Mr. Neil Roszell reports

HEADWATER EXPLORATION INC. ANNOUNCES 2023 RESERVES, YEAR END 2023 OPERATING AND FINANCIAL RESULTS, OPERATIONS UPDATE, INCREASE TO 2024 CAPITAL BUDGET AND DECLARES QUARTERLY DIVIDEND

Headwater Exploration Inc. has released its operating and financial results for the three months and year ended Dec. 31, 2023. Selected financial and operational information is outlined herein and should be read in conjunction with the audited financial statements and the related management's discussion and analysis. These filings will be available at SEDAR+ and the company's website. In addition, readers are also directed to the company's annual information form for the year ended Dec. 31, 2023, dated March 7, 2024, filed on SEDAR+.

Fourth quarter 2023 highlights:

• Achieved record production of 19,939 barrels of oil equivalent per day (93 per cent heavy oil), an increase of 28 per cent over fourth quarter 2022 production of 15,546 boe/d (87 per cent heavy oil);
• Realized record adjusted funds flow from operations of $82.0-million (35 cents per basic share), cash flows from operating activities of $90.7-million (38 cents per basic share) and free cash flow of $51.9-million;
• Achieved an operating netback, including financial derivatives, of $49.07 per boe and an adjusted funds flow netback of $44.26 per boe;
• Generated net income of $45.5-million (19 cents per basic share) equating to $24.55 per boe;
• Executed a $30.1-million capital expenditure program, including 13 net crude oil wells in Marten Hills West at a 100-per-cent success rate;
• Returned 10 cents per common share to shareholders;
• As at Dec. 31, 2023, Headwater Exploration had working capital of $78.6-million, adjusted working capital of $63.5-million and no outstanding bank debt.

Year ended Dec. 31, 2023, highlights:

• Achieved average production of 18,038 boe/d (91 per cent heavy oil), an increase of 40 per cent over 2022 annual production of 12,841 boe/d (89 per cent heavy oil);
• Realized adjusted funds flow from operations of $288.3-million ($1.22 per basic share) and cash flows from operating activities of $303.3-million ($1.29 per basic share);
• Achieved an operating netback, including financial derivatives, of $49.95 per boe and an adjusted funds flow netback of $43.78 per boe;
• Generated net income of $156.1-million (66 cents per basic share) equating to $23.71 per boe;
• Returned a total of 40 cents per common share or $94.4-million to shareholders;
• Proven developed producing reserves increased by 33 per cent to 22.1 million boe from 16.6 million boe;
• Total proven reserves increased by 54 per cent to 32.5 MMboe from 21.1 MMboe;
• Total proven plus probable reserves increased by 51 per cent to 51.9 MMboe from 34.3 MMboe;
• Achieved finding and development costs, including changes in future development costs, of $19.17 per boe on a proven developed producing basis, $18.61 per boe on a total proven basis and $14.97 per boe on a total proven plus probable basis;
• Based on a 2023 adjusted funds flow netback of $43.78 per boe, achieved recycle ratios of 2.3 on a proven developed producing basis, 2.4 on a total proven basis and 2.9 on a total proven plus probable basis.

Operations update

Marten Hills West

Production from Marten Hills West grew more than 250 per cent from 3,000 barrels per day in the first quarter of 2023 to greater than 10,500 bbl/d in the fourth quarter of 2023. The year was also characterized by a significant pool expansion in addition to the validation of the stacked pay potential of the area. Economic production has been proved from four different Clearwater sands in Marten Hills West.

In the Clearwater A, successful tests at 00/03-15-075-01W5 and 02/05-18-075-01W5 have expanded the eastern Clearwater A pool boundary by four miles derisking an additional 10 sections of land. The 00/3-15-076-01W5 well achieved a 60-day initial production rate of 157 bbl/d while the 02/05-18-075-01W5 well achieved a 60-day initial production rate of 147 bbl/d. Success from these wells expands the potential of the Clearwater A in Marten Hills West to greater than 45 sections.

The positive results of the two active water flood pilots in the Clearwater A suggest that a large portion of the Clearwater A pool will be amenable to secondary recovery. The two active pilots continue to exceed expectations with decreasing gas oil ratios and greater than 200 bbl/d of stabilized oil production. Continued implementation of the Clearwater A water flood will occur with a full section water flood employed by the end of the first quarter of 2024.

The successful discovery well drilled at 02/13-15-076-02W5 in the Clearwater E in the fourth quarter of 2023 has recently been followed up with a second test at 00/04-35-076-02W5. This well finished recovering load fluid March 2 and is currently producing 160 bbl/d. In conjunction with its discovery well, this pool is estimated to be in excess of 15 sections. A further test of the Clearwater E sand will occur in the second quarter.

Its discovery well in the Clearwater G at 00/02-30-075-01W5 has achieved a 90-day initial production rate of 160 bbl/d. Three additional Clearwater G tests following up on this discovery will be drilled over the next couple of months to continue validation of the size and potential of this sand.

Further drilling in the Clearwater B will occur in the second half of 2024 with four wells planned within this sand.

Marten Hills core

In 2024, it will continue to advance the secondary recovery efforts in the core, converting two sections to injection and expanding its stabilized production to more than 4,000 bbl/d. By mid-2025, it will have the entire core area under secondary recovery, resulting in reduced corporate declines and required maintenance capital. In addition, it has recently expanded its enhanced recovery efforts with a pilot injector northeast of the core area supporting the 02/12-08-075-24W5 well. Early indications here look excellent with strong injectivity indicating enhanced recovery efforts can be expanded beyond the defined core area in Marten Hills.

West Nipisi

In the first quarter of 2024, three Clearwater C extension wells were drilled in the seven-section development area of West Nipisi. The northwest extension wells, 00/14-17-078-09W5 and 00/13-17-078-09W5, have achieved an average per well 30-day initial production rate of 195 bbl/d. The 03/04-04-078-09W5 well, a southern extension test, has achieved a 15-day initial production rate of 215 bbl/d. Results from these three tests validate economic development from the entire seven-section block.

In addition, two multilateral wells and a stratigraphic test have been drilled in the West Nipisi expansion area through winter access roads for evaluation of two prospective Clearwater sands. The 02/05-15-077-12W5 well, targeting the Clearwater G sand, was rig released Feb. 17, and the 00/05-18-77-11W5 well, targeting the Clearwater F sand, was rig released Feb. 27. Both wells are at various stages of load fluid recovery and will be produced until breakup conditions prevail. Results from the multilateral wells in addition to evaluation of the stratigraphic test will aid in determining the viability of an all-weather access road into the area.

Heart River and Little Horse

At Heart River, south of its Greater Peavine area, it has recently spudded its first Falher test at 00/06-36-076-16W5, targeting a Falher sandstone prospective for heavy oil. Results from this well are anticipated to be released in conjunction with its first quarter results.

The exploration team has also identified additional multizone prospectivity across 47 sections of newly acquired acreage in an offsetting area called Little Horse, which is prospective for heavy oil and located directly east of Heart River. The first test in this recently acquired acreage is planned for the fourth quarter of 2024.

Handel

To date, the team has been successful at acquiring 56 sections of land prospective for Mannville oil in the Handel area of west-central Saskatchewan. A stratigraphic test and one single-leg horizontal well have been recently drilled in the area. The horizontal well targeting the Lloydminster sandstone had encouraging geotechnical shows and is currently being placed on production. Pending the success of this well, up to two additional tests will be drilled in this area in 2024.

Exploration land update

The Headwater Exploration team continues its pursuit of organic growth opportunities in and beyond the boundaries of the Clearwater acreage. Year to date in 2024, it has added 81.5 net sections to its land base. It has accumulated over 520 net sections in the Clearwater fairway and 175 net sections of non-Clearwater acreage in oily fairways across the basin. Within the 175 sections of non-Clearwater acreage, it has defined numerous play concepts and plans to test four of these prospects in 2024.

McCully

McCully was placed back on production Dec. 1 to align with its aggressive hedging profile. Approximately 86 per cent of its December, 2023, to March, 2024, volumes are hedged at $17.85 per thousand cubic feet, which are expected to provide approximately $15-million of free cash flow over the winter producing season. Headwater Exploration's structured hedging program for the McCully asset has protected the asset's cash flow against highly volatile gas pricing experienced this winter.

2024 guidance update

As a result of Headwater Exploration's success in accumulating incremental lands year to date in 2024, the board of directors has approved an expansion of the company's 2024 capital budget from $180-million to $200-million. Average forecast production for 2024 will remain at 20,000 boe/d. At $75.30 (U.S.) West Texas Intermediate, the company expects to generate adjusted funds flow from operations of $298-million and exit the year with adjusted working capital of $65-million.

First quarter dividend

The board of directors of Headwater Exploration confirms a cash dividend to shareholders of 10 cents per common share payable on April 15, 2024, to shareholders of record at the close of business on March 29, 2024. This dividend is an eligible dividend for the purposes of the Income Tax Act (Canada).

Outlook

Since inception, it has continued to maintain a positive working capital balance. When combined with its existing credit facility, it provides it with optionality to organically expand its resource base, pursue accretive acquisitions and implement additional enhanced oil recovery schemes.

Headwater Exploration continues to focus on total shareholder returns through a combination of growth and return of capital.

2023 reserves information

Headwater Exploration currently has heavy oil reserves located in the Marten Hills, Greater Peavine and West Nipisi areas of Alberta and natural gas reserves in the McCully field near Sussex, N.B. McDaniel & Associates Consultants Ltd. assessed the company's reserves in its report dated effective Dec. 31, 2023, which was prepared in accordance with standards of the Canadian oil and gas evaluation handbook and National Instrument 51-101 (Standards of Disclosure for Oil and Gas Activities), and is based on the average forecast prices as at Dec. 31, 2023, of three independent reserves evaluation firms. Additional information regarding reserves data and other oil and gas information is included in Headwater Exploration's annual information form for the year ended Dec. 31, 2023, filed on SEDAR+ on March 7, 2024.

Certain attached tables are a summary of Headwater Exploration's petroleum and natural gas reserves, as evaluated by McDaniel, effective Dec. 31, 2023. It should not be assumed that the estimates of future net revenues presented in the attached tables represent the fair market value of the reserves. There is no assurance that the forecast prices and cost assumptions will be attained, and variances could be material. The recovery and reserves estimates of its crude oil, natural gas liquids and natural gas reserves provided herein are estimates only, and there is no guarantee that the estimated reserves will be recovered. It is important to note that the recovery and reserves estimates provided herein are estimates only. Actual reserves may be greater or less than the estimates provided herein. Reserves information may not add due to rounding.

Future development costs

An attached table contains a summary of the estimated FDC required to bring proven undeveloped reserves and proven plus probable undeveloped reserves on production.

Pricing assumptions

An attached table sets forth the benchmark reference prices, as at Dec. 31, 2023, reflected in the McDaniel report, using the average of commodity price forecasts from McDaniel, GLJ Ltd. and Sproule Associates Ltd., effective as at Jan. 1, 2024, to estimate the reserves volumes and associated values in the McDaniel report.

Additional corporate information can be found in the company's corporate presentation and on Headwater Exploration's website.

We seek Safe Harbor.