CALGARY, AB – Headwater Exploration Inc. (the “Company” or “Headwater“) (TSX: HWX) is pleased to announce its operating and financial results for the three and six months ended June 30, 2021. Selected financial and operational information is outlined below and should be read in conjunction with the unaudited condensed interim 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.
Financial and Operating Highlights
Three months ended June 30, |
Six months ended June 30, |
||||
2021 |
2020 |
2021 |
2020 |
||
Financial (thousands of dollars except share data) |
|||||
Sales, net of blending (1) |
37,429 |
565 |
60,552 |
2,873 |
|
Cash flow provided by operating activities |
23,232 |
863 |
36,015 |
2,045 |
|
Per share – basic |
0.12 |
0.01 |
0.18 |
0.02 |
|
– diluted (3) |
0.10 |
0.01 |
0.16 |
0.02 |
|
Adjusted funds flow (used in) from operations (2) |
23,182 |
(610) |
37,661 |
4,803 |
|
Per share – basic |
0.12 |
– |
0.19 |
0.04 |
|
– diluted (3) |
0.10 |
– |
0.17 |
0.04 |
|
Net income (loss) |
4,588 |
(1,679) |
(8,205) |
(8,489) |
|
Per share – basic |
0.02 |
(0.01) |
(0.04) |
(0.07) |
|
– diluted |
0.02 |
(0.01) |
(0.04) |
(0.07) |
|
Adjusted net income (loss) (2) |
10,561 |
(1,679) |
16,963 |
(8,489) |
|
Per share – basic |
0.05 |
(0.01) |
0.09 |
(0.07) |
|
– diluted (3) |
0.05 |
(0.01) |
0.08 |
(0.07) |
|
Development capital expenditures |
16,781 |
398 |
54,053 |
468 |
|
Adjusted working capital (2) |
69,697 |
113,569 |
|||
Shareholders’ equity |
268,191 |
156,386 |
|||
Weighted average shares (thousands) |
|||||
Basic |
197,445 |
144,749 |
196,389 |
125,401 |
|
Diluted |
213,905 |
144,749 |
196,389 |
125,401 |
|
Shares outstanding, end of period (thousands) |
|||||
Basic |
202,286 |
145,044 |
|||
Diluted (4) |
240,257 |
151,381 |
|||
Operating (6:1 boe conversion) |
|||||
Average daily production |
|||||
Heavy crude oil (bbls/d) |
6,185 |
– |
4,793 |
– |
|
Natural gas (mmcf/d) |
2.3 |
2.4 |
5.4 |
5.6 |
|
Natural gas liquids (bbl/d) |
5 |
– |
5 |
3 |
|
Barrels of oil equivalent (5)(boe/d) |
6,565 |
396 |
5,690 |
942 |
|
Average daily sales (6) (boe/d) |
6,653 |
396 |
5,715 |
942 |
|
Netbacks ($/boe) (7) |
|||||
Operating |
|||||
Sales, net of blending (1) |
61.83 |
15.67 |
58.53 |
16.76 |
|
Royalties |
(8.84) |
(0.39) |
(7.45) |
(0.42) |
|
Transportation (1) |
(8.21) |
– |
(7.31) |
– |
|
Production expenses |
(4.89) |
(14.79) |
(5.19) |
(6.89) |
|
Field netback (2) |
39.89 |
0.49 |
38.58 |
9.45 |
|
Realized gains on financial derivatives |
0.24 |
– |
(0.39) |
22.97 |
|
Operating netback (2) |
40.13 |
0.49 |
38.19 |
32.42 |
|
General and administrative expense |
(1.60) |
(23.33) |
(1.76) |
(8.90) |
|
Interest income and other (8) |
(0.23) |
6.00 |
(0.03) |
4.50 |
|
Adjusted funds flow netback (2) |
38.30 |
(16.84) |
36.40 |
28.02 |
(1) Heavy oil sales are netted with blending expense to compare the realized price to benchmark pricing while transportation expense is shown separately. In the interim condensed financial statements blending is recorded within blending and transportation expense. |
(2) See “Non-IFRS” measures. |
(3) Total weighted average shares, calculated using the treasury stock method, for the diluted per share number for cash flow provided by operating activities, adjusted funds flow (used in) from operations and adjusted net income (loss) is 221,966,942 and 219,449,573, respectively, for the three and six months ended June 30, 2021. |
(4) Includes in-the-money dilutive instruments as at June 30, 2021 which include 7.4 million stock options with a weighted average exercise price of $1.57, 15.6 million warrants issued pursuant to the recapitalization transaction with an exercise price of $0.92 and 15 million warrants with an exercise price of $2.00. |
(5) See ‘”Barrels of Oil Equivalent.” |
(6) Includes sales of unblended heavy crude oil, natural gas and natural gas liquids. The Company’s heavy crude oil sales and production volumes differ due to changes in inventory. |
(7) Netbacks are calculated using average sales volumes. |
(8) Excludes accretion on decommissioning liabilities and interest on lease liability. |
SECOND QUARTER 2021 HIGHLIGHTS
OPERATIONS UPDATE
Marten Hills Core Area Development
The 12 producing 8-leg horizontal wells drilled in the first quarter have achieved:
In early June, Headwater commenced the remainder of its 2021 drilling program. The learnings from the Company’s inaugural program in the first quarter have been applied to this ongoing drilling program with encouraging incremental results to date.
Since spring break-up, the Company has successfully rig released 13, 6-leg producing wells of which 7 of these wells have been placed on production and have recovered 100% of load fluid.
The first 2 wells drilled in this program achieved load recovery in early July with extremely positive initial results. The first well achieved a 30-day average rate post load recovery of 390 bbls/d (65 bbls/d per lateral) and the second well achieved a 20-day average rate post load recovery of 426 bbls/d (71 bbls/d per lateral). These wells are performing approximately 36% ahead of management’s expectations and are in the top decile of all wells drilled in Marten Hills to date.
In addition to the first 2 wells drilled in this program, 5 wells achieved first production, beyond load recovery, in late July or early August. The producing performance of these wells during the load recovery process is comparable to the first 2 wells drilled, confirming the improvements in capital efficiency that were expected during the Company’s second half program have occurred.
For the first 13 wells drilled with Headwater’s optimized drilling strategy, the Company is pleased to report that current drilling costs with oil-based muds are tracking 10% lower than the average water-based mud drilling costs from the first quarter of 2021. The optimized strategy allows superior oil-based mud systems to be cost competitive with water-based mud systems, delivering repeatable top decile production results and stronger capital efficiencies.
Enhanced Oil Recovery
Headwater commenced water injection into the 4-leg horizontal injector, 02/16-35-74-25W4, on April 15, 2021, and has injected approximately 56,000 bbls of water to date. The pilot waterflood results are extremely encouraging with the gas oil ratio in the supported producer having dropped from 875 scf/bbl that was seen prior to injection to a current gas oil ratio of 400 scf/bbl. The oil rate during this time has continued to climb with the rate increasing from 240 bbls/d prior to injection to its current rate of 275 bbls/d. The combined positive results validate Headwater’s plan to implement a full scale waterflood program over the next 18 months.
The 4 injection wells drilled in the first quarter of 2021 will be converted to injection in late August providing further validation of the merits and value of enhanced oil recovery.
Exploration Update
Headwater has licensed 7 exploration wells covering three distinct Clearwater prospects in the greater Marten Hills area. The current budget contemplates drilling 2 of these tests in the third quarter of 2021, with an additional 2 to 4 wells drilled in the fourth quarter of 2021.
Multiple additional exploration prospects in the Clearwater and other formations have been identified throughout the Company’s land base. The current plan contemplates drilling 3 to 5 additional exploration prospects by the end of the first quarter of 2022.
Oil Processing Facility Construction
Civil work on the 100% owned Headwater oil processing facility is currently in progress with mechanical construction expected to start by early September. The team has been successful in procuring all long lead items for construction and now expects to complete and commission the facility in late December 2021 which is approximately 3 months ahead of schedule.
ESG Update
The Company’s joint gas processing facility is expected to be commissioned in late August 2021, resulting in first sales gas and an approximate 50% reduction in Headwater’s CO2e emissions intensity.
Fresh water usage intensity has decreased by greater than 50% and placed the Company in the top decile of its peer group, due to changes in drilling strategy using primarily oil-based mud systems.
Guidance Increase
Headwater’s Board of Directors has approved an increase to Headwater’s capital budget from $110 million to $130 million, allowing for the acceleration of the oil processing facility. Accelerating $20 million from the first quarter of 2022 to the fourth quarter of 2021 is expected to result in operating and transportation costs savings of approximately $4 million in the first quarter of 2022.
With the oil processing facility commissioned, operating and transportation costs are expected to be reduced from $13.25 per boe in 2021 to $9.00 per boe in 2022.
The performance of the Company’s second half drilling program to date has provided the confidence to increase Headwater’s production and capital outlook as follows:
Previous |
Revised |
|
Annual average daily production (boe/d) |
7,000 – 7,250 |
7,250 |
Fourth quarter 2021 daily production (boe/d) |
9,000 – 9,500 |
10,250 |
Capital expenditures ($millions) |
105 – 110 |
130 |
Exit adjusted working capital ($millions) |
60 |
65 |
Outlook
Headwater continues to build momentum in the development of its marquee Clearwater assets. Based on Headwater’s increased guidance, production per share growth of greater than 200% is expected to be achieved in 2021 while having reduced the Company’s CO2e emissions intensity by approximately 50%. This is all expected to be completed while maintaining an estimated positive working capital position of $65 million, allowing for future capital acceleration and or acquisition opportunities.
Headwater’s guiding principles of shareholder value creation, sustainability, asset development with an emphasis on environmental, social, and governance goals, and maintaining a pristine balance sheet continue to be unwavering.
Additional corporate information can be found in the Company’s corporate presentation and on Headwater’s website at www.headwaterexp.com
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