Hemisphere Energy (HMENF) Valuation Update - June 14

[dan_s]

Here is the webinar replay link: https://www.youtube.com/watch?v=THxLR-vV61A

After listening to the replay of this morning's webinar I tweaked my forecast/valuation model for Hemisphere, primarily because I miscalculated the impact of some of their hedges. After August 2022 they have very little oil hedged with ceilings. For 2023 they only have Puts that set the floor for ~20% of their production. My stock valuation increases to $5.00Cdn / $4.00US. < I just multiply the Canadian dollar valuation by 0.8 to get the U.S. dollar valuation.

Hemisphere will be effectively debt free way before the end of Q3.
Operating cash flow in 2022 s/b over $70Cdn million, which compares to their expanded capex budget of $16Cdn million. The balance due on their bank credit facility was $8.7Cdn million at the end of April. They are drilling & completing eight new horizontal wells at Atlee Buffalo in July - October, but based on my forecast they will have over $20Cdn million of free cash flow net of the new dividend payments in Q2+Q3.

In addition to the variable dividend program, they are still buying back a lot of common stock.

As we discussed during the webinar, Hemisphere's year-end 2022 reserve report is going to show a MUCH HIGHER PV10 valuation per share of their proved reserves thanks to higher oil prices, this year's drilling program and the success of the G Pool polymer flood. By then (9 months from today) the market should recognize the true value of this stock.

[dan_s]

We will publish an updated profile on Hemisphere this week.

[sl6886]

Dan

So, I’m looking at your 2023 Hemisphere cash flow, and would like some confirmation/help with some modeling:
Assumptions

Assuming 100mm shares outstanding, and $100 WTI
$95 million cash flow from operations- your number

Projecting
$25 million CapEx - I know they’re at 16mm, but trying to be conservative
$70 FCF
$21mm variable dividend
$20mm estimate buyback - 10 million shares at $2 (very conservative here- I doubt they’ll spend this much)
————-
$29 million residual- (even after overestimating buy backs and CapEx)

So that’s $.21+$.29= $.50 per share
$.5/$1.20 = 41% cash return - Is this even close to being possible??? What am I doing wrong ?

[dan_s]

Yes, if WTI averages $100/bbl in 2023, Hemisphere should get realized oil price of $106Cdn/bbl. < Net of heavy oil differential estimated by Don Simmons.

Note that I am assuming they average 4,000 bpd of oil production next year. Don has not publicly said that, but here is my reasoning.
> They just started an 8 well drilling program with all 8 wells expected to be completed; four in mid Q3 and four early in Q4.
> Per Don, current production is 2,900 bpd (up from 2,648 bpd in Q1). 2,900 bpd was my forecast for Q2.
> Don's new public production guidance is that 2022 production will average 3,000 bpd, which would require a 2H 2022 average of 3,226 bpd day if Q2 average is 2,900 bpd. So, an exit rate of 3,400 bpd is a reasonable guess.
> Don's production guidance is usually conservative, which is what most good CEOs do.
> I think the 8 new wells + steady growth from the G Pool polymer flood will push Hemisphere's production over 3,500 bpd by mid-Q4.
> The Q1 2023 drilling program should add another 4-8 new horizontal wells, so production over 4,000 bpd in Q2 2023 is not an unreasonable forecast. < There are more than 20 undrilled low-risk HZ development drilling locations within Atlee Buffalo, so they could accelerate the drilling program.

Stock Buybacks are limited by daily trading volume, something I don't fully understand. I just know that Don thinks the stock is grossly under-valued, so he will buyback as much as he can.

I have talked to Don about making acquisitions to add more "running room". I know that they are looking, but they will only make an accretive deal.

If the polymer floods work in both the G and F pools, there is a lot more oil to be produced from Atlee Buffalo. I think Hemisphere's 12-31-2022 3rd party reserves report will show a PV10 value of Proved Reserves (P1) of ~$5.00Cdn per share.

Conclusion: Your calculation is reasonable and HMENF is a "Screaming Buy" at today's share price. I think the Hemisphere board will raise dividends soon after they are debt free, which should be very soon.

[dan_s]

I have posted my updated profile for Hemisphere to the EPG website. It will be sent to all EPG members by email this afternoon (June 22).