Headwater Exploration : 2020 Year End Financial Statements

Management's Report

The management of Headwater Exploration Inc. has prepared the accompanying financial statements of Headwater Exploration Inc. in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Financial and operating information presented throughout the regulatory filings is consistent with that shown in the financial statements.

Management is responsible for the integrity and objectivity of the financial information. Where necessary, the financial statements include estimates that are based on management's informed judgments. Internal control systems are designed and maintained to provide reasonable assurance that assets are safeguarded, transactions are properly authorized and reliable accounting records are produced for financial purposes.

KPMG LLP, an independent firm of Chartered Professional Accountants was appointed by the Company's shareholders to conduct an audit of the financial statements. Their examination included such tests and procedures as they considered necessary to provide reasonable assurance that the financial statements are presented fairly in accordance with International Financial Reporting Standards.

The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal controls. It exercises its responsibilities primarily through the Audit Committee, which is comprised of three independent directors. The Committee meets regularly with management and with the independent auditors to satisfy itself that management's responsibilities are properly discharged, to review the financial statements and to recommend that the financial statements be presented to the Board of Directors for approval.

The Audit Committee has reviewed the financial statements and recommended their approval to the Board of Directors. The Board has approved the financial statements for issuance to the Company's shareholders.

(signed) "Neil Roszell"	(signed) "Ali Horvath"
Neil Roszell	Ali Horvath, CPA, CA
Chief Executive Officer and Chairman	Vice President Finance and Chief Financial Officer
March 10, 2021

KPMG LLP 205 5th Avenue SW Suite 3100

Calgary AB T2P 4B9 Tel [phone] Fax [phone]www.kpmg.ca

INDEPENDENT AUDITORS' REPORT

To the Shareholders of Headwater Exploration Inc.

Opinion

We have audited the financial statements of Headwater Exploration Inc. (the "Entity"), which comprise:

• • the statement of financial position as at December 31, 2020

• • the statement of income and comprehensive income for the year then ended

• • the statement of changes in shareholders' equity for the year then ended

• • the statement of cash flows for the year then ended

• • and notes to the financial statements, including a summary of significant accounting policies

(Hereinafter referred to as the "financial statements").

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Entity as at December 31, 2020, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the "Auditors' Responsibilities for the Audit of the Financial Statements" section of our auditors' report.

We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

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Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements for the year ended December 31, 2020. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

We have determined the matters described below to be the key audit matters to be communicated in our auditors' report.

Evaluation of the acquisition-date fair value of property, plant and equipment acquired through a business combination

Description of the matter

We draw attention to note 2, note 3 and note 5 to the financial statements. The Entity acquired property, plant and equipment ("PP&E") through a business combination. The acquisition date fair value for the PP&E was $119,636 thousand. The determination of the acquisition-date fair value of PP&E involves significant estimates, including the cash flows associated with the proved and probable oil and gas reserves and the discount rates.

The estimation of the cash flows associated with the proved and probable oil and gas reserves requires the expertise of an independent third party reserve evaluator, and includes significant assumptions related to:

• • Forecasted production

• • Forecasted operating costs

• • Forecasted royalty costs

• • Forecasted future development costs

• • Forecasted oil and gas commodity prices.

The Entity engages an independent third party reserve evaluator to estimate the cash flows associated with the proved and probable oil and gas reserves.

Why the matter is a key audit matter

We identified the evaluation of the acquisition-date fair value of PP&E acquired through a business combination as a key audit matter. Significant auditor judgment was required in evaluating the results of our audit procedures regarding the estimate of the cash flows associated with the proved and probable oil and gas reserves and the discount rates.

How the matter was addressed in the audit

The primary procedures we performed to address this key audit matter included the following:

With respect to the estimate of the cash flows associated with the proved and probable oil and gas reserves:

• • We evaluated the competence, capabilities and objectivity of the independent third party reserve evaluator engaged by the Entity

• • We compared the forecasted oil and gas commodity prices to those published by other independent third party reserve evaluators

• • We evaluated the appropriateness of forecasted production and forecasted operating costs, royalty costs and future development costs by comparing to 2020 historical results. We took into account changes in conditions and events affecting the Entity to assess the adjustments or lack of adjustments made by the Entity in arriving at the assumptions.

We involved valuation professionals with specialized skills and knowledge, who assisted in

• • Evaluating the appropriateness of the Entity's discount rates by comparing the discount rates to market and other external data

• • Assessing the reasonableness of the Entity's estimate of the acquisition-date fair value of PP&E by comparing the Entity's estimate to market metrics and other external data.

Assessment of the recoverable amount of the New Brunswick cash generating unit

Description of the matter

We draw attention to note 2, note 3 and note 7 to the financial statements. The Entity assesses at each reporting date whether there is an indication that property, plant and equipment within a cash generating unit (the "CGU") may be impaired or that historical impairment may be reversed. The Entity has recorded an impairment reversal of $15,054 thousand related to its New Brunswick CGU. The determination of the recoverable amount of a CGU involves significant estimates, including the cash flows associated with the proved and probable natural gas reserves and the discount rates.

The estimation of the cash flows associated with the proved and probable natural gas reserves requires the expertise of an independent third party reserve evaluator, and includes significant assumptions related to:

• • Forecasted production

• • Forecasted operating costs