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, 2022. 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.
Three months ended June 30, |
Percent |
Six months ended June 30, |
Percent |
||||
2022 |
2021 |
2022 |
2021 |
||||
Financial (thousands of dollars except share data) |
|||||||
Sales, net of blending (1) (4) |
122,102 |
37,429 |
226 |
232,124 |
60,552 |
283 |
|
Adjusted funds flow from operations (2) |
79,435 |
23,182 |
243 |
149,458 |
37,661 |
297 |
|
Per share – basic |
0.35 |
0.12 |
192 |
0.67 |
0.19 |
253 |
|
– diluted |
0.34 |
0.10 |
240 |
0.65 |
0.17 |
282 |
|
Cash flow provided by operating activities |
84,728 |
23,232 |
265 |
145,417 |
36,015 |
304 |
|
Per share – basic |
0.37 |
0.12 |
208 |
0.65 |
0.18 |
261 |
|
– diluted |
0.36 |
0.10 |
260 |
0.63 |
0.16 |
294 |
|
Net income (loss) |
48,412 |
4,588 |
955 |
90,775 |
(8,205) |
nm |
|
Per share – basic |
0.21 |
0.02 |
950 |
0.41 |
(0.04) |
nm |
|
– diluted |
0.21 |
0.02 |
950 |
0.39 |
(0.04) |
nm |
|
Capital expenditures (1) |
30,860 |
16,781 |
84 |
112,817 |
54,053 |
109 |
|
Adjusted working capital (2) |
130,206 |
69,697 |
87 |
||||
Shareholders’ equity |
492,145 |
268,191 |
84 |
||||
Weighted average shares (thousands) |
|||||||
Basic |
226,168 |
197,445 |
15 |
223,702 |
196,389 |
14 |
|
Diluted |
233,479 |
213,905 |
9 |
230,957 |
196,389 |
18 |
|
Shares outstanding, end of period (thousands) |
|||||||
Basic |
229,908 |
202,286 |
14 |
||||
Diluted (5) |
241,585 |
240,257 |
1 |
||||
Operating (6:1 boe conversion) |
|||||||
Average daily production |
|||||||
Heavy crude oil (bbls/d) |
10,637 |
6,185 |
72 |
10,620 |
4,793 |
122 |
|
Natural gas (mmcf/d) |
6.4 |
2.3 |
178 |
8.6 |
5.4 |
59 |
|
Natural gas liquids (bbl/d) |
66 |
5 |
1220 |
36 |
5 |
620 |
|
Barrels of oil equivalent (9) (boe/d) |
11,772 |
6,565 |
79 |
12,091 |
5,690 |
112 |
|
Average daily sales (6) (boe/d) |
11,705 |
6,653 |
76 |
12,050 |
5,715 |
111 |
|
Netbacks ($/boe) (3) (7) |
|||||||
Operating |
|||||||
Sales, net of blending (4) |
114.63 |
61.83 |
85 |
106.43 |
58.53 |
82 |
|
Royalties |
(23.85) |
(8.84) |
170 |
(19.37) |
(7.45) |
160 |
|
Transportation |
(4.07) |
(8.21) |
(50) |
(4.49) |
(7.31) |
(39) |
|
Production expenses |
(5.66) |
(4.89) |
16 |
(5.72) |
(5.19) |
10 |
|
Operating netback (3) |
81.05 |
39.89 |
103 |
76.85 |
38.58 |
99 |
|
Realized gains (losses) on financial derivatives |
(0.24) |
0.24 |
(200) |
(1.93) |
(0.39) |
395 |
|
Operating netback, including financial derivatives (3) |
80.81 |
40.13 |
101 |
74.92 |
38.19 |
96 |
|
General and administrative expense |
(1.52) |
(1.60) |
(5) |
(1.50) |
(1.76) |
(15) |
|
Interest income and other (8) |
0.44 |
(0.23) |
(291) |
0.29 |
(0.03) |
(1067) |
|
Current tax expense |
(5.16) |
– |
100 |
(5.19) |
– |
100 |
|
Adjusted funds flow netback (3) |
74.57 |
38.30 |
95 |
68.52 |
36.40 |
88 |
(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 interim financial statements blending expense is recorded within blending and transportation expense. |
(5) |
In-the-money dilutive instruments as at June 30, 2022 includes 7.2 million stock options with a weighted average exercise price of $2.51 and 3.5 million warrants issued pursuant to the recapitalization transaction in March 2020 with an exercise price of $0.92, 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. |
(7) |
Netbacks are calculated using average sales volumes. For the three months ended June 30, 2022, sales volumes comprised of 10,571 bbs/d of heavy oil, 6.4 mmcf/d of natural gas and 66 bbls/d of natural gas liquids (2021- 6,273 bbls/d, 2.3 mmcf/d and 5 bbls/d). For the six months ended June 30, 2022, sales volumes comprised of 10,579 bbls/d of heavy oil, 8.6 mmcf/d of natural gas and 36 bbls/d of natural gas liquids (2021- 4,818 bbls/d, 5.4 mmcf/d and 5 bbls/d). |
(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.” |
(10) |
Nm = not meaningful. |
SECOND QUARTER 2022 HIGHLIGHTS
- Realized record adjusted funds flow from operations (1) of $79.4 million ($0.35 per share basic) and cash flows from operating activities of $84.7 million ($0.37 per share basic) representing an increase of 243% and 265%, respectively, over the second quarter of 2021.
- Recognized net income of $48.4 million ($0.21 per share basic) representing an increase of over 950% from the second quarter of 2021.
- Generated free cash flow (3) of $48.6 million.
- Achieved a record operating netback (2) of $81.05/boe and an adjusted funds flow netback (2) of $74.57/boe representing an increase of 103% and 95%, respectively, over the second quarter of 2021.
- Production averaged 11,772 boe/d (consisting of 10,637 bbls/d of heavy oil, 6.4 mmcf/d of natural gas and 66 bbls/d of natural gas liquids) representing an increase of 79% from the second quarter of 2021.
- Executed a $30.9 million capital expenditure (3) program including 5 successful Clearwater A wells in Marten Hills West plus 9 injection wells and 4 water source wells in Marten Hills as part of Headwater’s enhanced oil recovery acceleration project.
- Headwater has been approved for total funding of up to $18.5 million from Natural Resources Canada associated with the Emissions Reduction Fund program for infrastructure spend related to the elimination of venting and flaring of methane rich natural gas in the Company’s core area of Marten Hills.
- As at June 30, 2022, Headwater had adjusted working capital (1) of $130.2 million, working capital of $127.1 million and no outstanding bank debt.
(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 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
In the second quarter of 2022, Headwater rig released and successfully placed on production 5 Clearwater A wells in Marten Hills West elevating July production levels to 1,600 bbls/d. Year to date, 13 wells have been drilled in Marten Hills West at a 100% success rate. A further 19 development and step out locations are scheduled to be drilled over the balance of 2022. Our first Clearwater A water injection pilot is scheduled to be drilled and commissioned prior to year-end 2022.
Recent well results are as follows:
Average Rate (bbls/d) |
||||
Well UWI |
Zone |
IP 30 |
IP 60 |
IP 90 |
00/14-05-076-02W5 |
Clearwater A |
366 |
309 |
279 |
02/14-05-076-02W5 |
Clearwater A |
293 |
240 |
226 |
02/14-07-076-02W5 |
Clearwater A |
278 |
240 |
222 |
00/13-07-076-02W5 |
Clearwater A |
245 |
256 |
231 |
03/15-07-076-02W5 |
Clearwater A |
245 |
– |
– |
00/09-34-075-03W5 |
Clearwater B |
182 |
145 |
139 |
02/08-34-075-03W5 |
Clearwater A |
109 |
90 |
71 |
(1) Initial Production (“IP”) rates indicate the days the well is on production post load recovery. |
Greater Peavine Area
Headwater has added an additional 6.75 sections of land in Peavine at recent land sales increasing our total land position in the Greater Peavine area to 110 sections. Headwater has identified more than 10 distinct prospects on this acreage and will add a fourth rig to drill 8 wells, testing 8 prospects starting early in the fourth quarter of 2022.
Marten Hills
Development in Marten Hills continues to focus on secondary recovery with 9 horizontal injection wells, 4 water source wells and 1 production well drilled in the second quarter. The field currently has 3.5 sections with active water injection representing 35% of the field under secondary recovery. Headwater is on track to have 65% of the field under waterflood in the first half of 2023.
McCully
McCully was shut-in May 1st, 2022 and will be re-started in the fourth quarter to capitalize on winter 2023 premium gas prices which are currently > Cdn $30/mscf.
Outlook
Our 2022 program continues to progress on schedule and on budget. Capital expenditures for 2022 will remain at $230 million with corresponding expected annual production of 13,000 boe/d (11,900 bbls/d of heavy oil and 6.8 mmcf/d of natural gas) and expected fourth quarter production of 16,500 boe/d (15,200 bbls/d of heavy oil and 7.9 mmcf/d of natural gas) as previously released. Due to a decline in forecast commodity pricing, forecast 2022 adjusted funds flow from operations has decreased to $295 million resulting in forecast exit adjusted working capital of approximately $160 million.
Previous 2022 Guidance |
Revised 2022 Guidance |
|
2022 annual production (boe/d) |
13,000 |
13,000 |
2022 fourth quarter (boe/d) |
16,500 |
16,500 |
Capital expenditures (1) |
$230 million |
$230 million |
Adjusted funds flow from operations (2) |
$305 million |
$295 million |
Exit adjusted working capital (2) |
$170 million |
$160 million |
(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) For assumptions utilized in the above guidance see “Future Oriented Financial Information” within this press release. |
We currently have three drilling rigs active and will be adding a fourth drilling rig in the coming weeks. We look forward to reporting back on the extensive testing of new plays and play extensions over the coming months.
The company continues to achieve significant growth while spending less than our cash flow. As the business strategy continues to evolve, there will be an increased focus on returning excess free cash flow to shareholders. Headwater looks forward to providing clarity on these elements over the next 6 months.
Additional corporate information can be found in the Company’s corporate presentation and on Headwater’s website at www.headwaterexp.com