The comeback of energy stocks in 2023 is real, not superficial. As of this writing, the sector is the third-best performer, beating the broader market year to date at +10.73% versus +0.81%. Oil prices are spiking and nearing US$100 per barrel due to supply cuts by heavyweight crude producers, particularly Saudi Arabia.
Income investors who want exposure to the energy sector and ride on the building momentum should consider Headwater Exploration (TSX:HWX). This growth stock is one of the steadiest energy constituents. It has gained 17.64% in the last three months and is up 26.57% year to date. At $7.16 per share, you can partake in the lucrative 5.43% dividend.
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New dividend payer
Headwater Exploration isn’t an established dividend payer like sector heavyweights Enbridge, Canadian Natural Resources, or TC Energy. Its dividend track record is relatively young, only four quarters. The board of directors announced a dividend policy and implemented a return of capital strategy last year.
Because of the company’s exceptional financial performance, the board approved the inaugural quarterly cash dividend on November 3, 2022. The fourth payout will be on October 16, 2023, to shareholders of record at the close of business on September 29, 2023.
Growing the quarterly dividend is now part of Headwater’s multi-year business strategy. The board expects to maintain the regular quarterly dividend, given the projected long-term West Texas Intermediate (WTI) oil price of US$55 per barrel.
Multi-year business strategy
The $1.68 billion resource company explores, develops, and produces petroleum and natural gas in Canada. Headwater boasts high-quality oil production, reserves, and lands in its core operating areas. It operates in the Clearwater play in Alberta’s Marten Hills area. The McCully Field, close to Sussex, New Brunswick, has low-decline natural gas production and reserves.
On the development side (US$75 per barrel WTI), the identified inventory supports 10 years or more of stable production utilizing 60-70 locations per year. Management’s primary goal is to provide superior corporate-level returns by focusing on sustainability, asset quality, and balance sheet strength.
Besides growing the quarterly dividend, Headwater hopes to maintain positive working capital. It will also continue to add incremental prospects via strategic land acquisitions and accretive mergers and acquisitions.
Financial highlights
In the first half of 2023, total revenues (sales and royalties) and net income declined 9.2% and 39.2% year over year to $188.13 million and $60.92 million. The cash flows from operating activities dipped 13% to $127 million compared to a year ago.
Since introducing its dividend policy, Headwater has returned $70.5 million to shareholders. As of June 30, 2023, the working capital is $54.8 million, while outstanding bank debt is zero.
Despite the drop in the top and bottom lines, the board of directors increased the 2023 capital expenditure guidance to $225.0 million without reservations. The plan is to pursue additional strategic land and exploration prospects.
TSX30 winner
Headwater Exploration’s main attraction is its superb production growth. The company’s production soared 123.1% from 7,688 barrels of oil equivalent per day (boe/d) in the third quarter of 2021 to 17,152 boe/d in the second quarter of 2023. Because of the stock’s +442% gain in three years, it has joined the elite club of high-growth stocks. HWX ranks 16th in the 2023 TSX30 List.
