Drilling & Completions | Quarterly / Earnings Reports | Fourth Quarter (4Q) Update | Financial Results | Capital Markets | Capital Expenditure | Capex Increase | Capital Expenditure - 2021

Headwater Exploration Nearly Doubles 2021 Capex

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   |    Friday,March 12,2021

Headwater Exploration Inc. reported its Q4/full year 2020 results as well as its 2021 capital plan.

Ups 2021 Capex

Headwater is reaffirming its 2021 production guidance. 

Based on recent strip commodity prices Headwater now expects to achieve adjusted funds flow from operations of $90 – $95 million, an increase from approximately $48 – $52 million from our previously announced December guidance. 

The acceleration of the gas plant construction results in a modest increase in capital expenditures to $90 – $95 million from $85 – $90 million.

Q4/Full Year 2020 Report

Q4 2020 Highlights:

• Closed the acquisition of Cenovus Energy Inc.’s position in the Marten Hills area of Alberta for estimated total consideration of $135.3 million. The acquired assets included a 100% working interest in approximately 2,800 barrels per day of heavy oil production and 270 net sections of Clearwater rights.
• Generated average production of 1,646 boe/d inclusive of one month of production from the acquired Marten Hills assets.
• Achieved adjusted funds flow from operations of $4.8 million ($0.03/share basic), representing a 150% increase from the fourth quarter of 2019.
• Achieved an operating netback of $35.04/boe and an adjusted funds flow netback of $31.79/boe.
• Generated net income of $16.9 million ($0.10/share basic).
• As at December 31, 2020, Headwater had adjusted working capital of $80.8 million and no outstanding debt.

• Production averaged 882 boe/d for the year, an increase of 42% from 2019 annual production of 620 boe/d.
• Achieved adjusted funds flow from operations of $8.8 million ($0.06/share basic).
• Achieved free cash flow of $6.5 million.
• Proved developed producing reserves increased by 67% to 5.0 mmboe from 3.0 mmboe.
• Total proved reserves increased by 217% to 9.5 mmboe from 3.0 mmboe.
• Proved plus probable reserves increased 254% to 13.1 mmboe from 3.7 mmboe.
• Achieved finding, development, and acquisition (“FD&A”) costs, including changes in future development costs of $26.89 per boe on a proved basis and $18.87 per boe on a proved plus probable basis.
• As at December 31, 2020, Headwater’s Liability Management Rating (“LMR”) was 31 in Alberta significantly exceeding the Alberta industry LMR average. Headwater remains committed to maintaining an LMR rating above the industry average and minimizing its environmental footprint.

Operations Update

Marten Hills Core Area Development

The first quarter of 2021 has been very active to date.  Accomplishments include:

• Rig released 11 8-leg horizontal wells in the core producing area of Marten Hills;
• Currently drilling our one remaining 8-leg horizontal well in Marten Hills to complete Headwater’s first quarter program;
• Rig released 5 horizontal injection wells including 1 4-leg horizontal injector, 2 2-leg horizontal injectors and 2 single leg horizontal injectors;
• Drilled, completed and tested two Grand Rapids/Clearwater source wells;
• Drilled and evaluated one stratigraphic test well; and
• Drilled in excess of 150,000 meters and achieved average well costs equivalent to established Clearwater operators.

The producing and injection wells drilled this quarter occurred from three pad sites which prevented many of the new wells from being placed on production until all drilling and completion operations for the quarter were completed.  Through some ingenuity the team was able to begin production from four of the 8-leg horizontal wells in the last couple of weeks.  The balance of the new producing wells will be placed on production in conjunction with the completion of the multi-well batteries prior to the end of March.  Headwater looks forward to providing a fulsome production update in conjunction with our first quarter results to be released in early May.

The Marten Hills area is characterized by challenging break-up conditions from April through to June.  With the expected ramp up in production, and associated fluid movement in April, Headwater has been actively preparing contingencies to tackle the logistical challenges of break-up at Marten Hills.  The advanced preparations will assist the company in minimizing downtime during the second quarter.

Headwater initiated construction of a temporary injection setup and anticipates having first injection into the 4-leg horizontal injector by the end of April which is six months ahead of schedule.  The remaining injection wells will be placed on production prior to the end of March and produce until the third quarter of 2021, at which time the wells will then be converted to injection.

Production testing of two source wells showed strong inflow results of greater than 1,000 bbls/d per well confirming there is sufficient source water for our first phase of injection.

During the first quarter, Headwater executed an agreement with another area operator to construct a joint gas processing facility.  The facility is currently under construction and is expected to be commissioned by early July 2021.  This facility will allow us to achieve gas conservation from production in the core area nine months ahead of initial expectations.

Access to a portion of the Marten Hills exploration lands was confirmed during the first quarter.  We expect to license the first four exploration tests imminently and expect to begin drilling as early as late August 2021.  An additional three to five exploration tests will be drilled as soon as access allows, which is anticipated to commence in December and continue into the first quarter of 2022.

The McCully asset has performed strongly throughout this winter season and Headwater anticipates continuing to produce the field until May 1, 2021, when it will be shut-in to await next winter’s premium pricing season. Based on field receipts to date, the McCully field is expected to generate approximately $4.5 million of free cash flow during the first quarter of 2021.

Reserves growth with minimal capital expenditures continued for this property in 2020.  Positive technical revisions and improved recovery replaced 2020 production by 0.9 times on a proved basis and 1.3 times on a proved plus probable basis.