Headwater released Q4/23 results featuring in-line production volumes of 19,939 boe/d, driving strong CFPS of $0.34, on a capital program of $30 million. The company increased 2024 guidance to $200 million (previously $180 million), while leaving production guidance unchanged at 20,000 boe/d (exit 21,500 boe/d) to accommodate land purchases. Overall we expect the stock to trade in line with oil-weighted peers tomorrow, with exploration results on recently acquired lands likely the next catalysts for the stock.
Details:
Q4/23 volumes in line, CFPS ahead. Production volumes of 19,939 boe/d (~93% liquids) were in line with RBC/consensus of 20,295/20,000 boe/d. This drove CFPS of $0.34, which came in ahead of RBC/consensus estimates at $0.32/$0.32. Q4/23 capital spend totaled $30 million (RBC/consensus of $31/$31 million), primarily focused on Marten Hills West where production exceeded 10,500 bbls/d in Q4/23 ( >250% growth compared to 3,000 bbls/d in Q1/23).
Modest increase to 2024 budget. Management raised 2024 capital expenditure guidance by $20 million with the company now planning to spend $200 million, including roughly $25/$20 million in capital for waterflood/exploration. This is expected to drive volumes of 20,000 boe/d with growth weighted to the second half to align with TMX linefill; management expects exit volumes to exceed 21,500 boe/d and AFFO to reach roughly $300 million.
2P reserves +51%, FDC +81%. Headwater provided updated 2023 reserves, exhibiting a 32%/54%/51% increase in PDP/1P/2P reserves, largely attributable to secondary recovery and ongoing delineation activity. PDP reserves now account for 68%/43% of 1P/2P reserves (compared to 79%/48% in 2022). 2P FDC increased 81% y/y with 2P FDC/2024E Capex mapping to 1.4x (0.7x in 2023).
Exploration and organic growth in focus. The company is aiming to build on its momentum at Marten Hills West, which averaged 10,500 boe/d in Q4/23, and drill roughly 10 exploration wells in 2024 - with a focus on its Clearwater 'A'/'B'/'E' plays in >35/15/10 section pools. Management has also earmarked capital for up to 2 more exploration wells targeting the Mannville (note here), depending on results from the initial test well that is currently being placed on production.
Balance sheet in good shape. Headwater maintains a strong balance sheet, generating $52 million in FCF and exiting 2023 with net cash of $79 million (RBCe: $64 million). The company has capacity to pursue accelerated development (including the accelerated capital expenditures and strategic acquisitions) while retaining the flexibility to support its base dividend ($0.40 per share, annualized).