Summary
The core area will turn cash flow positive in the second year of development.
Headwater Exploration’s cash flow appears to be impressive enough to return the current enterprise value in 6 years.
There is plenty more acreage to explore and develop.
Headwater Exploration remains debt free with a decent cash balance.
This management has experience in building and selling companies.
This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Learn More »
imaginima/E+ via Getty Images (Note that this is a Canadian company that reports in Canadian Dollars Unless Otherwise Noted.)
Headwater Exploration ( OTCPK:CDDRF ) has begun a significant project. In the second year of the project, management is projecting more cash flow than is needed by the project. That is a significant benefit over many new projects that need years until they generate more cash than is invested. Management also noted that the entire enterprise value of the company will come back in the form of excess cash flow in about 6 years. That is also better than many projects. Headwater Exploration Core Area Development Guidance (Headwater Exploration Current Presentation February 2022) As shown above, the core area will begin to generate more cash flow than is needed to grow production. That by itself is quite an achievement. The company has no debt and plenty of cash that management intends to use on a consolidation strategy. For newer investors that is company language for a disciplined shopping spree.
There is always some risk to an acquisition strategy in that management can pay too much or for some other reason the acquisition will not work out. Then again, this management built and sold Raging River to Baytex Energy ( OTCPK:BTEGF ) [BTE]. So, there is some experience in executing the proposed strategy that should reduce the normal risks going forward. Headwater Exploration Characteristics And Results Of Core Area Activities (Headwater Exploration Current February 2022, Presentation) As shown above, Headwater currently has plenty of possibilities to expand current operations. Even the slide above which only captures a small part of the basin shows plenty of unclaimed acreage that will likely at some point be available for possible development. The whole basin itself has plenty of acreage that will likely come up for bids by the government in the future.
One of the advantages of acreage in Canada is that the acreage is dirt cheap compared to the Permian and some of the other hot basins in the United States. Also, this is a conventional opportunity that recent advances in well completion and design techniques have turned (this conventional opportunity) into a very profitable opportunity.
There are so many areas that have been explored for a long time in North America. Therefore, the industry knows where the oil is. But until recently some of these deposits were not profitable to produce. That appears to be rapidly changing as North America becomes a major oil producer in the world. That means that any exploration is more about verifying that the new techniques result in a profitable cost structure. The “good old days” of wildcatting are slowly heading into the sunset because many of the oil deposits do not need to be found. Instead, they are waiting for those profitable production techniques to be discovered.
Management has proposed some test wells on the rest of the acreage. The success in those areas should provide considerable growth prospects for the company. In terms of long-term growth, Canada is loaded with oil and natural gas possibilities. Therefore, the only real question is whether the company grows by acquisition or through organic growth from successful bids of leases.
Recently, management reported a few successful exploration wells. There will likely be growth in addition to the core area guidance noted above once management figures out the significance of the discoveries.
Much of the industry is currently focused on consolidation. This has been brought about by the history of the last five years. There is a big drive for companies to have a minimal optimal size moving forward so that surviving industry downturns is not such a challenge.
That consolidation attitude is likely to propel the current recovery into an unexpectedly long duration. There are definitely companies like this one that are growth oriented. But the market focus on balance sheet improvement and the return of profits to shareholders may prod many managements to pursue slower growth. Then as long as the forward curve remains discouraging, then outside money will not […]
Protected by Patchstack