HEADWATER EXPLORATION INC. ANNOUNCES SECOND QUARTER OPERATING AND FINANCIAL RESULTS AND DECLARES QUARTERLY DIVIDEND

CALGARY, AB, July 23, 2026 /CNW/ -- Headwater Exploration Inc. (the "Company" or "Headwater") (TSX: HWX) is pleased to announce its operating and financial results for the three and six months ended June 30, 2026. 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 at www.sedarplus.ca and the Company's website at www.headwaterexp.com.

 Financial and Operating Highlights

	Three months ended  June 30,		Percent  Change		Six months ended  June 30,		Percent  Change
	2026	2025			2026	2025
Financial (thousands of dollars except share data)
Total sales, net of blending expense ^(1) (4)	227,666	138,808	64		397,571	301,996	32
Adjusted funds flow from operations^(2)	117,749	74,218	59		215,108	166,577	29
Per share - basic ^(3)	0.50	0.31	61		0.91	0.70	30
- diluted ^(3)	0.49	0.31	58		0.90	0.70	29
Cash flow provided by operating activities	134,566	68,673	96		174,635	138,608	26
Per share - basic	0.57	0.29	97		0.73	0.58	26
- diluted	0.56	0.29	93		0.73	0.58	26
Net income	85,416	38,023	125		120,983	88,027	37
Per share - basic	0.36	0.16	125		0.51	0.37	38
- diluted	0.36	0.16	125		0.51	0.37	38
Capital expenditures ^(1)	81,552	50,704	61		148,292	113,551	31
Adjusted working capital ^(2)					9,018	58,472	(85)
Shareholders' equity					814,452	735,055	11
Dividends declared	28,532	26,155	9		54,686	52,310	5
Per share	0.12	0.11	9		0.23	0.22	5
Weighted average shares (thousands)
Basic	237,763	237,763	-		237,763	237,767	-
Diluted	240,052	239,471	-		239,897	239,469	-
Shares outstanding, end of period (thousands)
Basic					237,763	237,763	-
Diluted ^(5)					237,763	237,763	-
Operating (6:1 boe conversion)
Average daily production
Heavy crude oil (bbls/d)	23,046	20,249	14		22,455	19,882	13
Natural gas (mmcf/d)	8.2	10.8	(24)		10.6	12.6	(16)
Natural gas liquids (bbl/d)	148	185	(20)		142	164	(13)
Barrels of oil equivalent ^(9) (boe/d)	24,567	22,235	10		24,362	22,151	10
Average daily sales ^(6)(boe/d)	24,627	22,123	11		24,281	22,071	10
Netbacks ($/boe)^(7)
Operating
Sales, net of blending ^(4)	101.59	68.95	47		90.47	75.61	20
Royalties	(22.09)	(12.84)	72		(17.37)	(13.65)	27
Transportation	(6.06)	(5.65)	7		(5.93)	(5.53)	7
Production	(8.27)	(7.44)	11		(8.23)	(7.68)	7
Operating netback ^(3)	65.17	43.02	51		58.94	48.75	21
Realized losses on financial derivatives	(5.29)	(0.36)	1,369		(3.94)	(0.97)	306
Operating netback, including financial derivatives ^(3)	59.88	42.66	40		55.00	47.78	15
General and administrative expense	(1.51)	(1.44)	5		(1.49)	(1.44)	3
Interest income and other expense ^(8)	0.21	0.45	(53)		0.23	0.51	(55)
Current income tax expense	(6.04)	(4.81)	26		(4.80)	(5.12)	(6)
Settlement of decommissioning liability	-	-	-		-	(0.03)	(100)
Adjusted funds flow netback ^(3)	52.54	36.86	43		48.94	41.70	17

(1)	Non-GAAP financial measure. Refer to "Non-GAAP and Other Financial Measures" within this press release.
(2)	Capital management measure. Refer to "Non-GAAP and Other Financial Measures" within this press release.
(3)	Non-GAAP ratio. Refer to "Non-GAAP and Other Financial Measures" within this press release.
(4)	Heavy oil sales are netted with blending expense to compare the realized price to benchmark pricing while transportation expense is shown separately. In the interim financial statements blending expense is recorded within blending and transportation expense.
(5)	Performance share units and restricted share units have been excluded as the Company intends to cash settle these awards.
(6)	Includes sales of unblended heavy crude oil, natural gas and natural gas liquids. The Company's heavy crude oil sales volumes and production volumes differ due to changes in inventory.
(7)	Netbacks are calculated using average sales volumes. For the three months ended June 30, 2026, sales volumes comprised of 23,106 bbs/d of heavy oil, 8.2 mmcf/d of natural gas and 148 bbls/d of natural gas liquids (three months ended June 30, 2025 – 20,136 bbls/d heavy oil, 10.8 mmcf/d natural gas and 185 bbls/d natural gas liquids). For the six months ended June 30, 2026, sales volumes comprised of 22,374 bbls/d of heavy oil, 10.6 mmcf/d of natural gas and 142 bbls/d of natural gas liquids (six months ended June 30, 2025 – 19,802 bbls/d heavy oil, 12.6 mmcf/d natural gas and 164 bbls/d natural gas liquids).
(8)	Excludes unrealized foreign exchange gains/losses, accretion on decommissioning liabilities, interest on lease liability and interest on repayable contribution.
(9)	See '"Barrels of Oil and Cubic Feet of Natural Gas Equivalent."

SECOND QUARTER 2026 HIGHLIGHTS

• Achieved record production of 24,567 boe/d representing an increase of 10% from the second quarter of 2025.

• Realized record adjusted funds flow from operations ⁽¹⁾ of $117.7 million ($0.50 per share basic ⁽²⁾).

• Achieved an operating netback, including financial derivatives ⁽²⁾ of $59.88/boe and an adjusted funds flow netback ⁽²⁾ of $52.54/boe.

• Achieved record net income of $85.4 million ($0.36 per share basic) equating to $38.11 per boe and an industry leading net income margin driven by increased volumes and lower depletion and depreciation expense.

• Executed an $81.6 million capital expenditure ⁽³⁾ program inclusive of development, land, exploration expenditures and secondary recovery implementation.  

• Declared a cash dividend of $28.5 million, or $0.12 per common share. To date, Headwater has paid out cumulative dividends of $372.3 million to shareholders ($1.57 per common share).

• As at June 30, 2026, Headwater had adjusted working capital ⁽¹⁾ of $9.0 million, working capital of $10.2 million, and no outstanding bank debt.

(1)	Capital management measure. Refer to "Non-GAAP and Other Financial Measures" within this press release.
(2)	Non-GAAP ratio. Refer to "Non-GAAP and Other Financial Measures" within this press release.
(3)	Non-GAAP financial measure. Refer to "Non-GAAP and Other Financial Measures" within this press release.

OPERATIONS UPDATE

MARTEN HILLS WEST

Development in the second quarter was primarily focused at Marten Hills West.  The Company drilled 14 producing wells and 25 injectors across the Grand Rapids, Clearwater sandstone and Clearwater E formations. Current production levels have achieved new records of over 18,000 boe/d with more than 8,500 bbls/d currently supported by secondary recovery. By year end 2026, it is estimated more than 9,000 bbls/d will be supported by secondary recovery in Marten Hills West, representing 53% of the area's oil production. Continued success throughout Marten Hills West has defined more than a decade of continued development.

The Grand Rapids formation in Marten Hills West realized production growth of 82% in the second quarter growing from 2,200 bbls/d to current rates in excess of 4,000 bbls/d. Seven multi-lateral Grand Rapids producers were brought onstream with an average 30-day initial production rate of 260 bbls/d. In addition, 10 Grand Rapids injectors were drilled, increasing secondary recovery supported volumes to 2,500 bbls/d. For the balance of 2026, Headwater will continue to push the southern pool boundaries with an additional 6-8 producing wells supported by another full section of secondary recovery development. By year end 2026, Headwater anticipates having approximately 3 sections and more than 70% of Grand Rapids production supported by secondary recovery. The Grand Rapids formation has proven to be very prolific, repeatable and responsive to waterflood implementation.  The prospect has doubled in size over the past year to an estimated 30 sections of which only 3 have been developed to date.

During the second quarter, Headwater focused on pool expansions in the Clearwater sandstone and Clearwater E formations at Marten Hills West. The 00/04-05-075-01W5 well, a Clearwater sandstone southern step-out test, achieved a 25-day initial production rate of 195 bbls/d and the 03/13-05-075-01W5 well, a Clearwater E southern step-out test achieved a 30-day initial production rate of 328 bbls/d. Secondary recovery in the Clearwater E and Clearwater sandstone was also very active in the second quarter.  A total of 15 injectors were drilled that have increased supported production to greater than 6,000 bbls/d, representing 46% of the current production from these formations.

In Central Marten Hills, the Company drilled a big bore southern pool extension test at 00/16-23-074-26W4, that has recently recovered load fluid and is currently producing at rates of 150 bbls/d.

SECONDARY RECOVERY

Outperformance of existing secondary recovery, combined with a $65 million budget for secondary recovery implementation in 2026, has Headwater forecasted to be supporting approximately 16,000 bbls/day (64% of corporate oil volumes) from approximately 30 sections by year end. With more than 50 sections remaining to be developed under secondary recovery, Headwater has near term visibility to sustainable corporate declines of approximately 15% and sustaining capital of less than 20% of adjusted funds flow from operations at US$70 WTI, while continuing to show year over year production growth.

GREATER PELICAN

Headwater is excited to report we have recently moved a rig into the Greater Pelican area and have kicked off our second half exploration and development program.

The program started with two exploration tests in Hoole, west of the Bigstone block. The Wabiskaw C test, a 4-leg multi-lateral exploration well drilled at 00/05-04-080-24W4 had excellent geological shows while drilling and has recently started load fluid recovery. The second well, a 3-leg multi-lateral Clearwater E test at 00/03-33-079-24W4 was recently rig-released. Headwater anticipates having results from these two exploration wells in September.

Following up the exploration tests, the Company has recently moved a rig to the 12-30-079-22W4 pad to expand the polymer flood.  The expansion will include 4 additional producers supported by 7 additional injectors. Once complete, which is expected early in the fourth quarter, Headwater will have 6 producing wells supported by 9 polymer injection wells. Since the discovery well at 04/04-19-079-22W4 was drilled in April of 2025, Headwater has achieved cumulative oil production of more than 350,000 bbls from 3 producing wells. The Company is very excited to expand this highly prolific pool.

Once the development program is complete, exploration across the area will continue with the drilling of 4 independent exploration prospects across the 96 section Greater Pelican area.

GREATER PEAVINE – SEAL

Following up the success of the 00/13-12-083-16W5 Falher B drill, which achieved a 365-day initial production rate of 140 bbls/d (51,000 bbls of cumulative oil), Headwater moved a rig into Seal late in the second quarter to drill two multi-lateral producers and two stratigraphic tests.

The first multi-lateral drilled, 02/04-12-083-16W5 which is an 8-leg Falher well, had excellent sample quality and oil shows while drilling and has recently started recovering load fluid.

The second multi-lateral currently being drilled at 00/04-07-083-15W5 is a fishbone style Bluesky test with large diameter hole. Casing will be run to total depth in the main lateral so the well can be set up with a circulation string for hot water or cyclical steam injection. Headwater is very encouraged to test this technology, which has the potential to unlock multiple stratigraphic intervals across the greater Seal area.

LAND & EXPLORATION

Year to date Headwater has acquired 50 sections of land across the Clearwater fairway and remains committed to organic inventory and duration expansion. Exploration efforts for the balance of 2026 will be focused on Greater Pelican with four exploration targets testing four new play concepts.

THIRD QUARTER DIVIDEND

The Board of Directors of Headwater has declared a quarterly cash dividend to shareholders of $0.12 per common share payable on October 15, 2026, to shareholders of record at the close of business on September 30, 2026. This dividend is an eligible dividend for the purposes of the Income Tax Act (Canada).

OUTLOOK

Positive working capital in conjunction with a highly adaptable capital budget allows timely capital allocation adjustments during times of high market volatility.

Our continuous outperformance in secondary recovery and inventory expansion has allowed us to shatter expectations. Sustained production growth alongside decreasing corporate declines is unprecedented in our industry. With decline rates stabilizing near 15% and evolving technologies continuing to point towards increased recoveries, we see a clear path to asset longevity, lower maintenance capital, and delivering exceptional long-term returns for our shareholders.

Headwater remains focused on maximizing total shareholder returns through organic expansion, secondary recovery, dividends and strategic share buy backs.

Additional corporate information can be found in the Company's corporate presentation and on Headwater's website at www.headwaterexp.com.

FORWARD LOOKING STATEMENTS: This press release contains forward-looking statements. The use of any of the words "guidance", "initial, "anticipate", "scheduled", "can", "will", "prior to", "estimate", "believe", "potential", "should", "unaudited", "forecast", "future", "continue", "may", "expect", "project", and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained herein, including the expectation that by year end 2026 it is estimated more than 9,000 bbls/d will be supported by secondary recovery in Marten Hills West, representing 53% of the area's oil production; the expectation that in Grand Rapids for the balance of 2026 Headwater plans to push the southern pool boundaries with an additional 6-8 producing wells supported by another full section of secondary recovery development; the expectation that by year end 2026, Headwater will have approximately 3 sections and more than 70% of Grand Rapids production supported by secondary recovery; the expectation that by year end 2026 Headwater forecasts secondary recovery supporting approximately 16,000 bbls/day (64% of corporate oil volumes) from approximately 30 sections by year end;  Headwater's forecast of having sustainable corporate declines of approximately 15% and sustaining capital of less than 20% of adjusted funds flow from operations at US$70 WTI, while continuing to show year over year production growth; the timing of results in Greater Pelican; the expectation that the expansion in Greater Pelican will include 4 additional producers supported by 7 additional injectors and that by the fourth quarter of 2026, Headwater will have 6 producing wells with 9 polymer injection wells; the expectation that once the development program is complete, exploration across Greater Pelican will continue with four exploration prospects; the expected timing and results from wells drilled in the Seal area; anticipated terms of the Company's quarterly dividend, including its expectation that it will be designated as an "eligible dividend"; the expectation that with decline rates stabilizing near 15% and evolving technologies continuing to point towards increased recoveries, the Company sees a clear path to asset longevity, lower maintenance capital, and delivering exceptional long-term returns for our shareholders and the Company's ability to focus on shareholder returns through a combination of organic expansion, enhanced oil recovery, dividends and strategic share buybacks. The forward-looking statements contained herein are based on certain key expectations and assumptions made by the Company, including but not limited to the availability of capital, current legislation, receipt of required regulatory approvals, the success of future drilling, development and waterflooding activities, the performance of existing wells, the performance of new wells, Headwater's growth strategy, general economic conditions, availability of required equipment and services, prevailing equipment and services costs, prevailing commodity prices. Although the Company believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because the Company can give no assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, risks associated with the oil and gas industry in general (e.g., operational risks in development, exploration and production; the impact of tariffs and other trade retaliatory measure imposed by the United States, Canada and other countries including the impact on the ability or costs of Canadian oil and gas companies to export their products into the United States; the negative impacts to the Canadian economy and/or the Company's business from developments arising from the July 1, 2026 United States- Mexico – Canada Agreement ("USMCA") joint review, including any future amendments to, extension of, or withdrawal from USMCA; disruptions to the Canadian and global economy resulting from major public health events, the impacts of the Russian-Ukrainian war, U.S.- Israel – Iran war (and other middle eastern conflicts) and United States interventions in Venezuela on the global economy and commodity prices; the impacts of inflation and supply chain issues and steps taken by central banks to curb inflation; pandemics, war, terrorist events, political upheavals and other similar events; events impacting the supply and demand for oil and gas including actions taken by the OPEC+ group; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to production, costs and expenses, and health, safety and environmental risks); commodity price and exchange rate fluctuations; changes in legislation affecting the oil and gas industry and the Company's business uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures; the risk that Headwater's 2026 operating and financial results may not be consistent with its expectations; and the risk that the Company's McCully asset may not resume production when anticipated.  Readers are cautioned that the foregoing list of factors is not exhaustive. Refer to Headwater's Annual Information Form dated March 5, 2026, on SEDAR+ at www.sedarplus.ca, and the risk factors contained therein.

DIVIDEND POLICY: The amount of future cash dividends paid by the Company, if any, will be subject to the discretion of the Board and may vary depending on a variety of factors and conditions existing from time to time, including, among other things, adjusted funds flow from operations, fluctuations in commodity prices, production levels, capital expenditure requirements, acquisitions, debt service requirements and debt levels, operating costs, royalty burdens, foreign exchange rates and the satisfaction of the liquidity and solvency tests imposed by applicable corporate law for the declaration and payment of dividends. Depending on these and various other factors, many of which will be beyond the control of the Company, the Board will adjust the Company's dividend policy from time to time and, as a result, future cash dividends could be reduced or suspended entirely.

BARRELS OF OIL AND CUBIC FEET OF NATURAL GAS EQUIVALENT: The term "boe" (or barrels of oil equivalent) and "Mcf" (or thousand cubic feet of natural gas equivalent) may be misleading, particularly if used in isolation. A boe and Mcf conversion ratio of six thousand cubic feet of natural gas to one barrel of oil equivalent (6 Mcf: 1 bbl) is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Additionally, given that the value ratio based on the current price of crude oil, as compared to natural gas, is significantly different from the energy equivalency of 6:1; utilizing a conversion ratio of 6:1 may be misleading as an indication of value.

INITIAL PRODUCTION RATES: References in this press release to initial production ("IP") rates, other short-term production rates or initial performance measures relating to new wells are useful in confirming the presence of hydrocarbons; however, such rates are not determinative of the rates at which such wells will commence production and decline thereafter and are not indicative of long-term performance or of ultimate recovery. All IP rates presented herein represent the results from wells after all "load" fluids (used in well completion stimulation) have been recovered. While encouraging, readers are cautioned not to place reliance on such rates in calculating the aggregate production for the Company. Accordingly, the Company cautions that the test results should be considered to be preliminary.

NON-GAAP AND OTHER FINANCIAL MEASURES: In this press release, we use various non-GAAP and other financial measures to analyze operating performance and financial position. These non-GAAP and other financial measures do not have standardized meanings prescribed under IFRS and therefore may not be comparable to similar measures presented by other issuers. The term cash flow in this press release is equivalent to adjusted funds flow from operations.

Non-GAAP Financial Measures

Total sales, net of blending expense

Management utilizes total sales, net of blending expense to compare realized pricing to benchmark pricing. It is calculated by deducting the Company's blending expense from total sales. In the interim financial statements blending expense is recorded within blending and transportation expense.

	Three months ended June 30,		Six months ended June 30,
	2026	2025	2026	2025
	(thousands of dollars)		(thousands of dollars)
Total sales	237,928	144,944	414,649	315,099
Blending expense	(10,262)	(6,136)	(17,078)	(13,103)
Total sales, net of blending expense	227,666	138,808	397,571	301,996

Capital expenditures

Management utilizes capital expenditures to measure total cash capital expenditures incurred in the period. Capital expenditures represents capital expenditures – exploration and evaluation and capital expenditures – property, plant and equipment in the statement of cash flows in the Company's interim financial statements.

	Three months ended June 30,		Six months ended June 30,
	2026	2025	2026	2025
	(thousands of dollars)		(thousands of dollars)
Cash flows used in investing activities	78,784	40,781	129,016	103,884
Change in non-cash working capital	2,768	9,923	19,276	9,667
Capital expenditures	81,552	50,704	148,292	113,551

Capital Management Measures

Adjusted Funds Flow from Operations

Management considers adjusted funds flow from operations to be a key measure to assess the Company's management of capital. Adjusted funds flow from operations is an indicator as to whether adjustments are necessary to the level of capital expenditures. For example, in periods where adjusted funds flow from operations is negatively impacted by reduced commodity pricing, capital expenditures may need to be reduced or curtailed to preserve the Company's capital structure and return of capital policy. Management believes that by excluding the impact of changes in non-cash working capital and adjusting for current income taxes in the period, adjusted funds flow from operations provides a useful measure of Headwater's ability to generate the funds necessary to manage the capital needs of the Company. In addition to being a capital management measure, adjusted funds flow from operations is used by management to assess the Company's financial performance.

	Three months ended June 30,		Six months ended June 30,
	2026	2025	2026	2025
	(thousands of dollars)		(thousands of dollars)
Cash flows provided by operating activities	134,566	68,673	174,635	138,608
Changes in non–cash working capital	(13,331)	4,122	40,353	11,010
Current income taxes	(13,541)	(9,683)	(21,080)	(20,453)
Current income taxes	10,055	9,106	21,200	35,412
Restricted cash	-	2,000	-	2,000
Adjusted funds flow from operations	117,749	74,218	215,108	166,577

Adjusted Working Capital

Adjusted working capital is a capital management measure which management uses to assess the Company's liquidity. Financial derivative receivable/liability have been excluded as these contracts are subject to a high degree of volatility prior to settlement and relate to future production periods. Financial derivative receivable/liability are included in adjusted funds flow from operations when the contracts are ultimately realized. Management has included the effects of the repayable contribution to provide a better indication of Headwater's net financing obligations.

				As at June 30, 2026	As at December 31, 2025
			(thousands of dollars)
Working capital				10,199	29,951
Repayable contribution				-	(7,202)
Financial derivative receivable				(1,397)	(393)
Financial derivative liability				216	1,225
Adjusted working capital				9,018	23,581

Non-GAAP Ratios

Adjusted funds flow netback, operating netback and operating netback, including financial derivatives

Adjusted funds flow netback, operating netback and operating netback, including financial derivatives are non-GAAP ratios and are used by management to better analyze the Company's performance against prior periods on a more comparable basis.

Adjusted funds flow netback is defined as adjusted funds flow from operations divided by sales volumes in the period.

Operating netback is defined as sales less royalties, transportation and blending costs and production expense divided by sales volumes in the period. Sales volumes exclude the impact of purchased condensate and butane. Operating netback, including financial derivatives is defined as operating netback plus realized gains (losses) on financial derivatives.

Adjusted funds flow from operations per share

Adjusted funds flow from operations per share is a non-GAAP ratio and is used by management to better analyze the Company's performance against prior periods on a more comparable basis. Adjusted funds flow per share is calculated as adjusted funds flow from operations divided by weighted average shares outstanding on a basic or diluted basis.

Supplementary Financial Measures

Per boe numbers

This press release represents various results on a per boe basis including Headwater average realized sales price, net of blending, realized gains (losses) on financial derivatives per boe, royalty expense per boe, transportation expense per boe, production expense per boe, general and administrative expenses per boe, interest income and other expense per boe, current taxes per boe and settlement of decommissioning liability expense per boe. These figures are calculated using sales volumes.

SOURCE Headwater Exploration Inc.

FOR FURTHER INFORMATION PLEASE CONTACT: HEADWATER EXPLORATION INC., Mr. Neil Roszell, P. Eng., Executive Chairman; HEADWATER EXPLORATION INC., Mr. Jason Jaskela, P.Eng., President and Chief Executive Officer; HEADWATER EXPLORATION INC., Ms. Ali Horvath, CPA, CA, Chief Financial Officer; [email protected], [phone]