Hammerhead is a Calgary, Canada-based energy company, with assets and operations in Alberta targeting the Montney formation. Hammerhead Resources Inc., a wholly owned subsidiary of Hammerhead, was formed in 2009.
Contacts:
For further information, please contact:
Scott Sobie
President & CEO
Hammerhead Energy Inc.
403-930-0560
Mike Kohut
Senior Vice President & CFO
Hammerhead Energy Inc.
403-930-0560
Kurt Molnar
Vice President Capital Markets & Corporate Planning
Hammerhead Energy Inc.
403-930-0560
Reader Advisory
Currency
All amounts in this press release are stated in Canadian dollars unless otherwise specified.
Forward Looking Statements
Certain information contained herein may constitute forward-looking statements and information (collectively, “forward-looking statements”) within the meaning of applicable securities legislation, including Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, that involve known and unknown risks, assumptions, uncertainties and other factors. Undue reliance should not be placed on any forward-looking statements. Forward-looking statements may be identified by words like “anticipates”, “estimates”, “expects”, “indicates”, “forecast”, “intends”, “may”, “believes”, “could”, “should”, “would”, “plans”, “proposed”, “potential”, “will”, “target”, “approximate”, “continue”, “might”, “possible”, “predicts”, “projects” and similar expressions, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this press release include but are not limited to: the Company’s assessment of future plans, operations and strategies; expectations for 2023 and benefits to be derived therefrom for 2024; the Company’s 2023 capital program and drilling plans, including the allocation of capital between Karr and Gold Creek; the Company’s ability to focus on new growth at Karr and the anticipated benefits therefrom; the expected additional infrastructure expansion at South Karr, including the capacity and the anticipated timing thereof; the Company’s 2023 corporate outlook and guidance, including anticipated production, royalties, operating costs, transportation costs, net general and administrative costs, cash interest and financing costs, cash taxes and capital expenditures; the Company’s plans to concentrate its development activities in certain of its operating areas and the Company’s expectation to deliver on its 2023 guidance; the anticipated surface infrastructure expansions throughout the Company’s Karr and anticipated timing and benefits therefrom; the focus of the Company’s operations and the Company’s drilling plans and targets and the timing thereof; the Company’s expectations regarding in-field infrastructure capability by the end of 2023; the Company’s expectation regarding material free fund flow generation including the anticipated timing thereof; the Company’s ability to generate significant annual free cash flow and intention to return annual cash flow to our shareholders; the Company’s expected production growth; the Company’s general strategy for its business and assets; and other matters related to the foregoing. In addition, forward-looking statements contained in this document include statements relating to “reserves”, which are by their nature forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the reserves described can be profitably produced in the future. The recovery and reserve estimates of the Company’s reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered.
Such forward-looking statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions that could cause results to differ materially from those expressed in the forward-looking statements. These risks and uncertainties include but are not limited to: the impact of general economic conditions; volatility in market prices for crude oil and natural gas; industry conditions; currency fluctuations; imprecision of reserve estimates; liabilities inherent in crude oil and natural gas operations; environmental risks; incorrect assessments of the value of acquisitions and exploration and development programs; the lack of availability of qualified personnel, drilling rigs or other services; changes in income tax laws or changes in royalty rates and incentive programs relating to the oil and gas industry including abandonment and reclamation programs; hazards such as fire, explosion, blowouts, and spills, each of which could result in substantial damage to wells, production facilities, other property and the environment or in personal injury; the Company’s ability to access sufficient capital from internal and external sources; Hammerhead’s success in retaining or recruiting, or changes required in, its officers, key employees or directors; litigation and regulatory enforcement risks, including the diversion of management time and attention and the additional costs and demands on the Company’s resources; the ability of the Company to execute its business plan; general economic and business conditions; the risks of the oil and natural gas industry, such as operational risks in exploring for, developing and producing crude oil and natural gas and market demand; pricing pressures and supply and demand in the oil and gas industry; fluctuations in currency and interest rates; inflation; risks of war, hostilities, civil insurrection, pandemics and epidemics, and general political and economic instability (including the ongoing Russian-Ukrainian conflict); severe weather conditions, including risks related to Alberta’s wildfires, and risks related to climate change; terrorist threats; risks associated with technology; changes in laws and regulations, including environmental, regulatory and taxation laws, and the application of such changes to the Company’s future business; availability of adequate levels of insurance; difficulty in obtaining necessary regulatory approvals and the maintenance of such approvals; risk that the Company’s 2023 capital program and drilling plans, including the allocation of capital between its properties is different than anticipated; the anticipated timing of a new facility being brought on-steam is delayed; and risk that the Company’s 2023 corporate outlook and guidance, including anticipated production, royalties, operating costs, transportation costs, net general and administrative costs, cash interest and financing costs, cash taxes and capital expenditures is different than anticipated. Readers are cautioned that the foregoing list is not exhaustive of all possible risks and uncertainties.
With respect to forward-looking statements contained in this press release, the Company has made assumptions regarding, among other things: availability of future acquisition opportunities; future capital expenditure levels; future oil and natural gas prices; future oil and natural gas production levels; future currency exchange rates and interest rates; ability to obtain equipment and services in a timely manner to carry out development activities; ability to market oil and natural gas successfully to current and new customers; the impact of competition; the general stability of the economic and political environments in which the Company operates; the timely receipt of any required regulatory approvals; the ability of the Company to obtain qualified staff, equipment and services in a timely and cost efficient manner; that the Company will have sufficient cash flow, debt or equity sources or other financial resources required to fund its capital and operating expenditures and requirements as needed; that the Company’s conduct and results of operations will be consistent with its expectations; that the Company will have the ability to develop its oil and gas properties in the manner currently contemplated; the estimates of the Company’s reserves and production volumes and the assumptions related thereto (including commodity prices and development costs) are accurate in all material respects; the Company’s ability to add production and reserves through development and exploration activities; and other matters. Although the Company believes that the expectations reflected in the forward-looking statements contained in this press release, and the assumptions on which such forward-looking statements are made, are reasonable, there can be no assurance that such expectations will prove to be correct. Readers are cautioned that the foregoing list is not an exhaustive list of all assumptions which have been considered.
Management has included the above summary of assumptions and risks related to forward-looking information provided in this document in order to provide shareholders with a more complete perspective on the Company’s current and future operations and such information may not be appropriate for other purposes. the Company’s actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what benefits the Company will derive. The forward-looking statements contained in this press release speak only as of the date of this press release. Accordingly, forward-looking statements should not be relied upon as representing Hammerhead’s views as of any subsequent date, and except as expressly required by applicable securities laws, Hammerhead does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
This press release contains information that may be considered a financial outlook under applicable securities laws about the Company’s potential financial position, including, but not limited to, the Company’s 2023 anticipated royalties, operating costs, transportation costs, net general and administrative costs, cash interest and financing costs, cash taxes and capital expenditures, all of which are subject to numerous assumptions, risk factors, limitations and qualifications, including those set forth in the above paragraphs. The actual results of operations of the Company and the resulting financial results will vary from the amounts set forth in this press release and such variations may be material. This information has been provided for illustration only and with respect to future periods are based on budgets and forecasts that are speculative and are subject to a variety of contingencies and may not be appropriate for other purposes. Accordingly, these estimates are not to be relied upon as indicative of future results. Except as required by applicable securities laws, the Company undertakes no obligation to update such financial outlook. The financial outlook contained in this press release was made as of the date of this press release and was provided for the purpose of providing further information about the Company’s potential future business operations. Readers are cautioned that the financial outlook contained in this press release is not conclusive and is subject to change.
Oil and Gas
The Company’s aggregate production for the selected periods below, and the references to “natural gas”, “crude oil” and “NGLs”, reported in this press release consist of shale gas, tight oil and natural gas liquid product types, respectively, as defined in NI 51-101 and using a conversion ratio of 6 mcf : 1 bbl where applicable:
| Q1 2023 | Q1 2022 | |||
| Tight oil (bbls/d) | 14,813 | 9,874 | ||
| Shale gas (Mcf/d) | 127,322 | 113,703 | ||
| Natural gas liquids (bbls/d) | 3,958 | 4,030 | ||
| Total (boe/d) | 39,992 | 32,854 |
Nine-well pad at North Karr 5-12:
| Q1 2023 | |||
| Tight oil (bbls/d) | 7,144 | ||
| Shale gas (Mcf/d) | 37,380 | ||
| Natural gas liquids (bbls/d) | 1,359 | ||
| Total (boe/d) | 14,733 |
Oil and Gas Metrics
This press release contains certain oil and gas metrics, including operating netback, which do not have standardized meanings or standard methods of calculation and therefore such measures may not be comparable to similar measures used by other companies and should not be used to make comparisons. Such metrics have been included in this document to provide readers with additional measures to evaluate the Company’s performance; however, such measures are not reliable indicators of the Company’s future performance and future performance may not compare to the Company’s performance in previous periods and therefore such metrics should not be unduly relied upon. Management uses these oil and gas metrics for its own performance measurements and to provide security holders with measures to compare the Company’s operations over time. Readers are cautioned that the information provided by these metrics, or that can be derived from the metrics presented in this news release, should not be relied upon for investment or other purposes.
The term “Boe” means a barrel of oil equivalent on the basis of 6 Mcf of natural gas to 1 barrel of oil (“bbl”). Boe’s may be misleading, particularly if used in isolation. A boe conversation ratio of 6 Mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion ratio at 6:1 may be misleading as an indication of value.
Abbreviations
The following is a list of abbreviations that may be used in this press release:
| bbl | barrel | AECO | AECO “C” hub price index for Alberta natural gas | |||
| bbls | barrels | Crude oil | Tight oil as defined in National Instrument 51-101 | |||
| bbls/d | barrels per day | Natural gas | Shale gas as defined in National Instrument 51-101 | |||
| boe | barrels of oil equivalent | GAAP | generally accepted accounting principles | |||
| boe/d | barrels of oil equivalent per day | WTI | West Texas Intermediate | |||
| Mcf | thousand cubic feet | CDN | Canadian | |||
| Mcf/d | thousand cubic feet per day | GJ | gigajoule | |||
| MMBtu | million British thermal units | RSUs | Company Restricted Share Units | |||
| NGL | Natural gas liquids |
Non-GAAP and Other Financial Measures Advisory
This press release includes certain meaningful performance measures commonly used in the oil and natural gas industry that are not defined under IFRS, as outlined below. These performance measures should not be considered in isolation or as a substitute for performance measures prepared in accordance with IFRS and should be read in conjunction with the consolidated financial statements. Readers are cautioned that these non-GAAP and capital management measures are not standardized financial measures under IFRS, and might not be comparable to similar financial measures disclosed by other entities. The non-GAAP and capital management measures used in this report are summarized as follows:
Non-GAAP Financial Measures
Capital Expenditures
Management uses capital expenditures to determine the amount of cash flow used for capital reinvestment and compare its capital expenditures to budget. The measure is comprised of additions to property, plant and equipment (“PP&E”) per the consolidated statements of cash flows. See the following table for the reconciliation of capital expenditures to net cash used in investing activities, the most directly comparable GAAP measure.
| Three Months Ended March 31, |
||||||
| (Cdn$ thousands) | 2023 | 2022 | ||||
| Net cash used in investing activities | 142,323 | 95,514 | ||||
| Net change in accounts payable related to the addition of PP&E | 30,119 | (13,026 | ) | |||
| Capital expenditures | 172,442 | 82,488 | ||||
Available Funding
The available funding measure allows management and other users to evaluate the Company’s short term liquidity, and its capital resources available at a point in time. Available funding is comprised of adjusted working capital, the undrawn component of Hammerhead’s Credit Facilities, plus the remaining equity commitment related to any outstanding investment agreements. Available funding reconciles to the capital management measure, adjusted working capital and its related balance sheet line items.
| (Cdn$ thousands) | March 31, 2023 | December 31, 2022 | ||||
| Adjusted working capital deficit | (93,699 | ) | (32,915 | ) | ||
| Debt capacity | 145,167 | 170,200 | ||||
| Equity commitment | — | 172,700 | ||||
| Available funding | 51,468 | 309,985 |
Operating Netback
Operating netback is calculated by deducting royalties, operating expense, transportation expense, and realized (losses) gains from risk management contracts from oil and gas revenue. Management believes that operating netback is a key industry performance indicator to assess the profitability of the Company’s developed and producing assets, and to provide investors with information that is also commonly presented by peers within the industry. See the following table for the reconciliation of operating netback to oil and gas revenue, the most directly comparable GAAP measure.
| Three Months Ended March 31, |
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| (Cdn$ thousands) | 2023 | 2022 | % Change | ||||||
| Revenue | 217,054 | 189,542 | 15 | ||||||
| Royalties | (24,925 | ) | (17,891 | ) | 39 | ||||
| Operating expense | (29,859 | ) | (25,074 | ) | 19 | ||||
| Net transportation expense | (21,007 | ) | (16,731 | ) | 26 | ||||
| Operating netback, excluding realized losses on risk management contracts | 141,263 | 129,846 | 9 | ||||||
| Realized losses on risk management contracts | (240 | ) | (22,738 | ) | (99 | ) | |||
| Operating netback | 141,023 | 107,108 | 32 | ||||||
| Average Realized Prices | |||||||||
| Crude oil and field condensate ($/bbl) | 99.37 | 115.89 | (14 | ) | |||||
| Natural gas ($/Mcf)1 | 5.33 | 5.73 | (7 | ) | |||||
| Natural gas liquids ($/bbl) | 65.90 | 76.98 | (14 | ) | |||||
| Total ($/boe) | 60.31 | 64.10 | (6 | ) | |||||
| (Cdn$ per boe) | |||||||||
| Revenue | 60.31 | 64.10 | (6 | ) | |||||
| Royalties | (6.92 | ) | (6.05 | ) | 14 | ||||
| Operating expense | (8.30 | ) | (8.48 | ) | (2 | ) | |||
| Net transportation expense | (5.84 | ) | (5.66 | ) | 3 | ||||
| Operating netback, excluding realized losses on risk management contracts | 39.25 | 43.91 | (11 | ) | |||||
| Realized losses on risk management contracts | (0.07 | ) | (7.69 | ) | (99 | ) | |||
| Operating netback per boe | 39.18 | 36.22 | 8 | ||||||
- At the Company’s current heating value of 42.0 GJ/e3m3, 1 mcf of natural gas is approximately 1.18 GJ.
Funds from Operations, Adjusted Funds from Operations and Free Funds Flow
Funds from operations is comprised of cash provided by operating activities, excluding the impact of changes in non-cash working capital and settlement of decommissioning obligations. Management believes excluding the changes in non-cash working capital provides a meaningful performance measure of the Company’s operations on an ongoing basis, as it removes the impact of changes in timing of collections and payments, which are variable. Decommissioning provision costs incurred also vary depending upon the Company’s planned capital program and the maturity of operating areas requiring environmental remediation.
Adjusted funds from operations is funds from operations adjusted for other items that are not considered part of the long-term operating performance of the business. Management considers these measures to be key, as they demonstrate the Company’s ability to generate the necessary funds to maintain production and fund future growth. Funds from operations and adjusted funds from operations as presented should not be considered an alternative to, or more meaningful than, cash flow from operating activities, net profits or other measures of financial performance calculated in accordance with IFRS.
Free funds flow is an indicator of the efficiency and liquidity of the business, and provides an indication of funds the Company has available for future capital allocation decisions such as the repayment of long-term debt. The measure is calculated as adjusted funds from operations less capital expenditures and settlement of decommissioning obligations.
The following table reconciles funds from operations, adjusted funds from operations and free funds flow to net cash from operating activities, which is the most directly comparable GAAP measure:
| Three Months Ended March 31, |
||||||
| (Cdn$ thousands) | 2023 | 2022 | ||||
| Net cash from operating activities | 115,541 | 70,463 | ||||
| Changes in non-cash working capital | 10,277 | 30,162 | ||||
| Settlement of decommissioning obligations | — | 123 | ||||
| Funds from operations | 125,818 | 100,748 | ||||
| Transaction costs | 8,967 | — | ||||
| Transaction costs, non-cash | (5,793 | ) | — | |||
| Listing expense | 180,478 | — | ||||
| Listing expense, non-cash | (180,478 | ) | — | |||
| (Gain) loss on foreign exchange | (53 | ) | (2,117 | ) | ||
| Unrealized gain (loss) on foreign exchange | 166 | 2,074 | ||||
| Other income, excluding transportation income | (311 | ) | (241 | ) | ||
| Adjusted funds from operations | 128,794 | 100,464 | ||||
| Capital expenditures | (172,442 | ) | (82,488 | ) | ||
| Settlement of decommissioning obligations | — | (123 | ) | |||
| Free funds flow | (43,648 | ) | 17,853 | |||
Non-GAAP Financial Ratios
Operating Netback per boe
Management calculates operating netback per boe as operating netback divided by the Company’s total production. Operating netback is a non-GAAP financial measure component of operating netback per boe. Management believes this performance measure provides key information about the profitability of the Company’s developed and producing assets, isolated for the impact of changes in production volumes. Operating netback per boe is disclosed in the “Operational and Financial Summary” section within this press release.
Cash Netback per boe and Adjusted Funds from Operations per Basic Share and Diluted Share
Cash netback per boe (or adjusted funds from operations per boe) is calculated by dividing adjusted funds from operations by the Company’s total production. Adjusted funds from operations per basic share and diluted share is calculated by dividing adjusted funds from operations by the Company’s basic and diluted weighted average shares outstanding. Adjusted funds from operations is a non-GAAP financial measure component of adjusted funds from operations per boe, and adjusted funds from operations per basic share and diluted share.
Cash netback per boe is utilized by management to assess the profitability of the Company’s developed and producing assets, adjusted for items that are not considered part of the long-term operating performance of the business, and to compare current results to prior periods or to peers by isolating for the impact of changes in production volumes. Adjusted funds from operations per basic share and diluted share is utilized by management to indicate the funds generated from the business that could be allocated to each shareholder’s equity position. Cash netback per boe is disclosed in the “Highlights” section within this press release and adjusted funds from operations per basic share and diluted share are disclosed in the “Operational and Financial Summary” section within this press release.
Capital Management Measures
Adjusted EBITDA and Annualized Adjusted EBITDA
Adjusted EBITDA is calculated as net profit (loss) before interest and financing expenses, income taxes, depletion, depreciation and amortization, adjusted for certain non-cash items, or other items that are not considered part of normal business operations. Annualized adjusted EBITDA is adjusted EBITDA for the quarter, multiplied by four. Adjusted EBITDA indicates the Company’s ability to generate funds from its asset base on a continuing and long-term basis, for future development of its capital program and settlement of financial obligations.
Adjusted EBITDA as presented should not be considered an alternative to, or more meaningful than, net profit (loss) before income tax, or other measures of financial performance calculated in accordance with IFRS. The following is a reconciliation of adjusted EBITDA to the most directly comparable GAAP measure, net profit (loss) before income tax:
| Three Months Ended March 31, |
|||||||||
| (Cdn$ thousands) | 2023 | 2022 | % Change | ||||||
| Net profit (loss) before income tax | (107,488 | ) | (6,442 | ) | 1569 | ||||
| Add (deduct): | |||||||||
| Unrealized (gain) loss on risk management contracts | (21,060 | ) | 66,492 | (132 | ) | ||||
| Transaction costs | 8,967 | — | 100 | ||||||
| Share-based compensation | 4,794 | 3,175 | 51 | ||||||
| Depletion and depreciation | 50,518 | 35,734 | 41 | ||||||
| Finance expense | 6,640 | 5,577 | 19 | ||||||
| Loss (gain) on foreign exchange | (53 | ) | (2,117 | ) | (97 | ) | |||
| Loss (gain) on warrant liability | 10,426 | (281 | ) | (3,810 | ) | ||||
| Listing expense | 180,478 | — | 100 | ||||||
| Other income, excluding transportation income | (311 | ) | (241 | ) | 29 | ||||
| Adjusted EBITDA | 132,911 | 101,897 | 30 | ||||||
| Annualized adjusted EBITDA | 531,644 | 407,588 | 30 | ||||||
Adjusted Working Capital Deficit
Previously, working capital was computed including risk management contracts and the current portion of lease obligations. As at March 31, 2023 and 2022, adjusted working capital has been computed excluding these items. The current presentation of adjusted working capital is aligned with measures used by management to monitor its liquidity for use in budgeting and capital management decisions. Adjusted working capital is defined as the sum of cash, accounts receivable, prepaid expenses and deposits and accounts payable and accrued liabilities.
| (Cdn$ thousands) | March 31, 2023 | December 31, 2022 | ||||
| Cash | (6,666 | ) | (8,833 | ) | ||
| Accounts receivable | (79,242 | ) | (89,235 | ) | ||
| Prepaid expenses and deposits | (9,935 | ) | (4,564 | ) | ||
| Accounts payable and accrued liabilities | 189,542 | 135,547 | ||||
| Adjusted working capital deficit | 93,699 | 32,915 |
Net Debt, Net Debt to Adjusted EBITDA, and Net Debt to Annualized Adjusted EBITDA
Net debt is calculated as the outstanding balance on the Company’s bank debt, term debt and adjusted working capital. Term debt (2020 Senior Notes) is calculated as the principal amount outstanding, plus accrued PIK interest, converted to Canadian dollars at the closing exchange rate for the period. Net debt to adjusted EBITDA is net debt divided by adjusted EBITDA. Net debt to annualized adjusted EBITDA is net debt divided by annualized adjusted EBITDA. Net debt is used to assess and monitor liquidity at a point in time, while the net debt to EBITDA ratios assist the Company in monitoring its capital structure and financing requirements.
Net debt and net debt to annualized adjusted EBITDA are disclosed in the “Highlights” section within this press release.
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