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Headwater Exploration First Quarter 2021 Results

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   |    Wednesday,May 12,2021

Q1 Highlights:

• Generated average production of 4,805 boe/d representing an increase of 192% over the fourth quarter of 2020.
• Achieved adjusted funds flow from operations of $14.5 million ($0.07 per share basic), representing an increase of 201% over the fourth quarter of 2020.
• Achieved an operating netback of $35.46/boe and an adjusted funds flow netback of $33.75/boe.
• Achieved adjusted net income of $6.4 million ($0.03 per share basic).
• Successfully executed a $37.3 million exploration and development capital program in the Marten Hills area inclusive of drilling 12, 8-leg multi-lateral producing wells, 5 horizontal injection wells, 2 source water wells and 1 stratigraphic test well.
• Executed an agreement with another area operator to construct a joint gas processing facility. The facility is currently under construction and is on track to be commissioned by early July 2021. This facility will allow Headwater to achieve gas conservation from production in the core area of Marten Hills.
• The Company’s McCully asset performed strongly throughout the quarter contributing $5.0 million in operating cash flow. Consistent with prior years and to optimize cash flow, Headwater shut-in production May 1, 2021, to await next winter’s premium pricing season. Approximately 40% of next winter’s volumes are hedged at an average price of US$7.39/mmbtu.
• As at March 31, 2021, Headwater had adjusted working capital of $58.4 million with no outstanding debt.

Operations Update

Marten Hills Core Area Development

During the first quarter, Headwater drilled 12 producing 8-leg horizontal wells.  Numerous drilling strategies were tested including changes to drilling mud systems, drill bit design, strategies to improve steering, and techniques to increase penetration rates.  Tracer surveys were conducted on several of the producing wells to understand relative contribution from each lateral.

The different strategies employed resulted in a larger variability in the peak 30-day average production per well (“IP 30”) than initially anticipated.  The IP 30’s varied from 205 – 720 bbls/d of oil.  A summary of results by section is as follows:

The combined learnings from the different drilling strategies employed provide technical clarity and confidence going forward.  These will allow Headwater to improve production per lateral during the next phase of planned drilling operations and provide greater certainty on expected returns on capital deployed.

Headwater commenced water injection into the 4-leg horizontal injector, 02/16-35-74-25W4, on April 15, 2021.  Headwater initially limited the injection rate to 400 bbls/d and has since increased this to 600 bbls/d.   Based on early indications, this well appears to have injection capacity in excess of 1,000 bbls/d.  This is very encouraging for full field waterflood implementation, as injectability into the lower portion of the reservoir has been validated. Source well deliverability is also confirmed with two successful source well tests completed in the first quarter.  These results represent key milestones in moving towards full scale waterflood implementation.

Exploration Update

Headwater is rapidly moving towards the licensing of eight exploration wells in two prospect areas of Marten Hills.  The current budget contemplates drilling four of these tests with a start date in mid-August.  Once success is confirmed on the prospects, Headwater will return and drill the remaining four additional delineation wells on these prospects in the fourth quarter of 2021.

Multiple additional exploration prospects in the Clearwater and other formations have been identified throughout our land base.  The current plan contemplates drilling three to five additional exploration prospects by the end of the first quarter of 2022.

Gas Conservation

Facility construction on the joint gas processing facility continues with expected commissioning in early July 2021.  This facility will allow Headwater to achieve gas conservation from all production in the core development area of Marten Hills.

Guidance Increase

At the end of the first quarter Headwater took steps to prepare for an earlier restart of drilling activities by placing rig mats on three of our existing padsites.  The pads have held together very well during the second quarter, resulting in Headwater being optimistic that drilling operations will recommence by early July.

As a result of the success achieved to date, the Board of Directors of Headwater has approved an increase to the Company’s 2021 capital expenditure budget and associated production guidance as follows:

The revised budget contemplates that three drilling rigs are expected to spud in early July.  The three drilling rigs will initially drill within the core development area.  Once access is available into Headwater’s exploration lands, one of the rigs will be re-deployed to drill exploration tests in mid-August.