Headwater Exploration Inc. is pleased to announce its operating and financial results for the three and nine months ended September 30, 2021.
THIRD QUARTER 2021 HIGHLIGHTS
- Generated average production of 7,688 boe/d representing an increase of 17% over the second quarter of 2021 and an increase of 60% over the first quarter of 2021.
- Achieved adjusted funds flow from operations of $31.5 million ($0.16 per share basic), representing an increase of 36% over the second quarter of 2021 and an increase of 118% over the first quarter of 2021.
- Achieved an operating netback of $46.17/boe and an adjusted funds flow netback of $45.01/boe.
- Achieved adjusted net income of $28.9 million ($0.14 per share basic).
- Commissioned the Company's joint gas processing facility in the Marten Hills area which resulted in first sales gas and an approximate 50% reduction in CO2e emissions intensity from the first quarter of 2021.
- Executed a $37.3 million capital program in the Marten Hills area including 3 successful exploration wells and 16 multi-lateral development wells at a 100% success rate.
- As at September 30, 2021, Headwater had adjusted working capital of $63.7 million and no outstanding debt.
OPERATIONS UPDATE
Marten Hills Core Area
As of September 30th, the Company has drilled 30 multi-lateral horizontal wells in the core development area which has grown oil production from 3,385 bbls/d in the first quarter of 2021 to current levels exceeding 9,000 bbls/d.
Significant capital efficiency improvements have been realized with the drilling technique changes that were implemented after the first quarter. As of September 30th, 18 producing wells have been drilled with the improved drilling techniques and 11 of these wells have been on production post load recovery for at least 30 days. The 30-day average rate post load recovery production of these 11 wells is approximately 400 bbls/d per well. This represents a 33% improvement in capital efficiency from our first quarter wells that achieved 30-day average rates of 300 bbls/d per well.
Construction on the 100% owned Headwater oil processing facility is currently in progress. Once complete, the facility will tie-in directly to the Rangeland pipeline system and is anticipated to reduce our corporate transportation costs by approximately $4.00/boe resulting in a facility payout in less than 2 years. Commissioning of the facility is expected to occur in mid-January 2022.
Headwater has expanded its waterflood pilot operations with 2 additional injection wells placed on injection in mid-October. Results from our first pilot that commenced in April 2021 continue to be strong, with oil rates stabilizing at approximately 280-300 bbls/d which is 20% above the oil rates prior to injection.
Marten Hills Exploration Update
During the third quarter, Headwater drilled its first 3 successful exploration tests in Marten Hills west. Headwater is highly encouraged by the results which have begun to validate and provide confidence in the value associated with the Company's 285 net sections of exploration lands.
The first two of these wells were drilled as 6-leg lateral wells targeting the upper Clearwater formation in section 32-75-02W5. The first exploration well drilled, 11-32-75-02W5, achieved load recovery on September 19th and achieved average oil production in October of 127 bbls/d of 16.5 degree API crude oil. Based on current pricing, this well is expected to achieve payout within its first 7 months of production. The second exploration well, 13-32-75-02W5, is still producing load fluid however the inflow characteristics are very similar to the 11-32 well. With the encouragement provided from these two successful wells, Headwater has licensed an additional 17 development locations in this area with plans to drill 2 additional delineation wells prior to year-end.
The third exploration well, 16-14-075-26W4, was drilled as a 4-leg lateral well targeting the upper Clearwater formation. The well was designed as an 8-leg lateral, but a structural anomaly showed productive reservoir approximately 10 metres above the initial prognosis. This well appears to be producing from only two laterals and achieved average oil production in October of 67 bbls/d. This is encouraging as we believe modest drilling orientation adjustments will allow Headwater to take advantage of improved up hole reservoir. Headwater plans to licence 6 follow-up development wells targeting the upper Clearwater sand adjacent to the 16-14 well.
In addition to the above-mentioned activity, Headwater anticipates drilling five incremental unique exploration prospects on our Marten Hills land base prior to the end of the first quarter of 2022.
McCully Update
Consistent with the Company's historical strategy of producing the McCully field during the winter months to take advantage of premium winter gas pricing, the McCully asset is expected to be placed back on production in the middle of November.
2021 Guidance Update
Headwater's Board of Directors has approved an increase to Headwater's 2021 capital budget from $130 million to $140 million, which will allow our two drilling rigs to maintain steady operations throughout the balance of the fourth quarter.
The performance of the Company's second half drilling program has exceeded expectations and we now expect to achieve average annual production of 7,400 boe/d (6,690 bbls/d of heavy oil and 4.2 mmcf/d of natural gas) and fourth quarter production of 10,400 boe/d (9,410 bbls/d of heavy oil and 6.0 mmcf/d of natural gas). We anticipate exit 2021 adjusted working capital to be approximately $66 million.
2022 Budget
The Board of Directors has approved an initial capital budget for 2022 of $120 million.
The capital budget includes approximately $78 million directed towards the continued development of the Marten Hills core area and approximately $42 million to continued delineation and development of our Marten Hills west acreage. Headwater has incorporated a 5% increase in drilling, completions and infrastructure costs to account for inflationary pressures in materials and manpower.
Resulting 2022 annual average production is expected to be 12,500 boe/d (11,500 bbls/d of heavy oil and 6.2 mmcf/d of natural gas) with fourth quarter 2022 average production expected to be 15,000 boe/d (13,770 bbls/d of heavy oil and 7.4 mmcf/d of natural gas).
The $120 million capital budget is expected to generate 70% production per share growth at a reinvestment rate of 58% of 2022 forecasted adjusted funds flow from operations. At US$75/bbl WTI, Headwater forecasts 2022 adjusted funds flow from operations of $207 million and free cash flow of approximately $87 million, resulting in positive exit 2022 adjusted working capital of approximately $153 million.
The $78 million of expenditures directed towards the core development area will result in the drilling of 19 multi-lateral producing wells, 24 injection wells, and 6 water source wells / stratigraphic tests. With the commissioning of Headwater's oil processing facility in January 2022, we plan to expand our waterflood implementation throughout our core acreage. By the end of the first quarter, we expect to have a total of 14 4-leg lateral injectors on injection, with an additional 13 4-leg lateral injectors on injection in the third quarter. By year end 2022, approximately 30% of our core area will be under waterflood.
The $42 million directed towards development and exploration of our Marten Hills west land includes the drilling of 7 exploration wells, 15 development wells and 3 stratigraphic wells. Additional exploration capital of $10 million (included in the $42 million) will be spent on infrastructure upgrades, seismic and additional land purchases.
2022 and Beyond
2022 is expected to be another pivotal year for Headwater. With full scale waterflood development implemented across our Marten Hills core acreage, we expect corporate declines to moderate to the low double-digit level and provide meaningful steady state free cash flow.
Our exploration evaluation program will continue throughout 2022 and with continued success, will set not only the next leg of growth for Headwater, but more importantly the next leg of free cash flow generation.
We continue to evaluate acquisition expansion opportunities in the Clearwater fairway and continue to maintain our balance sheet strength to be strategically positioned to participate in the Clearwater consolidation.
As the Company evolves with rapid growth and execution of the corporate strategy, there will be an increased focus on returning excess free cash flow to shareholders. While it is early, we look forward to providing clarity on these elements over the next 18 months.
Headwater's guiding principles of shareholder value creation, sustainability, asset development with an emphasis on environmental, social, and governance goals, and maintaining a pristine balance sheet continue to be unwavering.
