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On today’s Breakouts report, there are 21 stocks on the positive breakouts list (stocks with positive price momentum), and 39 securities on the negative breakouts list (stocks with negative price momentum). Gold and silver stocks represent nearly 25 per cent of the stocks on the negative breakouts list.

Discussed today is a high-flying small-cap energy stock that is on the positive breakouts list – Headwater Exploration Inc. (HWX-T). Its share price has rallied more than 300 per cent in a little over a year, recently taking its market capitalization above the $1-billion mark.

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.

Last week, the share price rallied 11 per cent. As a result, the stock’s positive price momentum may soon pause in order to digest these rapid gains, which may present a buying opportunity to investors.

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 junior oil and gas company with operations in Alberta and 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 chief executive officer 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. Clearwater formation in the Marten Hills area in Alberta, an area with high quality heavy oil production and a quick payback period.
  • Robust production and cash flow growth is anticipated.
  • Strong balance sheet. Debt-free and $84-million of cash at quarter-end. Financial flexibility to fund its growth.
  • Management has “skin in the game.” Insiders own approximately 15 per cent of the fully diluted shares outstanding as per the company’s investor presentation issued last month.
  • Potential catalyst: exploration success providing further upside to production forecasts. Management is focused on exploration and development.
  • Potential catalyst: acquisition announcement.
  • Potential catalyst: initiation of a dividend in the future.
  • Potential longer-term catalyst: takeover candidate.
  • Supportive commodity pricing. The price of oil well off of depressed 2020 levels.
  • Major risk to consider: volatility in the price of oil.

Quarterly earnings

After the market closed on Nov. 10, the company reported solid third-quarter financial results that sent the share price higher by 7 per cent the following day on high volume with over 6 million shares traded. This is well above the three-month historical daily average trading volume of approximately 2.3million shares.

The company reported average production of 7,688 barrels of oil equivalent per day (boe/d). Adjusted cash flow per share came in at 13 cents, in-line with the consensus estimate. For 2021, management forecasts average production of 7,400 boe/d and fourth-quarter production of 10,400 boe/d.

In 2022, management aims to achieve average annual production of 12,500 boe/d with fourth-quarter average production of 15,000 boe/d.

Management targets solid growth in the upcoming year, “The $120 million capital budget is expected to generate 70 per cent production per share growth at a reinvestment rate of 58 per cent of 2022 forecasted adjusted funds flow from operations. At US$75 per barrel WTI [West Texas Intermediate crude oil], Headwater forecasts 2022 adjusted funds flow from operations of $207-million and free cash flow of approximately $87-million, resulting in positive exit 2022 adjusted working capital of approximately $153-million.”

In 2023 and the years ahead, the reinvestment rate is anticipated to be between 30 per cent and 40 per cent.

Management’s is forecasting distributable cash per share based on its core are development and an oil price of US$75/barrel as follows: $1.03 in 2022, $1.55 in 2023, $2.12 in 2024, $2.91 in 2025, and $3.70 in 2026.

Currently, the company does not pay its shareholders a dividend. However, in its earnings release issued on Nov. 10, management alluded to the potential initiation of a dividend in the future, “As the company evolves with rapid growth and execution of the corporate strategy, there will be an increased focus on returning excess free cash flow to shareholders. While it is early, we look forward to providing clarity on these elements over the next 18 months.”

Analysts’ recommendations

This small-cap stock with a market capitalization of $1-billion is actively covered by nine analysts. The stock has a unanimous buy recommendation.

The firms providing recent 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

Earlier this month, Desjardins’ Chris MacCulloch bumped his target price to $7.25 from $7.

In November, Paradigm’s Adam Gill increased his target price to $6.90 from $6.15 and Stifel’s Cody Kwong raised his target price by 75 cents to $7.75.

Financial forecasts

The consensus cash flow per share estimates are 53 cents in 2021, rising 70 per cent to 91 cents in 2022.

Cash flow forecasts have been rising. For instance, four months ago, the consensus estimates were 49 cents for 2021 and 78 cents for 2022.

Valuation

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

Dividend policy

The average one-year target price is $7.27, implying the share price may appreciate 37 per cent over the next 12 months. Individual target prices are as follows in numerical order: $6.50 (from Raymond James’ Jeremy McCrea), $6.90, three at $7, $7.25, $7.75, and two at $8.

Insider transaction activity

Quarter-to-date, there has not been any trading activity in the public market reported by insiders.

Chart watch

The stock has experienced an explosive move in its share price.

On Nov. 6, 2020, the share price closed at $1.27. Just over one year later, on Dec. 10, the stock price closed at $5.31, reflecting a price return of 318 per cent.

Looking at key technical resistance and support levels, the stock has an initial ceiling of resistance around $5.50. After that, there is overhead resistance between $6.50 and $7. Looking at the downside, there is strong technical support between $4.30 and $4.50, near its 200-day moving average (at $4.31). Since the beginning of 2020, the 200-day moving average has proven to be a major support level.

This small-cap stock has reasonable liquidity. The three-month historical daily average trading volume is approximately 2.3 million shares.

POSITIVE BREAKOUTSDec. 10 close
AIF-TAltus Group Ltd $71.96
AND-TAndlauer Healthcare Group Inc. $50.96
APR-UN-TAutomotive Properties REIT $13.75
BNS-TBank of Nova Scotia $86.12
GBT-TBMTC Group Inc $15.84
CFP-TCanfor Corp $30.02
KOR-TCorvus Gold Inc. $4.08
CPG-TCrescent Point Energy Corp $6.74
DRM-TDREAM Unlimited Corp $36.38
ERF-TEnerplus Corp $13.66
FTS-TFortis Inc $57.98
HWX-THeadwater Exploration Inc. $5.31
IFP-TInterfor Corp $36.12
JWEL-TJamieson Wellness Inc. $41.39
L-TLoblaw Cos Ltd $99.21
LA-XLos Andes Copper Ltd. $11.67
NTR-TNutrien Ltd. $89.45
OSK-TOsisko Mining Inc. $3.78
RSI-TRogers Sugar Inc $6.05
RUP-XRupert Resources Ltd. $5.49
TCN-TTricon Residential Inc $18.76
NEGATIVE BREAKOUTS
AEM-TAgnico Eagle Mines Ltd $60.65
CLIQ-TAlcanna Inc. $6.89
HOT-UN-TAmerican Hotel Income Properties REIT LP $3.77
BDGI-TBadger Infrastruture Solution $30.33
BB-TBlackBerry Ltd $11.19
BLX-TBoralex Inc $33.94
BYD-TBoyd Group Services Inc. $196.92
BRAG-TBragg Gaming Group Inc. $6.88
BEPC-TBrookfield Renewable Corporation $42.92
BEP-UN-TBrookfield Renewable Energy Partners LP $42.30
WEED-TCanopy Growth Corp. $12.18
CDAY-TCeridian HCM Holding Inc. $132.09
DOC-XCloudMD Software & Services Inc. $1.14
CGO-TCogeco Inc $77.72
CMG-TComputer Modelling Group Ltd $4.20
DNTL-Tdentalcorp Holdings Ltd. $15.89
DRT-TDIRTT Environmental Solutions $2.51
EDV-TEndeavour Mining Corp. $27.08
ERO-TEro Copper Corp. $18.57
FN-TFirst National Financial Corp $39.80
FVI-TFortuna Silver Mines Inc $4.11
GAU-TGaliano Gold Inc. $0.87
GOLD-TGoldMining Inc. $1.47
ISV-TInformation Services Corp. $25.42
INE-TInnergex Renewable Energy Inc $18.16
KL-TKirkland Lake Gold Inc $48.17
LSPD-TLightspeed Commerce Inc. $55.98
MAG-TMAG Silver Corp $18.76
MMX-TMaverix Metals Inc. $5.35
MOGO-TMogo Inc. $4.84
NXE-TNexGen Energy Ltd. $5.49
NPI-TNorthland Power Inc $37.31
PLTH-CNPlanet 13 Holdings Inc. $4.20
POM-TPolyMet Mining Corp. $3.46
SMT-TSierra Metals Inc $1.67
SVM-TSilvercorp Metals Inc $4.54
TOI-XTopicus.com Inc. $105.62
WFC-TWall Financial Corp. $14.30
WELL-TWell Health Technologies Corp. $5.14

Source: Bloomberg and The Globe and Mail

This report is not an investment recommendation. 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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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 27/03/24 4:00pm EDT.

SymbolName% changeLast
HWX-T
Headwater Exploration Inc
+1.18%7.73

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