX: HWX) announces its operating and financial results for the three months and year ended December 31, 2022 . Selected financial and operational information is outlined below and should be read in conjunction with the audited financial statements and the related management's discussion and analysis ("MD&A"). These filings will be available at www.sedar.com and the Company's website at www.headwaterexp.com . In addition, readers are also directed to the Company's Annual Information Form for the year ended December 31, 2022 , dated March 9, 2023 , filed on SEDAR at www.sedar.com .

Financial and Operating Highlights

| | Three months ended

December 31, | Percent Change | Year ended

December 31, | Percent Change | | | | | | 2022 | 2021 | 2022 | 2021 | | | | | Financial ( thousands of dollars except share data) | | | | | | | | | Sales, net of blending (1) (4) | 102,974 | 70,125 | 47 | 430,047 | 179,517 | 140 | | | Adjusted funds flow from operations (2) | 71,828 | 48,731 | 47 | 279,727 | 117,916 | 137 | | | Per share - basic | 0.31 | 0.24 | 29 | 1.23 | 0.59 | 108 | | | - diluted | 0.31 | 0.22 | 41 | 1.21 | 0.55 | 120 | | | Cash flows provided by operating activities | 66,448 | 47,753 | 39 | 283,925 | 111,656 | 154 | | | Per share - basic | 0.29 | 0.23 | 26 | 1.25 | 0.56 | 123 | | | - diluted | 0.28 | 0.22 | 27 | 1.23 | 0.52 | 137 | | | Net income | 39,789 | 27,927 | 42 | 162,109 | 45,828 | 254 | | | Per share - basic | 0.17 | 0.14 | 21 | 0.71 | 0.23 | 209 | | | - diluted | 0.17 | 0.13 | 31 | 0.70 | 0.21 | 233 | | | Capital expenditures (1) | 60,677 | 49,043 | 24 | 244,495 | 140,389 | 74 | | | Adjusted working capital (2) | | | | 104,918 | 92,929 | 13 | | | Shareholders' equity | | | | 543,335 | 397,791 | 37 | | | Weighted average shares (thousands) | | | | | | | | | Basic | 231,766 | 204,005 | 14 | 227,299 | 199,802 | 14 | | | Diluted | 235,305 | 220,958 | 6 | 230,755 | 215,861 | 7 | | | Shares outstanding, end of period ( thousands) | | | | | | | | | Basic | | | | 233,920 | 217,681 | 7 | | | Diluted (5) | | | | 241,029 | 242,448 | (1) | | | Operating ( 6:1 boe conversion) | | | | | | | | | | | | | | | | | | Average daily production | | | | | | | | | Heavy crude oil (bbls/d) | 13,536 | 9,377 | 44 | 11,411 | 6,665 | 71 | | | Natural gas (mmcf/d) | 11.5 | 6.4 | 80 | 8.2 | 4.4 | 86 | | | Natural gas liquids (bbls/d) | 99 | - | 100 | 57 | 2 | 2750 | | | Barrels of oil equivalent (9) (boe/d) | 15,546 | 10,449 | 49 | 12,841 | 7,393 | 74 | | | | | | | | | | | | | | | | | | | | | Average daily sales (6) (boe/d) | 15,568 | 10,459 | 49 | 12,843 | 7,390 | 74 | | | | | | | | | | | | Netbacks _($/boe) _(3) (7) | | | | | | | | | Operating | | | | | | | | | Sales, net of blending (4) | 71.90 | 72.88 | (1) | 91.74 | 66.57 | 38 | | | Royalties | (13.51) | (11.34) | 19 | (18.17) | (9.62) | 89 | | | Transportation | (4.21) | (6.98) | (40) | (4.28) | (7.55) | (43) | | | Production expenses | (6.25) | (4.20) | 49 | (5.93) | (4.64) | 28 | | | | | | | | | | | | Operating netback (3) | 47.93 | 50.36 | (5) | 63.36 | 44.76 | 42 | | | Realized losses on financial derivatives | 2.96 | 1.41 | 110 | 0.01 | 0.35 | (97) | | | Operating netback, including financial derivatives (3) | 50.89 | 51.77 | (2) | 63.37 | 45.11 | 40 | | | General and administrative expense | (1.14) | (1.23) | (7) | (1.38) | (1.48) | (7) | | | Interest income and other expense (8) | 1.15 | 0.10 | 1050 | 0.76 | 0.09 | 744 | | | Current tax expense | (0.75) | - | 100 | (3.07) | - | 100 | | | Adjusted funds flow netback (3) | 50.15 | 50.64 | (1) | 59.68 | 43.72 | 37 | |

| (1) | Non-GAAP measure. Refer to "Non-GAAP and Other Financial Measures" within this press release. | | (2) | Capital management measure. Refer to "Non-GAAP and Other Financial Measures" within this press release. | | (3) | Non-GAAP ratio. Refer to "Non-GAAP and Other Financial Measures" within this press release. | | (4) | Heavy oil sales are netted with blending expense to compare the realized price to benchmark pricing while transportation expense is shown separately. In the annual financial statements blending expense is recorded within blending and transportation expense. | | (5) | In-the-money dilutive instruments as at December 31, 2022 includes 6.1 million stock options with a weighted average exercise price of $2.74, 0.2 million restricted share units and 0.8 million performance share units. | | (6) | Includes sales of unblended heavy crude oil, natural gas and natural gas liquids. The Company's heavy crude oil sales volumes and production volumes differ due to changes in inventory. For the three months ended December 31, 2022, sales volumes comprised of 13,558 bbs/d of heavy oil, 11.5 mmcf/d of natural gas and 99 bbls/d of natural gas liquids (2021- heavy oil of 9,377 bbls/d and natural gas of 6.4 mmcf/d). For the year ended December 31, 2022, sales volumes comprised of 11,411 bbls/d of heavy oil, 8.2 mmcf/d of natural gas and 57 bbls/d of natural gas liquids (2021- heavy oil of 6,665 bbls/d, natural gas of 4.4 mmcf/d and natural gas liquids of 2 bbls/d). | | (7) | Netbacks are calculated using average sales volumes. | | (8) | Excludes unrealized foreign exchange gains/losses, accretion on decommissioning liabilities, interest on lease liability and interest on repayable contribution. | | (9) | See '"Barrels of Oil Equivalent." |

FOURTH QUARTER 2022 HIGHLIGHTS

Headwater declared its inaugural quarterly cash dividend of $0.10 per common share and returned $23.4 million to shareholders in January 2023 . Achieved average production of 15,546 boe/d (consisting of 13,536 bbls/d of heavy oil, 11.5 mmcf/d of natural gas and 99 bbls/d of natural gas liquids), an increase of 49% from the fourth quarter of 2021. Generated significant adjusted funds flow from operations (1) of $71.8 million ( $0.31 per basic share), representing an increase of 47% from the fourth quarter of 2021. Achieved an operating netback (2) of $47.93 /boe and an adjusted funds flow netback (2) of $50.15 /boe. Recognized net income of $39.8 million ( $0.17 per share basic). As at December 31, 2022 , Headwater had working capital of $109.4 million , adjusted working capital (1) of $104.9 million and no outstanding bank debt.

YEAR ENDED DECEMBER 31, 2022 HIGHLIGHTS

Achieved average production of 12,841 boe/d (consisting of 11,411 bbls/d of heavy oil, 8.2 mmcf/d of natural gas and 57 bbls/d of natural gas liquids), an increase of 74% from 2021 annual production of 7,393 boe/d. Adjusted funds flow from operations (1) was $279.7 million ( $1.23 per basic share), representing an increase of 137% from 2021. Achieved an operating netback (2) of $63.36 /boe and an adjusted funds flow netback (2) of $59.68 /boe. Generated significant net income of $162.1 million , $0.71 per basic share, an increase of 254% from the comparable period in 2021. Proved developed producing reserves increased by 69% to 16.6 mmboe from 9.8 mmboe. Total proved reserves increased by 34% to 21.1 mmboe from 15.7 mmboe. Proved plus probable reserves increased by 44% to 34.3 mmboe from 23.8 mmboe. Achieved finding and development ("F&D") costs (2) , including changes in future development costs of $21.42 on a proved developed producing basis, $24.70 per boe on a proved basis and $20.38 per boe on a proved plus probable basis. Based on a 2022 adjusted funds flow netback (2) of $59.68 /boe, achieved recycle ratios (2) of 2.8 on a proved developed producing basis, 2.4 on a proved basis and 2.9 on a proved plus probable basis.

| (1) | Capital management measure. Refer to "Non-GAAP and Other Financial Measures" within this press release. | | (2) | Non-GAAP ratio that does not have any standardized meaning under IFRS and therefore may not be comparable with the calculation of similar measures of other entities. Refer to "Non-GAAP and Other Financial Measures" within this press release. |

EXPLORATION UPDATE

West Nipisi

Headwater validated a new pool discovery on our acreage by successfully drilling five wells in West Nipisi over the last four months. Results have exceeded expectations with on average 19 degree API oil and we are pleased to provide the following initial production details:

| Well UWI | Zone | Initial 30-day average production rates ("IP30") (bbls/d) | | 100/12-08-078-09W5 | Clearwater | 300 | | 100/13-08-078-09W5 | Clearwater | 288 | | 100/05-08-078-09W5 | Clearwater | 276 | | 100/13-16-078-09W5 | Clearwater | 201 | | 100/14-16-078-09W5 | Clearwater | 128 |

A drilling rig has recently been moved back into this area and a stratigraphic test was conducted to assist with the validation of two additional prospective horizons. As a result of the stratigraphic test, two multi-laterals will be drilled prior to the end of the first quarter, testing these two previously untested zones.

Headwater has also continued to expand its land base during the first quarter of 2023 with the acquisition of an additional 31.5 sections of land in the West Nipisi area.

Greater Peavine

Two exploration wells in Peavine were drilled and placed on production in February of 2023. The first well 10-08-080-17W5 has a 14-day initial production rate of approximately 120 bbls/d of 13 degree API oil which is consistent with our expectations for the area. The second well at 11-08-080-17W5 finished recovering load fluid March 7 th and is currently producing 200 bbls/d oil.

Our first exploration well at Seal, 13-06-083-15W5, was recently drilled and has been placed on production. This well is currently recovering load fluid and it exhibited strong geotechnical shows. We look forward to reporting back on its initial production results.

Marten Hills West

Headwater successfully drilled an exploration discovery well testing a previously untested Clearwater sand at 13-02-074-01W5, approximately 8 miles southeast of our Marten Hills West accumulation. The well recently came off load recovery and is producing at rates of approximately 175 bbls/d of oil. This previously untested Clearwater sand has the potential to materially increase our drilling inventory across our Marten Hills West land base.

Headwater continued delineation drilling on the southern extension of our Marten Hills West Clearwater A pool with 4 follow-up wells. The wells have exceeded expectations achieving average IP30's of 230 bbls/d of 20 degree API oil.

Testing of enhanced oil recovery is progressing on the West Marten Hills Clearwater A pool with two waterflood pilots. First water injection has recently commenced on our northern pilot at 13-07-76-02W5. Our second pilot at 16-22-75-02W5 will commence injection early in the third quarter of 2023.

Marten Hills Core

Headwater drilled 16 crude oil wells in the fourth quarter of 2022 and has drilled 6 crude oil wells quarter to date in 2023. The upper bench of 21-074-25W4 was developed in the fourth quarter with 11 wells placed on production with IP30's averaging approximately 300 bbls/d.

Waterflood implementation continues with 9 injection wells added in 2023. The increased injection has elevated stabilized waterflood production from 2,000 bbls/d to in excess of 2,500 bbls/d.

McCully

McCully was placed on production late November and is expected to deliver approximately $22 million of free cash flow (1) for the 2022/2023 winter season, with 64% of volumes hedged at Cdn$25.32 /mmbtu. Headwater's structured hedging program for the McCully asset has protected the asset's cash flow against the highly volatile gas pricing experienced this winter.

| (1) Non-GAAP measure. Refer to "Non-GAAP and Other Financial Measures" within this press release. | | (2) McCully's winter season is estimated to be November 2022 to April 2023. |

2023 GUIDANCE UPDATE

Headwater is re-confirming its previously released capital expenditures guidance of $200 million and corresponding annual average production at 18,000 boe/d. At strip pricing (1) the Company expects to generate adjusted funds flow from operations of $280 million with exit adjusted working capital of $90 million .

| (1) Based on oil and gas commodity strip pricing at February 27, 2023 | | (2) Non-GAAP measure. Refer to "Non-GAAP and Other Financial Measures" within this press release. | | (3) Capital management measure. Refer to "Non-GAAP and Other Financial Measures" within this press release. | | (4) For assumptions utilized in the above guidance see "Future Oriented Financial Information" within this press release. |

FIRST QUARTER DIVIDEND

The Board of Directors of Headwater has declared a quarterly cash dividend to shareholders of $0.10 per common share payable on April 17, 2023 , to shareholders of record at the close of business on March 31, 2023 . This dividend is an eligible dividend for the purposes of the Income Tax Act ( Canada ).

OUTLOOK

Since inception we have continued to maintain a positive working capital balance. When combined with our existing credit facility, it provides us with optionality to organically expand our Clearwater resource base, pursue accretive acquisitions and implement additional enhanced oil recovery schemes.

Our exploration and pool extension results have continued to be robust with multiple new discoveries over the last several months. The discoveries and extensions continue to quantify the depth and quality of Headwater's drilling inventory which provides a pathway for continued success in the future.

Headwater continues to focus on total shareholder returns through a combination of growth and return of capital through a consistent and growing dividend stream. Based on current strip pricing and our projected growth rate, we anticipate having the optionality to materially increase our quarterly dividend in 2024 and beyond.

2022 RESERVE INFORMATION

Headwater currently has heavy oil reserves located in the Marten Hills and West Nipisi areas of Alberta and natural gas reserves in the McCully Field near Sussex , New Brunswick. GLJ Ltd. (" GLJ ") assessed the Company's reserves in its report dated effective December 31, 2022 (" GLJ Report ") which was prepared in accordance with standards of the Canadian Oil and Gas Evaluation Handbook (the " COGE Handbook ") and National Instrument 51-101 – _Standards of Disclosure for Oil and Gas Activities _and is based on the average forecast prices as at December 31, 2022 of three independent reserves evaluation firms. Additional information regarding reserves data and other oil and gas information is included in Headwater's Annual Information Form for the year ended December 31, 2022 , filed on SEDAR on March 9 , 2023.

The following tables are a summary of Headwater's petroleum and natural gas reserves, as evaluated by GLJ, effective December 31, 2022 . It should not be assumed that the estimates of future net revenues presented in the tables below represent the fair market value of the reserves. There is no assurance that the forecast prices and cost assumptions will be attained, and variances could be material. The recovery and reserves estimates of our crude oil, natural gas liquids and natural gas reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. It is important to note that the recovery and reserves estimates provided herein are estimates only. Actual reserves may be greater or less than the estimates provided herein. Reserves information may not add due to rounding.

Reserves Summary

| | Heavy | Shale | Conventional | | Oil | | | Oil | Gas | Gas | NGL | Equivalent | | | Mbbls | MMcf | MMcf | Mbbls | MBOE | | | | | | | | | Proved developed producing | 12,937 | 776 | 20,750 | 89 | 16,614 | | Proved developed non-producing | 221 | 1,500 | 51 | 1 | 480 | | Proved undeveloped | 4,006 | - | 145 | 1 | 4,032 | | Total proved | 17,164 | 2,276 | 20,946 | 91 | 21,126 | | Total probable | 11,422 | 758 | 9,453 | 45 | 13,169 | | Total proved plus probable | 28,587 | 3,034 | 30,399 | 136 | 34,295 |

| (1) | Reserves have been presented on gross basis which are the Company's total working interest share before the deduction of any royalties and without including any royalty interests of the Company. | | (2) | Based on the average of GLJ, McDaniel & Associates Ltd. and Sproule Associates Limited price forecasts effective as at January 1, 2023. | | (3) | Pursuant to the COGE Handbook, reported reserves should target at least a 90 percent probability that the quantities actually recovered will be equal to or exceed the estimated proved reserves and that at least a 50 percent probability that the quantities actually recovered will equal or exceed the sum of the estimated proved plus probable reserves. |

Net Present Value of Future Net Revenue

| | Before Income Tax and Discounted at | After Income Tax and Discounted at | | | | | | | | | | | 0 % | 5 % | 10 % | 15 % | 20 % | 0 % | 5 % | 10 % | 15 % | 20 % | | | $M | $M | $M | $M | $M | $M | $M | $M | $M | $M | | | | | | | | | | | | | | Proved developed producing | 602,841 | 542,500 | 490,424 | 448,535 | 414,689 | 518,371 | 466,231 | 420,704 | 384,152 | 354,730 | | Proved developed non-producing | 19,856 | 16,687 | 14,333 | 12,572 | 11,222 | 15,297 | 12,803 | 10,958 | 9,590 | 8,551 | | Proved undeveloped | 96,883 | 80,232 | 67,182 | 56,705 | 48,181 | 73,343 | 59,446 | 48,609 | 39,945 | 32,928 | | Total proved | 719,579 | 639,419 | 571,939 | 517,812 | 474,092 | 607,011 | 538,480 | 480,271 | 433,686 | 396,209 | | Total probable | 463,302 | 338,961 | 257,863 | 202,875 | 163,966 | 357,115 | 260,011 | 196,588 | 153,646 | 123,301 | | Total proved plus probable | 1,182,881 | 978,380 | 829,802 | 720,687 | 638,058 | 964,126 | 798,491 | 676,859 | 587,332 | 519,510 |

| (1) | Based on the average of GLJ, McDaniel & Associates Ltd. and Sproule Associates Limited price forecasts effective as at January 1, 2023. | | (2) | All future net revenues are stated prior to provision for interest income and other, general and administrative expenses and after deduction of royalties, operating costs, estimated well and facility abandonment and reclamation costs and estimated future capital expenditures. | | (3) | After-income tax net present value of future net revenue are based on Headwater's estimated tax pools as at December 31, 2022. The after-income tax net present value of Headwater's oil and natural gas properties reflects the income tax burden on the properties on a stand-alone basis and takes into account Headwater's existing tax pools. It does not consider tax planning. |

Future Development Costs ("FDC")

The following is a summary of the estimated FDC required to bring proved undeveloped reserves and proved plus probable undeveloped reserves on production.

| | Proved

Reserves

$M | Proved Plus Probable

Reserves

$M | | 2023 | 58,383 | 85,583 | | 2024 | 33,249 | 70,470 | | Thereafter (1) | 3,194 | 3,323 | | Total Undiscounted | 94,826 | 159,376 |

| (1) Future development capital after 2024 is associated with McCully gas plant optimization. |

Pricing Assumptions

The following tables set forth the benchmark reference prices, as at December 31, 2022 , reflected in the GLJ Report, using the average of commodity price forecasts from GLJ, McDaniel & Associates Ltd. and Sproule Associates Limited effective as at January 1, 2023 , to estimate the reserves volumes and associated values in the GLJ Report.

SUMMARY OF PRICING AND INFLATION RATE ASSUMPTIONS as of December 31, 2022 FORECAST PRICES AND COSTS

| Year | WTI

Cushing

Oklahoma

($US/Bbl) | MSW

Light Crude

40 o API

($Cdn/Bbl) | WCS Crude Oil Stream Quality at Hardisty

($Cdn/Bbl) | NYMEX Henry Hub

($US/

MMBtu) | Natural Gas AECO-C Spot

($Cdn/

MMBtu) | Algonquin City Gates Natural Gas

($US/MMBtu) | McCully Gas