(Idea) Headwater Exploration Update
Editor's Note: Starting on July 1, new idea write-ups like Headwater Exploration will only be published on Ideas from HFI Research.
Important Note: Jon Costello, the writer of this article and head of "Ideas from HFI Research", has owned the stock of Headwater Exploration in his portfolio. At HFI Research, we did not go long the stock, but we have followed it closely.
We’ve owned Headwater Exploration (HWX:CA) since we bought the shares for C$1.00 in March 2020. We haven’t sold a share since, and we don’t intend to for the foreseeable future.
When we bought the shares, the company had yet to assemble the collection of assets it operates today. In fact, it had little more than a new management team, a net cash position, and a small base of natural gas assets. What distinguished it from its peers, however, was the phenomenal track record of its new management under Neil Roszell. Roszell had led the successful growth and sale of three previous E&Ps, delivering billions of dollars of value to investors in the process. Headwater was to be Roszell’s next E&P growth project.
Roszell’s previous successes involved exploration, recognizing new plays early, and acquisitions—all aimed at growing value for shareholders at a rapid clip. His early successes included Wild River Resources, which successfully grew production from zero to 2,000 boe/d in two years before it was sold in 2009, and Wild Stream Exploration, which grew from 350 boe/d to 6,400 boe/d before being sold in 2012.
Roszell’s next venture, Raging River Exploration, would be his biggest to date. Raging River was a light oil producer specializing primarily in the Viking play in Saskatchewan. Its production grew from 1,000 boe/d in 2012 to 24,000 boe/d in 2018, when Baytex Energy (BTE) acquired it for C$2.8 billion. For several years, Raging River was one of the best-performing public E&P stocks in North America.
In every one of his E&P iterations, Roszell managed to capture the Holy Grail of E&P investing: compounding growth. As a rule, E&Ps are not compounding vehicles. We’ve seen more E&Ps compound in a negative sense—with value heading to zero—than successfully compounding value positively for shareholders over time.
One proven formula for successfully compounding E&P intrinsic value per share involves acquiring nonproducing or underproducing reserves at low cost, increasing production, generating a high return on capital, and reinvesting capital to acquire new reserves that produce at a high return on capital. Roszell had demonstrated time and again that he could execute this formula successfully.
Back in 2020, when Headwater Exploration was in its infancy, we bet that Roszell would pull it off again. So far, the company's performance has vindicated our thesis.