CALGARY, AB, Nov. 10, 2021 /CNW/ - Headwater Exploration Inc.
(the "Company" or "Headwater") (TSX: HWX) is
pleased to announce its operating and financial results for
the three and nine months ended September 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
September
30,
|
|
Nine months
ended
September
30,
|
|
2021
|
2020
|
|
2021
|
2020
|
Financial
(thousands of dollars except share data)
|
|
|
|
|
|
Sales, net of
blending (1)
|
48,841
|
-
|
|
109,392
|
2,873
|
Cash flow provided by
operating activities
|
27,888
|
(364)
|
|
63,903
|
1,681
|
Per share - basic
|
0.14
|
(0.00)
|
|
0.32
|
0.01
|
- diluted (3)
|
0.12
|
(0.00)
|
|
0.27
|
0.01
|
Adjusted funds flow
(used in) from operations (2)
|
31,524
|
(837)
|
|
69,185
|
3,966
|
Per share - basic
|
0.16
|
(0.01)
|
|
0.35
|
0.03
|
- diluted (3)
|
0.13
|
(0.01)
|
|
0.29
|
0.03
|
Net income
(loss)
|
26,106
|
(1,723)
|
|
17,901
|
(10,212)
|
Per share - basic
|
0.13
|
(0.01)
|
|
0.09
|
(0.08)
|
- diluted
|
0.12
|
(0.01)
|
|
0.08
|
(0.08)
|
Adjusted net income
(loss) (2)
|
28,868
|
(1,723)
|
|
45,831
|
(10,212)
|
Per share - basic
|
0.14
|
(0.01)
|
|
0.23
|
(0.08)
|
- diluted (3)
|
0.12
|
(0.01)
|
|
0.19
|
(0.06)
|
Capital
expenditures
|
37,293
|
61
|
|
91,346
|
529
|
Adjusted working
capital (2)
|
|
|
|
63,709
|
112,667
|
Shareholders'
equity
|
|
|
|
295,528
|
155,148
|
Weighted average
shares (thousands)
|
|
|
|
|
|
Basic
|
202,313
|
145,044
|
|
198,385
|
131,997
|
Diluted
|
218,190
|
145,044
|
|
214,166
|
131,997
|
Shares outstanding,
end of period (thousands)
|
|
|
|
|
|
Basic
|
|
|
|
202,466
|
145,044
|
Diluted
(4)
|
|
|
|
240,447
|
158,627
|
Operating
(6:1 boe conversion)
|
|
|
|
|
|
|
|
|
|
|
|
Average daily
production
|
|
|
|
|
|
Heavy crude
oil (bbls/d)
|
7,637
|
-
|
|
5,751
|
-
|
Natural gas
(mmcf/d)
|
0.3
|
-
|
|
3.7
|
3.7
|
Natural gas
liquids (bbls/d)
|
-
|
-
|
|
3
|
2
|
Barrels of oil
equivalent (5) (boe/d)
|
7,688
|
-
|
|
6,363
|
625
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily sales
(6) (boe/d)
|
7,613
|
-
|
|
6,355
|
625
|
|
|
|
|
|
|
Netbacks
($/boe) (7)
|
|
|
|
|
|
Operating
|
|
|
|
|
|
Sales, net of blending
(1)
|
69.73
|
-
|
|
63.05
|
16.76
|
Royalties
|
(10.46)
|
-
|
|
(8.66)
|
(0.42)
|
Transportation
(1)
|
(8.68)
|
-
|
|
(7.86)
|
-
|
Production
expenses
|
(4.42)
|
-
|
|
(4.88)
|
(9.92)
|
|
|
|
|
|
|
Field netback
(2)
|
46.17
|
-
|
|
41.65
|
6.42
|
Realized gains on financial
derivatives
|
-
|
-
|
|
(0.23)
|
22.97
|
Operating
netback (2)
|
46.17
|
-
|
|
41.42
|
29.39
|
General and administrative
expense
|
(1.40)
|
-
|
|
(1.61)
|
(12.44)
|
Interest income and other
(8)
|
0.24
|
-
|
|
0.08
|
6.19
|
Adjusted funds
flow netback (2)
|
45.01
|
-
|
|
39.89
|
23.14
|
(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" and "Operating Metrics".
|
(3)
|
Calculated based on
fully diluted shares outstanding for both the three and nine months
ended September 30, 2021 (refer to note (4)).
|
(4)
|
Includes in-the-money
dilutive instruments as at September 30, 2021 which include 7.6
million stock options with a weighted average exercise price of
$1.63, 15.4 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.
|
THIRD QUARTER 2021 HIGHLIGHTS
- Generated average production of 7,688 boe/d representing an
increase of 17% over the second quarter of 2021 and an increase of
60% over the first quarter of 2021.
- Achieved adjusted funds flow from operations of $31.5 million ($0.16 per share basic), representing an increase
of 36% over the second quarter of 2021 and an increase of 118% over
the first quarter of 2021.
- Achieved an operating netback of $46.17/boe and an adjusted funds flow netback of
$45.01/boe.
- Achieved adjusted net income of $28.9
million ($0.14 per share
basic).
- Commissioned the Company's joint gas processing facility in the
Marten Hills area which resulted in first sales gas and an
approximate 50% reduction in CO2e emissions intensity from the
first quarter of 2021.
- Executed a $37.3 million capital
program in the Marten Hills area including 3 successful exploration
wells and 16 multi-lateral development wells at a 100% success
rate.
- As at September 30, 2021,
Headwater had adjusted working capital of $63.7 million and no outstanding debt.
OPERATIONS UPDATE
Marten Hills Core Area
As of September 30th,
the Company has drilled 30 multi-lateral horizontal wells in the
core development area which has grown oil production from 3,385
bbls/d in the first quarter of 2021 to current levels exceeding
9,000 bbls/d.
Significant capital efficiency improvements have been realized
with the drilling technique changes that were implemented after the
first quarter. As of September
30th, 18 producing wells have been drilled with
the improved drilling techniques and 11 of these wells have been on
production post load recovery for at least 30 days. The
30-day average rate post load recovery production of these 11 wells
is approximately 400 bbls/d per well. This represents a 33%
improvement in capital efficiency from our first quarter wells that
achieved 30-day average rates of 300 bbls/d per well.
Construction on the 100% owned Headwater oil processing facility
is currently in progress. Once complete, the facility will
tie-in directly to the Rangeland pipeline system and is anticipated
to reduce our corporate transportation costs by approximately
$4.00/boe resulting in a facility
payout in less than 2 years. Commissioning of the facility is
expected to occur in mid-January
2022.
Headwater has expanded its waterflood pilot operations with 2
additional injection wells placed on injection in mid-October.
Results from our first pilot that commenced in April 2021 continue to be strong, with oil rates
stabilizing at approximately 280-300 bbls/d which is 20% above the
oil rates prior to injection.
Marten Hills Exploration Update
During the third quarter, Headwater drilled its first 3
successful exploration tests in Marten Hills west. Headwater
is highly encouraged by the results which have begun to validate
and provide confidence in the value associated with the
Company's 285 net sections of exploration lands.
The first two of these wells were drilled as 6-leg lateral wells
targeting the upper Clearwater
formation in section 32-75-02W5. The first exploration well
drilled, 11-32-75-02W5, achieved load recovery on September 19th and achieved average
oil production in October of 127 bbls/d of 16.5 degree API crude
oil. Based on current pricing, this well is expected to
achieve payout within its first 7 months of production. The
second exploration well, 13-32-75-02W5, is still producing load
fluid however the inflow characteristics are very similar to the
11-32 well. With the encouragement provided from these two
successful wells, Headwater has licensed an additional 17
development locations in this area with plans to drill 2 additional
delineation wells prior to year-end.
The third exploration well, 16-14-075-26W4, was drilled as a
4-leg lateral well targeting the upper Clearwater formation. The well was designed as
an 8-leg lateral, but a structural anomaly showed productive
reservoir approximately 10 metres above the initial prognosis. This
well appears to be producing from only two laterals and achieved
average oil production in October of 67 bbls/d. This is encouraging
as we believe modest drilling orientation adjustments will allow
Headwater to take advantage of improved up hole reservoir.
Headwater plans to licence 6 follow-up development wells targeting
the upper Clearwater sand adjacent
to the 16-14 well.
In addition to the above-mentioned activity, Headwater
anticipates drilling five incremental unique exploration prospects
on our Marten Hills land base prior to the end of the first quarter
of 2022.
McCully Update
Consistent with the Company's historical strategy of producing
the McCully field during the winter months to take advantage of
premium winter gas pricing, the McCully asset is expected to be
placed back on production in the middle of November.
2021 Guidance Update
Headwater's Board of Directors has approved an increase to
Headwater's 2021 capital budget from $130
million to $140 million, which
will allow our two drilling rigs to maintain steady operations
throughout the balance of the fourth quarter.
The performance of the Company's second half drilling program
has exceeded expectations and we now expect to achieve average
annual production of 7,400 boe/d (6,690 bbls/d of heavy oil and 4.2
mmcf/d of natural gas) and fourth quarter production of 10,400
boe/d (9,410 bbls/d of heavy oil and 6.0 mmcf/d of natural gas). We
anticipate exit 2021 adjusted working capital to be approximately
$66 million.
2022 Budget
The Board of Directors has approved an initial capital budget
for 2022 of $120 million.
The capital budget includes approximately $78 million directed towards the continued
development of the Marten Hills core area and approximately
$42 million to continued delineation
and development of our Marten Hills west acreage. Headwater has
incorporated a 5% increase in drilling, completions and
infrastructure costs to account for inflationary pressures in
materials and manpower.
Resulting 2022 annual average production is expected to be
12,500 boe/d (11,500 bbls/d of heavy oil and 6.2 mmcf/d of
natural gas) with fourth quarter 2022 average production expected
to be 15,000 boe/d (13,770 bbls/d of heavy oil and 7.4 mmcf/d of
natural gas).
The $120 million capital budget is
expected to generate 70% production per share growth at a
reinvestment rate of 58% of 2022 forecasted adjusted funds flow
from operations. At US$75/bbl WTI,
Headwater forecasts 2022 adjusted funds flow from operations of
$207 million and free cash flow of
approximately $87 million, resulting
in positive exit 2022 adjusted working capital of approximately
$153 million.
The $78 million of expenditures
directed towards the core development area will result in the
drilling of 19 multi-lateral producing wells, 24 injection wells,
and 6 water source wells / stratigraphic tests. With the
commissioning of Headwater's oil processing facility in
January 2022, we plan to expand our
waterflood implementation throughout our core acreage. By the end
of the first quarter, we expect to have a total of 14 4-leg lateral
injectors on injection, with an additional 13 4-leg lateral
injectors on injection in the third quarter. By year end 2022,
approximately 30% of our core area will be under
waterflood.
The $42 million directed towards
development and exploration of our Marten Hills west land includes
the drilling of 7 exploration wells, 15 development wells and 3
stratigraphic wells. Additional exploration capital of $10 million (included in the $42 million) will be spent on infrastructure
upgrades, seismic and additional land purchases.
2022 and Beyond
2022 is expected to be another pivotal year for Headwater. With
full scale waterflood development implemented across our Marten
Hills core acreage, we expect corporate declines to moderate to the
low double-digit level and provide meaningful steady state free
cash flow.
Our exploration evaluation program will continue throughout 2022
and with continued success, will set not only the next leg of
growth for Headwater, but more importantly the next leg of free
cash flow generation.
We continue to evaluate acquisition expansion opportunities in
the Clearwater fairway and
continue to maintain our balance sheet strength to be strategically
positioned to participate in the Clearwater consolidation.
As the Company evolves with rapid growth and execution of the
corporate strategy, there will be an increased focus on returning
excess free cash flow to shareholders. While it is early, we
look forward to providing clarity on these elements over the next
18 months.
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.
FORWARD LOOKING STATEMENTS: This press release contains
forward-looking statements. The use of any of the words "guidance",
"initial, "anticipate", "scheduled", "can", "will", "prior to",
"estimate", "believe", "potential", "should", "unaudited",
"forecast", "future", "continue", "may", "expect", "project", and
similar expressions are intended to identify forward-looking
statements. The forward-looking statements contained herein,
include, without limitation, the revised 2021 guidance including
expected 2021 annual average daily production, fourth quarter 2021
daily production, expected 2021 capital expenditures and estimated
exit 2021 adjusted working capital; 2022 budget including expected
2022 annual average daily production, fourth quarter 2022 daily
production, expected 2022 capital expenditures and details of such
capital expenditures, expected 2022 adjusted funds flow from
operations, expected 2022 free cash flow and estimated exit 2022
adjusted working capital; the expectation the Company's oil
processing facility will be commissioned in mid-January 2022 and tie-in directly to the
Rangeland pipeline system resulting in a facility payout in less
than 2 years and a reduction to corporate transportation costs by
approximately $4.00/boe; the
expectation the 11-32-75-02W5 exploration well will achieve payout
within its first 7 months of production based on current pricing;
the expectation that the 16-14-075-26W4 well has encouraging
results as modest drilling orientation adjustments is expected to
allow Headwater to take advantage of improved up hole reservoir;
the expectation that Headwater will drill 2 delineation wells prior
to year-end; the expectation that Headwater plans to license 6
follow-up development wells that target upper Clearwater sand; the expectation that
Headwater will drill 5 unique exploration prospects prior to the
end of the first quarter in 2022; the expected timing for the
McCully field to be brought back on production; the timing of the
injection well conversion; the expectation the Company will
maintain two drilling rigs throughout the balance of the fourth
quarter of 2021; the expectation the $120
million 2022 capital budget will result in 70% production
per share growth at a reinvestment rate of 58% of 2022 forecasted
funds flow from operations; the expectation that with the
commissioning of Headwater's oil processing facility in
January 2022, the Company will be
able to expand its waterflood implementation through the core
acreage and by the end of 2022 approximately 30% of the core area
will be under waterflood; the expectation 2022 will be another
pivotal year for Headwater; the expectation that during 2022, full
scale waterflood implementation will occur resulting in corporate
declines to moderate to the low double-digit level and provide
meaningful steady state free cash flow; the expectation that the
Company's exploration program will continue through 2022; and the
expectation to focus on returning excess free cash flow to
shareholders. The forward-looking statements contained herein are
based on certain key expectations and assumptions made by the
Company, including but not limited to expectations and assumptions
concerning the success of optimization and efficiency improvement
projects, the availability of capital, current legislation, receipt
of required regulatory approval, the success of future drilling,
development and waterflooding activities, the performance of
existing wells, the performance of new wells, Headwater's growth
strategy, general economic conditions, availability of required
equipment and services, prevailing equipment and services costs and
prevailing commodity prices. Although the Company believes that the
expectations and assumptions on which the forward-looking
statements are based are reasonable, undue reliance should not be
placed on the forward-looking statements because the Company can
give no assurance that they will prove to be correct. Since
forward-looking statements address future events and conditions, by
their very nature they involve inherent risks and uncertainties.
Actual results could differ materially from those currently
anticipated due to a number of factors and risks. These include,
but are not limited to, risks associated with the oil and gas
industry in general (e.g., operational risks in development,
exploration and production; disruptions to the Canadian and global
economy resulting from major public health events, including the
COVID-19 pandemic, war, terrorist events, political upheavals and
other similar events; events impacting the supply and demand for
oil and gas including the COVID-19 pandemic and actions taken by
the OPEC + group; delays or changes in plans with respect to
exploration or development projects or capital expenditures; the
uncertainty of reserve estimates; the uncertainty of estimates and
projections relating to production, costs and expenses, and health,
safety and environmental risks), the uncertainty associated with
exploration and development projects, including waterfloods,
commodity price and exchange rate fluctuations, changes in
legislation affecting the oil and gas industry and uncertainties
resulting from potential delays or changes in plans with respect to
exploration or development projects or capital expenditures. Refer
to Headwater's most recent Annual Information Form dated
March 10, 2021, on SEDAR at
www.sedar.com, and the risk factors contained therein.
The forward-looking statements contained in this press
release are made as of the date hereof and the Company undertakes
no obligation to update publicly or revise any forward-looking
statements or information, whether as a result of new information,
future events or otherwise, unless so required by applicable
securities laws.
FUTURE ORIENTED FINANCIAL INFORMATION: Any financial outlook
or future oriented financial information in this press release, as
defined by applicable securities legislation, has been approved by
management of the Company as of the date hereof. Readers are
cautioned that any such future-oriented financial information
contained herein should not be used for purposes other than those
for which it is disclosed herein. The Company and its management
believe that the prospective financial information as to the
anticipated results of its proposed business activities for 2021
has been prepared on a reasonable basis, reflecting management's
best estimates and judgments, and represent, to the best of
management's knowledge and opinion, the Company's expected course
of action. However, because this information is highly subjective,
it should not be relied on as necessarily indicative of future
results. The assumptions used in the revised 2021 guidance include:
WTI US$68.95/bbl, WCS Cdn$69.80/bbl, AGT US$6.70/mmbtu and a foreign exchange rate of
US$/Cdn$ of 0.80. The assumptions used in the 2022 budget include:
WTI US$75.00/bbl, WCS Cdn$74.00/bbl, AGT US$12.95/mmbtu and a foreign exchange rate of
US$/Cdn$ of 0.80. The AGT price is the volume weighted average
price for the winter producing months in the McCully field which
include January to April and November to December. The 2021 and
2022 estimated exit adjusted working capital does not contemplate
Headwater exercising its call right on the Cenovus warrants which
could result in exercise proceeds of up to $30 million.
NON-IFRS MEASURES: This document contains the terms "adjusted
funds flow from operations", "adjusted net income", "adjusted
working capital", "free cash flow", "operating cash flow",
"payout", "capital efficiency" and "reinvestment rate" which do not
have standardized meanings prescribed by International Financial
Reporting Standards ("IFRS") and therefore may not be comparable
with the calculation of similar measures by other companies.
Management uses adjusted funds flow from operations to analyze
operating performance and leverage. Adjusted funds flow from
operations is calculated as cash flow provided by (used in)
operating activities before changes in non-cash working capital and
adding back transaction costs. Management uses adjusted net
income to assess financial performance that is more comparable
between periods and is calculated as net income or loss before the
remeasurement loss of the warrant liability. Adjusted working
capital is used by the Company to measure liquidity. Adjusted
working capital is defined as working capital excluding the effects
of the Company's financial derivatives and warrant liability.
Management uses free cash flow as a measure of profitability and
ability to return capital to shareholders and is calculated as
adjusted funds flow from operations after capital expenditures.
Management uses operating cash flow as a measure of the company's
efficiency and its ability to fund future capital expenditures and
is calculated as sales received after royalties, production,
blending and transportation costs and realized gains (losses) on
financial derivatives. Payout is a capital budgeting metric used to
determine the period of time required for a project to pay for
itself and is calculated as the time at which a project's
cumulative operating cash flow equals its total capital
expenditures. The Company believes capital efficiency and
reinvestment rate are useful measures to analyze operating and
financial performance. Capital efficiency is calculated as the
capital cost to drill, complete, equip and tie-in a well divided by
the total production of the well. Reinvestment rate is calculated
as annual capital expenditures divided by adjusted funds from
operations. Additional information relating to certain of these
non-IFRS measures, including the reconciliation of cash flow from
operating activities to adjusted funds from operations, net income
or loss to adjusted net income or loss, working capital to adjusted
working capital, and operating cash flow can be found in the
MD&A.
OPERATING METRICS: Operating metrics including field netback,
operating netback, adjusted funds flow netback, cash flow provided
by operating activities per share, adjusted funds flow per share
and adjusted net income (loss) per share are metrics used in the
oil and gas industry and are used by management to better analyze
the Company's performance against prior periods on a comparable
basis. These metrics have no equivalent IFRS measure and are
therefore excluded from the discussion under "Non-IFRS Financial
Measures". They also may not be comparable with the calculation of
similar measures presented by other issuers. Field netback,
operating netback and adjusted funds flow netback are presented as
field cash flow, operating cash flow and adjusted funds flow from
operations on a per boe basis. Volumes used to calculate these
netbacks include unblended heavy crude oil sales volumes in
addition to sales volumes for natural gas and natural gas liquids.
Cash flow provided by operating activities per share, adjusted
funds flow per share and adjusted net income (loss) per share are
calculated as cash flow provided by operating activities, adjusted
funds flow from operations and adjusted net income (loss) divided
by the number of weighted average basic or diluted shares
outstanding during the period.
BARRELS OF OIL AND CUBIC FEET OF NATURAL GAS EQUIVALENT: The
term "boe" (or barrels of oil equivalent) and "Mcf" (or thousand
cubic feet of natural gas equivalent) may be misleading,
particularly if used in isolation. A boe and Mcf conversion ratio
of six thousand cubic feet of natural gas to one barrel of oil
equivalent (6 Mcf: 1 bbl) is based on an energy equivalency
conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the wellhead. Additionally,
given that the value ratio based on the current price of crude oil,
as compared to natural gas, is significantly different from the
energy equivalency of 6:1; utilizing a conversion ratio of 6:1 may
be misleading as an indication of value.
INITIAL PRODUCTION RATES: References in this press release to
initial production rates, other short-term production rates or
initial performance measures relating to new wells are useful in
confirming the presence of hydrocarbons; however, such rates are
not determinative of the rates at which such wells will commence
production and decline thereafter and are not indicative of
long-term performance or of ultimate recovery. Additionally, such
rates may also include recovered "load oil" fluids used in well
completion stimulation. While encouraging, readers are cautioned
not to place reliance on such rates in calculating the aggregate
production for the Company. Accordingly, the Company cautions that
the test results should be considered to be preliminary.
OIL AND GAS METRICS: In this press release, Headwater has
used a number of oil and gas metrics which do not have standardized
meanings and therefore may be calculated differently from the
metrics presented by other oil and gas companies. Such metrics
include "production per share growth" and "corporate declines".
Production per share growth is calculated as the year over year
change in annual production divided by fully diluted shares
outstanding. Corporate decline is calculated by the year over year
reduction in the corporate production if the Company is not
drilling any additional wells. Such metrics have been included
herein to provide readers with additional measures to evaluate the
performance of the Company exploration and development projects.
Such measures are not a reliable indicator of the future
performance of Headwater's assets or value of its common
shares.
SOURCE Headwater Exploration Inc.