Headwater Exploration Inc. Q3/23 – Change at the Helm
Our view: Headwater's Q3/23 results were generally as expected with management highlighting a suite of exploration results, extending several pool boundaries and ultimately adding drilling inventory. The company announced management succession with Neil Roszell moving to Executive Chairman, Jason Jaskela taking on the CEO role, and Brad Christman promoted to COO. We generally view the update favourably with the company building strong momentum on the exploration front.
Key points:
Q3/23 generally as expected. Volumes of 18,027 boe/d (94% liquids) were in line with RBC/consensus estimates of 18,022/17,925 boe/d. CFPS of $0.34 was +6%/-3% compared to RBC/consensus at $0.32/$0.35; see Exhibit 1 for key variances/estimate changes. Headwater drilled 26 wells in Marten Hills West, driving a $70 million capital program which was in line with RBC/ahead of consensus estimates of $70/$60 million. Headwater 'accelerated' $10 million of capital into Q4/23 (now $235 million); management plans to release 2024 guidance December 7th.
Marten Hills West front and centre; exploration continues. Marten Hills West volumes now exceed 10,000 bbl/d. In the Clearwater 'A', management has identified >35 sections with step-outs scheduled in the coming six months; in the 'B', the team plans to develop a 15-section pool; in the 'E' will be testing a potential 10-section pool. Headwater provided broader exploration updates at Seal, though the team has not yet disclosed where its non-Clearwater acreage sits (141 sections); Headwater plans for 5-7 exploration wells in 2024.
Succession planning – Neil Roszell shifting to Executive Chairman.
Headwater announced that Neil Roszell will be shifting to Executive Chairman effective January 1, 2024; current President and COO Jason Jaskela will take over as CEO. Additionally, Brad Christman will be promoted to COO, from VP, Production.
Cash is king, strong return of capital framework. Headwater generated $11 million in FCF and exited Q3/23 with a working capital surplus of $43 million (RBCe: $38 million); we forecast 2024E/25E net cash of $159/$195 million. Headwater maintains significant financial flexibility to support the base dividend ($0.40/share annualized) and optionality to pursue accelerated development, potential M&A, and/or bolstering shareholder returns.
Reiterating Sector Perform rating. We reiterate our Sector Perform rating and increase our target price to $9.00/share following continued Marten Hills West success. Headwater shares trade at a ~1.5-turn premium to oil-weighted peers (Exhibits 4/5), 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.