The Canadian energy sector has been a fantastic source of explosive investment returns for active investors in oil stocks in recent years. However, Headwater Exploration (TSX:HWX) stock has been a phenomenal growth story unlike any other. It’s a multi-bagger, returning 1,140% in five years. If you had invested $1,000 in this growth stock five years ago, your investment could have grown to $12,350 today.
The $1.7 billion energy stock‘s returns are largely due to a change in operating strategy, capitalizing on a multi-year oil price super cycle. Here’s how this explosive growth stock created wealth for active investors.
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How did Headwater Exploration stock produce explosive returns?
Headwater Exploration has significantly transformed and expanded its energy business operations over the past five years, allowing investors to enjoy significant wealth accumulation. The energy stock’s cash flow generation rate increased 35-fold between 2019 and 2023 and could grow further this year and in 2025.
Riding a multi-year oil price surge, Headwater Exploration has morphed from a pure natural gas and natural gas liquids producer generating $9.3 million in revenue, $2.8 million in net income, and $8.2 million in funds flow in 2019 to a predominantly heavy oil producer. In 2023, the company posted $482.8 million in annual revenue and $156.1 million in net income, and generated $288.3 million in adjusted funds flow. The company may exceed some of these figures in 2024.
The Canadian energy stock’s impressive rally began with a strategic shift in 2020. Headwater Exploration raised new equity in March 2020, appointed a new management team, reconstituted its board, and changed its name from Corridor Resources. The company actively acquired new crude oil resources, and production has expanded from 620 barrels of oil equivalent per day (boe/d) in 2019 to an expected 20,000 boe/d for this year.
Revenue, earnings, and cash flow production have grown exponentially, propelling the energy stock higher. Additionally, management’s decision to amplify shareholder returns with a quarterly dividend since the fourth quarter of 2022 further boosted the already-soaring growth stock.
Headwater Exploration’s $0.10 quarterly dividend yields 5.5% annually. It’s well covered by earnings given a 58% payout rate.
Should you invest in this explosive growth stock?
Investors seeking growth and bullish on oil may consider Headwater Exploration stock and potentially earn positive returns over the next 12 months. The energy stock’s average analyst price target of $9.83 suggests a potential 34% upside over the next year. However, the bullish thesis on HWX stock goes beyond this.
Headwater Exploration stock could rise further as investors value its sustained production growth, strong balance sheet with no bank debt, robust free cash flow generation, and a shareholder-friendly dividend policy that amplifies total returns during the current oil super cycle.
The company continues to reinvest cash flow through accretive land acquisitions and exploration activities this year. Management forecasts production growth of 10.9% year-over-year to 20,000 boe/d in 2024 and maintains a target of 22,000 boe/day for 2025 – assuming oil prices remain firm at around US$75 per barrel and Canadian oil price differentials don’t widen beyond US$15 during the period.
Bay Street analysts project a 19.5% increase in Headwater Exploration’s annual revenue through 2026, with a long-term earnings growth rate of 10% attached to the stock.
Furthermore, despite the multi-year rally in the stock, shares trade at reasonable valuations. The stock appears cheap given current market conditions. A forward price-to-earnings (PE) multiple of 5.7 appears too attractive to ignore, and a forward price-to-earnings-to-growth ratio of 0.47 suggests the stock is currently undervalued given its potential earnings growth.
Investors could consider the 5.5% dividend yield a good source of passive income for as long as oil’s good times roll.
