Hemisphere Energy (HME.V and HMENF) Update - Jan 25

[dan_s]

My updated forecast/valuation model for Hemisphere will be posted to the EPG website late this morning.

HMENF is now in our High Yield Income Portfolio, and it has significant production growth potential.

Vancouver, British Columbia--(Newsfile Corp. - January 25, 2024) - Hemisphere Energy Corporation (TSXV: HME) (OTCQX: HMENF) ("Hemisphere" or the "Company") is pleased to provide a corporate update, announce the declaration of a quarterly dividend payment to shareholders, and deliver guidance for 2024.

Corporate Update

Hemisphere realized another successful year in 2023, balancing production growth with balance sheet strength and shareholder return. During the year, $17.5 million was returned to shareholders in the form of dividends ($13.1 million) and share buybacks ($4.4 million), representing an approximate 14% yield to shareholders based on the market capitalization of Hemisphere at year-end. < 2023 dividends totaled $0.96US per share; ~10% yield at the current share price.

The Company achieved record average production in the fourth quarter of 3,375 boe/d (99% heavy oil), which represents a 16% increase over the same period in 2022. This growth in production year-over-year is the combined result of Hemisphere's successful third quarter drilling program with the Company's effective enhanced oil recovery ("EOR") polymer flood projects. Hemisphere's annual average production for 2023 was approximately 3,100 boe/d (99% heavy oil), representing 10% growth as compared to 2022. < Q4 production beat my forecast of 3,300 Boepd.

Balance sheet strength continued to be a priority in 2023, with Hemisphere exiting the year in a cash position. Hemisphere funded all of its shareholder returns and entire $16 million capital expenditure program on 2023 cash flow.

In addition to drilling 8 successful Atlee Buffalo wells and upgrading some of its facilities, the Company acquired over 2,500 hectares of new land in Saskatchewan and Alberta. Hemisphere has plans to drill a new prospect on some of these Saskatchewan lands in the first half of 2024, and believes it to be prospective for EOR polymer flooding. < This new project has the potential to double Hemisphere's production over the next three years with a successful polymer flood.

Given the significant free cash flow generated by Hemisphere's ultra-low production decline and long-life reserve asset base, the Company was able to complement its $0.025 per share quarterly base dividend with a $0.03 per share special dividend paid in the fourth quarter of 2023. This brought total shareholder returns last year to $0.13Cdn per share in dividends. Hemisphere also invested $4.4 million into its normal course issuer bid ("NCIB") share buyback program to purchase and cancel 3.5 million shares in 2023.

Quarterly Dividend

Hemisphere is pleased to announce that its Board of Directors has approved a quarterly cash dividend of $0.025 per common share in accordance with the Company's dividend policy. The dividend will be paid on February 23, 2024 to shareholders of record as of the close of business on February 9, 2024. The dividend is designated as an eligible dividend for income tax purposes.

2024 Corporate Guidance

Hemisphere's Board of Directors has approved a 2024 capital expenditure program of $21 million, which is planned to be entirely funded by Hemisphere's estimated 2024 adjusted funds flow ("AFF") of $40 million and is anticipated to provide 10% annual production growth. The majority of capital will be allocated to drilling and facility work, with approximately 10% allotted to exploration and land acquisition. Over half of the planned capital expenditures are scheduled for the third quarter, providing Hemisphere with the flexibility to adjust plans subject to the commodity price environment.

The start of 2024 brought with it some extreme cold weather which has substantially affected corporate production during the month of January. The failure of an electrical panel at Hemisphere's G pool facility resulted in the loss of power to its operations. Subsequent sustained -40°C weather led to freezing of most of the G pool wells and facility, which experienced 5 days of complete downtime and an additional few days of lower production as equipment was repaired and wells were brought back online. All impacts of this production disruption have been accounted for in the guidance set out below, and the team has now restored operations back to normal levels.

After capital expenditures and asset retirement obligations ("ARO"), 2024 free funds flow ("FFF") is estimated to be $19 million, of which approximately 50% is planned to be paid in quarterly dividends as shown in the table below. The balance of cash will be used for discretionary purposes, which may include potential acceleration of other development or exploration projects, acquisitions, and additional return of capital to shareholders through Hemisphere's NCIB program and/or special dividends.

Management believes that the 2024 development plan provides stable production growth and consistent shareholder returns, while still allowing for modest investment in a new EOR play with exciting growth potential for the Company.

Highlights and assumptions of Hemisphere's guidance at US$75/bbl WTI are as follows:

Average annual production of 3,400 boe/d (99% heavy oil), a 10% increase as compared to 2023

Average WTI price of US$75/bbl, with sensitivities shown at US$65/bbl and US$85/bbl

WCS differential of US$15.50/bbl and quality adjustment of $7.50/bbl

CAD/US FX of 1.35

Operating and transportation costs of $14.85/boe

Royalties and GORRs on gross revenue of 20% at US$75/bbl WTI, 18% at US$65/bbl WTI, and 22% at US$85/bbl WTI

Net G&A of $3.65/boe

Tax Costs of $7.29/boe at US$75/bbl WTI, $4.91/boe at US$65/bbl WTI, and $9.53/boe at US$85/bbl WTI

[dan_s]

Note just in from HFI Research:
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Hemisphere Energy = Huge Free Cash Flow Generation Potential

It isn’t easy to find North American E&Ps that generate a 20%+ free cash flow yield on their enterprise value with WTI in the mid-US$70s per barrel. Hemisphere Energy (HME:CA) (OTCQX:HMENF) is a unique standout. The company’s 22% free cash flow yield at current oil prices is among the highest we’ve come across. Moreover, nearly all of its free cash flow is distributed to shareholders through dividends and share repurchases. These characteristics give HME shares some of the best return prospects at current oil prices.

With robust cash flow generation and shareholder-oriented capital allocation, we rate HME as a Buy with a $2.00 price target that implies 58.7% upside from HME’s current $1.26 market price.

Uniquely Attractive Economics
HME stands apart from its peers because nearly 100% of its production is comprised of oil, and its production is subject to an extremely low decline rate. These features allow it to maintain flat production at a very low cost per barrel. They also create some of the highest cash flow torque to higher oil prices among North American E&Ps.

HME accomplishes this feat by targeting high-quality reserves in the Manville F & G pools in Southeast Alberta, in which it owns a 100% working interest. It produces the oil using polymer flooding, which involves injecting polymers and water into the oil reservoir to displace crude and increase oil recovery. HME’s favorable geology and effective use of enhanced recovery reduce the decline rate of its wells to minimal levels, as shown below.

Source: Hemisphere Energy, December 2023 Investor Presentation.

A low decline rate on HME’s production base translates into greater capital efficiency: it costs HME significantly less than its peers to bring new production online. Its production per dollar of capex causes more cash to flow to the bottom line for shareholders.

While HME boosted capex in the third quarter to increase production heading into year-end, we estimate it can keep production flat by spending $18 million on capex. Consider that with WTI at US$75 per barrel, the company can generate $48.1 million of free cash flow. After capex, $30.1 million of free cash flow is left for shareholders. On a per-share basis, that equates to $0.28 of free cash flow, a 22% yield on HME’s $1.26 share price.

That’s an impressive amount of free cash flow at such a low oil price. Shareholders also benefit from HME’s more than $20 million of tax pools, which will shield it from cash taxes for years.