HEADWATER EXPLORATION INC. Three months ended |
Percent Change | |||
2022 | 2021 | |||
Financial (thousands of dollars except share data) | ||||
Total sales, net of blending (1) (4) | 110,022 | 23,122 | 376 | |
Adjusted funds flow from operations (2) | 70,023 | 14,479 | 384 | |
Per share - basic | 0.32 | 0.07 | 357 | |
- diluted | 0.30 | 0.07 | 329 | |
Cash flows provided by operating activities | 60,689 | 12,783 | 375 | |
Per share - basic | 0.27 | 0.07 | 286 | |
- diluted | 0.26 | 0.07 | 271 | |
Net income (loss) | 42,363 | (12,793) | (431) | |
Per share - basic | 0.19 | (0.07) | (371) | |
- diluted | 0.18 | (0.07) | (357) | |
Capital expenditures (1) | 81,957 | 37,272 | 120 | |
Adjusted working capital (2) | 80,072 | 58,367 | 37 | |
Shareholders' equity | 441,148 | 257,461 | 71 | |
Weighted average shares (thousands) | ||||
Basic | 221,209 | 195,322 | 13 | |
Diluted | 234,265 | 195,322 | 20 | |
Shares outstanding, end of period (thousands) | ||||
Basic | 223,727 | 195,574 | 14 | |
Diluted(5) | 241,688 | 240,456 | 1 | |
Operating (6:1 boe conversion) | ||||
Average daily production | ||||
Heavy crude oil (bbls/d) | 10,602 | 3,385 | 213 | |
Natural gas (mmcf/d) | 10.8 | 8.5 | 27 | |
Natural gas liquids (bbls/d) | 7 | 5 | 40 | |
Barrels of oil equivalent (9)(boe/d) | 12,414 | 4,805 | 158 | |
Average daily sales(6) (boe/d) | 12,398 | 4,768 | 160 | |
Netbacks ($/boe) (3) (7) | ||||
Operating | ||||
Sales, net of blending (4) | 98.60 | 53.89 | 83 | |
Royalties | (15.09) | (5.49) | 175 | |
Transportation | (4.90) | (6.04) | (19) | |
Production expenses | (5.77) | (5.62) | 3 | |
Operating netback (3) | 72.84 | 36.74 | 98 | |
Realized losses on financial derivatives | (3.54) | (1.28) | 177 | |
Operating netback, including financial derivatives (3) | 69.30 | 35.46 | 95 | |
General and administrative expense | (1.48) | (1.97) | (25) | |
Interest income and other expense (8) | 0.14 | 0.26 | (46) | |
Current tax expense | (5.21) | - | 100 | |
Adjusted funds flow netback (3) | 62.75 | 33.75 | 86 | |
(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 |
(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. First quarter 2022 sales volumes comprised of 10,587 bbs/d of heavy oil, 10.8 mmcf/d of natural gas and 7 bbls/d of natural gas liquids. First quarter 2021 sales volumes comprised of 3,347 bbs/d of heavy oil, 8.5 mmcf/d of natural gas and 5 bbls/d of natural gas liquids. |
(8) | Excludes unrealized foreign exchange gains/losses, accretion on decommissioning liabilities and interest on lease liability. |
(9) | See '"Barrels of Oil Equivalent." |
FIRST QUARTER 2022 HIGHLIGHTS
- Production averaged 12,414 boe/d (consisting of 10,602 bbls/d of heavy oil, 10.8 mmcf/d of natural gas and 7 bbls/d of natural gas liquids) representing an increase of 158% from the first quarter of 2021.
- Added 98 net sections of unburdened lands in the Greater Peavine area of the
Clearwater play establishing the Company's next exploration focus area. - Realized record adjusted funds flow from operations (1) of
$70.0 million ($0.32 per share basic). - Achieved our highest net income in the Company's history of
$42.4 million ($0.19 per share basic) representing$37.96 per boe. - Achieved record operating netback (2) of
$72.84 /boe and an adjusted funds flow netback (2) of$62.75 /boe. - Executed an
$82.0 million capital expenditure (3) program. The Company drilled 26 crude oil wells inclusive of 7 exploration and step-out wells inMarten Hills West at a 100% success rate. - As at
March 31, 2022 , Headwater had adjusted working capital (1) of$80.1 million , working capital of$77.1 million , and no outstanding 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. Refer to "Non-GAAP and Other Financial Measures" within this press release. |
2022 Guidance Update
Headwater's Board of Directors (the "Board") has approved an increase in the 2022 capital budget (1) from
- Greater Peavine $50 million
- Marten Hills West $70 million
- Marten Hills
$110 million
The accelerated capital includes
With Headwater's substantial pre-planning, we continue to operate one drilling rig throughout break-up and will have two additional drilling rigs operational before the end of the second quarter. The extensive road and pad construction contemplated in the revised budget will begin in early July, allowing a fourth drilling rig to be added to our program in October. All four of the rigs are expected to continue operations for Headwater throughout 2023.
The increased 2022 capital is expected to have a significant impact on 2023 production levels. Headwater's updated 2022 guidance is summarized below along with a comparison to previous guidance published as of
Previous 2022 Guidance | Revised 2022 Guidance | |
2022 annual production (boe/d) (1) | 12,500 | 13,000 |
2022 fourth quarter (boe/d) (2) | 15,000 | 16,500 |
Capital expenditures (3) | ||
Adjusted funds flow from operations (4) | ||
Exit adjusted working capital (4) |
(1) | |
(2) | |
(3) | Non-GAAP measure. Refer to "Non-GAAP and Other Financial Measures" within this press release. |
(4) | Capital management measure. Refer to "Non-GAAP and Other Financial Measures" within this press release. |
(5) | For assumptions utilized in the above guidance see "Future Oriented Financial Information" within this press release. |
Greater Peavine Exploration Area
Headwater has continued to be active with our land expansion strategy. Since
The team is extremely excited about the prospectivity of the new land base. Headwater has identified more than 10 distinct prospects on the acreage and are actively preparing to test the prospects with our fourth quarter drilling campaign.
The Company's revised guidance will see approximately
With success, this new exploration focus area is expected to provide an additional material leg of long-term growth for Headwater.
Marten Hills West Update
We have continued to experience exceptional success in both the Clearwater A and Clearwater B formations in the Marten Hills West area. As such, the Board has approved incremental expenditures to accelerate development. Headwater's revised guidance contemplates
Recent wells results are as follows:
Well UWI |
Zone |
Initial Production ("IP") (Producing Days) (1) |
Average Rate (bbls/d) |
00/14-05-076-02W5 | Clearwater A | IP-23 | 395 |
02/14-05-076-02W5 | Clearwater A | IP-14 | 315 |
02/14-07-076-02W5 | Clearwater A | IP-14 | 285 |
00/13-07-076-02W5 | Clearwater A | IP-35 | 245 |
00/09-34-075-03W5 | Clearwater B | IP-60 | 145 |
02/08-34-075-03W5 | Clearwater A | IP-42 | 95 |
(1) | IP rates indicate the days the well is on production post load recovery. |
The success of the recent drilling campaign has resulted in area production growing from 70 bbls/d in September of 2021 to an average of 1,350 bbls/d in April of 2022.
Marten Hills Update
Initial production rates from our latest area wells have been consistent with an average post load recovery 30-day production rate of approximately 300-400 bbls/d. Area production continues to grow, with current rates of approximately 10,500-11,000 boe/d.
Headwater's oil processing facility is now fully commissioned resulting in reduced oil transportation costs. Cost savings, partially realized in the first quarter, will be fully realized in the second quarter of 2022, resulting in annual corporate transportation expenses of approximately
Headwater's revised guidance will see approximately
Secondary recovery continues to ramp in the field with approximately 15% of the
McCully Update
The Company's McCully asset performed strongly throughout the first quarter of 2022, contributing
(1) | Capital management measure. Refer to "Non-GAAP and Other Financial Measures" within this press release. |
Outlook
Our business continues to evolve with a very strong growth outlook for the foreseeable future. Our successful land expansion strategy will be tested with exploration drilling in the fourth quarter of 2022. When combined with the success we have already witnessed with our historical exploration and development strategy we anticipate a very strong and profitable future. The significant growth, land expansion and exploration continue to occur, while spending less than our cash flow in 2022.
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, 2022 revised 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 ability to drill 150 incremental wells in 2023 and beyond with minimal construction expense; the expectation that Headwater will operate one drilling rig through beak-up and expect to have two drilling rigs operational by the middle of June; the expectation to have a fourth drilling added to the program in October and that all four rigs will continue operations for Headwater through to the end of the first quarter 2023; the expectation that 2022 capital will have significant impact on 2023 production levels; expected details of the 2022 capital expenditure program by area; the expectation that capital allocated to the Greater Peavine area for construction of roads and pads will result in the ability to drill the next 50 locations with minimal civil construction; the expectation the new exploration focus area is anticipated to provide an additional material leg of long-term growth for Headwater; the expectation to drill 22 wells over the remainder of 2022 in
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
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 total sales, net of blending, capital expenditures and free cash flow) 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
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 | ||||
2022 | 2021 | |||
(thousands of dollars) | ||||
Total sales | 119,262 | 25,492 | ||
Blending expense | (9,240) | (2,370) | ||
Total sales, net of blending expense | 110,022 | 23,122 | ||
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.
Three months ended | ||||
2022 | 2021 | |||
(thousands of dollars) | ||||
Cash flows used in investing activities | 80,374 | 8,260 | ||
Restricted cash | (5,000) | 1,237 | ||
Change in non-cash working capital | 6,583 | 27,775 | ||
Capital expenditures | 81,957 | 37,272 | ||
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 | ||||
2022 | 2021 | |||
(thousands of dollars) | ||||
Cash flows provided by operating activities | 60,689 | 12,783 | ||
Changes in non–cash working capital | 15,150 | 1,696 | ||
Current income taxes | (5,816) | - | ||
Adjusted funds flow from operations | 70,023 | 14,479 | ||
Adjusted working capital is a capital management measure which management uses to assess the Company's liquidity.
2022 |
| |||
(thousands of dollars) | ||||
Working capital | 77,122 | 89,775 | ||
Financial derivative receivable | (565) | (770) | ||
Financial derivative liability | 3,515 | 3,924 | ||
Adjusted working capital | 80,072 | 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 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
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