CALGARY, AB, Aug. 5, 2021 /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, 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
- Generated average production of 6,565 boe/d representing an
increase of 37% over the first quarter of 2021.
- Achieved adjusted funds flow from operations of $23.2 million ($0.12 per share basic), representing an increase
of 60% over the first quarter of 2021.
- Achieved an operating netback of $40.13/boe and an adjusted funds flow netback of
$38.30/boe.
- Achieved adjusted net income of $10.6
million ($0.05 per share
basic).
- As at June 30, 2021, Headwater
had adjusted working capital of $69.7
million and no outstanding debt.
OPERATIONS UPDATE
Marten Hills Core Area Development
The 12 producing 8-leg horizontal wells drilled in the first
quarter have achieved:
- 30-day average rates of 38 bbls/d per lateral (304 bbls/d per
well)
- 60-day average rates of 36 bbls/d per lateral (288 bbls/d per
well)
- 90-day average rates of 35 bbls/d per lateral (280 bbls/d per
well)
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
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 adjusted working capital; the expectation that the producing
performance of the wells drilled post spring break-up indicate
improvements in capital efficiency have occurred; the expectation
that current waterflood results including gas oil ratios and oil
rates are indicative of future results; the expectation to
implement a full scale waterflood program over the next 18 months;
the expectation that the gas processing facility will be
commissioned in late August 2021 and
result in an approximate 50% reduction in Headwater's CO2e
emissions intensity; the expectation that the remaining 4 injection
wells drilled in the first quarter of 2021 will be placed on
injection in late August providing further validation for the
merits and value of enhanced oil recovery; the expectation to drill
2 exploration tests in the third quarter of 2021 with an additional
2 to 4 tests in the fourth quarter of 2021 and to complete an
additional 3 to 5 tests by the end of the first quarter of 2022;
the expectation to complete and commission the oil processing
facility in December 2021; the
expectation that shifting $20 million
of capital, for Headwater's oil processing facility, to the fourth
quarter of 2021 will result in operating and transportation costs
savings of $4 million in the first
quarter of 2022; the expectation that 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; and the expectation to achieve production per share growth of
greater than 200% while reducing CO2e emissions intensity by
approximately 50% in 2021 and maintaining an estimated positive
working capital position of $65
million with Headwater's increased guidance. 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), 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$66.00/bbl, WCS
Cdn$67.00/bbl, AGT US$5.00/mmbtu and a foreign exchange rate of
US$/Cdn$ of 0.80.
NON-IFRS MEASURES: This document contains the terms "adjusted
funds flow from operations", "adjusted net income", "adjusted
working capital", "operating cash flow", "field netback",
"operating netback", and "adjusted funds flow netback", 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 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. Management believes "field netback",
"operating netback" and "adjusted funds flow netback" are useful
supplemental measures to consider the profitability of the
Company's operations on a per unit basis using unblended sales
volumes and have been calculated in respect of field netback by
taking the amount of sales received after royalties and production
and blending and transportation costs, in respect of operating
netback by taking the amount of sales received after royalties,
production, blending and transportation costs and realized gains
(losses) on financial derivatives, and in respect of adjusted funds
flow netback by taking the amount of sales received after
royalties, production, blending and transportation costs, realized
gains (losses) on financial derivatives, general and administrative
costs, interest income and other (excluding accretion on
decommissioning liabilities) and decommissioning liabilities
settled. 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 sales to operating cash flow can be found in
the MD&A.
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. A pressure transient analysis or
well-test interpretation has not been carried out in respect of all
wells. Accordingly, the Company cautions that the test results
should be considered to be preliminary.
SOURCE Headwater Exploration Inc.