August 3, 2023
Headwater Exploration Inc. Q2/23 – Broadening Horizons
Our view: Headwater posted in-line Q2/23 results, punctuated by continued momentum at Marten Hills West. Management noted continued land acquisitions, adding 63 net sections in the Clearwater and 121 net sections targeting an unspecified oil play. We expect the company will benefit from broader exploration next year, likely driving incremental catalysts.
Key points:
Q2/23 in-line. Q2/23 volumes of 17,152 boe/d were in-line with RBC/ consensus of 17,001/17,048 boe/d. Accordingly, CFPS of $0.28 was in-line with RBCe/consensus of $0.27/$0.27; see Exhibit 1 for key variances and estimate changes. Q2/23 E&D capital spend of $64 million was higher than RBC/consensus estimates at $55/$40 million, with management noting $8.5 million in land expenditures to add 90 sections of undeveloped land along with 24 crude oil wells drilled in Martin Hills West.
Marten Hills West driving corporate growth. Marten Hills West volumes continue to drive corporate growth, with July volumes averaging over 7,000 bbl/d (>50% growth since April 2023); 25 wells have been brought on production YTD at an average IP30 rate of 215 bbl/d. Management also flagged encouraging initial results on a Central Marten Hills well pushing the southern boundary of the region, achieving an IP20 of 280 bbl/d.
Land acquisitions nudging capital guidance higher. Headwater has added 63 net Clearwater sections YTD, citing multiple potential new pools along with 121 net sections in unspecified oil-focused plays in the WCSB. Management has outlined key exploration areas of focus in H2/23 (West Nipisi, Seal) with the team piloting its "StingWray" fan-style well design in Q4/23 in Marten Hills West and Seal. Accordingly, management bumped capital guidance to $225 million (+$25 million), with $15/$10 million associated with land expenditures/drill-ready Clearwater exploration wells.
Net cash position offers flexibility for Headwater's capital program.
Headwater exited the quarter with working capital of $55 million (RBC: $61 million), offering ample flexibility for the company's base dividend ($0.40/ share annually) and exploration capital. We place Headwater at a net cash balance of $70/$112 million in 2023E/24E, ahead of most oil-weighted peers, allowing for optionality to pursue accelerated development, potential transactions, and/or increased shareholder returns.
Reiterating Sector Perform rating. We reiterate our Sector Perform rating and bump our target price to $8.50/share driven by strong performance in Martin Hills West. Headwater shares trade at roughly a 2x premium to oil-weighted peers (Exhibit 3), which we believe is justified given the company’s pure-play Clearwater exposure, competitive dividend yield, and management’s track record of value creation. However, the current valuation appropriately captures these attributes, in our view.