Hemisphere upsides and polymer injection

[Petroleum economist]

Dan posted his update on Hemisphere Energy.

I agree with Dan that Hemisphere is an attractive small Canadian company (market value US$ 167 M), which is certainly worth a bit of extra attention.
Using WTI = $ 80/bbl, Hemisphere ranks seventh in my company ranking sheet (out of seventy-two companies). I bought some shares myself. Drawback is the limited trading (130 K shares/day) OTC, which means that share prices can vary.

Reserves
Hemisphere late 2023 had proven reserves of 12.1 M BoE, equivalent to an industry average of 9.6 years of 2024 production. The RRR over the last five years was a reasonable 0.9.
The current reserves and RRR allow Hemisphere only limited production growth. As Dan has indicated for growth additional reserves, to be proven up in the polymer pilot in Manito Lake (Saskatchewan), are required. This trial will start in H2 2024. Hemisphere has booked in 2023 only 0.5 M BoE for the acquisition of Manito Lake in 2023.

Polymer injection pilot
The success of a polymer injection pilot in Manito Lake is not guaranteed. There are many variables which affect polymer sweep:
1. Right polymer weight (MW = 8 - 20 million) suitable for the permeability of the reservoir.
2. Right polymer concentration/viscosity in relation to the oil viscosity (ratio about 1:4 – 1:5).
3. Correct spacing between injector wells and producer wells – too far and nothing happens for a long time and/or the polymer degradates in the reservoir – too close and polymer breakthrough is immediate.
4. Subsurface well sectionalizing, required to prevent preferential flow between the heels of the wells, thus leaving the oil at the far end of the well (the “toe”) untouched.
5. Sufficient uptime in the injection facilities – polymer facilities are known to have high downtime.
As Hemisphere has experience with polymer injection at Altee Buffalo, it gives me hope that the Manoto lake pilot will be successful.

The initial production from the five wells in Manito Lake will be limited. With two injectors and three producers it will be 150-250 bbl/d. As the pilot requires time (at least 6 months - if done at a limited well spacing), I do not expect to see a significant expansion of production in case of a successful pilot until H2 2025 earliest, more likely 2026.

Balance sheet
The balance sheet of Hemisphere is rock solid. Solvency is a high 65.7% and the debt is hardly noticeable. The balance sheet allows the generous dividends and share buybacks that Dan has indicated.

Profitability
Dan expects a profit C$ 98 M and an eps of C$ 0.37. I agree with this.
With a share price of C$ 1.70 this gives Hemisphere an unjustified low PE of 4.4.
Hemisphere has low unit costs of $ 27.10/BoE (inclusive depreciation, interest and administration). This aided by interest costs at only US$ 0.60/BoE (other companies carry $ 2-6/BoE). The low unit costs make Hemisphere robust under low oil price scenarios.

Shareholder returns
I expect shareholder returns in 2024 to remain at 2023 levels. Hemisphere already has bought back 1.4 M shares in Q1 2024 which is 43% of the total in 2023. Total returns can be >8%.

With good reserves, production upside, a solid balance sheet, a PE of only 4.4 and generous shareholder returns of Hemisphere is clearly undervalued.

[dan_s]

Hemisphere's investor relations company is the same one that does IR work for InPlay Oil, which hosted the EPG luncheon in Houston today. I talked to him about both companies after the luncheon.

IMO they should both be doubles for us. If the Manito Lake polymer flood is successful, HMENF should be AT LEAST a triple for us within two years.

Both companies have pristine balance sheets. InPlay has more current "Running Room" with over 300 low-risk development drill locations in their two core areas. At $80/WTI, InPlays realized oil price today is over $100Cdn/bbl and Doug Bartole said today that he expects the differential for his oil to go to zero this summer thank to the Trans Mountain Pipeline (TMX), which is selling oil out of the west coast now. Heavy oil producers are moving oil to the TMX, which is freeing up pipeline capacity going south out of Alberta. Great news for both companies.

[ChuckGeb]

Do you have any info on the unsuccessful exploration well drill in Q4. Was this in the new area?

[dan_s]

It was not in the new area. I think they were testing deeper zones within Atlee Buffalo.