Hemisphere Energy (HMENF) Valuation Update - June 7

[dan_s]

I have updated my forecast/valuation model for Hemisphere using my higher oil & gas price deck that was highlighted in my Saturday podcast.
My valuations increase from $4.19Cdn to $4.88 Cdn for HME.V and $3.35US to $3.90US for HMENF

This is VERY GOOD NEWS My comments are in blue.
Hemisphere Energy Announces Inaugural Variable Dividend, Renewed Credit Facility, Increased Guidance, and Operations Update
Tue, June 7, 2022, 7:00 AM

Vancouver, British Columbia--(Newsfile Corp. - June 7, 2022) - Hemisphere Energy Corporation (TSXV: HME) (OTCQX: HMENF) ("Hemisphere" or the "Company") is pleased to provide an update on its renewed credit facility, operations, revised annual guidance, and return to shareholder plan.

Credit Facility

Hemisphere has completed the renewal of its extendible two year committed term facility with ATB Financial, providing for borrowings of up to $35,000,000 (the "Credit Facility"). As was announced with the latest quarterly financials, the Company exited the first quarter with a net debt of just $8.7 million, and net debt to adjusted funds flow (AFF) of 0.2. This marks a significant milestone for Hemisphere and allows the Company flexibility to move forward with additional return of capital to shareholders through a variable dividend, which complements the current Normal Course Issuer Bid (NCIB) program. Even with enhanced shareholder return, Hemisphere anticipates being debt free by the fourth quarter, based on the updated guidance described below.

Operations and Guidance Update

Hemisphere is pleased to announce an increase to its 2022 capital program and resulting annual guidance due to exceptionally strong commodity pricing and excellent production results in the field year-to-date. The Company is now planning to drill up to eight wells in 2022, including three that will be re-drilled from current wellbores in order to use existing equipment, minimize costs, and lower abandonment liabilities. Hemisphere recently spudded the first well of this drilling program and anticipates production to start coming onstream from the wells through July.

With continued success at Hemisphere's Atlee Buffalo G pool polymer project, the Company has also accelerated its polymer injection project at the Atlee Buffalo F pool into the summer of 2022. Preparations are already underway in the field to expand treating facilities and tie-in polymer injection equipment. While production response is expected to be slower than in the G pool, management is highly encouraged by reservoir simulation predictions and analogue performance in the area and expects to see production gains through 2023 from the project. Hemisphere views this as a strategic investment that will add long-term value to shareholders. < The impact of the polymer flood (a very simple and cheap method to increase oil recovery) is a Game Changer for a company of this size.

Hemisphere's updated guidance set out below includes an increase in capital spending of $7 million for the year. In addition to drilling four new wells and accelerating the F pool polymer project into 2022, the Company is investing in new technologies, continuing an exploration program, improving injection, upgrading facilities and power, increasing net abandonment expenditures, and allocating capital to account for overall inflation of costs through the remainder of the year. These additional investments are anticipated to increase average production to 3,000 boe/d for the year and boost Hemisphere's estimated exit production rate to 3,300 boe/d. Run at the following pricing parameters for the remainder of the year, the Company expects to achieve record cash flows in 2022 at this updated production guidance.

Commencement of Quarterly Variable Dividend

The Board of Directors has approved a variable dividend policy targeting approximately 30% of Hemisphere's annual free funds flow to be paid quarterly. Accordingly, the first ever quarterly cash dividend paid to Hemisphere shareholders will be $0.025/share on June 30, 2022, to shareholders of record as of the close of business on June 15, 2022. The dividend is designated as an "eligible dividend" for income tax purposes. Using the mid-point of guidance, this would return an annualized 6% dividend yield to shareholders on Hemisphere's current market capitalization of approximately $180 million.

Further quarterly payments of this variable dividend will be subject to board approval, and be conditional on continued production performance, commodity price environment, and compliance with the terms of the Company's credit facility. The remaining 70% of free funds flow may be used for additional spending on Hemisphere's Normal Course Issuer Bid (NCIB) and/or other special dividends, in addition to possible strategic acquisitions and accelerated investments in the Company's long-term development program.
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My updated forecast valuation model for Hemisphere will be posted to the EPG website by 11AM CT

[dan_s]

Note that my forecast/valuation model is based on the following:
> WTI will average $105US in Q2, $115US in Q3 and $105US in Q4 2022. WTI will average $100US in 2023.
> I am using Don's production guidance of 3,000 Boepd for full-year 2022, but I think there is a good chance Q4 production exceeds what I have in the model. Steady production growth in the G Pool and additional wells could push production over 3,500 Boepd by year-end.

If the polymer injections work in both the G Pool and the F Pool, Hemisphere's production could move over 4,000 Boepd in 2H 2023. If so, HMENF should have a Fair Value of over $5.00US per share within 18 months.

[dan_s]

Don Simmons has agreed to join me on a live webinar next week. We are shooting for next Tuesday afternoon. We will send out an email with details in a few days when we confirm the time.

I also confirmed a few things in my forecast/valuation model with Don and I have reposted it to the EPG website. No big changes.

My valuation stays at $4.88Cdn and $3.90US with more confidence.

Based on my forecast model, Hemisphere should generate enough free cash flow from operations during Q2 & Q3 2022 to fund 100% of the Company's increased capex program, pay dividends of $0.05/share (two quarters at $0.025) and pay off all of their debt by 9/30/2022.

From where HMENF closed today ($1.48US) it should be at least a double for us by year-end.

[allen46]

Dan, I sincerely want to thank you for many stock recommendations. This is but one example - I have 116,000 shares and started to buy in June of 2021 at 51 cents per share. My average purchase price is $0.87 per share and I think I will buy more with what little cash I have left. I have bigger positions in IPOOF, CRK, AR ESTE, SBOW, CLR and CTRA and smaller positions in the rest of the sweet 16. The last year has been transformational for me, my future and my family. I went huge into energy and the stocks you recommend. I will be in Dallas area next May for my grandsons college graduation. Would love to take you and wife out for dinner at the best restaurant in Dallas as a thank you.

[sl6886]

The way I read the Hemisphere dividend, it's 6%'ish right now, but if you look at 2023 production and cash flow, this thing is going to yield 15% based on paying out 30% (variable) FCF. So then one wonders what if they can't buy back enough stock or find an appropriate bolt-on acquisition with the remaining 70% ($.52 USD per share) of the FCF. That money could easily keep right on flowing to the shareholders! $.75-$.80 2023 FCF value (assuming a $10 million CapEx next year) on a $1.48 stock stock appears to be about 2x FCF, and I think you now see the motivation for the dividend where the market "forced" Hemisphere to pay this dividend to try and unlock some of the inherent value. It's working - I'm buying more tomorrow!

[dan_s]

I have confirmed that Don Simmons will join me on a live webinar on Tuesday, June 14.

I highly recommend that all of you join us on this webinar.

HMENF has been a BIG WINNER for us and I think it should at least double for us again by year-end.
> The polymer flood within Atlee Buffalo is working. It will gradually increase production, but the "Game Changer" is that it will significantly increase Hemisphere's proved reserves (P1).
> Based on my oil price deck, Hemisphere's operating cash flow should be over $70Cdn million this year and close to $90Cdn million in 2023.
> Hemisphere's capex budget for 2022 has increased to $16Cdn million, so free cash flow should be $54Cdn million.
> The Company will soon be debt free.
> Acceleration of the polymer flood at the F Pool is very good news.