Headwater Exploration Inc. press release

HEADWATER EXPLORATION INC. ANNOUNCES 2023 RESERVES, YEAR END 2023 OPERATING AND FINANCIAL RESULTS, OPERATIONS UPDATE, INCREASE TO 2024 CAPITAL BUDGET AND DECLARES QUARTERLY DIVIDEND

2024-03-07

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

Canada NewsWire

CALGARY, AB , March 7, 2024 /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, 2023 . 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.sedarplus.ca 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, 2023 , dated March 7, 2024 , filed on SEDAR+ at www.sedarplus.ca .

Financial and Operating Highlights

| | Three months ended

December 31, | Percent Change | Year ended

December 31, | Percent Change | | | | | 2023 | 2022 | 2023 | 2022 | | | | Financial _( thousands of dollars except per share and production data) _ | | | | | | | | Sales, net of blending (1) (4) | 131,690 | 102,974 | 28 | 482,823 | 430,047 | 12 | | Adjusted funds flow from operations (2) | 81,983 | 71,828 | 14 | 288,262 | 279,727 | 3 | | Per share - basic (3) | 0.35 | 0.31 | 13 | 1.22 | 1.23 | (1) | | - diluted (3) | 0.34 | 0.31 | 10 | 1.21 | 1.21 | - | | Cash flows provided by operating activities | 90,690 | 66,448 | 36 | 303,316 | 283,925 | 7 | | Per share - basic | 0.38 | 0.29 | 31 | 1.29 | 1.25 | 3 | | - diluted | 0.38 | 0.28 | 36 | 1.28 | 1.23 | 4 | | Net income | 45,469 | 39,789 | 14 | 156,072 | 162,109 | (4) | | Per share - basic | 0.19 | 0.17 | 12 | 0.66 | 0.71 | (7) | | - diluted | 0.19 | 0.17 | 12 | 0.66 | 0.70 | (6) | | Capital expenditures (1) | 30,050 | 60,677 | (50) | 233,846 | 244,495 | (4) | | Adjusted working capital (2) | | | | 63,526 | 104,918 | (39) | | Shareholders' equity | | | | 610,498 | 543,335 | 12 | | Dividends declared | 23,658 | 23,392 | 1 | 94,421 | 23,392 | 304 | | Per share | 0.10 | 0.10 | - | 0.40 | 0.10 | 300 | | Weighted average shares (thousands) | | | | | | | | Basic | 236,408 | 231,766 | 2 | 235,583 | 227,299 | 4 | | Diluted | 238,872 | 235,305 | 2 | 237,705 | 230,755 | 3 | | Shares outstanding, end of period (thousands) | | | | | | | | Basic | | | | 236,580 | 233,920 | 1 | | Diluted (5) | | | | 241,138 | 241,029 | - | | Operating ( 6:1 boe conversion) | | | | | | | | Average daily production | | | | | | | | Heavy crude oil (bbls/d) | 18,514 | 13,536 | 37 | 16,466 | 11,411 | 44 | | Natural gas (mmcf/d) | 8.0 | 11.5 | (30) | 8.8 | 8.2 | 7 | | Natural gas liquids (bbls/d) | 93 | 99 | (6) | 98 | 57 | 72 | | Barrels of oil equivalent (9) (boe/d) | 19,939 | 15,546 | 28 | 18,038 | 12,841 | 40 | | Average daily sales (6) (boe/d) | 20,134 | 15,568 | 29 | 18,038 | 12,843 | 40 | | Netbacks _($/boe) _(3) (7) | | | | | | | | Operating | | | | | | | | Sales, net of blending (4) | 71.09 | 71.90 | (1) | 73.34 | 91.74 | (20) | | Royalties | (12.91) | (13.51) | (4) | (13.01) | (18.17) | (28) | | Transportation | (5.12) | (4.21) | 22 | (5.35) | (4.28) | 25 | | Production expenses | (7.34) | (6.25) | 17 | (7.17) | (5.93) | 21 | | Operating netback (3) | 45.72 | 47.93 | (5) | 47.81 | 63.36 | (25) | | Realized gains on financial derivatives | 3.35 | 2.96 | 13 | 2.14 | 0.01 | na | | Operating netback, including financial derivatives (3) | 49.07 | 50.89 | (4) | 49.95 | 63.37 | (21) | | General and administrative expense | (1.51) | (1.14) | 32 | (1.47) | (1.38) | 7 | | Interest income and other expense (8) | 0.84 | 1.15 | (27) | 0.92 | 0.76 | 21 | | Current tax expense | (4.14) | (0.75) | 452 | (5.62) | (3.07) | 83 | | Adjusted funds flow netback (3) | 44.26 | 50.15 | (12) | 43.78 | 59.68 | (27) |

| (1) | Non-GAAP financial 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 audited annual financial statements blending expense is recorded within blending and transportation expense. | | (5) | In-the-money dilutive instruments as at December 31, 2023 includes 2.5 million stock options with a weighted average exercise price of $3.88 and 2.0 million performance share units ("PSUs"). The number of outstanding PSUs has been adjusted for dividends. Restricted share units have been excluded as the Company intends to cash settle these awards. | | (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, 2023, sales volumes comprised of 18,709 bbs/d of heavy oil, 8.0 mmcf/d of natural gas and 93 bbls/d of natural gas liquids (2022- heavy oil of 13,558 bbls/d, natural gas of 11.5 mmcf/d and natural gas liquids of 99 bbls/d). For the year ended December 31, 2023, sales volumes comprised of 16,465 bbls/d of heavy oil, 8.8 mmcf/d of natural gas and 98 bbls/d of natural gas liquids (2022- heavy oil of 11,413 bbls/d, natural gas of 8.2 mmcf/d and natural gas liquids of 57 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 2023 HIGHLIGHTS

Achieved record production of 19,939 boe/d (93% heavy oil), an increase of 28% over 2022 fourth quarter production of 15,546 boe/d (87% heavy oil). Realized record adjusted funds flow from operations (1) of $82.0 million ( $0.35 per basic share), cash flows from operating activities of $90.7 million ( $0.38 per basic share) and free cash flow (3) of $51.9 million . Achieved an operating netback, including financial derivatives, (2) of $49.07 /boe and an adjusted funds flow netback (2) of $44.26 /boe. Generated net income of $45.5 million ( $0.19 per basic share) equating to $24.55 /boe. Executed a $30.1 million capital expenditure (3) program including 13 net crude oil wells in Marten Hills West , at a 100% success rate. Returned $0.10 per common share to shareholders. As at December 31, 2023 , Headwater had working capital of $78.6 million , adjusted working capital (1) of $63.5 million and no outstanding bank debt.

YEAR ENDED DECEMBER 31, 2023 HIGHLIGHTS

Achieved average production of 18,038 boe/d (91% heavy oil), an increase of 40% over 2022 annual production of 12,841 boe/d (89% heavy oil). Realized adjusted funds flow from operations (1) of $288.3 million ( $1.22 per basic share) and cash flows from operating activities of $303.3 million ( $1.29 per basic share). Achieved an operating netback, including financial derivatives, (2) of $49.95 /boe and an adjusted funds flow netback (2) of $43.78 /boe. Generated net income of $156.1 million ( $0.66 per basic share) equating to $23.71 /boe. Returned a total of $0.40 per common share or $94.4 million to shareholders. Proved developed producing reserves increased by 33% to 22.1 mmboe from 16.6 mmboe. Total proved reserves increased by 54% to 32.5 mmboe from 21.1 mmboe. Total proved plus probable reserves increased by 51% to 51.9 mmboe from 34.3 mmboe. Achieved finding and development ("F&D") costs (2) , including changes in future development costs of $19.17 per boe on a proved developed producing basis, $18.61 per boe on a total proved basis and $14.97 per boe on a total proved plus probable basis. Based on a 2023 adjusted funds flow netback (2) of $43.78 /boe, achieved recycle ratios (2) of 2.3 on a proved developed producing basis, 2.4 on a total proved basis and 2.9 on a total 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. | | (3) | Non-GAAP financial measure 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. |

OPERATIONS UPDATE

Marten Hills West

Production from Marten Hills West grew more than 250% from 3,000 bbls/d in the first quarter of 2023 to greater than 10,500 bbls/d in the fourth quarter of 2023. The year was also characterized by a significant pool expansion in addition to the validation of the stacked pay potential of the area. Economic production has now been proven from four different Clearwater sands in Marten Hills West .

In the Clearwater A, successful tests at 00/03-15-075-01W5 and 02/05-18-075-01W5 have expanded the eastern Clearwater A pool boundary by 4 miles de-risking an additional ten sections of land. The 00/3-15-076-01W5 well achieved a 60-day initial production rate of 157 bbls/d while the 02/05-18-075-01W5 well achieved a 60-day initial production rate of 147 bbls/d. Success from these wells expands the potential of the Clearwater A in Marten Hills West to greater than 45 sections.

The positive results of the two active waterflood pilots in the Clearwater A suggest that a large portion of the Clearwater A pool will be amenable to secondary recovery. The two active pilots continue to exceed our expectations with decreasing gas oil ratios and greater than 200 bbls/d of stabilized oil production. Continued implementation of the Clearwater A waterflood will occur with a full section waterflood employed by the end of the first quarter of 2024.

The successful discovery well drilled at 02/13-15-076-02W5 in the Clearwater E in the fourth quarter of 2023 has recently been followed up with a second test at 00/04-35-076-02W5. This well finished recovering load fluid March 2 nd and is currently producing 160 bbls/d. In conjunction with our discovery well, this pool is now estimated to be in excess of 15 sections. A further test of the Clearwater E sand will occur in the second quarter.

Our discovery well in the Clearwater G at 00/02-30-075-01W5 has achieved a 90-day initial production rate of 160 bbls/d. Three additional Clearwater G tests following up on this discovery will be drilled over the next couple of months to continue validation of the size and potential of this sand.

Further drilling in the Clearwater B will occur in the second half of 2024 with 4 wells planned within this sand.

Marten Hills Core

In 2024 we will continue to advance the secondary recovery efforts in the core converting two sections to injection and growing our stabilized production to more than 4,000 bbls/d. By mid-2025 we will have the entire core area under secondary recovery resulting in reduced corporate declines and required maintenance capital. In addition, we have recently expanded our enhanced recovery efforts with a pilot injector northeast of the core area supporting the 02/12-08-075-24W5 well. Early indications here look excellent with strong injectivity indicating enhanced recovery efforts can be expanded beyond the defined core area in Marten Hills.

West Nipisi

In the first quarter of 2024, three Clearwater C extension wells were drilled in the 7-section development area of West Nipisi. The northwest extension wells, 00/14-17-078-09W5 and 00/13-17-078-09W5 have achieved an average per well 30-day initial production rate of 195 bbls/d. The 03/04-04-078-09W5 well, a southern extension test, has achieved a 15-day initial production rate of 215 bbls/d. Results from these three tests validate economic development from the entire 7-section block.

In addition, two multi-lateral wells and a stratigraphic test have been drilled in the West Nipisi expansion area via winter access roads for evaluation of two prospective Clearwater sands. The 02/05-15-077-12W5 well, targeting the Clearwater G sand, was rig-released February 17 th and the 00/05-18-77-11W5 well, targeting the Clearwater F sand, was rig-released February 27 th . Both wells are at various stages of load fluid recovery and will be produced until break up conditions prevail. Results from the multi-lateral wells in addition to evaluation of the stratigraphic test will aid in determining the viability of an all-weather access road into the area.

Heart River & Little Horse

At Heart River, south of our Greater Peavine area, we have recently spud our first Falher test at 00/06-36-076-16W5 targeting a Falher sandstone prospective for heavy oil. Results from this well are anticipated to be released in conjunction with our first quarter results.

The exploration team has also identified additional multi-zone prospectivity across 47 sections of newly acquired acreage in an offsetting area called Little Horse, which is prospective for heavy oil and located directly east of Heart River. The first test in this recently acquired acreage is planned for the fourth quarter of 2024.

Handel

To date, the team has been successful at acquiring 56 sections of land prospective for Mannville oil in the Handel area of West Central Saskatchewan. A stratigraphic test and one single-leg horizontal well have been recently drilled in the area. The horizontal well targeting the Lloydminster sandstone had encouraging geotechnical shows and is currently being placed on production. Pending the success of this well, up to two additional tests will be drilled in this area in 2024.

Exploration Land Update

The Headwater team continues its pursuit of organic growth opportunities in and beyond the boundaries of the Clearwater acreage. Year to date in 2024, we have added 81.5 net sections to our land base. We have now accumulated over 520 net sections in the Clearwater fairway and 175 net sections of non- Clearwater acreage in oily fairways across the basin. Within the 175 sections of non-clearwater acreage we have defined numerous play concepts, and plan to test 4 of these prospects in 2024.

McCully

McCully was placed back on production December 1 st to align with our aggressive hedging profile. Approximately 86% of our December 2023 to March 2024 volumes are hedged at Cdn$17.85 /mcf which is expected to provide approximately $15 million of free cash flow (1) over the winter producing season (2) . Headwater's structured hedging program for the McCully asset has protected the asset's cash flow against highly volatile gas pricing experienced this winter.

| (1) | Non-GAAP financial measure 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. | | (2) | McCully's winter season is estimated to continue until April 2024. |

2024 GUIDANCE UPDATE

As a result of Headwater's success in accumulating incremental lands year to date in 2024, the Board of Directors has approved an expansion of the Company's 2024 capital budget from $180 million to $200 million . Average forecast production for 2024 will remain at 20,000 boe/d. At US$75.30 WTI, the Company expects to generate adjusted funds flow from operations of $298 million and exit the year with adjusted working capital of $65 million .

| (1) | The Company's previous 2024 guidance as set out in a press release dated December 7, 2023 was $180 million of capital expenditures (comprised of $135 million in maintenance and growth capital, $25 million in waterflood capital and $20 million of exploration capital), adjusted funds flow from operations of $275 million and exit adjusted working capital of $58 million based on assumptions of US$70.00/bbl WTI and WCS of Cdn$73.30/bbl (and certain other assumptions as set out in such press release). | | (2) | Non-GAAP financial 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 confirms a cash dividend to shareholders of $0.10 per common share payable on April 15, 2024 , to shareholders of record at the close of business on March 29, 2024 . 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 resource base, pursue accretive acquisitions and implement additional enhanced oil recovery schemes.

Headwater continues to focus on total shareholder returns through a combination of growth and return of capital.

2023 RESERVES INFORMATION

Headwater currently has heavy oil reserves located in the Marten Hills, Greater Peavine and West Nipisi areas of Alberta and natural gas reserves in the McCully Field near Sussex , New Brunswick. McDaniel & Associates Consultants Ltd. (" McDaniel ") assessed the Company's reserves in its report dated effective December 31, 2023 (" McDaniel 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, 2023 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, 2023 , filed on SEDAR+ on March 7 , 2024.

The following tables are a summary of Headwater's petroleum and natural gas reserves, as evaluated by McDaniel, effective December 31, 2023 . 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 | 18,073 | 756 | 22,363 | 145 | 22,071 | | Proved developed non-producing | - | 1,477 | - | 2 | 248 | | Proved undeveloped | 9,796 | - | 2,206 | 34 | 10,198 | | Total proved | 27,869 | 2,233 | 24,569 | 181 | 32,517 | | Total probable | 16,982 | 690 | 12,868 | 166 | 19,407 | | Total proved plus probable | 44,851 | 2,923 | 37,437 | 347 | 51,925 |

| (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 Ltd., McDaniel & Associates Ltd. and Sproule Associates Limited price forecasts effective as at January 1, 2024. | | (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. |