Headwater keeps on rolling

Debt free, growing quickly with great margins

I have been asked many times why Headwater Exploration (HWX.TO) trades at a higher multiple of cash flow than man Western Canadian E&P’s. It might have something to do with its extraordinary growth and debt free balance sheet.

In Q1 2022 Headwater reported revenue growth of 376% and cash flow growth of 375%, zero debt and cash on hand of about CAD$100 million. The company bumped up its capital budget for 2022 from CAD$145 million to CAD$230 million and guides to cash flow of CAD$305 million. The company expects to exit 2022 with production at a 16,500 Boe/Day rate versus just over 10,000 Boe/Day in Q1 and is enjoying operating netbacks north of CAD$70 per barrel. Try to find another oil & gas company growing at 60% within its own cash flows.

There is commodity price risk in every oil & gas company and that explains why Headwater doesn’t trade at 30 times net income like some technology companies, but is not an excuse for a stock price of CAD$6.30 or about 8 times Net Income at current run rates. Headwater can operate profitably at much lower oil prices, has little financial risk, and will show rapid growth in output and its cash balance in the present pricing environment. With all-in operating costs including royalties and transportation of about CAD$25 a barrel, Headwater will be cash flow positive at less than a third of today’s oil price.

I value the stock at CAD$10 a share and own 15,000 shares.