CALGARY, AB – Headwater Exploration Inc. (the “Company” or “Headwater“) (TSX:HWX) announces its operating and financial results for the three months and year ended December 31, 2020. 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, 2020, dated March 10, 2021, filed on SEDAR at www.sedar.com.
Financial and Operating Highlights
Three months ended December 31, |
Percent |
Year ended December 31, |
Percent |
|||
2020 |
2019 |
2020 |
2019 |
|||
Financial (thousands of dollars except share data) |
||||||
Sales |
6,626 |
2,310 |
187 |
9,499 |
9,333 |
2 |
Cash flow provided by (used in) operating activities |
(1,451) |
(192) |
656 |
230 |
8,861 |
(97) |
Per share – basic |
(0.01) |
– |
100 |
– |
0.10 |
(100) |
– diluted |
(0.01) |
– |
100 |
– |
0.10 |
(100) |
Adjusted funds flow from operations (1) |
4,816 |
1,929 |
150 |
8,782 |
8,206 |
7 |
Per share – basic |
0.03 |
0.02 |
50 |
0.06 |
0.09 |
(33) |
– diluted |
0.03 |
0.02 |
50 |
0.06 |
0.09 |
(33) |
Net income |
16,919 |
1,447 |
1,069 |
6,707 |
2,815 |
138 |
Per share – basic |
0.10 |
0.02 |
400 |
0.05 |
0.03 |
67 |
– diluted |
0.10 |
0.02 |
400 |
0.05 |
0.03 |
67 |
Development capital expenditures |
1,748 |
227 |
670 |
2,277 |
685 |
232 |
Property Acquisition |
135,297 |
– |
100 |
135,297 |
– |
100 |
Adjusted working capital (1) |
80,759 |
63,141 |
28 |
|||
Shareholders’ equity |
269,030 |
114,310 |
135 |
|||
Weighted average shares (thousands) |
||||||
Basic |
161,365 |
88,147 |
83 |
139,379 |
88,472 |
58 |
Diluted |
168,600 |
88,542 |
90 |
145,377 |
88,757 |
64 |
Shares outstanding, end of period (thousands) |
||||||
Basic |
195,106 |
88,147 |
121 |
|||
Diluted (4) |
238,121 |
89,842 |
165 |
|||
Operating (6:1 boe conversion) |
||||||
Average daily production |
||||||
Heavy crude oil (bbls/d) |
979 |
– |
100 |
246 |
– |
100 |
Natural gas (MMcf/d) |
4.0 |
3.5 |
14 |
3.8 |
3.7 |
3 |
Natural gas liquids (bbls/d) |
3 |
2 |
50 |
3 |
4 |
(25) |
Barrels of oil equivalent (2) (boe/d) |
1,646 |
586 |
181 |
882 |
620 |
42 |
Netbacks ($/boe) |
||||||
Operating |
||||||
Sales |
43.77 |
42.84 |
2 |
29.43 |
41.24 |
(29) |
Royalties |
(3.86) |
(0.96) |
302 |
(2.03) |
(1.02) |
99 |
Blending and transportation expenses |
(7.37) |
– |
100 |
(3.46) |
– |
100 |
Production expenses |
(7.92) |
(12.19) |
(35) |
(8.98) |
(11.54) |
(22) |
Field netback (1) |
24.62 |
29.69 |
(17) |
14.96 |
28.68 |
(48) |
Realized gains on financial derivatives |
10.42 |
14.70 |
(29) |
17.09 |
16.31 |
5 |
Operating netback (1) |
35.04 |
44.39 |
(21) |
32.05 |
44.99 |
(29) |
General and administrative expense |
(4.64) |
(13.22) |
(65) |
(8.78) |
(13.26) |
(34) |
Interest income and other (3) |
1.39 |
4.73 |
(71) |
3.94 |
4.64 |
(15) |
Decommissioning liabilities settled |
– |
(0.13) |
(100) |
– |
(0.11) |
(100) |
Adjusted funds flow netback (1) |
31.79 |
35.77 |
(11) |
27.21 |
36.26 |
(25) |
Net income ($/boe) |
111.75 |
26.84 |
316 |
20.78 |
12.43 |
67 |
(1) |
See “Non-IFRS” measures |
(2) |
See ‘”Barrels of Oil Equivalent.” |
(3) |
Excludes accretion on decommissioning liabilities and interest on lease liability. |
(4) |
Includes in-the-money dilutive securities as at December 31, 2020, which include 6.3 million stock options at a weighted average exercise price of $1.04/share and 21.7 million warrants vested and exercisable at an average exercise price of $0.92/share and 15 million warrants issued to Cenovus at $2.00/share. |
FOURTH QUARTER 2020 HIGHLIGHTS
- Closed the acquisition of Cenovus Energy Inc.’s position in the Marten Hills area of Alberta for estimated total consideration of $135.3 million. The acquired assets included a 100% working interest in approximately 2,800 barrels per day of heavy oil production and 270 net sections of Clearwater rights.
- Generated average production of 1,646 boe/d inclusive of one month of production from the acquired Marten Hills assets.
- Achieved adjusted funds flow from operations of $4.8 million ($0.03/share basic), representing a 150% increase from the fourth quarter of 2019.
- Achieved an operating netback of $35.04/boe and an adjusted funds flow netback of $31.79/boe.
- Generated net income of $16.9 million ($0.10/share basic).
- As at December 31, 2020, Headwater had adjusted working capital of $80.8 million and no outstanding debt.
YEAR ENDED DECEMBER 31, 2020
- Production averaged 882 boe/d for the year, an increase of 42% from 2019 annual production of 620 boe/d.
- Achieved adjusted funds flow from operations of $8.8 million ($0.06/share basic).
- Achieved free cash flow of $6.5 million.
- Proved developed producing reserves increased by 67% to 5.0 mmboe from 3.0 mmboe.
- Total proved reserves increased by 217% to 9.5 mmboe from 3.0 mmboe.
- Proved plus probable reserves increased 254% to 13.1 mmboe from 3.7 mmboe.
- Achieved finding, development, and acquisition (“FD&A”) costs, including changes in future development costs of $26.89 per boe on a proved basis and $18.87 per boe on a proved plus probable basis.
- As at December 31, 2020, Headwater’s Liability Management Rating (“LMR”) was 31 in Alberta significantly exceeding the Alberta industry LMR average. Headwater remains committed to maintaining an LMR rating above the industry average and minimizing its environmental footprint.
Operations Update
Marten Hills Core Area Development
The first quarter of 2021 has been very active to date. Accomplishments include:
- Rig released 11 8-leg horizontal wells in the core producing area of Marten Hills;
- Currently drilling our one remaining 8-leg horizontal well in Marten Hills to complete Headwater’s first quarter program;
- Rig released 5 horizontal injection wells including 1 4-leg horizontal injector, 2 2-leg horizontal injectors and 2 single leg horizontal injectors;
- Drilled, completed and tested two Grand Rapids/Clearwater source wells;
- Drilled and evaluated one stratigraphic test well; and
- Drilled in excess of 150,000 meters and achieved average well costs equivalent to established Clearwater operators.
The producing and injection wells drilled this quarter occurred from three pad sites which prevented many of the new wells from being placed on production until all drilling and completion operations for the quarter were completed. Through some ingenuity the team was able to begin production from four of the 8-leg horizontal wells in the last couple of weeks. The balance of the new producing wells will be placed on production in conjunction with the completion of the multi-well batteries prior to the end of March. Headwater looks forward to providing a fulsome production update in conjunction with our first quarter results to be released in early May.
The Marten Hills area is characterized by challenging break-up conditions from April through to June. With the expected ramp up in production, and associated fluid movement in April, Headwater has been actively preparing contingencies to tackle the logistical challenges of break-up at Marten Hills. The advanced preparations will assist the company in minimizing downtime during the second quarter.
Enhanced Oil Recovery
Headwater initiated construction of a temporary injection setup and anticipates having first injection into the 4-leg horizontal injector by the end of April which is six months ahead of schedule. The remaining injection wells will be placed on production prior to the end of March and produce until the third quarter of 2021, at which time the wells will then be converted to injection.
Production testing of two source wells showed strong inflow results of greater than 1,000 bbls/d per well confirming there is sufficient source water for our first phase of injection.
Gas Conservation
During the first quarter, Headwater executed an agreement with another area operator to construct a joint gas processing facility. The facility is currently under construction and is expected to be commissioned by early July 2021. This facility will allow us to achieve gas conservation from production in the core area nine months ahead of initial expectations.
Exploration Update
Access to a portion of the Marten Hills exploration lands was confirmed during the first quarter. We expect to license the first four exploration tests imminently and expect to begin drilling as early as late August 2021. An additional three to five exploration tests will be drilled as soon as access allows, which is anticipated to commence in December and continue into the first quarter of 2022.
McCully Asset
The McCully asset has performed strongly throughout this winter season and Headwater anticipates continuing to produce the field until May 1, 2021, when it will be shut-in to await next winter’s premium pricing season. Based on field receipts to date, the McCully field is expected to generate approximately $4.5 million of free cash flow during the first quarter of 2021.
Reserves growth with minimal capital expenditures continued for this property in 2020. Positive technical revisions and improved recovery replaced 2020 production by 0.9 times on a proved basis and 1.3 times on a proved plus probable basis.
2021 Guidance
Headwater is reaffirming its 2021 production guidance. Based on recent strip commodity prices Headwater now expects to achieve adjusted funds flow from operations of $90 – $95 million, an increase from approximately $48 – $52 million from our previously announced December guidance. The acceleration of the gas plant construction results in a modest increase in capital expenditures to $90 – $95 million from $85 – $90 million.
2020 Reserve Information
Headwater currently has heavy oil reserves located in the Marten Hills area 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, 2020 (“GLJ Report“) which were 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, 2020 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, 2020 which will be filed on SEDAR on March 10, 2021.
The following tables are a summary of Headwater’s petroleum and natural gas reserves, as evaluated by GLJ, effective December 31, 2020. 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 |
2,181 |
831 |
16,057 |
17 |
5,013 |
Proved developed non-producing |
– |
989 |
– |
1 |
166 |
Proved undeveloped |
3,673 |
– |
3,099 |
128 |
4,317 |
Total proved |
5,854 |
1,820 |
19,157 |
146 |
9,495 |
Total probable |
2,478 |
524 |
5,713 |
67 |
3,584 |
Total proved plus probable |
8,332 |
2,344 |
24,869 |
212 |
13,080 |
(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 3 consultants’ average of GLJ, McDaniel & Associates Ltd. and Sproule Associates Limited effective as at January 1, 2021. |
(3) |
Pursuant to the COGE Handbook, reported reserves should target at least 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 |
|||||
0% |
5% |
8% |
10% |
15% |
|
$MM |
$MM |
$MM |
$MM |
$MM |
|
Proved developed producing |
115.3 |
101.0 |
92.7 |
87.8 |
77.5 |
Proved developed non-producing |
1.4 |
1.3 |
1.3 |
1.2 |
1.1 |
Proved undeveloped |
60.5 |
49.0 |
43.1 |
39.5 |
31.8 |
Total proved |
177.2 |
151.3 |
137.1 |
128.5 |
110.4 |
Total probable |
94.4 |
70.0 |
59.4 |
53.8 |
43.2 |
Total proved plus probable |
271.7 |
221.2 |
196.5 |
182.3 |
153.6 |
(1) |
Based on the average of the commodity price forecasts of GLJ, McDaniel & Associates Ltd. and Sproule Associates Limited effective as at January 1, 2021. |
(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. |
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 $MM |
Proved Plus Probable Reserves $MM |
|
2021 |
41.2 |
41.2 |
2022 |
4.0 |
4.0 |
Thereafter (1) |
2.7 |
2.8 |
Total Undiscounted |
47.9 |
48.0 |
(1) |
Future development capital after 2022 is associated with McCully gas plant optimization. |
Pricing Assumptions
The following tables set forth the benchmark reference prices, as at December 31, 2020, reflected in the GLJ Report, using the average of commodity price forecasts from GLJ, McDaniel & Associates Ltd. and Sproule Associates Limited effective as at January 1, 2021, to estimate the reserves volumes and associated values in the GLJ Report. These price assumptions were provided to Headwater by GLJ and were GLJ’s then current forecast at the date of the GLJ Report.
SUMMARY OF PRICING AND INFLATION RATE ASSUMPTIONS (1)
as of December 31, 2020
FORECAST PRICES AND COSTS
Year |
WTI Cushing Oklahoma ($US/Bbl) |
MSW Light Crude 40o API ($Cdn/Bbl) |
WCS ($Cdn/Bbl) |
NYMEX ($US/ MMBtu) |
Natural ($Cdn/ MMBtu) |
Algonquin ($US/MMBtu) |
McCully Price(4) ($Cdn/Mcf) |
Inflation %/Year |
Exchange ($Cdn/$US) |
|||||||||
Forecast(3) |
||||||||||||||||||
2021 |
47.17 |
55.76 |
44.63 |
2.83 |
2.78 |
3.58 |
6.47 |
0.0% |
0.7683 |
|||||||||
2022 |
50.17 |
59.89 |
48.18 |
2.87 |
2.70 |
3.87 |
6.47 |
1.3% |
0.7650 |
|||||||||
2023 |
53.17 |
63.48 |
52.10 |
2.90 |
2.61 |
3.85 |
6.51 |
2.0% |
0.7633 |
|||||||||
2024 |
54.97 |
65.76 |
54.10 |
2.96 |
2.65 |
3.86 |
5.74 |
2.0% |
0.7633 |
|||||||||
2025 |
56.07 |
67.13 |
55.19 |
3.02 |
2.70 |
3.97 |
6.37 |
2.0% |
0.7633 |
|||||||||
2026 |
57.19 |
68.53 |
56.29 |
3.08 |
2.76 |
4.05 |
6.50 |
2.0% |
0.7633 |
Thereafter |
Escalation rate of 2.0% |
Notes: |
|
(1) |
This summary table identifies benchmark reference pricing schedules that might apply to a reporting issuer. |
(2) |
The exchange rate used to generate the benchmark reference prices in this table. |
(3) |
As at December 31, 2020. |
(4) |
The forecast McCully gas price is used by GLJ in calculating the net present value of Headwater’s future natural gas net revenues from the McCully field. The McCully gas price is determined by adjusting the forecast AGT gas prices to reflect the expected premiums received at Headwater’s delivery point, transportation costs, as applicable, heat content and marketing conditions. The McCully gas price in years 2021 – 2023 reflects only the winter producing months (January to April and November to December) or correlate to the intermittent production strategy employed by the Company to capture seasonal premium pricing. After 2023, the GLJ Report assumes Headwater produces volumes from its reserves continuously over the year and as such, McCully pricing reflects the full year. |
Response to COVID-19
Headwater continues to prioritize the health and safety of the Company’s employees, contractors, partners, service providers and the communities in which we operate. The Company remains committed to protecting the well–being of all stakeholders and following the guidance of public health officials, while maintaining safe operations and business continuity.
Additional corporate information can be found in our corporate presentation on our website at www.headwaterexp.com