April 3, 2023
Headwater Exploration Inc.
Management Update: More to Explore
Our view: We sat down with Jason Jaskela (COO) and Ali Horvath (CFO) of Headwater Exploration to catch up following Q4/22 results (note here). Key areas of focus included the company's core development strategy, broader exploration efforts, capital allocation framework, and key catalysts in 2023. We reiterate our SP rating and $8/share target price.
Key points:
Premium Clearwater portfolio with running room. Headwater provides investors pure-play exposure to the Clearwater, concentrated in some of the best acreage in the broader fairway in our view. We estimate 3-5 years of Tier 1/2 inventory, though we note Headwater continues to actively de- risk West Marten Hills/Nipisi, which likely bolsters this figure over time. Management has identified more than a decade of running room, likely augmented by ongoing delineation, land sales/swaps, and potential M&A.
Marten Hills integral to the long-term development plan. The 10 section core Marten Hills asset has backstopped corporate production growth to date (representing ~12,000 boe/d); it is currently 65% under waterflood as of Q1/23, with plans for full conversion by 2024. Strong exploration results in West Marten Hills have expanded inventory in the region, with the 'A' sand largely derisked through the 2021/22 drilling programs. Headwater has drilled two waterflood pilots at West Marten Hills, with management noting the potential to add an incremental 30 MMbbl, if successful.
Sizeable exploration portfolio across West Nipisi, Greater Peavine.
Headwater's winter drilling program at Utikuma (five wells averaging IP30's of 240 bbl/d) has validated the Clearwater 'A' sand. Combined with 31.5 sections acquired in West Nipisi, Headwater has mapped 464 MMbbls of OOIP in the region, with plans to test three potential zones by April 2023. Headwater has outlined ongoing exploration efforts in West Clearwater, with a three-well program across Peavine/Seal; the company also plans to test the fishbone well design in H2/23.
Strong capital discipline provides optionality. We believe Headwater strikes the balance between a competitive return of capital program (6.3% dividend yield) and reinvesting into the business to support growth and exploration efforts. On our updated estimates, we forecast Headwater will exit 2023E/24E with net cash (debt) of $50/$91 million (($7)/($124) million at strip), providing optionality for accelerated development, potential transactions, and/or incremental shareholder returns.
Maintaining Sector Perform. We reiterate our Sector Perform rating and $8/share target price. We note that the company trades at roughly a 1-2x premium to its oil-weighted peers (Exhibit 7/8), which we believe reflects pure-play Clearwater exposure, a strong return of capital framework, and management's track record of value creation, though we believe the current spread appropriately captures these factors.