Hemisphere Energy (HME.V and HMENF) Update - Sept 18

[dan_s]

Hemisphere is a pure play on heavy oil (over 99% of revenues).

The U.S. is "short" heavy oil (needed to make diesel and home heating oil), so the differentials between light and heavy oil in Alberta improved from Q1 to Q2 and they continue to improve. The Company's 2H 2023 financial results are now likely to exceed my forecast. They completed several nice horizontal wells in August, with another batch to be completed early in Q4. Hemisphere's 2023 production exit rate should be over 3,600 Boepd (up from 2,883 Boepd in Q2).

WTI oil prices declined from $76.11US/bbl in Q1 to $73.66US/bbl in Q2, but Hemisphere's realized heavy oil price increased from $65.12Cdn to $72.96Cdn over the same period. Hemisphere's heavy oil price should be over $80Cdn/bbl in Q3 and over $90Cdn/bbl in Q4. Since the differential goes right to the bottomline, Hemisphere's operating cash flow should almost double from Q2 to Q4 this year.

The Company's operating cash flow should be over $25Cdn during 2H 2023 with 2H 2023 free cash flow of approximately $16Cdn million. I do expect Hemisphere to pay out a "Special dividend" after year-end in addition to their quarterly dividends of $0.025Cdn.

I called Don Simmons, Hemisphere's CEO late last week. In addition to confirming my forecast model assumptions, I wanted to confirm that he was going to speak at our Houston luncheon on December 8th and I wanted to get some details on this comment in Hemisphere's Q2 results press release:

"Hemisphere has strategically invested approximately $1 million in the acquisition of over 10 sections of new land that management believes to be prospective enough to become an additional core area for the Company. This resource is characterized by high oil in place and low recovery factor, and reservoir simulation supports its significant potential as an application for Hemisphere's expertise in Enhanced Oil Recovery ("EOR") techniques. Current plans include drilling and testing a pilot flood into this new asset as part of Hemisphere's 2024 development capital budget."

Don would not give me details on the location since he is still buying more leasehold in this new EOR project area. He did tell me that his team believes there is significant unrecovered oil in place and that they believe it is strong candidate for another polymer flood. "Reading between the lines" it sounds like the new area could double the size of Hemisphere's probable oil reserves (P2). After they acquire all of the leasehold they can get, Don told me that they would provide more details. This will be a hot topic at our December luncheon.

Hemisphere is now a "Cash Flow Machine" on pace to generate $41Cdn million of operating cash flow this year; over $25 million of free cash flow. If WTI averages $90/bbl, the Company's operating cash flow in 2024 will be 3X what their 2023 capital program is. So, they have more than enough cash flow to fund an aggressive D&C program to develop a new core area. This is the "Running Room" needed to draw more attention to this under-valued stock.