May 11, 2023
Headwater Exploration Inc. Q1/23 – Westbound
Our view: Headwater posted an in-line quarter with the outlook for the balance of the year intact. Management noted continued success at Marten Hills West, highlighting strong well results and indications that the area may have as much productive potential as (or more than) the company’s core block. We expect this to be well received as investors look for clarity on the duration of the current asset base. We reiterate our Sector Perform rating and $8/share price target.
Key points:
Q1/23 results largely in line. Q1/23 volumes of 17,004 boe/d were in line with RBCe/consensus of 17,020/17,139 boe/d. Accordingly, CFPS of $0.25 was in line with RBCe/consensus of $0.25/$0.26; see Exhibit 1 for key variances and estimate changes. Q1/23 E&D capital spend of $69 million (RBCe/consensus: $70/$71 million) included 24 wells drilled and 31.5 net sections added in West Nipisi. 2023 guidance remains unchanged, as operations have not been impacted by Alberta wildfires.
Solid exploration results; Marten Hills West a standout. Headwater outlined a successful exploration campaign, spanning Marten Hills West to Peavine/Seal with several results well above type curve. We expect continued momentum on this front to be well received. The company continues to aggregate land, adding 31.5 net sections at West Nipisi, and plans to test out a fishbone well design in the second half. Management also noted indications that the Marten Hills West area may have as much productive potential as (or more than) the company’s core block (10–12k + bbl/d), though early days.
Minor adjustments to our estimates. We update our estimates to reflect actualized Q1 figures along with minor margin/mix assumptions. Our production forecasts are largely unchanged, with CFPS increasing 3% in 2023E and decreasing 2% in 2024E.
Solid balance sheet supports exploration, RoC. Headwater maintains a net cash position, providing ample flexibility to support the capital program and the company’s RoC framework. We forecast Headwater to exit 2023E/24E with net cash balances of $134/$217 million ($71/$45 million at strip), providing optionality for accelerated development, potential transactions, and/or incremental shareholder returns on top of the base dividend of $0.40/share (6.6% yield).
Reiterating Sector Perform rating. We reiterate our Sector Perform rating and $8.00/share price target. Headwater shares trade at a roughly 1–1.5x premium to oil-weighted peers (Exhibits 3–4), which we believe is justified given the company’s pure-play Clearwater exposure, its competitive dividend yield, and management’s track record of value creation. However, the current valuation appropriately captures these attributes, in our view.