Headwater Exploration Inc. (HWX) Earnings Call Transcript & Summary
September 8, 2026
Earnings Call Speaker Segments
Operator
operatorGood morning, ladies and gentlemen, and welcome to Tamarack Valley Energy LTD merger webcast. [Operator Instructions] On the call with us today are Jason Jaskela, President and Chief Executive Officer of Headwater Exploration Inc.; Steve Buytels, President of Tamarack Valley; and Brian Schmidt, Founder and CEO of Tamarack Valley. I would now like to turn the conference call over to Brian Schmidt. Please go ahead.
Brian Schmidt
executiveGood morning, and welcome to everyone joining us on this conference call. My name is Brian Schmidt. Today, I'm joined with Steve and Jason Jaskela, as were introduced. We are pleased to announce that we've entered into a definitive agreement whereby our 2 companies will merge in an all-stock transaction valued at $10 billion to form a premier North American oil company. The combined company will be led by the management team of Tamarack Valley and will be the largest and only publicly pure-play Clearwater producer in Canada. This transaction reflects an exceptional value proposition for shareholders of both Tamarack Valley and Headwater exploration by creating meaningful size and scale to the Clearwater creating strong operating and capital synergies and driving higher sustainable profit margins. The transaction is expected to immediately be accretive to our free funds flow per share and our 5-year plan, and we are positioned to deliver even higher returns to shareholders moving forward. We are also pleased to announce the formation of a new oil and gas exploration company, tributary exploration that will be led by Jason Jaskela and the formula management of Headwater expiration. As part of the transaction, the legacy shareholders of both Tamarack and Headwater will receive ownership stakes in the newly formed company providing meaningful participation in this exciting new investment opportunity. I'll now turn it over to our President, Steve Buytels, to provide an overview of the transaction.
Steve Buytels
executiveThanks, Brian. This merger is an exceptional fit for these 2 companies. The land bases are highly contiguous across our core development areas at Marten Hills, Nipisi and West Marten Hills as well as our emerging plays at Seal and Pelican. This transaction amasses a combined 1,500 sections of land across the Greater Clearwater fairway with over 3,000 identified drilling locations and over 300 million barrels of proved and probable reserves. Combined, we are producing over 80,000 barrels per day together with unmatched economics and decades of clear water drilling and waterflood inventory. Run rate synergies from the transaction are anticipated to be at least $50 million per year through the integration of our operations, marketing and corporate offices as well as the consolidation and streamlining of our exploration and development programs. These synergies are worth greater than $350 million over our long-range plan. The transaction is expected to be immediately accretive, driving more than 10% growth in our free funds flow per share. We expect annual corporate declines to improve to 15% next year with a view to reaching 12% by 2030. We also expect our unhedged corporate breakeven price to drop to USD 37 per barrel including the base dividend. The combined company will be in a net cash position at close with over $1.2 billion of available funding, including an undrawn credit facility of $875 million. At close, we will issue 237.8 million Tamarack common shares to Headwater shareholders, reflecting a [ 1-for-1 ] share exchange ratio to acquire all of the outstanding common shares of Headwater. Pro forma legacy Tamarack shareholders will own 66.5% of the combined company and legacy Headwater shareholders will own 33.5%. In connection with the transaction, we plan to increase our quarterly dividend by 20% from $0.05 per share to $0.06 per share, which is $0.24 per share annualized. In the near term, the combined company is expected to continue executing a disciplined capital management strategy. Our updated 5-year plan includes Clearwater growth of 10% to 12%, up from 8% to 10% prior to the transaction and enhance shareholder returns in the form of an increased dividend and share buybacks. The pro forma company will stand out among large North American oil companies in '27 with maintenance capital less than 20% of cash flow, total returns approaching 15% and net cash on the balance sheet. This unique and advantaged position is rooted in the exceptional economics of the Clearwater. The transaction is subject to customary shareholder and regulatory approvals. In the following days, we will be publishing a joint information circular that will provide additional details regarding the plan of arrangement between Tamarack Valley Energy, Headwater exploration and tributary exploration. Shareholders will be given the opportunity to vote at a special meeting of the shareholders, which we are currently planning to schedule in November 2026. Additional details regarding our integrated 2027 budget and revised 5-year plan will be provided in the fourth quarter. I will now turn it over to Jason Jaskela, President and CEO of Headwater.
Jason Jaskela
executiveThank you, Steve. We are extremely pleased with today's announcement. This synergistic combination with Tamarack Valley Energy is exceptional opportunity for us to maximize value for our shareholders by establishing greater size and scale to the prolific Clearwater play and enhance long-term sustainable returns. As part of the transition, I'll be joining the Tamarack Board of Directors and look forward to continue to help Steve with these great assets forward. I'm also excited to announce the formation of our new exploration company, Tributary Exploration. This company will be led by myself and [ Neil Rosell ], together with the rest of the current Headwater management team. As part of the transaction, our Mannville-stack lands in Alberta, prospective heavy oil opportunities at Handel, Saskatchewan together with our legacy McCully natural gas production in Brunswick will be spun out of Headwater into the newly formed Tributary Exploration. The common shares at Tributary will be initially be distributed to the shareholders of both Tamarack and Headwater proportionate to the pro forma ownership percentage of the combined Tamarack entity. Assuming all warrants issued to legacy shareholders are exercised, Tamarack shareholders will own approximately 55% and Headwater shareholders willing approximately 45% of a Tributary common shares outstanding. We also plan a nonbrokered equity private placement financing with the executive officers, directors and staff of Tributary Exploration and will pursue a public listing. With full participation, we'll be well capitalized with approximately $50 million cash to fund organic growth and development opportunities. Similar to Headwater, Tributary will plan to pursue oil-weighted assets in Western Canada that are reaching organic opportunity and provide stable free cash flow backstopping our team's relentless pursuit to holder returns. Brian Schmidt will now deliver the closing comments on the call.
Brian Schmidt
executiveThank you, Jason. I'm pleased to announce that Steve Buytels will be promoted to President and CEO and join the Board of Directors. Mr. Buytels joined Tamarack in March 2020 as Chief Financial Officer and was promoted to President July 2025. We are progressing our CEO transition plan the culmination of a thorough succession planning process that will position the company -- combined company for the future. I will transition, too, as Executive Chair of the Board. These appointments are effective January 1, 2027. Over the past 17 years, I've had the honor and privilege of leading Tamarack Valley Energy. The company has grown tremendously over that time. We've overseen a significant transformation of the business from a small junior Cardium Viking based company into one of the top 10 producers in Canada. The company is well positioned to continue generating long-term sustainable value for our shareholders, and I'm extremely excited about the future of this company. I will now turn it back to the moderator for questions.
Operator
operator[Operator Instructions] And your first question is from [ Sam Burbo ] from Jefferies.
Unknown Analyst
analystCongrats on getting this over the finish line. I guess the first question would be on the new Clearwater growth rate coming up. So is that a function of just aspects of the combination or any other sort of outside considerations and scaling that up to 10% to 12% versus the 8% to 10%?
Steve Buytels
executiveYes Sam, it's Steve here. I think it's a couple of things. One, the combination, for sure, when you look at the synergies on the development program, that's going to help in terms of being more efficient and being able to do more for less there with respect to the capital allocation. But I think the other big piece of that is what we're seeing too on a combined basis with the waterflood and where that's driving our decline and ultimately, our sustained reinvestment rate just quite a bit lower. Again, more capital available to add incremental growth through the business from that standpoint as well.
Unknown Analyst
analystOkay. Perfect. And then I guess just on Tributary, I mean this is going to be a piece of the value both for the Tamarack holders and the legacy Headwater holders. And how quickly can production get scaled up in Alberta and Saskatchewan, like just -- I mean, at a high level, curious as to the cadence of that growth for that entity?
Jason Jaskela
executiveYes. So it's Jason here. I think I would look towards a budget for next year that will come out in December. And we have a lot of ideas, a ton of ideas. Actually, the team is super excited. But I'm not sure at this point in time, I'm going to share exactly what the growth looks like. But yes, just trusting the team that we're excited, and we have a lot of things to pursue. And yes, I think I say it will be a budget will come out in December.
Operator
operator[Operator Instructions] And your next question is from Patrick O'Rourke from ATB Cormark.
Patrick O'Rourke
analystCongratulations on the transaction to all involved and congratulations to Steve on the promotion here. First question here, just on the $50 million in synergies, I guess, is the expectation that those are harvested immediately? And I think you've laid them out pretty well in the presentation, but are there opportunities above and beyond the $50 million, I think, probably specific to the waterflood here?
Steve Buytels
executiveYes. Patrick, and thanks for the comments there. Yes, the $50 million is what we would see, we're calling them immediate on close broken out between the netback improvement of about $15 million per year. The more efficient investment with the larger pads and co-development of about $15 million a year and then the lower corporate cost, which is really the G&A element of the business and the lower overhead, so which is about just over $20 million a year. We see that is pretty immediate. But as we continue to work through putting the businesses together here and we work to our budget, that will come out in mid-November, there on close. I think we'll be able to point to more, but we do need to just sit down and have some more time in terms of really looking at that capital outlay. And then longer term, I think you're going to see some bigger pieces, too, just in terms of overlapping infrastructure, both with our general development of the assets, but also with the waterflood in terms of being able to have a more shared an optimized injection network and recycling network and things like that. And then on top of that would be potential egress opportunity where we have uncommitted barrels as we grow here that together we'll be able to look to add some more optimized egress optionality that could come with that, too. So we see it as a bit of a step process here, but are pretty confident that, one, we see that $50 million or a bit more immediate. And then two, that, that could grow as we have some time here with the assets and can update that as we look at that budget timing.
Patrick O'Rourke
analystGreat. And then second question just here with regards to capital structure, going to have cash on hand. You've got a very low decline. You've got a robust growth rate. You got a significant free cash flow profile. In terms of the optimal capital structure and releasing some of that value to shareholders, where would you see target debt to cash flow. Do you want to keep it at 0? Or are there opportunities to optimize here and somehow transfer value to the equity shareholder?
Steve Buytels
executiveYes. I think at the end of the day, when you look at -- you look at the combined entities with both having cash on the balance sheet, it allowed us really to do this combination with the like-for-like assets valuation. And then obviously, that optionality with keeping a really clean balance sheet with a lot of potential flexibility, I guess, moving forward to be opportunistic. So again, we're disciplined in what we do. You guys know that with respect to how we look at any other opportunity. But at the end of the day, we're able to deliver sector-leading total returns in the large-cap space of mid- to high teens with less than 20% maintenance reinvestment ratio. So across commodity cycles, I think having that cash and that undrawn balance sheet is just going to allow us to strike and be opportunistic when the right opportunity presents itself, but it also is optionality for more growth at higher prices, for example, to differentiate ourselves. So everything is on the table, I would say there. We do -- again, running cash in our view isn't optimal when we look at the returns that sit in front of us. So things like more waterflood, things like testing other concepts like thermal or other EOR initiatives, that's also a place that we can look to put more capital to work and accelerate bringing forward some of the value of this greater than 18 billion barrels of OIP that sits in front of us.
Operator
operatorNo more questions on the phone. I will now hand the call back to [ Pamela ].
Unknown Executive
executiveThank you. Our first question on the online Q&A is for Mr. Brian Schmidt. What is driving the change to a lower decline rate, 12% in 2030 from Slide 10 in the presentation?
Brian Schmidt
executiveSo the key aspect of lower declines is increased water injection and the performance of the waterflood. So -- and I would say even in the combination of this company, more -- a higher percentage of our capital will be directed toward waterflood and that's going to further reduce declines. It's just very unique, and I would ask any listeners to think about a company where you can put growth on the table and drive declines down at the same time. and reference to Steve's growing free cash flow, that's what's really driving that. So I would say that in the last few years, we've been very -- the decline has dropped further than what we had anticipated. I expect there's room there to drop even further here going forward.
Unknown Executive
executiveWe have no more questions on the online Q&A. So I'll pass it back to Brian for closing comments.
Brian Schmidt
executiveClosing comments. I think that in the M&A experience that I've had, I rarely see something where this is a win-win-win. And I think both management teams are operating what they're used to -- what they're good at. And that's going to create a lot of value here going forward. Synergy came up here. It's always -- we can identify the hard ones now, but we know the no and unknowns that are coming, and we're going to be having a lot of synergy here going forward that isn't accounted for yet. And then lastly, we have, I think, 18 billion barrels of OOIP to work with. Any little twitch on increased recovery is going to make a big difference and drive these returns even further. So I'm very excited about it, very excited about working with Jay on the Board and the future here as well, thank you.
Operator
operatorThank you, ladies and gentlemen. The conference has now ended. Thank you all for joining. You may now disconnect your lines.
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