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On today’s TSX Breakouts report, there are 15 stocks on the positive breakouts list (stocks with positive price momentum), and 22 securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is an energy stock that is on the positive breakouts list – Headwater Exploration Inc. (HWX-T). The share price has experienced strong positive price momentum in recent weeks.

Month-to-date, the share price is up a staggering 26 per cent, making it the second best performing stock out in the S&P/TSX energy (sector) index and outpacing the 12 per cent move higher in the price of oil. Between Oct. 3-13, the share price has rallied by more than 3 per cent during six of these eight trading sessions. Given this rapid move higher, the positive price momentum may pause in the near-term in order for the stock to digest these gains.

This company stands out from its industry peers due to its proven management team, assets with strong economics and its pristine balance sheet. The company’s chief executive officer is experienced in growing junior energy companies that attractive takeover bids. The stock has a unanimous buy recommendation from nine analysts. The average one-year target price is $9.97, implying the share price may appreciate 50 per cent over the next 12 months.

A brief outline on Headwater is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Calgary-based Headwater is an oil-weighted energy company with operations in the Clearwater formation in Alberta as well as New Brunswick.

Investment thesis

  • Strong leadership. Senior executives were previously at Raging River Exploration Inc. and Wild Stream Exploration Inc.
  • Management has a proven track record of growing junior energy company that became takeover targets. Chief executive officer Neil Roszell was the former president and CEO of Raging River.
  • In 2018, Raging River was acquired by Baytex Energy Corp. (BTE-T). Mr. Roszell was also the president and chief executive officer of Wildstream Exploration until 2012, when it was purchased by Crescent Point Energy (CPG-T). Additionally, Mr. Roszell was the president and chief operating officer of Prairie Schooner Energy Ltd., which was acquired by True Energy Trust in 2006.
  • Strong economics leading to high returns. The Clearwater formation in the Marten Hills area of Alberta is an area with high quality heavy oil production and a quick payback period.
  • Robust production and cash flow growth is anticipated. By 2027, management targets production of 22,500 barrels of oil equivalent per day (boe/d), up from the 2022 average production target of 13,000 boe/d.
  • Strong balance sheet. Debt-free and $144.8-million of cash at quarter-end. Financial flexibility to fund its growth.
  • Potential catalysts: Exploration success providing further upside to production forecasts; acquisition announcements and initiation of a dividend, perhaps in 2023.
  • Potential longer-term catalyst: takeover candidate.
  • Price of oil remains supportive.
  • Major risk to consider: volatility in the price of oil.

Quarterly earnings and outlook

After the market closed on Aug. 4, the company reported its second-quarter financial results that sent the share price higher by 3 per cent the following day on high volume.

The company reported average production of 11,772 boe/d, up 79 per cent year-over-year. Adjusted cash flow per share came in at 34 cents, topping the consensus estimate of 32 cents.

In an investor presentation issued in September, management reiterated its 2022 guidance, forecasting average production of 13,000 boe/d and fourth-quarter average production of 16,500 boe/d. Capital expenditures were maintained at $230-million. However, expected adjusted cash flow from operations decreased to $281-million from $305-million and the company’s West Texas Intermediate (WTI) oil assumption declined to US$94 a barrel from US$97.50.

Dividend policy

Currently, the company does not pay its shareholders a dividend. However, in the earnings release issued on Aug. 4, management indicated that initiating a dividend in the future is a possibility, “The company continues to achieve significant growth while spending less than our cash flow. As the business strategy continues to evolve, there will be an increased focus on returning excess free cash flow to shareholders. Headwater looks forward to providing clarity on these elements over the next six months.”

Analysts’ recommendations

This small-cap stock with a market capitalization of $1.5-billion is covered by nine analysts. The stock has a unanimous buy recommendation.

The firms providing research coverage on the company are: BMO Nesbitt Burns, Desjardins Securities, Haywood Securities, National Bank Financial, Paradigm Capital, Peters & Co., Raymond James, RBC Dominion Securities and Stifel Canada.

Revised recommendations

Month-to-date, two analysts have lowered their target prices.

  • Paradigm’s Adam Gill to $9.25 (the low on the Street) from $10.
  • Peters’ Dan Grager to $9.50 from $10.

Financial forecasts

The consensus cash flow per share estimates are $1.29 in 2022, rising over 20 per cent to $1.57 in 2023.

Cash flow forecasts have been relatively stable in recent months. For instance, four months ago, the consensus estimates were $1.34 for 2022 and $1.58 for 2023.


Analysts commonly valued the stock on an enterprise value-to-debt adjusted cash flow (EV/DACF) basis.

The average one-year target price is $9.97, implying the share price may appreciate 50 per cent over the next 12 months. Individual target prices are as follows in numerical order: $9.25 (from Paradigm’s Adam Gill), two at $9.50, four at $10, $10.50 and $11 (from Haywood Securities’ Christopher Jones).

Insider transaction activity

The most recent trading activity in the public market reported by insiders occurred in June.

On June 30, Brad Christman, vice-president – production, purchased 100,000 shares at a price per share of $5.4842, increasing this particular account’s position to 1,002,321 shares.

On June 30, lead director Kevin Olson bought 100,000 shares at a cost per share of $5.4774, lifting this specific account’s holdings to 3,474,045 shares.

On June 29, president, chief operating officer and director Jason Jaskela acquired 100,000 shares at a price per share of $5.9493 for an account in which he has indirect ownership (Jaskela Family Trust), after which this particular account held 1,895,680 shares.

Chart watch

Year-to-date, the share price has rallied 29 per cent thanks to the recent surge in the share price, which is slightly ahead of the S&P/TSX energy sector’s gain of 24 per cent.

Month-to-date, the stock price is up 26 per cent, making it the second best performing stock (behind NuVista Energy Ltd.) out of the 38 stocks in the S&P/TSX energy (sector) index.

Looking at key technical resistance and support levels, the stock has an initial ceiling of resistance between $7.50 and $8. After that, there is overhead resistance around $10. Looking at the downside, there is strong technical support around $5.

This small-cap stock has reasonable liquidity. The three-month historical daily average trading volume is approximately 1.5-million shares.

ESG Risk Rating

According to risk provider Sustainalytics, Headwater has an ESG (environmental, social and governance) risk score of 56.4 as of Oct. 2, 2022. A risk score exceeding 40 reflects a ‘severe risk’ rating.

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Source: Bloomberg and The Globe and Mail

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

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