November 8, 2024
Sector Perform
TSX: HWX; CAD 7.07
Price Target CAD 9.00
Headwater Exploration Inc.
Q3/24 Model - Update Keeping It Simple
Our view: Headwater released solid Q3/24 featuring volumes of 20,342 boe/d and in-line CFPS of $0.35 on a capital program of $58 million; the company also nudged up its 2024 capital and production guidance slightly and provided several encouraging step-out results. Based on our outlook the company should easily be able to provide 10%+ YoY growth for the foreseeable future, while supporting modest increases to the base dividend.
Key points:
Q3/24 Results – Slight Beat on Volumes. HWX recorded Q3/24 production volumes of 20,342 boe/d (RBC: 20,039 boe/d; Street: 19,805 boe/d) driving AFFO (f.d) of $0.35/sh (RBC/Street: $0.34/$0.35). Capital expenditures were slightly above expectations at $58mm (RBC/Street: $50mm/$51mm), with the quarterly program including 18 wells in Marten Hills West and successful multi-lateral exploration tests in both Little Horse and Clay.
Guidance – Increased. 2024 guidance was nudged up to 20,250 boe/d (from 20,000 boe/d), with the corresponding capital figure increased to $220mm (from $200mm). HWX's FY2025 budget is expected to be released in December.
Balance Sheet – In Good Shape. Headwater maintains a strong balance sheet with positive working capital of $64mm, while generating $26mm in FCF for the quarter. As a result, the company expects to have capacity to pursue accelerated development (including the accelerated capital expenditures and strategic acquisitions) including beyond the Clearwater while retaining the flexibility to support its core base dividend (currently $0.40 per share, annualized).
Core Activity – Marten Hills. In Q3/24, HWX drilled 18 wells within Marten Hills West; in the Clearwater E pool, the company has six producing wells testing the pool's regional borders estimated over 50 sections of HWX lands. Waterflooding is a highlight; the company has commenced secondary recovery at its 16-07 wells (2 wells) where it anticipates to expand its waterflood program coinciding with the development of the Clearwater E pool. The company noted that secondary recovery efforts in Marten Hills (Core) has had the effect of reducing its corporate declines by ~5% and corresponding maintenance capital requirements by $25mm/year (see more in Exhibit 3). See more operational updates in Exhibit 1 below.
Updates to Estimates. We update our estimates to reflect an increase to HWX's 2024 guidance and increasing production estimates for 2025/26 (+2%) driving our CFPS estimates to increase by +3%/+3%/+2%, respectively (see more in Exhibit 2).