Any Canadian Royalty experts here? HME

[Fraser921]

I was doing a deep dive on HME this afternoon and was reviewing their latest presentation

https://www.hemisphereenergy.ca/sites/d ... 202022.pdf

Page 5 they have a price sensitivty table

at $ 85 they do 33 m FCF
at 100 they do 36 m FCF
at 115 they do 38 FCF

Their avg production is 3000 / day which is 1,095 bbls

3 m for a 15 higher price is only roughly $ 3 per bbl
2 m at 115 is roughly 2 per bbl

The only thing that explains this is, as I understand it , they have to pay higher royalty prices with higher oil price environment.

Seems to me the taxing authority is scooping up most of the extra revenue 15 * 1095 is 16.4 m net to hme is 3???!! That sucks and is a big negative for all Canadian producers

Worse if they hedge at 60, they cap their revenue but their royalties are based on 115 YUCK!!!!

It is essentially a back door windfall profit tax

[dan_s]

On the flip side, as oil prices go down the percentage paid for Alberta royalties goes down. This is an advantage for the Canadian Juniors. Alberta is a very friendly place for upstream oil companies since the industry is the primary source of Alberta's jobs and tax revenues.

In the U.S. royalties are locked in by the lease agreements, usually around 25%. Upstream companies also pay a lot of real estate and sales taxes.

I have updatd my forecast/valuation model for Hemisphere based on the assumptions that their realized oil prices will be $100Cdn/bbl in Q3 and $105Cdn/bbl in Q4. Very little of their oil is hedged after August. My current valuation is $4.87Cdn and $3.90US per share.

Hemisphere should be virtually debt free by the end of September.
Once the debt is paid off, I expect them to increase dividends and fund more stock repurchases.
2022 free cash flow should be over $50Cdn million.

[Fraser921]

Thanks for the remarks

I took a position in HME, previously