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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-270624

SUPPLEMENT NO. 1 TO

PROSPECTUS OF HAMMERHEAD ENERGY INC.

This prospectus supplement amends and supplements the prospectus dated May 1, 2023 as supplemented or amended from time to time (the "Prospectus"), which forms a part of our Registration Statement on Form F-1 (Registration Statement No. 333-270624). This prospectus supplement is being filed to update and supplement the information included or incorporated by reference in the Prospectus with the information contained in our Report on Form 6-K, which was furnished to the Securities and Exchange Commission on May 12, 2023 (the "Q1 Form 6-K"), and the information contained in our Report on Form 6-K, which was furnished to the Securities and Exchange Commission on May 12, 2023 (the "Circular Form 6-K"). Accordingly, we have attached the Q1 Form 6-K and the Circular Form 6-K to this prospectus supplement.

This prospectus supplement updates and supplements the information in the Prospectus and is not complete without, and may not be delivered or utilized except in combination with, the Prospectus, including any amendments or supplements thereto. This prospectus supplement should be read in conjunction with the Prospectus and if there is any inconsistency between the information in the Prospectus and this prospectus supplement, you should rely on the information in this prospectus supplement.

Our Class A Common Shares and Warrants are listed on The Nasdaq Stock Market LLC ("Nasdaq") under the symbols "HHRS" and "HHRSW", respectively, and on the Toronto Stock Exchange (the "TSX") under the symbols "HHRS" and "HHRS.WT," respectively. On May 11, 2023, the last reported sales prices of the Class A Common Shares on Nasdaq and the TSX were $7.25 and C$9.80 respectively, and the last reported sales prices of the Warrants were $1.05 and C$1.43, respectively.

Investing in our securities involves a high degree of risk. You should review carefully the risks and uncertainties described under the heading "Risk Factors" beginning on page 5 of the Annual Report and beginning on page 5 of the Prospectus, and under similar headings in any amendment or supplements to the Prospectus.

Neither the U.S. Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved of the securities offered by this prospectus supplement or the Prospectus or determined if the Prospectus or this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.

This Supplement No. 1 is dated May 12, 2023.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13A-16 OR 15D-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of May 2023

Commission File Number 001-41630

HAMMERHEAD ENERGY INC.

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant's name)

Suite 2700, 525-8th Avenue SW

Calgary, Alberta, T2P 1G1

(403) 930-0560

(Address and telephone number of registrant's principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F ☒ Form 40-F ☐

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DOCUMENTS INCLUDED AS PART OF THIS REPORT

Exhibit
99.1	Consolidated Financial Statements as at and for the three months ended March 31, 2023
99.2	Management's Discussion and Analysis for the three months ended March 31, 2023

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Hammerhead Energy Inc.
Date: May 11, 2023	By:	/s/ Scott Sobie
		Name: Scott Sobie
		Title: President and Chief Executive Officer

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Hammerhead Energy Inc.

Consolidated Financial Statements

As at and for the Three Months Ended
March 31, 2023

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Dated: May 11, 2023

 

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CONDENSED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)

As at
(Cdn$ thousands)	Note		March 31, 2023			December 31, 2022
ASSETS
Current assets
Cash			6,666			8,833
Accounts receivable			79,242			89,235
Prepaid expenses and deposits			9,935			4,564
Risk management contracts	17		40,923			19,293
Total current assets			136,766			121,925
Property, plant and equipment	5		1,766,067			1,644,199
Total assets			1,902,833			1,766,124
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities			189,542			135,547
Current portion of lease obligations	8		1,197			1,180
Risk management contracts	17		7,856			7,286
Total current liabilities			198,595			144,013
Bank debt	6		204,833			179,800
Term debt	7		81,223			78,932
Non-current portion of lease obligations	8		3,640			3,945
Warrant liability	10		42,506			21,971
Decommissioning obligations	9		21,538			23,115
Deferred tax liabilities			57,891			31,720
Total liabilities			610,226			483,496
SHAREHOLDERS' EQUITY
Common share capital	12		1,330,605			585,732
Preferred share capital	12		-			606,131
Contributed surplus			101,313			96,417
Deficit			(139,311	)		(5,652	)
Total shareholders' equity			1,292,607			1,282,628
Total liabilities and shareholders' equity			1,902,833			1,766,124
Subsequent event	10
Commitments	19

See accompanying notes to the consolidated financial statements.

Approved by the Board of Directors,

(signed)	(signed)
Stewart Hanlon	Scott Sobie
Director and Audit Committee Chair	President and Chief Executive Officer

                                           

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CONDENSED INTERIM CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS (UNAUDITED)

			Three Months Ended March 31,
(Cdn$ thousands, except per share amounts)	Note		2023			2022
REVENUE
Oil and gas revenue	15		217,054			189,542
Royalties			(24,925	)		(17,891	)
Oil and natural gas revenue, net of royalties			192,129			171,651
RISK MANAGEMENT CONTRACTS
Realized loss on risk management contracts	17		(240	)		(22,738	)
Unrealized gain (loss) on risk management contracts	17		21,060			(66,492	)
			20,820			(89,230	)
OTHER INCOME			311			241
			213,260			82,662
EXPENSES
Operating			29,859			25,074
Transportation			21,007			16,731
General and administrative			8,112			5,211
Transaction costs	4		8,967			-
Share-based compensation	13		4,794			3,175
Depletion and depreciation	5		50,518			35,734
Finance	16		6,640			5,577
Gain on foreign exchange			(53	)		(2,117	)
Loss (gain) on warrant revaluation	10		10,426			(281	)
Listing expense	4		180,478			-
Total expenses			320,748			89,104
Net loss and comprehensive loss before income taxes			(107,488	)		(6,442	)
Deferred income tax expense			26,171			-
Net loss and comprehensive loss			(133,659	)		(6,442	)
Net loss per common share
Basic 1			(2.68	)		(0.49	)
Diluted 1			(2.68	)		(0.49	)

1 For the period ended March 31, 2022, the Company's basic and diluted earnings per share is the net loss per common share of Hammerhead Resources Inc., and the weighted average common shares outstanding has been scaled by the applicable exchange ratio following the completion of the business combination with DCRD (note 4).

See accompanying notes to the consolidated financial statements.

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CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

For the three months ended
(Cdn$ thousands)	Note		March 31, 2023			March 31, 2022
Common share capital
Balance, beginning of period			585,732			584,275
Common shares converted per business combination	4, 12		(585,732	)		-
Issuance of new common shares per business combination	4, 12		585,732			-
Issuance for exercise of preferred shares	4, 12		606,131			-
Issuance for exercise of 2020 Warrants	4, 10		21,684			-
Issuance to DCRD shareholders	4, 12		109,597			-
Long-term retention program	4, 13		5,793			-
Issuance for exercise of legacy restricted share units and options	12		1,668			-
Balance, end of period			1,330,605			584,275
Preferred share capital
Balance, beginning of period			606,131			606,131
Exercise of preferred shares to common shares	12		(606,131	)		-
Balance, end of period			-			606,131
Contributed surplus
Balance, beginning of period			96,417			83,704
Recognized under share-based compensation plans	13		6,484			4,437
Exercise of restricted share units			(1,588	)		-
Balance, end of period			101,313			88,141
Deficit
Balance, beginning of period			(5,652	)		(230,752	)
Net loss			(133,659	)		(6,442	)
Balance, end of period			(139,311	)		(237,194	)
Total shareholders' equity, beginning of period			1,282,628			1,043,358
Total shareholders' equity, end of period			1,292,607			1,041,353

See accompanying notes to the consolidated financial statements.

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CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

			Three Months Ended March 31,
(Cdn$ thousands)	Note		2023			2022
OPERATING ACTIVITIES
Net loss			(133,659	)		(6,442	)
Adjustments for non-cash items:
Unrealized (gain) loss on risk management contracts	17		(21,060	)		66,492
Share-based compensation	13		4,794			3,175
Depletion and depreciation	5		50,518			35,734
Finance, non-cash	16		2,523			4,144
Unrealized gain on foreign exchange			(166	)		(2,074	)
Loss (gain) on warrant revaluation	10		10,426			(281	)
Deferred income tax expense			26,171			-
Settlement of decommissioning obligations	9		-			(123	)
Transaction costs, non-cash	4, 13, 18		5,793			-
Listing expense, non-cash	4		180,478			-
Change in non-cash working capital	14		(10,277	)		(30,162	)
Net cash from operating activities			115,541			70,463
FINANCING ACTIVITIES
Drawdown of bank debt			57,042			37,000
Repayment of bank debt			(32,000	)		(19,000	)
Settlement of 2013 Warrants	4, 10		(168	)		-
Proceeds from common shares issued			80			-
Payment of lease obligations			(288	)		(251	)
Net cash used in financing activities			24,666			17,749
INVESTING ACTIVITIES
Additions to property, plant and equipment ("PP&E")	5		(172,442	)		(82,488	)
Net change in accounts payable related to the addition of PP&E	14		30,119			(13,026	)
Net cash used in investing activities			(142,323	)		(95,514	)
Net change in cash			(2,116	)		(7,302	)
Cash, beginning of period			8,833			12,239
Foreign exchange revaluation			(51	)		86
Cash, end of period			6,666			5,023

See accompanying notes to the consolidated financial statements.

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NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As at and for the three months ended March 31, 2023 and 2022.

1. REPORTING ENTITY

Hammerhead Energy Inc. ("HEI", "Hammerhead", or the "Company") was incorporated in Alberta on September 1, 2022. Refer to Note 4 Business Combination for additional information on the amalgamation of HEI on February 23, 2023. These unaudited condensed interim consolidated financial statements (the "Interim Financial Statements") are comprised of the accounts of HEI and its wholly owned subsidiaries, Hammerhead Resources ULC and Prairie Lights Power GP Inc., and the prior period amounts are those of Hammerhead Resources Inc., which continued as the operating entity, Hammerhead Resources ULC, following the amalgamation.

HEI is an oil and natural gas exploration, development and production company. HEI's reserves, producing properties and exploration prospects are located in the Deep Basin of West Central Alberta where it is developing multi-zone, liquids-rich oil and gas plays. The Company conducts certain of its operating activities jointly with others through unincorporated joint arrangements and these condensed interim consolidated financial statements reflect only the Company's share of assets, liabilities, revenues and expenses under these arrangements. The Company conducts all of its principal business in one reportable segment.

The Company is controlled by Riverstone Holdings LLC ("Riverstone"). The Company's head office is located at Eighth Avenue Place, East Tower, Suite 2700, 525-8^th Avenue SW, Calgary, Alberta, Canada, T2P 1G1.

2. BASIS OF PRESENTATION

(a) Statement of compliance

The Interim Financial Statements were approved and authorized for issue by the Company's Board of Directors on May 11, 2023. The Interim Financial Statements have been prepared in accordance with International Accounting Standard ("IAS") 34 - Interim Financial Reporting using accounting polices consistent with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").

The Interim Financial Statements should be read in conjunction with the audited annual consolidated financial statements of Hammerhead Resources Inc., as at December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020 and the notes thereto (the "Annual Financial Statements"). Hammerhead Resources Inc. was amalgamated to form Hammerhead Resources ULC, which continues as the operating entity of HEI following the business combination described in note 4. The Interim Financial Statements have been prepared on a basis consistent with the accounting, estimation and valuation policies described in the Annual Financial Statements. Certain information and disclosures normally required to be included in the notes to the Annual Financial Statements prepared in accordance with IFRS have been condensed or omitted in the Interim Financial Statements.

(b) Basis of measurement

The Interim Financial Statements have been prepared on a historical cost basis except for the warrant liability (note 10) and the risk management contracts (note 17), which are measured at fair value.

(c) Functional and presentation currency

The Interim Financial Statements are presented in Canadian dollars ("Cdn$"), which is also the Company's functional currency. All references to US$ or USD are to United States dollars.

(d) Use of estimates and judgements

The preparation of the Interim Financial Statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates.

 

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Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future years affected. Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies are outlined in the Annual Financial Statements.

3. CHANGES IN ACCOUNTING STANDARDS

Effective for periods beginning on or after January 1, 2023, the International Accounting Standard Board has published a new standard, IFRS 17 Insurance, as well as amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors; IAS 12 Income Taxes; and IAS 1 Presentation of Financial Statements. The Company has adopted this standard and these amendments and determined no significant impact to the Company's Interim Financial Statements.

4. BUSINESS COMBINATION

On February 23, 2023, the Company completed a plan of arrangement pursuant to a business combination agreement with Decarbonization Plus Acquisition Corporation IV ("DCRD"), an affiliate of the Company's controlling shareholder, Riverstone, and certain other parties and their respective shareholders. Pursuant to the plan of arrangement, DCRD amalgamated with a wholly owned subsidiary of the Company which was incorporated for the purpose of effecting the business combination to form Hammerhead Energy Inc. ("HEI"). Also pursuant to the plan of arrangement, Hammerhead Resources Inc. ("HHR") amalgamated with a wholly owned subsidiary of DCRD incorporated to effect the business combination to form Hammerhead Resources ULC, a wholly owned subsidiary of HEI. 

HEI's common shares and public warrants are traded on the Nasdaq Stock Market LLC ("Nasdaq") under the symbols "HHRS" and "HHRSW", respectively and the Toronto Stock Exchange ("TSX") under the symbols "HHRS" and "HHRS.WT," respectively. 

As a result of the business combination, the following occurred:

• HHR's 392.6 million common shares were converted to 25.1 million Class A common shares of HEI,

• HHR's 500.9 million preferred shares were converted to 56.1 million Class A common shares of HEI,

• HHR's 35.0 million 2020 Warrants were converted to 1.6 million Class A common shares of HEI,

• HHR's 6.0 million 2013 Warrants were settled for a cash payment of $0.028 per warrant, totaling $0.2 million,

• HHR's limited recourse loans under the long-term retention program of $5.8 million were terminated, and

• 8.0 million DCRD common shares were converted to 8.0 million Class A common shares of HEI.

HEI issued a combined total of 90,778,275 common shares and 28,549,991 warrants to the former shareholders of HHR and DCRD.

The transaction is a business combination under common control and applies IFRS 2 Share Based Payment as DCRD does not meet the definition of a business under IFRS 3 Business Combinations. On closing, the Company accounted for the fair value of the HEI common shares issued to DCRD shareholders at the market price of DCRD's publicly traded common shares on February 23, 2023. The total fair value of the HEI common shares issued to DCRD shareholders was $109.6 million. As part of the amalgamation, HEI acquired cash, prepaid expenses, accounts payable, related party payables and warrant liabilities. The fair value of the shares issued to DCRD shareholders less the sum of the net liabilities acquired was accounted for as listing expense. The following table reconciles the elements of the amalgamation:

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(Cdn$ thousands)		Amalgamation under IFRS 2
Total fair value of consideration
8,032,671 shares at US$10.07 per common share (US$80.9 million)		109,597
less the following
Cash		156
Prepaid expenses		3,705
Less: Accounts payable		(24,179	)
Less: Due to related parties		(18,457	)
Less: Warrant liabilities 1		(32,106	)
Total listing expense		180,478

1 Warrant liabilities include Public Warrants and Private Warrants. See note 10 for additional information.

The listing expense is presented in the condensed interim consolidated statements of loss and comprehensive loss. The related party payables include $9.5 million due to HEI that was eliminated upon closing and $8.9 million due to Riverstone. All related party payable balances were settled as at March 31, 2023.

For the three months ended March 31, 2023, the Company expensed $9.0 million in transaction costs (three months ended March 31, 2022 - nil).

5. PROPERTY, PLANT AND EQUIPMENT ("PP&E")

The following table reconciles movements of PP&E during the year:

(Cdn$ thousands)		Development and Production Assets			Corporate Assets			Right-of-Use Assets			Total
PP&E, at cost:
Balance - December 31, 2021		2,123,153			10,926			6,411			2,140,490
Additions		379,220			1,857			1,451			382,528
Balance - December 31, 2022		2,502,373			12,783			7,862			2,523,018
Additions		171,448			938			-			172,386
Balance - March 31, 2023		2,673,821			13,721			7,862			2,695,404
Accumulated depletion and depreciation
Balance - December 31, 2021		721,852			7,588			2,211			731,651
Depletion and depreciation		144,133			1,982			1,053			147,168
Balance - December 31, 2022		865,985			9,570			3,264			878,819
Depletion and depreciation		49,666			538			314			50,518
Balance - March 31, 2023		915,651			10,108			3,578			929,337
Net book value - December 31, 2022		1,636,388			3,213			4,598			1,644,199
Net book value - March 31, 2023		1,758,170			3,613			4,284			1,766,067

At March 31, 2023, an estimated $2.7 billion in future development costs associated with the proved plus probable undeveloped reserves were included in the calculation of depletion (December 31, 2022 - $2.8 billion).

(a) Capitalization of general and administrative and share-based compensation expenses

During the three months ended March 31, 2023, $1.4 million (year ended December 31, 2022 - $5.1 million) of directly attributable general and administrative expenses and $1.7 million (year ended December 31, 2022 - $4.1 million) of share-based compensation expenses were capitalized to PP&E assets. These amounts directly related to development activities conducted during the period.

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(b) Impairment

At March 31, 2023 and December 31, 2022, the Company assessed its production and development assets for indicators of impairment and none were noted.

6. BANK DEBT

(Cdn$ thousands)		March 31, 2023			December 31, 2022
Syndicated facility 1		204,833			164,800
Operating facility		-			15,000
Total bank debt outstanding		204,833			179,800

1 Included in the syndicated facility is a draw of US$10.0 million. As at March 31, 2023, the US$ draw was translated to Cdn$13.5 million.

The Company's bank debt is held in a credit facility with a syndicate of lenders. Under the amended credit facility, determination of the borrowing base is made by the lenders at their sole discretion, and is subject to re-determinations semi-annually as of May 31^st and November 30^th of the respective year. The amended credit facility consists of a $330.0 million revolving syndicated facility and a $20.0 million operating facility.

As at March 31, 2023, Hammerhead was compliant with all covenants and cross default clauses stated in the amended credit facility agreement. Covenants include reporting requirements and limitations on excess cash, indebtedness, equity issuances, acquisitions, dispositions, hedging, encumbrances, asset retirement obligations, as well as other standard business operating covenants. The Company is not subject to financial covenants. The lenders have first lien on all of the assets held by the Company and its subsidiaries.

Amounts borrowed under the amended credit facility bear interest based on the referenced Canadian prime lending rate or the bankers' acceptance rate in effect, at the Company's option, plus an applicable margin or fee, respectively. The applicable rate is determined by the ratio of first lien indebtedness to earnings before interest, taxes, depreciation, depletion and amortization. The amended credit facility also includes standby fees on balances not drawn.

The following ranges are the applicable prime margin, bankers' acceptance and standby fees:

		Margin on Canadian Prime Rate			Bankers' Acceptance Fee			Standby Fee
Credit facility		1.75% - 5.25%			2.75% - 6.25%			0.69% - 1.56%

Letters of Credit

The Company has guaranteed letters of credit in both Canadian and US dollars. As at March 31, 2023, the Company's Canadian dollar denominated letters of credit were guaranteed through Export Development Canada ("EDC") and totaled $14.3 million (December 31, 2022 - $13.8 million). The Company's US dollar denominated letters of credit totaled US$0.7 million as at March 31, 2023 and December 31, 2022 (Cdn$1.0 million and Cdn$0.9 million, respectively).

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7. TERM DEBT

(Cdn$ thousands)		March 31, 2023			December 31, 2022
2020 Senior Notes - outstanding principal		120,648			120,648
Principal repayment, net of outstanding PIK interest 1		(40,061	)		(42,414	)
Foreign exchange revaluation 2		636			698
Total carrying value of long-term debt		81,223			78,932

1 The Company repaid $78.6 million of principal on its 2020 Senior Notes on September 26, 2022. The repayment is netted with the accumulated PIK interest of $32.1 million. Total accrued unpaid PIK as at March 31, 2023 is $6.4 million.

2  The term debt is issued in US dollars and is revalued to Canadian dollars at each reporting period using the period end foreign exchange rate.

Term debt consists of the 2020 Senior Notes, which have a maturity date of July 10, 2024. The notes bear interest at 12% per annum and provide the option of paying interest as cash or as paid-in-kind ("PIK"). PIK interest is added to the principal balance and is due on maturity.

As at March 31, 2023, the Company was in compliance with all covenants related to term debt. There are no maintenance financial covenants related to the term debt; however, there are standard business operating covenants, as well as covenants that may limit Hammerhead's ability to incur additional debt.

8. LEASE OBLIGATIONS

The Company incurs lease payments related to office facilities in Calgary and Grande Prairie, as well as leased equipment for operations. The Company has recognized lease liabilities measured at the present value of the remaining lease payments using an incremental borrowing rate for the Calgary and Grande Prairie offices of 4.6% and 7.0%, respectively (December 31, 2022 - 4.6% and 7.0%, respectively). The incremental borrowing rate for the leased equipment is 4.7% (December 31, 2022 - 4.7%).

(Cdn$ thousands)		March 31, 2023			December 31, 2022
Balance, beginning of period		5,125			4,957
Additions and modifications		-			1,451
Interest expense		62			257
Lease payments		(350	)		(1,540	)
Balance, end of period		4,837			5,125
Current portion		1,197			1,180
Long-term portion		3,640			3,945

Property taxes associated with the above leases are classified as variable payments not linked to an index. Such items are charged to operating expense and general and administrative expense in the condensed interim consolidated statements of loss and comprehensive loss and are immaterial for further disclosure.

9. DECOMMISSIONING OBLIGATIONS

Decommissioning obligations arise as a result of the Company's net ownership interests in petroleum and natural gas assets including well sites, processing facilities and infrastructure. The following table reconciles the changes in the decommissioning obligation:

(Cdn$ thousands)		March 31, 2023			December 31, 2022
Balance, beginning of period		23,115			29,569
Obligations incurred		667			2,963
Settlements 1		-			(123	)
Change in rates		-			(9,948	)
Change in estimates		(2,414	)		73
Accretion of decommissioning obligations 2		170			581
Balance, end of period		21,538			23,115

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1 For the period ended December 31, 2022, all obligations were indirectly settled through a government subsidy, whereby third party service providers were reimbursed on behalf of HEI.

2 Accretion of the decommissioning obligation due to the passage of time is presented within finance expense in the consolidated statement of loss. See note 16.

At March 31, 2023, key assumptions on which the carrying amount of the decommissioning obligations is based include a risk free rate of 3.3% and an inflation rate of 2.1% (December 31, 2022 - 3.3% and 2.1%, respectively). As at March 31, 2023, the undiscounted and uninflated amount of the estimated cash flows required to settle the obligation is $31.2 million (December 31, 2022 - $30.2 million), which is estimated to be incurred within the next 33 years.

10. WARRANT LIABILITY

The following table summarizes the warrants outstanding:

Number of warrants (000's)		March 31, 2023			December 31, 2022
2020 Warrants		-			35,020
2013 Warrants		-			6,000
Public Warrants		15,812			-
Private Warrants		12,738			-
Total		28,550			41,020

Upon close of the business combination with DCRD (note 4), the 2013 Warrants were settled for a cash payment of $0.028 per warrant and the 2020 Warrants were exercised on a cashless basis and converted to common shares of HEI. The Company also assumed through the business combination, public and private warrants ("Public Warrants" and "Private Warrants", collectively "the Warrants") in connection with the agreement.

The Warrants each entitle their holders to purchase one common share at an exercise price of US$11.50 per common share, which is variable in Cdn$. Accordingly, they are classified as a liability rather than equity as the Warrants do not meet the 'fixed for fixed' requirement. The Warrants became exercisable on March 25, 2023 and will expire on February 23, 2028, or earlier upon redemption or liquidation in accordance with the warrant terms. The Public Warrants are exercisable on a cash basis at the holder's option. The Private Warrants are identical to the Public Warrants, except that the Private Warrants will be exercisable for cash or on a cashless basis, at the holder's option.

At the option of the Company, the Public Warrants may be redeemed at a price of US$0.01 per Warrant, upon at least 30 days' prior written notice, provided that the last reported sales price of the common shares equals or exceeds US$18.00 per common share for any 20 trading days within the 30 trading-day period ending on the third business day prior to the date on which the Company gives notice of such redemption and provided certain other conditions are met.

Further, at the option of the Company, the Public Warrants may also be redeemed at a price of $0.10 per Warrant, upon at least 30 days' prior written notice, if, among other things, the last reported sales price of the common shares equals or exceeds US$10.00 per Common Share on the trading day prior to the date on which notice of the redemption is given. In such a case, Warrant holders will be able to exercise their Warrants prior to redemption for a number of common shares determined by reference to a make-whole table. None of the Private Warrants are redeemable by the Company so long as they are held by the initial purchasers of the Private Warrants or their permitted transferees. All Private Warrants are held by the Company's controlling shareholder, Riverstone.

The Warrants were initially recorded at the fair value acquired through the business combination (note 4). The Warrants are reassessed at the end of each reporting period with subsequent changes in fair value recognized through income as a non-cash item. The Public Warrants are considered a level 1 financial instrument as the valuations at the end of each reporting period are based on the trading price of the Public Warrants on the Nasdaq, which are quoted and observable market prices. The Private Warrants are a level 2 financial instrument, as the valuations are based on the quoted and observable market prices of the Public Warrants.

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The change in fair value of all warrants during the period is summarized in the following table:

(Cdn$ thousands)		2020 Warrants			2013 Warrants			Public Warrants			Private Warrants			Total
Fair value at December 31, 2021		11,189			171			-			-			11,360
Change in fair value		10,614			(3	)		-			-			10,611
Fair value at December 31, 2022		21,803			168			-			-			21,971
Warrants acquired		-			-			17,782			14,324			32,106
Change in fair value		(119	)		-			5,840			4,705			10,426
Foreign exchange revaluation		-			-			(80	)		(65	)		(145	)
Exercise of warrants		(21,684	)		(168	)		-			-			(21,852	)
Fair value at March 31, 2023		-			-			23,542			18,964			42,506

Subsequent event

On April 27, 2023 the Company announced that it had commenced a substantial issuer bid (the "Offer") to purchase for cancellation up to 20,000,000 of its Warrants at the purchase price of US$1.00 per Warrant. The Offer will remain open for acceptance until 5:00 p.m. (Eastern Daylight Time) on June 2, 2023, unless withdrawn, extended or varied by HEI. The Offer will be for up to 20,000,000 of HEI's Warrants, which is approximately 70% of the total number of issued and outstanding Warrants. The Company expects to fund the Offer from cash on hand or by drawing on existing credit facilities.

11. EQUITY COMMITMENT

Upon the close of the business combination with DCRD (note 4), any remaining equity commitments with HHR were terminated.

12. SHARE CAPITAL

(a) Common shares

Authorized

HEI is authorized to issue an unlimited number of Class A common shares ("Common Shares") and first preferred shares (the "First Preferred Shares") in an amount equal to not more than 20% of the number of issued and outstanding Common Shares at the time of issuance of any First Preferred Shares.

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Issued and Outstanding

The following table summarizes common shares issued and outstanding as at March 31, 2023:

		Number of Shares (000's)			Amount (Cdn$ thousands)
Balance, December 31, 2022		392,561			585,732
Common shares converted per business combination		(392,561	)		(585,732	)
Issuance of new common shares per business combination		25,085			585,732
Issuance for exercise of preferred shares		56,068			606,131
Issuance for exercise of 2020 Warrants		1,592			21,684
Issuance to DCRD shareholders		8,033			109,597
Long term retention program		-			5,793
Exercise of legacy restricted share units and options		153			1,668
Balance, March 31, 2023		90,931			1,330,605

Upon the close of the business combination with DCRD (note 4), Hammerhead Energy Inc. issued 90.8 million Common Shares to the shareholders of DCRD and HHR.

(b) Preferred shares

As of December 31, 2022, HHR had 500.9 million preferred shares outstanding at a carrying amount of $606.1 million. These shares were Series I through VI and IV though IX, first preferred shares issued in various years. Upon the close of the business combination with DCRD (note 4), the outstanding preferred shares were converted to 50.1 million common shares of HEI, with no change to the carrying amount of $606.1 million.

(c) Per share amounts

The Company uses the treasury stock method to determine the dilutive effect of stock options, restricted share units ("RSUs"), warrants and convertible preferred shares. Under this method, only "in-the-money" dilutive instruments impact the calculation of diluted loss per common share.

The following table outlines the adjustments made to net loss, in computing the basic and diluted net loss per common share for the periods ended March 31, 2023 and 2022:

		Three Months Ended March 31,
(Cdn$ thousands)		2023			2022
Net loss 1		(133,659	)		(6,442	)
Effect of Series VII cumulative preferred share dividends 1,2		(4,090	)		(5,883	)
Net loss attributable to ordinary equity holders, basic and diluted 1		(137,749	)		(12,325	)

1 For the period ended March 31, 2022, the Company's net loss and net loss attributable to ordinary shareholders, basic and diluted, refers to Hammerhead Resources Inc..

2 For the period ended March 31, 2023, the effect of Series VII cumulative preferred share dividends has been incorporated up until the close of the business combination with DCRD (note 4).

In computing the diluted loss per common share for the periods ended March 31, 2023, and 2022 the Company excluded the effect of all preferred shares, share options, RSUs and warrants as they were anti-dilutive.

The following table outlines the weighted average number of common shares outstanding used in the calculation of basic and diluted net loss per common share:

		Three Months Ended March 31,
Number of shares (000's)		2023			2022
Weighted average common shares outstanding, basic and diluted 1		51,395			24,994

1 For the period ended March 31, 2022, the Company's weighted average common shares outstanding, basic and diluted refers to Hammerhead Resources Inc., and has been scaled by the applicable exchange ratio following the completion of the business combination with DCRD (note 4).

 

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13. SHARE-BASED COMPENSATION

Legacy Stock Options

Following the business combination (note 4) HEI's stock options were converted to legacy stock options. Legacy options to acquire common shares were granted to officers and employees from time to time under the Company's legacy stock option plan. Options granted under this plan are to be settled through the issuance of new common shares of the Company and have a maximum term of ten years to expiry. Following the close of the business combination with DCRD (note 4), each legacy option granted permits the holder to purchase one common share of the Company for $7.83 per share.

The following table summarizes information regarding legacy stock options outstanding at March 31, 2023:

		Number of Options (000's)
Issued February 23, 2023		672
Exercised		(8	)
Balance at March 31, 2023		664
Exercisable at March 31, 2023		664

Legacy Restricted Share Units

Following the business combination (note 4) HEI's restricted share units ("RSUs") were converted to legacy RSUs. Under the Company's legacy RSU plan, they were awarded to officers and employees from time to time. The legacy RSUs granted under this plan are to be settled through the issuance of common shares of the Company and have a maximum term of five years to expiry. Following the close of the business combination with DCRD (note 4), each legacy RSU granted permits the holder to purchase one common share of the Company for $0.16 per share.

The following table summarizes information regarding legacy RSUs outstanding at March 31, 2023:

		Number of RSUs (000's)
Issued February 23, 2023		5,330
Exercised		(146	)
Balance at March 31, 2023		5,184
Exercisable at March 31, 2023		5,184

Long-Term Retention Program

Upon the close of the business combination with DCRD (note 4), the loans under the long-term retention program were terminated. The loss on the loans was recognized in transaction costs in the condensed interim consolidated statements of loss and comprehensive loss.  Total value of the loans outstanding as of February 23, 2023 was $5.8 million.

Share-Based Compensation Expense

The total fair value associated with share options and RSUs is recognized over the service period using cliff or graded vesting, resulting in share-based compensation expense as outlined in the following table:

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		Three Months Ended March 31,
(Cdn$ thousands)		2023			2022
Share-based compensation payments		6,484			4,437
Capitalized to developed and producing assets		(1,690	)		(1,262	)
Share-based compensation expense		4,794			3,175

Upon the close of the business combination with DCRD (note 4), all legacy share options and RSUs vested, resulting in net share-based compensation expense of $4.4 million for the period ended March 31, 2023.

14. SUPPLEMENTAL INFORMATION

Cash Flow Presentation

Changes in non-cash working capital and cash interest transactions are summarized in the following table:

		Three Months Ended March 31,
(Cdn$ thousands)		2023			2022
Source (use) of cash:
Accounts receivable		9,993			(28,897	)
Prepaid expenses and deposits		(5,371	)		433
Accounts payable and accrued liabilities		53,995			(14,724	)
Non-cash working capital acquired		(38,775	)		-
		19,842			(43,188	)
Relating to:
Related to operating activities		(10,277	)		(30,162	)
Related to investing activities		30,119			(13,026	)
		19,842			(43,188	)
Other:
Interest paid		4,113			1,474
Interest received		-			3

15. REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company's revenue from contracts with customers consists of crude oil and natural gas sales, treating, processing & gathering income and transportation income.

Hammerhead's crude oil and field condensate, natural gas and natural gas liquids are generally sold under variable price contracts. The transaction price for variable priced contracts is based on the commodity market price, adjusted for quality, location or other factors. Hammerhead is required to deliver nominated volumes of crude oil and field condensate, natural gas and natural gas liquids to the contract counterparty. Each barrel equivalent of commodity delivered is considered to be a distinct performance obligation. The amount of revenue recognized is based on the agreed transaction price and is recognized as performance obligations are satisfied, therefore resulting in revenue recognition in the same month as delivery. Revenues are typically collected on the 25th day of the month following production.

Treating and processing & gathering fees charged to third parties are generally sold under multi-year contracts at fixed fees that vary by volume.

The following table presents the Company's revenue from contracts with customers, disaggregated by revenue source:

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		Three Months Ended March 31,
(Cdn$ thousands)		2023			2022
Crude oil & field condensate		132,480			102,986
Natural gas		61,098			58,638
Natural gas liquids ("NGL")		23,476			27,918
Total oil and gas revenue		217,054			189,542
Treating, processing & gathering		295			366
Total revenue from contracts with customers		217,349			189,908

Included in accounts receivable at March 31, 2023 was $67.4 million (March 31, 2022 - $75.0 million) of accrued oil and natural gas sales, which was collected subsequent to quarter end.

HEI has applied the practical expedient to recognize revenue in the amount to which the Company has the right to invoice. As such, no disclosure is included relating to the amount of transaction price allocated to remaining performance obligations and when these amounts are expected to be recognized as revenue.

16. FINANCE EXPENSE

		Three Months Ended March 31,
(Cdn$ thousands)		2023			2022
Interest on term debt - PIK		2,353			4,020
Interest and fees on bank debt		3,915			1,347
Interest on lease obligation		62			61
Interest on EDC facility - letters of credit		140			25
Accretion of decommissioning obligations		170			124
Total finance expense		6,640			5,577

17. FINANCIAL INSTRUMENTS, FAIR VALUES AND RISK MANAGEMENT

(a) Fair values of financial instruments

The Company classifies fair value measurements using a fair value hierarchy that reflects the significance of the observable inputs used in making the measurements. The fair value hierarchy has the following levels:

• Level 1 - Values are based on unadjusted quoted prices available in active markets for identical assets or liabilities as of the reporting date.

• Level 2 - Values are based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be substantially observed or corroborated in the marketplace. Prices in level 2 are either directly or indirectly observable as of the reporting date.

• Level 3 - Values are based on prices or valuation techniques that are not based on observable market data.

Assessment of the significance of a particular observable input to the fair value measurement requires judgement and may affect the placement within the fair value hierarchy. The Company has estimated the fair value amounts using appropriate valuation methodologies and information available to management as of the valuation dates. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it was practicable to estimate that value:

• Cash, accounts receivable, accounts payable and accrued liabilities - The carrying amounts approximate fair value due to the short-term maturity of these instruments.

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• Bank debt and term debt - The bank debt and term debt are valued at amortized cost. The amortized costs approximates the fair value of both the bank debt and term debt.

• Risk management contracts - The fair value of the risk management contracts are a level 2 in the fair value hierarchy. Risk management contracts are valued using valuation techniques with observable market inputs. The most frequently applied valuation techniques include forward pricing and swap models using present value calculations and third-party option valuation models. The models incorporate various inputs including the foreign exchange spot and forward rates, and forward rate curves and volatilities of the underlying commodity.

• Warrant liability - The fair value of the Public Warrant liability is classified as level 1, and the Private Warrant liability is classified as level 2 in the fair value hierarchy. Inputs to the change in fair value of the warrant liability are disclosed in note 10.

During the three months ended March 31, 2023 and 2022, there were no transfers of any financial assets or liabilities between levels.

(b) Risk management

The Company's activities expose it to a variety of financial risks that arise as a result of its exploration, development, production and financing activities such as:

• Credit risk

• Liquidity risk

• Market risk

(i) Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's accounts receivable from joint operators and oil and gas marketers.

Risk Management Contracts

HEI's risk management contracts are subject to master netting agreements that create a legally enforceable right to offset by counterparty, where the currency and timing of settlement are the same. The following is a summary of HEI's financial assets and financial liabilities and associated amounts subject to offsetting at March 31, 2023 and December 31, 2022. The net asset amounts represent the maximum exposure to credit risk for risk management contracts at each reporting date.

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(ii) Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company addresses its liquidity risk through its capital management of cash, working capital, credit facility capacity, and equity issuances along with its planned capital expenditure program. At March 31, 2023, the Company had $145.2 million borrowing capacity under the credit facility.

In the next twelve months, HEI's credit facility will undergo two borrowing base redeterminations. The Company has determined that its current financial obligations, including current commitments (note 19), are adequately funded from the available borrowing capacity and from funds derived from operations. However, any reduction in the borrowing base could result in a material impact to HEI's liquidity. Management believes that future funds generated from operations and available borrowing capacity will be sufficient to settle HEI's financial liabilities.

(iii) Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and commodity prices will affect the Company's income or the value of its financial instruments. The objective of market risk management is to manage and control market risk exposure within acceptable parameters, while optimizing the return.

Commodity Price Risk

Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for oil and natural gas are impacted not only by the relationship between the Canadian and United States dollars but also worldwide economic events that influence supply and demand.

HEI enters into risk management contracts to manage its exposure to commodity price fluctuations, which have served to protect and provide certainty on a portion of the Company's cash flows.

The following tables list the fair value of all outstanding risk management contracts by commodity type:

The following table summarizes commodity risk management contracts outstanding as at March 31, 2023:

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The following tables show the breakdown of realized and unrealized gains and losses recognized by commodity type:

The Company's operational results and financial condition are largely dependent on the commodity price received for its oil and natural gas production. Commodity prices have fluctuated widely in recent years due to global and regional factors including supply and demand fundamentals, inventory levels, weather, economic and geopolitical factors.

(c) Capital management

Hammerhead's objective when managing capital is to maintain a flexible capital structure and sufficient liquidity to meet its financial obligations and to execute its business plans. The Company considers its capital structure to include shareholders' equity, the funds available under outstanding debt and equity agreements, funds from operations and adjusted working capital. Modifications to Hammerhead's capital structure can be accomplished through issuing common and preferred shares, issuing new debt, adjusting capital spending and acquiring or disposing of assets, though there is no certainty that any of these additional sources of capital would be available if required.

Hammerhead's short-term capital management objective is to fund its capital expenditures using primarily funds from operations, noting value-creating activities may be financed with a combination of funds from operations and other sources of capital. Annualized adjusted EBITDA indicates the Company's ability to generate funds from its asset base on a continuing basis, for future development of its capital program and settlement of financial obligations. Annualized adjusted EBITDA is not a standardized measure and therefore may not be comparable with the calculation of similar measures by other entities.

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		Three Months Ended March 31,
(Cdn$ thousands)		2023			2022
Net loss before income tax		(107,488	)		(6,442	)
Add (deduct):
Unrealized (gain) loss on risk management contracts		(21,060	)		66,492
Transaction costs		8,967			-
Share-based compensation		4,794			3,175
Depletion and depreciation		50,518			35,734
Finance expense		6,640			5,577
Gain on foreign exchange		(53	)		(2,117	)
Loss (gain) on warrant liability		10,426			(281	)
Listing expense		180,478			-
Other income, excluding transportation income		(311	)		(241	)
Adjusted EBITDA		132,911			101,897
Annualized adjusted EBITDA		531,644			407,588

Previously, working capital was computed including risk management contracts, the current portion of lease obligations and current bank debt. As at March 31, 2023 and December 31, 2022 adjusted working capital has been computed excluding these items. The current presentation of adjusted working capital is aligned with measures used by Management to monitor its liquidity for use in budgeting and capital management decisions. Net debt is used to assess and monitor liquidity at a point in time, while net debt to annualized adjusted EBITDA assists the Company in monitoring its capital structure and financing requirements. Net debt and net debt to annualized adjusted EBITDA are not standardized measures and therefore may not be comparable with the calculation of similar measures by other entities.

(Cdn$ thousands)		March 31, 2023			December 31, 2022
Cash		(6,666	)		(8,833	)
Accounts receivable		(79,242	)		(89,235	)
Prepaid expenses and deposits		(9,935	)		(4,564	)
Accounts payable and accrued liabilities		189,542			135,547
Adjusted working capital deficit		93,699			32,915
Total bank debt		204,833			179,800
Total term debt		81,223			78,932
Total net debt		379,755			291,647
Annualized adjusted EBITDA		531,644			407,588
Net debt to annualized adjusted EBITDA		0.7			0.7

18. RELATED PARTY TRANSACTIONS

All related party transactions occurred in the normal course of operations.

On February 23, 2023, the Company completed a plan of arrangement pursuant to a business combination with DCRD with Decarbonization Plus Acquisition Corporation IV ("DCRD"), an affiliate of the Company's controlling shareholder, Riverstone, and certain other parties and their respective shareholders. During the three months ended March 31, 2023, HEI incurred $9.2 million in expenses due to Riverstone as part of the liabilities acquired through the business combination. As of March 31, 2023, the Company does not have any outstanding payables due to Riverstone.

Upon close of the business combination with DCRD (note 4) the Company terminated $5.6 million in limited recourse loans previously advanced to key management personnel.

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19. COMMITMENTS AND CONTRACTUAL OBLIGATIONS

The Company enters into commitments and contractual obligations in the normal course of operations. Commitments include short-term drilling rig contracts, operating costs for office leases, and firm transportation and processing agreements. Although transportation and processing commitments are required to ensure access to sales markets, the Company actively manages the commitment portfolio to ensure firm commitment levels are in line with future development plans and diversified to multiple sales markets. The Company's firm transportation and processing agreements are terminable in very limited circumstances. If the Company does not meet the commitments with produced volumes, it will be obligated to pay the commitment.

Contractual obligations are comprised of liabilities to third parties incurred for the purpose of managing the Company's capital structure, the liability portion of office building leases, risk management contracts, and decommissioning liabilities. HEI does not have guarantees or off-balance sheet arrangements other than as disclosed.

The following table is a summary of the Company's commitments and contractual obligations as at March 31, 2023:

(Cdn$ thousands)		1 Year			2-3 Years			4-5 Years			Thereafter			Total
Firm transportation & processing		103,626			230,077			200,520			321,628			855,851
Office buildings 1		959			1,632			1,428			-			4,019
Drilling services		2,100			-			-			-			2,100
Total annual commitments		106,685			231,709			201,948			321,628			861,970
Accounts payable and accrued liabilities		189,542			-			-			-			189,542
Bank indebtedness - principal 2		-			204,833			-			-			204,833
Bank indebtedness - interest		16,567			2,726			-			-			19,293
Term debt - principal		-			89,007			-			-			89,007
Term debt - PIK interest		-			5,192			-			-			5,192
Lease obligations 3		1,407			2,284			1,662			-			5,353
Risk management contracts		7,856			-			-			-			7,856
Decommissioning obligations 3		-			-			-			31,193			31,193
Total contractual obligations		215,372			304,042			1,662			31,193			552,269
Total future payments		322,057			535,751			203,610			352,821			1,414,239

1 Relates to non-lease components and non-indexed variable payments.

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2 The Company's credit facility is subject to a semi-annual borrowing base review at the sole discretion of the lenders. See note 6 for additional information.

3 These values are undiscounted and will differ from the amounts presented elsewhere in the Interim Financial Statements.

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Hammerhead Energy Inc.

 

Management's Discussion and Analysis

As at and for the Three Months Ended

March 31, 2023

 

 

Dated: May 11, 2023

 

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Management Discussion and Analysis

In this management's discussion and analysis ("MD&A"), unless otherwise indicated or the context otherwise requires, the terms "we", "us", "our", "HEI", "Hammerhead" and "the Company" refers to Hammerhead Energy Inc., as the parent corporation. Hammerhead Energy Inc. was incorporated pursuant to the provisions of the Business Corporations Act (Alberta). This MD&A is comprised of the accounts of HEI and its wholly owned subsidiaries, Hammerhead Resources ULC and Prairie Lights Power GP Inc., and prior period amounts are those of Hammerhead Resources Inc. ("HHR"), the operating entity prior to amalgamation.

On February 23, 2023, the Company completed a plan of arrangement pursuant to a business combination agreement with Decarbonization Plus Acquisition Corporation IV ("DCRD"), an affiliate of the Company's controlling shareholder, Riverstone Holdings LLC ("Riverstone"), and certain other parties and their respective shareholders. Pursuant to the plan of arrangement, DCRD amalgamated with a wholly owned subsidiary of the Company which was incorporated for the purpose of effecting the business combination to form Hammerhead Energy Inc. Also pursuant to the plan of arrangement, the operating entity, HHR amalgamated with a wholly owned subsidiary of DCRD incorporated to effect the business combination to form Hammerhead Resources ULC, a wholly owned subsidiary of HEI. See the subsection "Business Combination" in this MD&A for further information.

HEI also has a wholly owned subsidiary, Prairie Lights Power GP Inc., incorporated on March 11, 2019, and an associated limited partnership, Prairie Lights Power Limited Partnership. The power related project has no active operations as at the date of this MD&A.

The Company is controlled by Riverstone and its affiliates. The Company's head office is located at Eighth Avenue Place, East Tower, Suite 2700, 525-8th Avenue SW, Calgary, Alberta, T2P 1G1.

Hammerhead is an oil and natural gas exploration, development and production company. Hammerhead's reserves, producing properties and exploration prospects are located in the province of Alberta in the Deep Basin of West Central Alberta where it is developing multi-zone, liquids-rich oil and gas plays. The consolidated financial statements of the Company, as well as other information relating to the Company can be found on SEDAR at www.sedar.com and EDGAR at www.sec.gov/edgar under the profile for Hammerhead Energy Inc.

The following MD&A provides management's analysis of the Company's results of operations and financial position as at and for the three months ended March 31, 2023 and March 31, 2022. This MD&A is dated May 11, 2023 and should be read in conjunction with the unaudited condensed interim consolidated financial statements as at and for the three months ended March 31, 2023 (the "Interim Financial Statements"), the audited consolidated financial statements of HHR as at and for the years ended December 31, 2022, December 31, 2021 and December 31, 2020 (the "2022 Financial Statements") and the 2022 annual MD&A (the "Annual MD&A") of HHR.

This MD&A contains forward-looking statements and non-GAAP measures. Readers are cautioned that the MD&A should be read in conjunction with the Company’s disclosures under the headings “Forward-Looking Statements” and “Other Advisories - Non-GAAP and Other Specified Financial Measures” included at the end of this MD&A. Refer to the "Non-GAAP and Other Specified Financial Measures" section of this MD&A for reconciliations and information regarding the following measures and ratios used in this MD&A: "capital expenditures", "available funding", "operating netback", "funds from operations", "adjusted funds from operations", "free funds flow", operating netback per boe", "funds from operations per boe", "funds from operations per basic share and diluted share", "corporate netback per boe", "adjusted funds from operations per basic and diluted share", "adjusted EBITDA", "annualized adjusted EBITDA", "adjusted working capital", "net debt", "net debt to adjusted EBITDA" and "net debt to annualized adjusted EBITDA".

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All financial information has been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") as set out in Part I of the CPA Canada Handbook - Accounting, using accounting policies consistent with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").

Unless otherwise noted, all financial information provided herein is reported in Canadian dollars and tabular dollar amounts are presented in thousands. Production volumes are presented on a working-interest basis before royalties.

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Operational and Financial Summary

		Three Months Ended March 31,
(Cdn$ thousands, except per share amounts, production and unit prices)		2023			2022			% Change
Production volumes
Crude oil (bbls/d)		14,813			9,874			50
Natural gas (Mcf/d)		127,322			113,703			12
Natural gas liquids (bbls/d)		3,958			4,030			(2	)
Total (boe/d)		39,992			32,854			22
Liquids weighting %		47			42
Oil and gas revenue ($/boe)		60.31			64.10			(6	)
Operating netback ($/boe) 1		39.18			36.22			8
Oil and gas revenue		217,054			189,542			15
Operating netback 2		141,023			107,108			32
Net cash from operating activities		115,541			70,463			64
Per common share - basic 3		2.25			2.82			-20
Per common share - diluted 3		2.25			2.82			-20
Adjusted funds from operations 4		128,794			100,464			28
Per common share - basic 3,5		2.51			4.02			-38
Per common share - diluted 3,5		2.51			4.02			-38
Corporate netback ($/boe) 6		35.78			33.98			5
Net loss		(133,659	)		(6,442	)		1,975
Net loss attributable to ordinary equity holders		(137,749	)		(12,325	)		1,018
Per common share - basic 3		(2.68	)		(0.49	)		447
Per common share - diluted 3		(2.68	)		(0.49	)		447
Net cash used in investing activities		142,323			95,514			49
Capital expenditures 7		172,442			82,488			109
Free funds flow 8		(43,648	)		17,853			N/A
Weighted average common shares outstanding 9
Basic 3		51,395			24,994			106
Diluted 3		51,395			24,994			106

		As at March 31,
FINANCIAL		2023			2022
Adjusted working capital deficit 10		93,699			16,470
Available funding 11		51,468			206,930
Net debt 12		379,755			277,549

1 Operating netback per boe is a non-GAAP measure. Oil and gas revenue per boe is the most directly comparable GAAP measure to operating netback per boe. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

2 Operating netback is a non-GAAP measure. Oil and gas revenue is the most directly comparable GAAP measure to operating netback. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

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3 In comparative periods, per common share amounts are Hammerhead Resources Inc. The weighted average common shares outstanding in these periods has been scaled by the applicable exchange ratio following the completion of the business combination with DCRD. Refer to the subsection "Business Combination".

4 Adjusted funds from operations is a non-GAAP measure. Net cash from operating activities is the most directly comparable GAAP measure to adjusted funds from operations. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

5 Adjusted funds from operations per basic and diluted common share are non-GAAP measures. Net cash from operating activities per basic and diluted share are the most directly comparable GAAP measure to adjusted funds from operations per basic and diluted common share. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

6 Corporate netback per boe is a non-GAAP measure. Net cash from operating activities per boe is the most directly comparable GAAP measure for corporate netback per boe. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

7 Capital expenditures is a non-GAAP measure. Net cash used in investing activities is the most directly comparable GAAP measure to capital expenditures. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

8 Free funds flow is a non-GAAP measure. Net cash from operating activities is the most directly comparable GAAP measure to free funds flow. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

9 HEI has 90,973,622 Class A common shares, 28,549,991 warrants, 5,141,802 legacy RSUs, 664,328 legacy options, and 1,945,115 restricted share awards issued and outstanding as of the date of this MD&A.

10 Adjusted working capital deficit is a capital management measure. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

11 Available funding is a non-GAAP measure. Working capital deficit is the most directly comparable GAAP measure to available funding. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

12 Net debt is a capital management measure. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

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First Quarter 2023 Operating and Financial Highlights:

• Production averaged 39,992 boe/d in the first quarter of 2023, a 7,138 boe/d increase from the same period of 2022. New production from 24 gross (22.05 net) wells brought on-stream since March 31, 2022 offset production declines on existing wells.

• The Company's liquids weighting was 47% during the first quarter of 2023, compared to 42% in the same period of 2022. The increase was driven by high oil production from multiple pads brought on-stream throughout 2023 in the Karr area.

• Oil and gas revenue for the three months ended March 31, 2023 and 2022 was $217.1 million and $189.5 million, respectively. Oil and gas revenue is the most directly comparable GAAP measure for operating netback, which is a non-GAAP measure. Operating netback was $141.0 million or $39.18/boe for the first quarter of 2023, reflecting an increase of $33.9 million or $2.96/boe from the same period of 2022. The increase was driven by a $7.62/boe decrease in realized losses on risk management contracts, partially offset by a decrease in commodity pricing which reduced revenue by $3.79/boe.

• Net cash from operating activities for the three months ended March 31, 2023 and 2022 was $115.5 million and $70.5 million, respectively. Net cash from operating activities is the most directly comparable GAAP measure for funds from operations, which is a non-GAAP measure. Funds from operations was $125.8 million during the first quarter of 2023, a $25.1 million or 25% increase from the same quarter of 2022. The increase is primarily driven by a $33.9 million increase in operating netback.

• The Company reported a net loss of $133.7 million for the three months ended March 31, 2023, compared to a net loss of $6.4 million in the same period of 2022. The $127.2 million increase in loss was primarily due to $180.5 million in listing expenses, a $26.2 million increase in deferred income tax, a $14.8 million increase in depletion and depreciation, and a $10.7 million change in fair value of warrants. The increased expenses were partially offset by an $87.6 million increase in unrealized gain on risk management contracts.

• Net cash used in investing activities for the three months ended March 31, 2023 and 2022 was $142.3 million and $95.5 million, respectively. Net cash used in investing activities is the most directly comparable GAAP measure for capital expenditures, which is a non-GAAP measure. Capital expenditures during the first quarter of 2023 were $172.4 million, with the Company focusing its investments on well development activities in both the Karr and Gold Creek areas, along with spending on non-well activities in the Karr area. In Karr, the Company completed and tied in a seven gross (seven net) well pad, which came on-stream in March 2023, as well as the drill of five wells on a 12 gross (12 net) well pad, expected to be on-stream in the third quarter of 2023. In Gold Creek, the Company drilled, partially completed and partially tied-in a seven gross (seven net) well pad, which is expected to be on-stream in the second quarter of 2023.

• Effective February 23, 2023, the Company completed the business combination with DCRD.

Business Combination

On February 23, 2023, the Company completed a plan of arrangement pursuant to a business combination agreement with DCRD, an affiliate of the Company's controlling shareholder, Riverstone, and certain other parties and their respective shareholders. Pursuant to the plan of arrangement, DCRD amalgamated with a wholly owned subsidiary of the Company which was incorporated for the purpose of effecting the business combination to form Hammerhead Energy Inc. Also pursuant to the plan of arrangement, HHR amalgamated with a wholly owned subsidiary of DCRD incorporated to effect the business combination to form Hammerhead Resources ULC, a wholly owned subsidiary of HEI. 

HEI's common shares and warrants are publicly traded on the Nasdaq Stock Market LLC ("Nasdaq") under the symbols "HHRS" and "HHRSW", respectively and the Toronto Stock Exchange ("TSX") under the symbols "HHRS" and "HHRS.WT," respectively. 

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As a result of the business combination, the following occurred:

• HHR's 392.6 million common shares were converted to 25.1 million Class A common shares of HEI,

• HHR's 500.9 million preferred shares were converted to 56.1 million Class A common shares of HEI,

• HHR's 35.0 million 2020 Warrants were converted to 1.6 million Class A common shares of HEI,

• HHR's 6.0 million 2013 Warrants were settled for a cash payment of $0.028 per warrant, totaling $0.2 million,

• HHR's limited recourse loans under the long-term retention program of $5.8 million were terminated, and

• 8.0 million DCRD common shares were converted to 8.0 million Class A common shares of HEI.

HEI issued a combined total of 90,778,275 common shares and 28,549,991 warrants to the former shareholders of HHR and DCRD.

The transaction is a business combination under common control and applies IFRS 2 Share Based Payment as DCRD does not meet the definition of a business under IFRS 3 Business Combinations. On closing, the Company accounted for the fair value of the HEI common shares issued to DCRD shareholders at the market price of DCRD's publicly traded common shares on February 23, 2023. The total fair value of the HEI common shares issued to DCRD shareholders was $109.6 million. As part of the amalgamation, HEI acquired cash, prepaid expenses, accounts payable, related party payables and warrant liabilities. The fair value of the shares issued to DCRD shareholders less the sum of the net liabilities acquired was accounted for as listing expense. The following table reconciles the elements of the amalgamation:

(Cdn$ thousands)		Amalgamation under IFRS 2
Total fair value of consideration
8,032,671 shares at US$10.07 per common share (US$80.9 million)		109,597
less the following
Cash		156
Prepaid expenses		3,705
Less: Accounts payable		(24,179	)
Less: Due to related parties		(18,457	)
Less: Warrant liabilities 1		(32,106	)
Total listing expense		180,478

1 Warrant liabilities include Public Warrants and Private Warrants.

The listing expense is presented in the condensed interim consolidated statements of loss and comprehensive loss. The related party payables include $9.5 million due to HEI that was eliminated upon closing and $8.9 million due to Riverstone. All related party payable balances were settled as at March 31, 2023.

For the three months ended March 31, 2023, the Company expensed $9.0 million in transaction costs (three months ended March 31, 2022 - nil).

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Results of Operations

Production

		Three Months Ended March 31,
		2023			2022			% Change
Crude oil and field condensate (bbls/d)		14,813			9,874			50
Natural gas (Mcf/d)		127,322			113,703			12
Natural gas liquids (bbls/d)		3,958			4,030			(2	)
Total (boe/d)		39,992			32,854			22
Liquids weighting %		47			42

Average production during the three months ended March 31, 2023, was 39,992 boe/d, up 22% from the first quarter of 2022. The growth in production reflects 24 gross (22.05 net) wells brought on-stream since March 31, 2022, which offset production declines on existing wells.

The Company's liquids weighting was 47% for the three months ended March 31, 2023, compared to 42% for the same period in 2022. The increase in liquids weighting was driven by higher oil production from multiple pads brought on-stream throughout 2023 in the Karr area.

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Realized Prices and Benchmark Prices

		Three Months Ended March 31,
(Per unit amounts)		2023			2022			% Change
Average Realized Prices
Crude oil and field condensate ($/bbl)		99.37			115.89			(14	)
Natural gas ($/Mcf) 1		5.33			5.73			(7	)
Natural gas liquids ($/bbl)		65.90			76.98			(14	)
Total ($/boe)		60.31			64.10			(6	)
Benchmark Prices
Crude oil
WTI (Cdn$/bbl)		102.88			119.53			(14	)
Edmonton Light Sweet (Cdn$/bbl)		99.02			115.76			(14	)
WTI/Edmonton Light Sweet (Cdn$/bbl)		(3.86	)		(3.77	)		2
Natural gas
AECO 5A (Cdn$/GJ)		3.06			4.49			(32	)
AECO 5A (Cdn$/Mcf) 2		3.26			4.79			(32	)
NYMEX (US$/MMBtu)		3.43			4.91			(30	)
NYMEX (Cdn$/Mcf) 2		4.68			6.28			(25	)
Union-Dawn (US$/MMBtu)		2.73			4.42			(38	)
Union-Dawn (Cdn$/Mcf) 2		3.72			5.65			(34	)
Chicago City-Gate (US$/MMBtu)		2.65			4.41			(40	)
Chicago City-Gate (Cdn$/Mcf) 2		3.61			5.64			(36	)
Stanfield (US$/MMBtu)		9.35			4.53			106
Stanfield (Cdn$/Mcf) 2		12.72			5.79			120
Malin (US$/MMBtu)		9.39			4.60			104
Malin (Cdn$/Mcf) 2		12.78			5.88			117
Average foreign exchange
Exchange rate - US$/Cdn$		1.35			1.27			6

1 At the Company's current heating value of 42.0 GJ/e³m³, 1 mcf of natural gas is approximately 1.18 GJ.

2 At industry average heating values of 37.8 GJ/e³m³, 1 mcf of natural gas is approximately 1.065 GJ.

Crude oil and field condensate

The majority of the Company's crude oil and field condensate production is delivered and sold in Central Alberta through firm service commitments on Pembina's pipeline systems. The price that Hammerhead receives for crude oil and field condensate production is primarily driven by global supply and demand and the Edmonton light sweet oil and condensate price differentials.

During the three months ended March 31, 2023, the Company's realized crude oil and field condensate price decreased by $16.52/bbl or 14%, compared to the same period in 2022. This decrease was driven by a corresponding 14% decrease in crude oil benchmark pricing. In Q1 2023, increased global inflation has reduced demand for oil products in comparison to 2022, where increased pricing was driven by a rise in demand for oil products coupled with sanctions on Russian oil exports issued in response to the Russia-Ukraine war.

Natural Gas

The Company's natural gas transportation capacity provides geographical diversification across North America. The Company has firm service commitments to deliver and sell its natural gas production to the Alberta, Eastern Canada and United States (Midwest and West Path) markets. In comparison to the first quarter of 2022, the weighting of total gas sales in Alberta increased in the first quarter of 2023.

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		Three Months Ended March 31,
% weighting of total gas sales		2023			2022
Alberta		55			49
Eastern Canada		25			28
United States		20			23

For the three months ended March 31, 2023, Hammerhead's realized natural gas price decreased by $0.40/mcf or 7%, compared to the same period in 2022. The decrease in the Company's realized price was driven by reductions in benchmark prices across Canadian and northern United States markets, in particular, in AECO pricing which saw a decline of 32% period over period, and offset improvements in the West Path United States benchmark pricing.

NGL

The Company's natural gas liquids and plant condensate is currently sold on the Alberta market, but achieves geographical diversification in pricing through Pembina Pipeline's marketing pool. Pembina operates a pool of sales that provides access to the United States, Asia and Eastern Canadian markets, with market weightings adjusted for supply and demand outlook and seasonality.

For the three months ended March 31, 2023, Hammerhead's realized NGL price decreased by $11.08/bbl or 14%, compared to the same period in 2022. Increased inflation has lowered demand for North American NGL products, which decreased realized pricing for the three months ended March 31, 2023, in comparison to the same period in 2022, where diminished supply from low inventory levels was compounded by continued political unrest from the Russia-Ukraine war, and drove improvements in pricing.

Revenue

		Three Months Ended March 31,
(Cdn$ thousands, except per boe)		2023			2022			% Change
Crude oil and field condensate		132,480			102,986			29
Natural gas		61,098			58,638			4
Natural gas liquids		23,476			27,918			(16	)
Oil and gas revenue		217,054			189,542			15
Revenue - $/boe		60.31			64.10			(6	)

For the three months ended March 31, 2023, the Company earned revenue of $217.1 million, compared to $189.5 million in the comparative period of 2022. The increase in the period was driven by increased production and an increased liquids weighting, partially offset by lower realized prices across commodities.

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Royalty Expense

		Three Months Ended March 31,
(Cdn$ thousands, except per boe)		2023			2022			% Change
Royalty expense		24,925			17,891			39
Royalty expense - $/boe		6.92			6.05			14
Percentage of revenue		11			9

Hammerhead pays royalties to the Province of Alberta in respect of the Company's production and sales volumes in accordance with the established royalty regime. The majority of the Company's royalties are paid to the Crown, which are based on various sliding scales that are dependent on incentives, production volumes and commodity prices. Hammerhead's wells spud on or after January 1, 2017 qualify for the Crown's Modernized Royalty Framework ("MRF") incentive program which has a low initial 5% royalty rate until a threshold return of capital has been achieved. As of the latter half of 2018 and up until April 2022, the Company qualified for the Crown's Enhanced Hydrocarbon Recovery Program ("EHRP") associated with a pilot waterflood program in a portion of the Company's Gold Creek area. The EHRP provided for a flat royalty of 5% on all commodities produced from specific wells impacted by the waterflood program during this time period.

The Company receives a monthly Gas Cost Allowance ("GCA") credit from the Province of Alberta for expenses incurred to process and transport the Crown's portion of natural gas production. The credit is applied to the royalties that would have been owed to the Crown. The GCA credit is assessed annually every June and is subject to a true-up adjustment as a payable to the Crown or a receivable in the form of a credit to the Company.

During the first quarter of 2023, royalty expenses increased $7.0 million or $0.87/boe compared to the first quarter of 2022. On a percentage of revenue basis, royalties increased by 2% over the same period.

Higher production levels, with the added impact of fewer wells receiving an incentivized rate, drove the increase in royalties for the three months ended March 31, 2023 when compared to the same period in 2022. Recently drilled wells with high production rates have achieved their threshold return of capital under the MRF program quickly, resulting in a shorter time period to capture the incentivized rate, and therefore compounding the increase to royalty expense. These wells, now outside of the MRF program, are also driving the increase in royalty expense per boe and royalties as a percentage of revenue.

Operating Expense

		Three Months Ended March 31,
(Cdn$ thousands, except per boe)		2023			2022			% Change
Gas gathering and processing		11,014			10,214			8
Chemicals and fuel		5,613			5,118			10
Repairs and maintenance		4,091			2,288			79
Staff and contractor costs		2,459			2,254			9
Well servicing		1,169			1,129			4
Other		5,513			4,071			35
Operating expense		29,859			25,074			19
Operating expense - $/boe		8.30			8.48			(2	)

For the three months ended March 31, 2023, operating expense was $29.9 million or $8.30/boe, compared to $25.1 million or $8.48/boe for the same period of 2022. The increase of $4.8 million was driven by increased production volumes along with higher repairs and maintenance costs due to higher field activity.

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Transportation Expense

		Three Months Ended March 31,
(Cdn$ thousands, except per boe)		2023			2022			% Change
Transportation expense		21,007			16,731			26
Transportation expense - $/boe		5.84			5.66			3

During the three months ended March 31, 2023, transportation expense was $21.0 million or $5.84/boe, compared to $16.7 million or $5.66/boe in the same period of 2022. The increase in transportation expense for the three months ended March 31, 2023 of $4.3 million or $0.18/boe was due to higher overall volumes and a favorable third-party adjustment that lowered oil transportation costs in the first quarter of 2022.

Risk Management Contracts

The Company's risk management program is primarily designed to reduce volatility in revenue and cash flow, to provide consistency for the Company's capital program and to comply with debt covenant requirements.

Risk management contract settlements are recognized as a realized gain or loss. The fair value of the Company's unsettled risk management contracts is recorded as an asset or liability at each reporting period with any change in the mark-to-market positions of the outstanding contracts recognized as an unrealized gain or loss in net profit (loss). Both realized and unrealized gains and losses on risk management contracts vary based on fluctuations related to the specific terms of outstanding contracts in the period including contract types, contract quantities, contract prices and the underlying commodity reference prices.

The following table summarizes the liability or asset position of risk management contracts outstanding:

(Cdn$ thousands)		March 31, 2023			December 31, 2022
Crude liability		(2,470	)		(5,801	)
Gas asset		35,537			17,808
Net fair value asset		33,067			12,007

The following table summarizes the realized losses on risk management contract settlements, as well as the unrealized losses or gains related to changes in the fair value of outstanding contracts:

		Three Months Ended March 31,
(Cdn$ thousands)		2023			2022			% Change
Realized loss on risk management contracts 1		(240	)		(22,738	)		(99	)
Unrealized gain (loss) on risk management contracts 2		21,060			(66,492	)		N/A
Total gain (loss) on risk management contracts		20,820			(89,230	)		N/A

(Cdn$ per boe)
Realized loss on risk management contracts 1		(0.07	)		(7.69	)		(99	)
Unrealized gain (loss) on risk management contracts 2		5.85			(22.49	)		N/A
Total gain (loss) on risk management contracts		5.78			(30.18	)		N/A

1 Represents actual cash settlements under the respective contracts.

2 Represents the change in fair value of contracts outstanding during the period.

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During the three months ended March 31, 2023, the Company incurred a realized loss on risk management contracts of $0.2 million, compared to a realized loss of $22.7 million in the comparative period of 2022. The decreased loss primarily relates to a narrowed spread on oil and gas contracts between hedged prices and realized prices.

The unrealized gain on risk management contracts of $21.1 million for the three months ended March 31, 2023 is primarily due to the deterioration of gas forward pricing from December 31, 2022 to March 31, 2023, relative to the hedged prices of the risk management contracts outstanding. The unrealized loss on risk management contracts of $66.5 million for the three months ended March 31, 2022 was primarily due to significant improvements in forward pricing from December 31, 2021 to March 31, 2022, relative to the hedged prices of the oil and gas risk management contracts outstanding.

As at March 31, 2023, the Company held the following outstanding risk management contracts:

Remaining Term	Reference		Total Daily Volume (bbls/d)			Weighted Average (Price/bbls)
Crude Oil Swaps
Apr 1, 2023 - Jun 30, 2023	US$ WTI		1,000			87.00
Apr 1, 2023 - Sep 30, 2023	US$ WTI		7,000			75.28
Apr 1, 2023 - Dec 31, 2023	US$ WTI		1,100			65.00

Remaining Term	Reference		Total Daily Volume (GJ/d)			Total Daily Volume (MMbtu/d)			Weighted Average (CDN$/GJ)			Weighted Average (US$/MMbtu)
Natural Gas Swaps
Apr 1, 2023 - Sep 30, 2023	CDN$ AECO		30,000			-			4.96			-
Apr 1, 2023 - Jun 30, 2023	US$ Dawn		-			30,000			-			3.04
Apr 1, 2023 - Dec 31, 2023	US$ AECO - NYMEX		-			30,000			-			(1.48	)
Natural Gas Collar
Apr 1, 2023 - Dec 31, 2023	US$ NYMEX		-			30,000			-			5.00 - 9.80

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Operating Netback

		Three Months Ended March 31,
(Cdn$ thousands)		2023			2022			% Change
Revenue		217,054			189,542			15
Royalties		(24,925	)		(17,891	)		39
Operating expense		(29,859	)		(25,074	)		19
Net transportation expense		(21,007	)		(16,731	)		26
Operating netback, excluding realized losses on risk management contracts		141,263			129,846			9
Realized losses on risk management contracts		(240	)		(22,738	)		(99	)
Operating netback 1		141,023			107,108			32
(Cdn$ per boe)
Revenue		60.31			64.10			(6	)
Royalties		(6.92	)		(6.05	)		14
Operating expense		(8.30	)		(8.48	)		(2	)
Net transportation expense		(5.84	)		(5.66	)		3
Operating netback, excluding realized losses on risk management contracts		39.25			43.91			(11	)
Realized losses on risk management contracts		(0.07	)		(7.69	)		(99	)
Operating netback per boe 2		39.18			36.22			8

1 Operating netback is a non-GAAP measure. Oil and gas revenue is the most directly comparable GAAP measure to operating netback. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

2 Operating netback per boe is a non-GAAP measure. Oil and gas revenue per boe is the most directly comparable GAAP measure to operating netback per boe. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

For the three months ended March 31, 2023, the Company's operating netback was $39.18/boe, an increase of $2.96/boe from the corresponding period of 2022. The increase was driven by lower realized losses on risk management contracts of $7.62/boe, partially offset by a decrease in commodity pricing which reduced revenue by $3.79/boe.

General and Administrative ("G&A") Expense

		Three Months Ended March 31,
(Cdn$ thousands, except per boe)		2023			2022			% Change
Salaries and benefits		5,938			4,323			37
Insurance		820			471			74
Information technology		712			597			19
Professional fees 1		690			333			107
Office rent		207			193			7
Other		1,194			436			174
Gross G&A expense		9,561			6,353			50
Capitalized G&A expense		(1,449	)		(1,142	)		27
Net G&A expense		8,112			5,211			56
Net G&A - $/boe		2.25			1.76			28

1 Professional fees include external audit, legal and reserve evaluation fees and other contract services.

For the three months ended March 31, 2023, gross G&A expense increased by $3.2 million or 50%, compared to the same period in 2022. This increase was primarily due to a rise in salaries and benefits, other G&A expense and insurance costs. Higher salaries and benefits related to an increased headcount, salary level increases and additional costs related to the Company's short term incentive program. Other G&A expense increased due to director's fees. Higher insurance costs related to increased director and officer insurance following the Company's public share listings.

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Capitalized G&A expense varies with the composition and compensation levels of technical departments and their time attributed to capital projects. During the three months ended March 31, 2023, capitalized G&A expense increased by $0.3 million or 27% compared to the same period in 2022, based on an increased headcount of employees focused on capital activity in the current year, and increased costs related to those employees.

Transaction Costs

		Three Months Ended March 31,
(Cdn$ thousands, except per boe)		2023			2022			% Change
Cash transaction costs		3,174			-			100
Non-cash transaction costs		5,793			-			100
Total transaction costs		8,967			-			100
Cash transaction costs - $/boe		0.88			-			100
Non-cash transaction costs - $/boe		1.61			-			100

On February 23, 2023, the Company completed the business combination with DCRD, an affiliate of Riverstone. For the three months ended March 31, 2023 the Company expensed $9.0 million in transaction costs. Refer to the "Business Combination" subsection in this MD&A for more information.

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Share-based Compensation Expense

		Three Months Ended March 31,
(Cdn$ thousands, except per boe)		2023			2022			% Change
Gross share-based compensation expense		6,484			4,437			46
Capitalized share-based compensation expense		(1,690	)		(1,262	)		34
Net share-based compensation expense		4,794			3,175			51
Net share-based compensation expense - $/boe		1.33			1.07			24

Changes in gross share-based compensation expense generally relates to the number of units granted, the timing of grants, the fair value of units on the grant date, the vesting period over which the related expense is recognized and the timing and quantity of forfeitures.

Gross share-based compensation increased by $2.0 million or 46% for the three months ended March 31, 2023, compared to the same period in 2022. The increase was due to the accelerated vesting of all RSUs and options upon close of the business combination, partially offset by awards that fully vested in the second quarter of 2022, with no corresponding expense in the current period.

Capitalized share-based compensation for the three months ended March 31, 2023 increased by $0.4 million or 34%, compared to the same period in 2022 due to higher gross share-based compensation in 2023.

Finance Expense

		Three Months Ended March 31,
(Cdn$ thousands, except per boe)		2023			2022			% Change
Interest on term debt - PIK		2,353			4,020			(41	)
Interest and fees on bank debt		3,915			1,347			191
Interest on EDC facility - letters of credit		140			25			460
Interest on lease obligation		62			61			2
Accretion of decommissioning liabilities		170			124			37
Total finance expense		6,640			5,577			19
Cash interest expense - $/boe		1.14			0.48			138
Non-cash interest and accretion expense - $/boe		0.70			1.40			(50	)
Average principal debt outstanding during the period:
Term debt (2020 Senior Notes)		79,859			136,565			(42	)
Bank debt (credit facility)		185,366			127,533			45
Total average principal debt outstanding		265,225			264,098			-

Finance expense is primarily comprised of interest incurred on the Company's term debt and bank debt.

Term Debt

The Company's term debt consists of the 2020 Senior Notes, which bear interest at 12% and include the option of paying interest as cash or as paid-in-kind ("PIK"). During the three months ended March 31, 2023, interest expense on term debt decreased by $1.7 million or 41%, compared to the same period in 2022. The decrease for the quarter was due to a lower outstanding principal amount on which the interest is calculated, as a result of the repayment of a portion of the 2020 Senior Notes during the third quarter of 2022.

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Bank Debt

During the three months ended March 31, 2023, interest expense and fees on bank debt increased by $2.6 million or 191%, compared to the same period in 2022. The increase for the period was primarily due to higher prime interest rates in 2023.

(Gain) Loss on Foreign Exchange

		Three Months Ended March 31,
(Cdn$ thousands)		2023			2022			% Change
Realized loss (gain) on foreign exchange		113			(43	)		N/A
Unrealized gain on foreign exchange		(166	)		(2,074	)		(92	)
Gain on foreign exchange		(53	)		(2,117	)		(97	)

The Company's foreign exchange impacts primarily relate to warrants and term debt which are denominated in US dollars and translated into Canadian dollars at the end of each reporting period.

Relative to the US dollar, the Canadian dollar strengthened from 1.3549 at February 23, 2023 and 1.3544 at December 31, 2022 to 1.3533 at March 31, 2023. This resulted in a lower Canadian dollar liability for the warrants and term debt and a corresponding unrealized foreign exchange gain of $0.2 million during the first quarter of 2023. Similarly, the Canadian dollar strengthened from 1.2678 at December 31, 2021 to 1.2496 at March 31, 2022. This resulted in a lower Canadian dollar liability for term debt and a corresponding unrealized foreign exchange gain of $2.1 million during the first quarter of 2022.

Depletion and Depreciation Expense

		Three Months Ended March 31,
(Cdn$ thousands, except per boe)		2023			2022			% Change
Depletion of developed and producing assets		49,666			35,064			42
Depreciation of corporate assets		538			477			13
Depreciation of right-of-use assets		314			193			63
Total depletion and depreciation expense		50,518			35,734			41
Depletion and depreciation expense - $/boe		14.04			12.09			16

Depletion and depreciation reflect the development costs of Hammerhead's investments which are initially capitalized and then amortized to net income over the estimated useful lives of the assets. The Company's developed and producing assets are depleted using the unit-of-production method based on the estimated recoverable amount from total proved and probable ("2P") reserves determined in accordance with National Instrument 51-101. The depletion base consists of the historical net book value of capitalized costs plus estimated future development costs required to develop the Company's estimated 2P reserves. Depletion rates are subject to change based on changes in the carrying value of the asset base, changes in future development costs, reserve updates and changes in production. Depletion expenses are calculated using depletion rates and production volumes applicable to each depletable asset.

For the three months ended March 31, 2023, depletion and depreciation expense increased $14.8 million or 41%, compared to the same period in 2022. The increase was due to higher production volumes, which resulted in additional depletion of developed and producing assets and a higher depletion rate, which was driven by an increase in the depletable base.

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Loss (Gain) on Warrant Revaluation

		Three Months Ended March 31,
(Cdn$ thousands)		2023			2022			% Change
Loss (gain) on warrant revaluation		10,426			(281	)		N/A

The warrant liabilities were recorded at fair value upon inception and are reassessed at the end of each period, with changes in the estimated fair value recognized through income as a non-cash item. During the three months ended March 31, 2023, the Company incurred a $10.4 million loss on warrant revaluation compared to a $0.3 million gain on warrant revaluation for the same period of 2022. The increased loss for the three months ended March 31, 2023 relates to an increased liability for the new warrants outstanding due to a rise in the warrant's trading price from the close of the business combination to March 31, 2023.

Funds from Operations

		Three Months Ended March 31,
(Cdn$ thousands)		2023			2022			% Change
Operating netback 1		141,023			107,108			32
G&A expense		(8,112	)		(5,211	)		56
Cash transaction costs		(3,174	)		-			100
Cash interest expense		(4,117	)		(1,433	)		187
Realized foreign exchange (loss) gain		(113	)		43			N/A
Other cash impacts 2		311			241			29
Funds from operations 3		125,818			100,748			25
(Cdn$ per boe)
Operating netback 4		39.18			36.22			8
G&A expense		(2.25	)		(1.76	)		28
Cash transaction costs		(0.88	)		-			100
Cash interest expense		(1.14	)		(0.48	)		138
Realized foreign exchange (loss) gain		(0.03	)		0.01			N/A
Other cash impacts 2		0.09			0.08			13
Funds from operations 5		34.97			34.07			3
Weighted average common shares outstanding (000s)
Basic 6		51,395			24,994			106
Diluted 6		51,395			24,994			106
Per common share - basic 6,7		2.45			4.03			(39	)
Per common share - diluted 6,8		2.45			4.03			(39	)

1 Operating netback is a non-GAAP measure. Oil and gas revenue is the most directly comparable GAAP measure to operating netback. Oil and gas revenue for the three months ended March 31, 2023 and 2022 were $217.1 million and $189.5 million, respectively. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

2 Other cash impacts consist of treating and processing income, the Company's recoveries related to royalty interest and bad debt allowances, where applicable in the current period.

3 Funds from operations is a non-GAAP measure. Net cash from operating activities is the most directly comparable GAAP measure for funds from operations. Net cash from operating activities for the three months ended March 31, 2023 and 2022 was $115.5 million and $70.5 million, respectively. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

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4 Operating netback per boe is a non-GAAP measure. Oil and gas revenue per boe is the most directly comparable GAAP measure to operating netback per boe. Oil and gas revenue for the three months ended March 31, 2023 and 2022 were $60.31/boe and $64.10/boe, respectively. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

5 Funds from operations per boe is a non-GAAP measure. Net cash from operating activities per boe is the most directly comparable GAAP measure for funds from operations per boe. Net cash from operating activities per boe for the three months ended March 31, 2023 and 2022 was $32.10/boe and $23.83/boe, respectively. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

6 In comparative periods, per common share amounts are Hammerhead Resources Inc. The weighted average common shares outstanding in these periods has been scaled by the applicable exchange ratio following the completion of the business combination with DCRD. Refer to the subsection "Business Combination".

7 Funds from operations per common share - basic is a non-GAAP measure. Net cash from operating activities per common share - basic is the most directly comparable GAAP measure for funds from operations per common share - basic. Net cash from operating activities per common share - basic for the three months ended March 31, 2023 and 2022 was $2.25 and $2.82, respectively. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

8 Funds from operations per common share - diluted is a non-GAAP measure. Net cash from operating activities per common share - diluted is the most directly comparable GAAP measure for funds from operations per common share - diluted. Net cash from operating activities per common share - diluted for the three months ended March 31, 2023 and 2022 was $2.25 and $2.82, respectively. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

The Company generated funds from operations of $125.8 million during the first quarter of 2023, a $25.1 million or 25% increase from the same quarter of 2022. The increase is primarily driven by a $33.9 million increase in operating netback.

Adjusted Funds from Operations

		Three Months Ended March 31,
(Cdn$ thousands, except per boe)		2023			2022			% Change
Funds from operations 1		125,818			100,748			25
Cash transaction costs		3,174			-			100
Realized foreign exchange loss (gain)		113			(43	)		N/A
Other income, excluding transportation expense		(311	)		(241	)		29
Adjusted funds from operations 1		128,794			100,464			28
Corporate netback - $/boe 2		35.78			33.98			5
Weighted average common shares outstanding (000s)
Basic 3		51,395			24,994			106
Diluted 3		51,395			24,994			106
Per common share - basic 3,4		2.51			4.02			(38	)
Per common share - diluted 3,5		2.51			4.02			(38	)

1 Funds from operations and adjusted funds from operations are non-GAAP measures. Net cash from operating activities is the most directly comparable GAAP measure for funds from operations and adjusted funds from operations. Net cash from operating activities for the three months ended March 31, 2023 and 2022 was $115.5 million and $70.5 million, respectively. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

2 Corporate netback per boe is a non-GAAP measure. Net cash from operating activities per boe is the most directly comparable GAAP measure for corporate netback per boe. Net cash from operating activities per boe for the three months ended March 31, 2023 and 2022 was $32.10/boe and $23.83/boe, respectively. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

3 In comparative periods, per common share amounts are Hammerhead Resources Inc. The weighted average common shares outstanding in these periods has been scaled by the applicable exchange ratio following the completion of the business combination with DCRD. Refer to the subsection "Business Combination".

4 Adjusted funds from operations per common share - basic is a non-GAAP measure. Net cash from operating activities per common share - basic is the most directly comparable GAAP measure for adjusted funds from operations per common share - basic. Net cash from operating activities per common share - basic for the three months ended March 31, 2023 and 2022 was $2.25 and $2.82, respectively. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

5 Adjusted funds from operations per common share - diluted is a non-GAAP measure. Net cash from operating activities per common share - diluted is the most directly comparable GAAP measure for adjusted funds from operations per common share - diluted. Net cash from operating activities per common share - diluted for the three months ended March 31, 2023 and 2022 was $2.25 and $2.82, respectively. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

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Net Loss

		Three Months Ended March 31,
(Cdn$ thousands, except per share)		2023			2022			% Change
Net loss		(133,659	)		(6,442	)		1,975
Net loss attributable to ordinary equity holders - basic		(137,749	)		(12,325	)		1,018
Weighted average common shares outstanding - basic (000s) 1		51,395			24,994			106
Per common share - basic 1		(2.68	)		(0.49	)		447
Net loss attributable to ordinary equity holders - diluted		(137,749	)		(12,325	)		1,018
Weighted average common shares outstanding - diluted (000s) 1		51,395			24,994			106
Per common share - diluted 1		(2.68	)		(0.49	)		447

1 For the period ended March 31, 2022, the Company's basic and diluted earnings per share is the net loss per common share of Hammerhead Resources Inc., and the weighted average common shares outstanding has been scaled by the applicable exchange ratio following the completion of the business combination with DCRD. Refer to subsection "Business Combination".

(Cdn$ thousands)
Net loss, three months ended March 31, 2022		(6,442	)
Increase from funds from operations 1		25,070
Add (deduct) change in non-cash items:
Increase in deferred income tax expense		(26,171	)
Increase in unrealized gain on risk management contracts		87,552
Increase in listing expense		(180,478	)
Transaction costs, non-cash		(5,793	)
Increase in depletion, depreciation and impairment expense		(14,784	)
Change in fair value of warrants		(10,707	)
Other		(1,906	)
Net loss, three months ended March 31, 2023		(133,659	)

1 Funds from operations is a non-GAAP measure. Net cash from operating activities is the most directly comparable GAAP measure for funds from operations. Net cash from operating activities for the three months ended March 31, 2023 and 2022 was $115.5 million and $70.5 million, respectively. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

The Company reported a net loss of $133.7 million for the three months ended March 31, 2023, compared to a net loss of $6.4 million in the same period of 2022. The $127.2 million increase in loss was primarily due to the $180.5 million listing expense, combined with a $26.2 million increase in deferred income tax, a $14.8 million increase in depletion and depreciation, and a $10.7 million change in the fair value of warrants. The increased expenses were partially offset by a $87.6 million increase in unrealized gains on risk management contracts, and a $25.1 million increase in funds from operations.

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Capital Expenditures

		Three Months Ended March 31,
(Cdn$ thousands)		2023			2022			% Change
Drilling and completion		112,995			60,508			87
Equipment, facilities and pipelines		50,842			16,148			215
Workovers and maintenance capital		6,012			4,124			46
Land		-			315			(100	)
Geological and geophysical		152			10			1,420
Other 1		2,441			1,383			77
Capital expenditures 2		172,442			82,488			109
Karr		121,087			37,321			224
Gold Creek		44,760			42,882			4
Corporate		6,595			2,285			189
Capital expenditures 2		172,442			82,488			109

1 Other includes capitalized salaries and benefits and corporate capital expenditures.

2 Net cash used in investing activities is the most directly comparable GAAP measure for capital expenditures, which is a non-GAAP measure. Net cash used in investing activities for the three months ended March 31, 2023 and 2022 was $142.3 million and $95.5 million, respectively. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

Capital expenditures were $172.4 million for the three months ended March 31, 2023, compared to $82.5 million, an increase of $90.0 million. The increase in spending is primarily related to additional drilling and completion activity, as well as major facility and infrastructure expansion projects in the Karr area.

The Company directed approximately 66% of spending on drilling and completion activities, and 29% of spending on equipment, facilities and pipelines. In Karr, the Company spent approximately $121.1 million, primarily related to the completion and tie-in of a seven gross (seven net) well pad, which came on-stream in March 2023, as well as the drill of five wells on a 12 gross (12 net) well pad, expected to be on-stream in the third quarter of 2023. Additionally, a non-operated three gross (1.05 net) well pad was completed and brought on-stream in Q1 2023. Remaining funds spent were related to non-well Infrastructure projects, primarily on the North Karr battery expansion and South Karr battery construction, as well as two gross (two net) water disposal wells. In Gold Creek, the Company spent approximately $44.8 million, primarily related to the drill, and partial completion and tie-in of a seven gross (seven net) well pad, which is expected to be on-stream in the second quarter of 2023.

Well Count Information ¹

		Three Months Ended March 31,
(Number of  gross wells)		2023			2022
Spud		12			9
Rig released		12			10
Completed		10			9
Wells brought on-stream 2		10			13

(Number of net wells)		2023			2022
Spud		12.00			9.00
Rig released		12.00			10.00
Completed		8.05			9.00
Wells brought on-stream 2		8.05			13.00

1 Well counts include development Montney wells, shown on a net well basis.

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2 On-stream dates are based on the first production date after the well is tied-in to the permanent well site facilities. Wells brought on-stream may include wells drilled and/or completed in a prior period.

Land Acreage

		March 31, 2023									December 31, 2022
		Gross acres			Net acres			Working interest percentage			Gross acres			Net acres			Working interest percentage
Montney		118,560			106,800			90			118,560			106,800			90

Corporate Outlook and Guidance Reaffirmed

Hammerhead is reaffirming its 2023 annual guidance as outlined below:

Forward looking information 1			Q1 Results			2023 annual guidance 2
Annual average production	boe/d		39,992			40,200
Crude oil	%		37			33
Natural gas liquids ("NGLs")	%		10			12
Natural gas	%		53			55
Expenses
Royalties	%		11			13
Operating	$/boe		8.30			8.50
Transportation	$/boe		5.84			6.50
Net general and administrative	$/boe		2.25			1.60
Cash interest and financing	$/boe		1.14			1.40
Cash taxes	$/boe		-			-
Capital expenditures 3	$MM		172			525

1 Forward looking information are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated with forward looking information. Refer to the subsection "Forward-Looking Statements".

2 The Company's 2023 annual guidance is unchanged from the guidance previously released on March 28, 2023 in the Company's 2022 Annual MD&A and accompanying press release.

3 Net cash used in investing activities is the most directly comparable GAAP measure for capital expenditures, which is a non-GAAP measure. Net cash used in investing activities for the three months ended March 31, 2023 was $142.3 million. Refer to the subsection "Other Advisories - Non-GAAP and Other Specified Financial Measures".

Based on results to date, the Company is well positioned to deliver on its 2023 annual guidance. HEI is targeting greater than 25% production growth in 2023, with oil production growth expected to exceed 40%.

Hammerhead's actual results could differ materially from this outlook and guidance as a result of volatility in the market prices for oil, gas and NGLs, well performance, and success of the capital program.

Significant Project Update

Hammerhead is currently planning and executing on over $100.0 million of pipeline and facility expansions within both its North and South Karr areas in order to accommodate the Company's expected growth in production. In the North Karr location, the Company incurred capital expenditures of approximately $42.0 million to expand its current facility, which was completed in the first quarter of 2023. In South Karr, the Company is currently building a new facility, with a budgeted project cost of $61.0 million and is currently targeted to be on-stream in the fourth quarter of 2023. These expenditures will be financed through cash flow and capital sources.

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The Company has embarked on a decarbonization investment campaign across its asset base with the Company's CCS program. The program is expected to drive a reduction in Scope 1 and Scope 2 emissions of approximately 79% on an absolute basis and approximately 89% on a per boe basis by 2029, as compared to 2021 levels, assuming that each of Hammerhead's oil batteries are converted to CCS from 2024 through 2029. 

Prior to any construction or sequestration activity, the Company must receive final approval from the Alberta Department of Energy. The timeframe of approval is dependent on regulatory review and will be received later in 2023 at the earliest. There is no guarantee that such approval will be received on this timeline or at all. Presently, Hammerhead does not have the right to sequester carbon emissions nor is it authorized to generate credits or monetize the emissions sequestered.

The key milestones of the project, once approval from the Department of Energy is received include, drilling a deep CO2 disposal well and confirming adequate injectivity, finalizing the design engineering and lastly obtaining final approval from the Hammerhead Board of Directors (the "Board") to proceed with the first battery pilot project. As of September 30, 2022, the Company had planned to drill the disposal well, finalize engineering plans, and following regulatory approval, obtain board approval on the first battery pilot project in 2023. As at March 31, 2023, the Company expects regulatory approval to occur later in 2023, and as a result, plans to drill the disposal well and finalize the engineering designs in 2024. Upon successful testing of the CO2 disposal well, the Company will present the pilot project for approval to the Board in 2024. Following the Board's approval, the Company will initiate construction of the pilot battery, with equipment purchases occurring in 2024. Hammerhead expects to spend between $60.0 million to $75.0 million to build facilities, pipeline and disposal well assets at the pilot battery in Gold Creek. The remaining capital will be spent in the following five years; constructing carbon capture and storage facilities on Hammerhead's other four batteries. The total anticipated spend on the project is $240.0 million. As at March 31, 2023, the Company has not incurred costs or signed contractual commitments related to the CCS program.

Capital Resources and Liquidity

Capital Resources

Bank Debt

(Cdn$ thousands)		March 31, 2023			December 31, 2022
Syndicated facility 1		204,833			164,800
Operating facility