Mr. Neil Roszell reports

HEADWATER EXPLORATION INC. ANNOUNCES SECOND QUARTER OPERATING AND FINANCIAL RESULTS AND INCREASED 2023 CAPITAL GUIDANCE

Headwater Exploration Inc. has released its operating and financial results for the three and six months ended June 30, 2023. Selected financial and operational information is outlined below and should be read in conjunction with the unaudited condensed interim financial statements and the related management's discussion and analysis (MD&A). These filings will be available on SEDAR+ and the company's website.

Second quarter 2023 highlights

• Returned $23.5-million to shareholders. Since announcing the company's inaugural dividend in November, 2022, Headwater has returned a total of $70.5-million to shareholders.
• Achieved record production averaging 17,152 boe/d (barrels of oil equivalent per day) (consisting of 15,624 bbl/d (barrels per day) of heavy oil, 8.5 mmcf/d (million cubic feet per day) of natural gas and 107 bbl/d of natural gas liquids) representing an increase of 46 per cent from the second quarter of 2022.
• Realized adjusted funds flow from operations of $66.2-million (28 cents per share basic).
• Achieved an operating netback inclusive of financial derivatives of $46.88/boe and an adjusted funds flow netback of $42.44/boe.
• Achieved net income of $30.9-million (13 cents per share basic).
• Executed a $64.1-million capital expenditure program inclusive of $8.5-million of land expenditures adding a total of 90 sections of undeveloped acreage, while also focusing on development in Marten Hills West, drilling a total of 24 crude oil wells in the area at a 100-per-cent success rate.
• As at June 30, 2023, Headwater had adjusted working capital of $49.0-million, working capital of $54.8-million and no outstanding bank debt. Balance sheet strength has allowed the board of directors to confidently increase the 2023 capital expenditure guidance to $225.0-million to pursue additional strategic land and exploration prospects.

Operations update

Marten Hills West

Marten Hills West continues to be a compelling growth area for Headwater. July production averaged over 7,000 bbl/d, representing greater than 50-per-cent growth from production levels achieved in April, 2023. From January through to the end of June, 2023, 25 wells have been brought on production in the area achieving an average 30-day initial production (IP30) rate of 215 bbl/d.

Key highlights of the drilling program since the end of the first quarter include the 02/13-16-075-02W5 well, achieving an IP30 rate of 208 bbl/d. This well has continued the southwest extension of the company's previously defined pool boundaries. In addition, the 04/03-13-75-02W5 well achieved an IP30 rate of 177 bbl/d continuing the southeast extension of the Marten Hills West pool.

Headwater resumed Central Marten Hills development with the drilling of the 00/08-11-075-26W4 well. The well came off load recovery on July 10 and has achieved a 20-day initial production rate of 280 bbl/d. This well has exceeded Headwater's expectations for this area and the company now has increased confidence of a southern extension of this play on its 100-per-cent-owned lands.

Implementation of enhanced oil recovery pilot projects has continued in Marten Hills West. The company's first pilot has been on injection for 120 days, while its second pilot has been on injection for 50 days. The supported producing wells, in both cases, are exhibiting the expected initial behavior with a moderation in gas-oil ratios (GORs).

Marten Hills core

Although no new wells were placed on production in this area in the second quarter, the team has been active optimizing and expanding the waterflood. The company continues to be encouraged by the waterflood response since the expansion of its water injection capability in January, 2023. The enhanced oil recovery implemented to date has resulted in approximately 2,800 bbl/d of stabilized oil production. GORs on the supported production continue to decline as we have witnessed a 30-per-cent decrease in GORs since January. This leading indicator of declining GORs, with no water breakthrough and stabilized oil production continue to validate the early success of the enhanced recovery scheme.

Exploration update and capital guidance increase

The Headwater team continues to pursue organic growth opportunities in and beyond the Clearwater play. Year to date the company has added 63 net sections to its Clearwater land base with multiple potential new pools identified.

In addition to the company's Clearwater land expansion strategy, the team has also accumulated 121 net sections of land with multiple exploration opportunities throughout various oil prone areas in Western Canada. The company's land accumulation strategy will continue through these areas and the company intends to drill and test multiple prospects in 2024.

Considering Headwater's continued success, the board of directors has approved an expansion to the company's 2023 capital expenditure budget from $200-million to $225-million. The incremental capital will be allocated to approximately $15-million of land expenditures and an additional $10-million on currently identified drill-ready Clearwater exploration prospects. The exploration drilling will occur in the fourth quarter of 2023 and is not anticipated to add any incremental production to the company's previously released 2023 guidance of 18,000 boe/d. The revised 2023 capital expenditure guidance will result in exit adjusted working capital of approximately $65.0-million.

Executive appointment

With the continued evolution of Headwater, the board of directors is pleased to announce the creation of a new ventures group.

Jon Grimwood, the company's current vice-president of exploration, will now spearhead the company's recently created new ventures team. As vice-president of new ventures, Mr. Grimwood will continue to be actively involved in all geotechnical aspects of Headwater with a significantly increased focus on new play development.

Dieter Deines will be appointed as Headwater's vice-president of exploration effective Sept. 1, 2023. Mr. Deines will assume a portion of Mr. Grimwood's current duties, primarily focused on leading the geotechnical team in the continued development of the company's Clearwater assets. Mr. Deines extensive experience in the Western Canadian sedimentary basin will provide for a seamless integration into this role.

Outlook

The positive working capital balance that has been maintained throughout the company's corporate history continues to allow Headwater to be opportunistic on expanding its prospects, while achieving top tier production per-share growth combined with paying an approximate 5.4-per-cent dividend yield to the company's shareholders.

Headwater's business continues to evolve in and beyond the Clearwater, providing a path of stable and increasing dividends, while continuing to add per-share production and cash flow growth. Headwater remains committed to long-term top-quartile total shareholder returns through a combination of growth and return of capital.

We seek Safe Harbor.