Headwater Exploration Inc. announces transformational transaction with Cenovus Energy Inc. and third quarter operating and financial results
November 9, 2020 CNW
CALGARY, AB, Nov. 9, 2020 /CNW/ – Headwater Exploration Inc. (the “Company” or “Headwater“) (TSX: HWX) announces it has entered into a definitive agreement with Cenovus Energy Inc. (“Cenovus”) for a transformational transaction (the “Transaction”) to acquire 100% of Cenovus’ assets in the Marten Hills area of Alberta for approximately $100 million. Pursuant to the Transaction, Headwater will acquire a 100% working interest in approximately 2,800 barrels per day of medium oil production and 270 net sections of Clearwater rights.
The total consideration to be paid to Cenovus for the Transaction consists of:
- $35 million cash
- 50 million common shares of Headwater and 15 million purchase warrants (the “Warrants“) exercisable at $2.00 per common share with a three-year term
“We are extremely pleased to have obtained a strategic investor and business partner with Cenovus. Our common goals of developing and maximizing the value associated with this enviable position in the prolific Clearwater play have aligned us on all key business principles” said Neil Roszell, Headwater’s Chairman and Chief Executive Officer. Upon closing of the Transaction, Cenovus will own approximately 26% of the basic common shares of the Company and will be entitled to appoint two nominees to the Board of Directors of the Company. In addition, Headwater has provided Cenovus with the ability to participate in Headwater’s future equity financings based on its pro rata ownership level at such time for as long as Cenovus holds 20% or more of the issued and outstanding Headwater common shares.
Cenovus will retain a gross overriding royalty on the lands allowing them to benefit from execution strength of the Headwater team in the development of the Clearwater formation at Marten Hills. In conjunction with the Transaction, Headwater has committed to spend $100 million on the acquired lands by December 31, 2022.
Strategic Rationale
The Transaction solidifies Headwater’s strategy to become a premier publicly traded oil and gas producer focused on asset quality, corporate level returns and sustainability while maintaining a pristine balance sheet.
Relevance
The Transaction establishes Headwater as the only pure play public company with material interests in the Clearwater play, a unique high return play with compelling economics. Headwater’s acquisition of the assets will allow public company investors exposure to the Clearwater play through a team that has historically proven to be skilled capital allocators and consolidators. The acquired assets have top decile inventory in the core Marten Hills area of the Clearwater play, with Cenovus having 7 of the top 11 producing wells drilled to date.
Returns
In the context of current strip commodity pricing, the Headwater five-year business plan is expected to deliver 20-30% annualized debt adjusted funds flow growth with the potential to generate significant free cash flow.
Resiliency & Exploration Upside
The acquired development inventory on the core lands is highly economic on strip pricing. Our five-year business plan, under our current capital structure, is projected to have negligible to no leverage without any further capital injections.
Headwater plans to continue Cenovus’ efforts to de-risk the approximate 250 sections of exploration acreage. The 6 historical exploration wells drilled by Cenovus have established 4 potential development areas, which Headwater intends to follow-up on using a methodical delineation approach. Exploration success is not built into the above debt adjusted funds flow growth estimate.
ESG
The Transaction, in addition to Headwater’s existing business, combine to create sound building blocks for Headwater to be an industry environmental, social and governance leader. The assets acquired have a minimal undiscounted uninflated asset retirement obligation of $3.5 million. The environmental footprint associated with the development of the asset will be minimized with pipeline connected multi-well pad development. Fresh water usage will also be negligible with no fracture stimulations required to realize the full potential of the assets and future enhanced oil recovery initiatives are currently planned to be implemented using only saline water.
Asset Acquisition Summary
Cash consideration | $35 million |
Approximate equity consideration | $65 million |
Total consideration | $100 million |
Estimated January 2021 production | 2,800 boe/d (100% medium oil, average 22˚ API) |
Total land | 189,000 acres |
Land with Clearwater rights | 172,800 acres |
P+P reserves (1) | 8.3 MMbbls |
ARO undiscounted (2) | $3.5 million |
1. | The reserves information is based on an evaluation by GLJ Ltd. (“GLJ“) of the reserves associated with the Marten Hills assets in its report dated effective December 31, 2020, which was prepared in accordance with the COGE Handbook and NI 51-101 and is based on average forecast prices of three consultant’s average (GLJ, McDaniel & Associates Consultants Ltd. and Sproule Associates Ltd.) as of October 1, 2020. |
2. | Asset retirement obligations calculated in accordance with the polices and directives of the Alberta Energy Regulator. |
2021 Preliminary Pro forma Outlook (1)
Capital expenditures | $60-$70 million |
Average production | 6,000-6,500 boe/d (90% Oil) |
2021 funds flow from operations | $41-$45 million |
2021 exit working capital position | $50-$55 million |
Q4 2021 production | 7,500-8,000 boe/d |
2021 forecast operating netback | $20.00 per boe |
1. | 2021 preliminary pro forma outlook has been formulated using strip pricing as at November 4, 2020 which includes an average WTI price of US$41.06/bbl; an average WTI-WCS differential of US$12.41/bbl, an average AECO price of Cdn$2.89/mmbtu, an average NYMEX Henry Hub price of US$3.02/mmbtu, an average AGT price of CAD$5.36/mcf, and an average US$/CAD$ exchange rate of 1.31. The preliminary outlook is conditional on required approvals as discussed below. |
Enhanced Oil Recovery (“EOR”) has the potential to materially increase recovery factors and is an important part of the Headwater business plan. In 2021, we anticipate testing multiple injection pilots to validate full scale development of the EOR.
The Transaction has an effective date of October 1, 2020 and is expected to close on or about December 22, 2020. Headwater has paid a $10 million deposit to Cenovus which will be credited against the consideration on closing.
As the Transaction will result in the issuance of greater than 25% of the issued and outstanding common shares of Headwater to Cenovus, the Transaction will require the approval of Headwater’s shareholders in accordance with the rules of the TSX. Subject to the approval of the TSX, Headwater may seek shareholder approval by obtaining the written consents of shareholders holding in excess of 50% of the issued and outstanding Headwater common shares. Alternatively, Headwater will hold a special meeting of shareholders to approve the Transaction, which will require the affirmative vote of holders holding in excess of 50% of the votes cast at such meeting. The Transaction will also be subject to certain regulatory and other approvals and the satisfaction or waiver of other customary closing conditions.
New Board Members
On closing of the Transaction Cenovus and Headwater have agreed that Cenovus’ initial nominees to Headwater’s Board of Directors will be Kam Sandhar, Cenovus’ Senior Vice-President, Conventional, and Sarah Walters, Cenovus’ Senior Vice-President, Corporate Services. “We are very excited to have Kam and Sarah join our Board on closing of the Transaction. The skills and experience that Kam and Sarah bring to the Board table will add to and complement the already strong skill set of our existing Board members.” said Mr. Roszell.
Advisors
Peters & Co. Limited is acting as exclusive financial advisor to Headwater. Burnet, Duckworth & Palmer LLP is acting as legal counsel to Headwater.
THIRD QUARTER RESULTS
Headwater is also pleased to announce its operating and financial results for the three and nine months ended September 30, 2020. Selected financial and operational information is outlined below and should be read in conjunction with the unaudited condensed interim financial statements and the related management’s discussion and analysis (“MD&A”). These filings will be available at www.sedar.com and the Company’s website at www.headwaterexp.com.
Financial and Operating Highlights
Three months ended
September 30, |
Percent Change | Nine months
ended September 30, |
Percent Change | |||
2020 | 2019 | 2020 | 2019 | |||
Financial (thousands of dollars except share data) | ||||||
Sales | – | – | – | 2,873 | 7,023 | (59) |
Cash flow provided by (used in) operating activities | (364) | (342) | 6 | 1,681 | 9,053 | (81) |
Per share – basic | (0.00) | (0.00) | – | 0.01 | 0.10 | (90) |
– diluted | (0.00) | (0.00) | – | 0.01 | 0.10 | (90) |
Adjusted funds flow (used in) from operations (1) | (837) | (1,427) | (41) | 3,966 | 6,278 | (37) |
Per share – basic | (0.01) | (0.02) | (50) | 0.03 | 0.07 | (57) |
– diluted | (0.01) | (0.02) | (50) | 0.03 | 0.07 | (57) |
Net income (loss) | (1,723) | (1,318) | 31 | (10,212) | 1,368 | (846) |
Per share – basic | (0.01) | (0.02) | (50) | (0.08) | 0.02 | (500) |
– diluted | (0.01) | (0.02) | (50) | (0.08) | 0.02 | (500) |
Capital expenditures | 61 | 69 | (12) | 529 | 458 | 16 |
Working capital | 112,536 | 62,059 | 81 | |||
Shareholders’ equity | 155,148 | 112,792 | 38 | |||
Weighted average shares (thousands) | ||||||
Basic | 145,044 | 88,172 | 65 | 131,997 | 88,602 | 49 |
Diluted | 145,044 | 88,172 | 65 | 131,997 | 88,861 | 49 |
Shares outstanding, end of period (thousands) | ||||||
Basic | 145,044 | 88,147 | 65 | |||
Diluted (4) | 158,627 | 88,935 | 78 | |||
Operating (6:1 boe conversion) | ||||||
Average daily production | ||||||
Natural gas (mmcf/d) | – | – | – | 3.7 | 3.8 | (3) |
Natural gas liquids (bbl/d) | – | – | – | 2 | 4 | (50) |
Barrels of oil equivalent (2)(boe/d) | – | – | – | 625 | 632 | (1) |
Netbacks ($/boe) | ||||||
Operating | ||||||
Sales | – | – | – | 16.76 | 40.74 | (59) |
Royalties | – | – | – | (0.42) | (1.03) | (59) |
Production expenses | – | – | – | (9.92) | (11.33) | (12) |
Field netback (1) | – | – | – | 6.42 | 28.38 | (77) |
Realized gains on financial derivatives | – | – | – | 22.97 | 16.81 | 37 |
Operating netback (1) | – | – | – | 29.39 | 45.19 | (35) |
General and administrative expense | – | – | – | (12.44) | (13.28) | (6) |
Interest income and other (3) | – | – | – | 6.19 | 4.62 | 34 |
Decommissioning liabilities settled | – | – | – | – | (0.10) | (100) |
Adjusted funds flow netback(1) | – | – | – | 23.14 | 36.43 | (36) |
(1) | See “Non-IFRS” measures | |||||
(2) | See ‘”Barrels of Oil Equivalent.” | |||||
(3) | Excludes accretion on decommissioning liabilities. | |||||
(4) | Includes in-the-money dilutive securities as at September 30, 2020, which include 6.3 million stock options at a weighted average exercise price of $1.04/share and 7.2 million warrants vested and exercisable at an average exercise price of $0.92/share. |
Third Quarter 2020 Highlights
- As at September 30, 2020, Headwater has cash and cash equivalents of $112.7 million, a working capital surplus of $112.5 million and no outstanding debt.
- The Company’s natural gas production was shut-in during the quarter to take advantage of higher pricing in the winter months. The Company resumed production on October 30, 2020. Startup operations at McCully were seamless and average production is expected to be 5 mmcf/d during November and 10 mmcf/d during December.
- Locked into a financial derivative contract for 2,500 mmbtu/d at AGT Fixed CAD $5.00/mmbtu for November 2020.
- To appropriately manage the volatility in our natural gas pricing, Headwater has now entered a cumulative hedge position for the December 2020 through March 2021 period of 5,000 mmbtu/d that provides for an average fixed price of CAD $7.81/mmbtu.
RESPONSE TO COVID-19
Headwater continues to prioritize the health and safety of the Company’s employees, contractors, partners, service providers and the communities in which we operate. The Company remains committed to protecting the well–being of all stakeholders and following the guidance of public health officials, while maintaining safe operations and business continuity.
Additional corporate information can be found in our corporate presentation on our website at www.headwaterexp.com or on www.sedar.com.
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