CALGARY,
AB, Aug. 4, 2022 /CNW/ - 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.
Financial and Operating
Highlights
|
Three months
ended
June 30,
|
Percent
Change
|
Six months
ended
June 30,
|
Percent
Change
|
|
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
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, revised 2022 guidance related to
expected full-year and fourth quarter average daily production,
capital expenditures and the breakdown thereof, adjusted funds flow
from operations and adjusted working capital; the anticipation of
drilling 18 further development and step-out locations in
Marten Hills West over the balance
of 2022; the plan to drill the Company's first Clearwater A
injection pilot in Marten Hills West
prior to year-end 2022; the expectation to add a fourth rig and to
drill 8 wells, testing 8 prospects starting early in the fourth
quarter of 2022 in the Greater Peavine area; the expectation to
have 65% of the field in Marten Hills under waterflood in the first
half of 2023; the expectation to re-start McCully operations in the
fourth quarter of 2022 and the future expectation of natural gas
pricing in McCully; and the expectation to add a fourth drilling
rig in the coming weeks. 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, prevailing commodity prices and
certain other guidance assumptions as detailed below under the
heading "Future Oriented Financial Information" as set out
below. 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, the Russian-Ukrainian
war and the impact on the global economy and commodity prices; the
impacts of inflation and supply chain issues and steps taken by
central banks to curb inflation; 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), 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,
2022, on SEDAR at www.sedar.com, and the risk factors
contained therein.
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 2022 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 2022 guidance include: WTI US$96.30/bbl, WCS Cdn$101.70/bbl, AGT US$17.70/mmbtu, foreign exchange rate of US$/Cdn$
of 0.78, blending expense of WCS less $2.50, royalty rate of 20%, operating and
transportation costs of $10.00/boe,
financial derivatives losses of $1.25/boe, cash taxes of $4.40/boe and G&A and interest income and
other expense of $1.30/boe. 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.
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 IP 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. All IP rates
presented herein represent the results from wells after all "load"
fluids (used in well completion stimulation) have been recovered.
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.
NON-GAAP AND OTHER FINANCIAL MEASURES
In this press release, we refer to certain financial measures
(such as free cash flow, total sales, net of blending and capital
expenditures) which do not have any standardized meaning prescribed
by IFRS. Our determinations of these measures may not be comparable
with calculations of similar measures for other issuers. In
addition, this press release contains the terms adjusted funds flow
from operations and adjusted working capital, which are considered
capital management measures. The term cash flow in this press
release is equivalent to adjusted funds flow from
operations.
Non-GAAP Financial Measures
Free cash flow
Management utilizes free cash flow to assess the amount of funds
available for future capital allocation decisions. It is calculated
as adjusted funds flow from operations net of capital
expenditures.
|
Three months
ended
June 30,
|
Six months
ended
June 30,
|
|
2022
|
2021
|
2022
|
2021
|
|
(thousands of
dollars)
|
(thousands of
dollars)
|
Adjusted funds flow
from operations
|
79,435
|
23,182
|
149,458
|
37,661
|
Capital
expenditures
|
(30,860)
|
(16,781)
|
(112,817)
|
(54,053)
|
Free cash
flow
|
48,575
|
6,401
|
36,641
|
(16,392)
|
Total sales, net of blending
Management utilizes total sales, net of blending expense to
compare realized pricing to benchmark pricing. It is calculated by
deducting the Company's blending expense from total sales. In the
interim financial statements blending expense is recorded within
blending and transportation expense.
|
Three months
ended
June 30,
|
Six months
ended
June 30,
|
|
2022
|
2021
|
2022
|
2021
|
|
(thousands of
dollars)
|
(thousands of
dollars)
|
Total sales
|
130,153
|
40,038
|
249,415
|
65,530
|
Blending expense
|
(8,051)
|
(2,609)
|
(17,291)
|
(4,978)
|
Total sales, net of
blending expense
|
122,102
|
37,429
|
232,124
|
60,552
|
Capital expenditures
Management utilizes capital expenditures and capital
expenditures including acquisition to measure total cash capital
expenditures incurred in the period. Capital expenditures
represents capital expenditures – exploration and evaluation and
capital expenditures – property, plant and equipment in the
statement of cash flows in the Company's interim financial
statements netted by the government grant.
|
Three months
ended
June 30,
|
Six months
ended
June 30,
|
|
2022
|
2021
|
2022
|
2021
|
|
(thousands of
dollars)
|
(thousands of
dollars)
|
Cash flows used in
investing activities
|
35,663
|
30,079
|
116,037
|
38,339
|
Restricted
cash
|
-
|
240
|
(5,000)
|
1,477
|
Change in non-cash
working capital
|
(2,212)
|
(13,538)
|
4,371
|
14,237
|
Government
grant
|
(2,591)
|
-
|
(2,591)
|
-
|
Capital
expenditures
|
30,860
|
16,781
|
112,817
|
54,053
|
Capital Management Measures
Adjusted Funds Flow from Operations
Management considers adjusted funds flow from operations to be a
key measure to assess the Company's management of capital. In
addition to being a capital management measure, adjusted funds flow
from operations is used by management to assess the performance of
the Company's oil and gas properties. Adjusted funds flow from
operations is an indicator of operating performance as it varies in
response to production levels and management of production and
transportation costs. Management believes that by eliminating
changes in non-cash working capital and deducting current income
taxes, adjusted funds flow from operations is a useful measure of
operating performance. While current income taxes will not be paid
until 2023, management believes adjusting for current income taxes
in the period incurred is a better indication of the funds
generated by the Company.
|
Three months
ended
June 30,
|
Six months
ended
June 30,
|
|
2022
|
2021
|
2022
|
2021
|
|
(thousands of
dollars)
|
(thousands of
dollars)
|
Cash flows provided by
operating activities
|
84,728
|
23,232
|
145,417
|
36,015
|
Changes in non–cash
working capital
|
200
|
(50)
|
15,350
|
1,646
|
Current income
taxes
|
(5,493)
|
-
|
(11,309)
|
-
|
Adjusted funds flow
from operations
|
79,435
|
23,182
|
149,458
|
37,661
|
Adjusted Working Capital
Adjusted working capital is a capital management measure which
management uses to assess the Company's liquidity.
|
|
|
As at
June 30,
2022
|
As at
December31,
2021
|
|
|
|
|
|
(thousands of
dollars)
|
Working
capital
|
|
|
127,101
|
89,775
|
Contribution receivable
(long-term)
|
|
|
671
|
-
|
Repayable contribution
|
|
|
(4,132)
|
-
|
Financial derivative
receivable
|
|
|
(130)
|
(770)
|
Financial derivative
liability
|
|
|
6,696
|
3,924
|
Adjusted working
capital
|
|
|
130,206
|
92,929
|
Non-GAAP Ratios
Adjusted funds flow netback, operating netback and operating
netback, including financial derivatives
Adjusted funds flow netback, operating netback and operating
netback, including financial derivatives are non-GAAP ratios and
are used by management to better analyze the Company's performance
against prior periods on a more comparable basis. Adjusted funds
flow netback is defined as adjusted funds flow from operations
divided by sales volumes in the period.
Operating netback is defined as sales less royalties,
transportation and blending costs and production expense divided by
sales volumes in the period. The sales price, transportation and
blending costs, and sales volumes exclude the impact of purchased
condensate. Operating netback, including financial derivatives is
defined as operating netback plus realized gains or losses on
financial derivatives.
Adjusted funds flow per share and net income per
share
Adjusted funds flow per share and adjusted net income per share
are non-GAAP ratios and are used by management to better analyze
the Company's performance against prior periods on a more
comparable basis. Adjusted funds flow per share and net income per
share are calculated as adjusted funds flow from operations or net
income divided by weighted average shares outstanding on a basic or
diluted basis.
Per boe numbers
This press release represents various results on a per boe basis
including Headwater average realized sales price, net of blending,
financial derivatives gains (losses) per boe, royalty expense per
boe, transportation expense per boe, production expense per boe,
general and administrative expenses per boe, interest income and
other expense per boe and current taxes per boe. These figures are
calculated using sales volumes.
SOURCE Headwater Exploration Inc.