Headwater Exploration Inc T.HWX

National Bank

[Nadia6519]

Headwater Exploration Inc.

Compounding Value

HWX (TSX) STOCK RATING TARGET EST. TOTAL RETURN C$6.30 Outperform (Unchanged) C$9.50 (Unchanged) 57.1% Q4/22

Operating & Financial Results

Q4/22 Results In Line The company reported fourth quarter operating and financial results in line with expectations, including average production of 15.5 mboe/d (88% liquids) and associated CFPS of $0.31 (vs. consensus $0.29). Production expanded by a factor of 34% with the culmination of a strong annual program, with that growth coming under an ~85% payout ratio (~5% implied FCF yield). Importantly, and indicative of the insulation within the Clearwater project, while differentials expanded by 30% Q/Q, netbacks were only impacted by -8% ($50/boe) as cash costs proved supportive (-28%) and incremental tailwinds were seasonally delivered from its New Brunswick gas asset.

Expanded Reserves & Exploration Upside

Indicative of the value inherent to its high-impact project exposure in the Clearwater, the company delivered 69% Y/Y PDP reserve growth at an allin FD&A cost of $21/boe (incl. FDC), which implied a recycle ratio of 2.8x for the year. As evidence of that positive momentum across its assets, the company noted positive developments, in; a) Utikima/ West Nipisi (seven sections) initial tests around 240+ bbl/d (IP30), b) Peavine/Seal (50 sections) well rates 120-200 bbl/d, and c) West Marten rates ~230 bbl/d; each of which similarly compounds the extent and duration of its development runway (MORE WITHIN).

Outlook Intact

With that, the company remains well-oriented to continue executing towards critical mass (25 mboe/d) and in support of an outsized total return. Recall, its unchanged 2023 capital program ($200 mln) is expected to deliver 40% annual growth under a 70% payout ratio at strip (5% implied FCF yield), along with a base dividend (6% cash dividend yield; 30-35% payout). A note of extreme importance is the resonance to value of that total return outlook, where its free cash profile uniquely EXPANDS (relative to peer comps that are static) given its funded growth and decline mitigation of waterflood.

Maintain Outperform Rating & $9.50/sh Target Price

A strong conclusion to the year, providing further visibility to the strength and duration of its returns and long-term value through its pivot to total returns; HWX is poised for a 44% return profile (vs. peers 23%) on leverage of -0.4x (vs. peers 0.4x), while trading at 4.5x 2023e EV/DACF (vs. peers 2.9x).

[Bennys65]

Anyone watching wcs diff.-11 and change vs -30 a couple of months ago.HWX all wcs priced.with no hedges.