Energy Prospectus

Company has reportedly approval for up to $8,000,000 to buy back shares. 10,000 trade volume over last several days, I think.

Since the company trades at $1 now, the math is easy - 8,000,000 shares divided by 253 trading days = 31,000 shares per day.

Great 3 year performance, but now Mgmt. seems intent on preserving maximum Mgmt. financial flexibility (won't commit to particular shareholder return model) but honestly, they seem stuck now and the stock has traded sideways since February, and down 50% from it's high. Maybe this volatility comes with the territory of a small cap but the value give back has not been a fun return trip.

Yes, this does come with small-cap territory. Plus, oil price weakness does keep a lid on HME since oil sales are 100% of the company's revenues.

Based on my conversation with Don Simmons during the recent luncheon he hosted for us on November 28.
> With net debt now below zero, the company will have a lot of free cash flow. < Over $35Cdn million FCF in 2023 based on my forecast.
> Dividends will stay at current rate and they will buy back as much stock as possible, but stock buybacks are more limited in Canada. I doubt that stock buybacks will be 8 million shares in 2023. I am modeling 103 million shares dropping to 100 million in 2023 and 95 million in 2024.
> The company's largest shareholder wants capital gains, therefore stock buybacks will be the priority over higher dividends.
> There are only 12-14 more HZ drilling locations within Atlee Buffalo. Not much "running room" left for Hemisphere. Hemisphere will have enough FCF to drill all of them next year, but that is highly unlikely. There are several other potentially productive zones within the company's leasehold.
> Assuming polymer floods at both the G Pool and the F Pool work, which it appears they will, Hemisphere's production should ramp up to 4,000 bpd within 18 months. Don does not want to overbuild the production facilities, so 4,000 bpd should be max production from Atlee Buffalo and it could stay at that rate for 5-10 years. Atlee Buffalo will be a "cash machine" for this company.
> Don is looking for a high-quality acquisition, but he will only buy something that will be accretive and have development upside. As a shareholder myself, I definitely do not want Hemisphere to buy anything that is "marginal".
> If Hemisphere does not make an acquisition in 2023, I do expect them to pay a big "Special Dividend" at year-end.

This is what should take the stock price higher.
#1: The year-end reserve report should show HME's PV10 Net Asset Value of just P1 reserves over $3.00Cdn per share. < As you can see on slide 11 of the Company's most recent presentation, the PV10 Net Asset Value was $2.45Cdn per share at the end of 2021 and P1 reserves are sure to be higher this year-end.
#2: Higher oil prices are coming in 2023 because Biden can't keep draining the SPR and there are no significant oil supply additions coming online anywhere in the world. < IEA forecasts oil demand increasing by 1.7 million bpd in 2023 and I sure don't see where it will be coming from other than peace with Russia and Iran.
#3: HME = Atlee Buffalo. Atlee Buffalo is a "Screaming Takeover Target", which the year-end reserve report will show is worth more than $2.50 per share assuming WTI at $70/bbl and over $4.00 if WTI is over $100/bbl.

For me, HME is a "Call on oil" that pays a nice dividend.

Dan

Did you get any sense from Don what the CapEx would be for 2023? Hemisphere doesn't have that much in the way of facilities and as they have been upgrading all their equipment/facilities over the last year so I'm thinking CapEx will be decidedly lower. I know the Corporate Presentation says $16mm, but i was wondering if you heard anything in the presentation that would lead you to think it would be lower? I wish they would go purely into Maintenance Mode, cut the CapEx to the bone, and send every spare dollar to shareholders on first buy backs right up to their Normal Course Bid limit (they have about 7mm remaining) and then special divvy's at these prices.

$ 50mm FFO
($12mm) CapEx

$38mm FCF
($10mm) Base Dividend
($ 9mm) Buy Back @ whatever Canadian per share

I expect 2023 and 2024 capex for Atlee Buffalo to be in the range of $16 to $18 million each year. They will drill and complete 6-8 new wells each year, upgrade facilities to handle 4,000 bopd and convert a few wells to injection wells. By the end of 2024 Atlee Buffalo should be totally developed and producing ~4,000 bpd. Don did indicate that there are other zones that might be economic at current oil prices.

If WTI averages $85US per bbl, Atlee Buffalo should generate $50 to $55 million of annual operating cash flow.

I expect the fixed dividend to remain the same with excess FCF used to buyback shares. If the Company does not make an acquisition, I expect them to pay out a "Special dividend" at the end of each year. I think Don will add some clarification to the return of capital program when they release Q4 results.