Financial results benefit from fall drilling

Hemisphere releases reserve report

Hemisphere reports production levels near expectations, offers initial 2024 guidance

Estimates finetuned to reflect weak December quarter energy prices

Michael Heim

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Energy

Oil & Gas

Hemisphere Energy Corp

<p><strong>Hemisphere Energy reported fourth quarter and 2002 results demonstrating strong production growth and a sharp increase in cash flow and earnings.&nbsp;</strong>Quarterly results continued a production growth trend begun in mid 2021 when the company accelerated its drilling program. Management preannounced production numbers on January 24th so there were no surprises as far as production goes, but it is worth noting that production rates increased 55% for the year versus last year.</p>
<table border="1" style="border-collapse: collapse;width: 766px;height: 109px">
<tbody>
<tr style="height: 18px">
<td style="width: 219px;height: 18px">C$</td>
<td style="width: 62px;height: 18px">2022-4Q</td>
<td style="width: 64px;height: 18px">2021-4Q</td>
<td style="width: 64px;height: 18px">2022-3Q</td>
<td style="width: 142px;height: 18px">Noble Est.</td>
<td style="width: 67px;height: 18px">2022</td>
<td style="width: 60px;height: 18px">2021</td>
<td style="width: 88px;height: 18px">Noble Est</td>
</tr>
<tr style="height: 18px">
<td style="width: 219px;height: 18px">Production (BOE/d)</td>
<td style="width: 62px;height: 18px">2907</td>
<td style="width: 64px;height: 18px">2164</td>
<td style="width: 64px;height: 18px">2870</td>
<td style="width: 142px;height: 18px">2974</td>
<td style="width: 67px;height: 18px">2828</td>
<td style="width: 60px;height: 18px">1819</td>
<td style="width: 88px;height: 18px">2828</td>
</tr>
<tr style="height: 18px">
<td style="width: 219px;height: 18px">Realized Oil Prices</td>
<td style="width: 62px;height: 18px">73.53</td>
<td style="width: 64px;height: 18px">74.43</td>
<td style="width: 64px;height: 18px">90.39</td>
<td style="width: 142px;height: 18px">90.20</td>
<td style="width: 67px;height: 18px">94.29</td>
<td style="width: 60px;height: 18px">65.46</td>
<td style="width: 88px;height: 18px">98.44</td>
</tr>
<tr style="height: 19px">
<td style="width: 219px;height: 19px">Royalties per BOE</td>
<td style="width: 62px;height: 19px">(16.49)</td>
<td style="width: 64px;height: 19px">(15.38)</td>
<td style="width: 64px;height: 19px">(24.19)</td>
<td style="width: 142px;height: 19px">(22.00)</td>
<td style="width: 67px;height: 19px">(23.71)</td>
<td style="width: 60px;height: 19px">(15.38)</td>
<td style="width: 88px;height: 19px">(25.03)</td>
</tr>
<tr style="height: 18px">
<td style="width: 219px;height: 18px">Prod Cost (exc trans) per BOE</td>
<td style="width: 62px;height: 18px">(13.14)</td>
<td style="width: 64px;height: 18px">(9.27)</td>
<td style="width: 64px;height: 18px">(13.12)</td>
<td style="width: 142px;height: 18px">(9.00)</td>
<td style="width: 67px;height: 18px">(11.09)</td>
<td style="width: 60px;height: 18px">(9.86)</td>
<td style="width: 88px;height: 18px">(9.99)</td>
</tr>
<tr style="height: 18px">
<td style="width: 219px;height: 18px">
         </td>
<td style="width: 62px;height: 18px">
         </td>
<td style="width: 64px;height: 18px">
         </td>
<td style="width: 64px;height: 18px">
         </td>
<td style="width: 142px;height: 18px">
         </td>
<td style="width: 67px;height: 18px">
         </td>
<td style="width: 60px;height: 18px">
         </td>
<td style="width: 88px;height: 18px">
         </td>
</tr>
</tbody>
</table>
<p>Increased production was partially offset by a drop in energy prices. Hemisphere&#8217;s well prices are based off of Western Canada Special (WCS) oil prices. WCS prices diverged from U.S.-based West Texas Intermediate (WTI) prices in the last trading days of 2022 as shown by the chart below. The pricing differential has improved since the beginning of March, but remain above US$20 as of the close of last night&#8217;s trading. We have increased the basin discount in our models to reflect recent pricing.<br />
   </p>
<p> <img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/WCSchart.jpg" style="width: 577px;height: 387px" /><br />
   </p>
</p>
<p>Source: Alberta Energy and US Energy Information Administration</p>
<p>Lower-than-expected realized prices in the quarter were partially offset by a decrease in royalty rates. Production costs (excluding transportation costs) remain somewhat elevated as they were in the September quarter. We look for production costs per barrel to decrease modestly as new production comes on line in 2023.</p>
<p><strong>As netbacks rose, so did the company&#8217;s Adjusted Fund Flow (AFF) and Net Income.</strong> Despite a slip in pricing in the fourth quarter, the margin between prices and costs is high. Operating netbacks (realized prices less royalties and operating costs) continues to be favorable for the company and is leading to strong cash flow and earnings. This bodes well for the company&#8217;s plans to pay a dividend and repurchase shares. We would note that Hemisphere has already virtually eliminated all debt and has begun to turn its focus towards accelerating drilling and returning capital to shareholders. The company spent C$18.3 million in 2022, up from C$8.2 million last year. At the same time, it initiated its first dividend in June and repurchased C$3.4 million of common stock in 2022, more than offsetting C$1.2 million on shares issued under incentive programs. A full net C$1.7 million of share repurchases were done in the fourth quarter alone.&nbsp;<br />
   </p>
<table border="1" style="border-collapse: collapse;width: 751px;height: 90px">
<tbody>
<tr style="height: 18px">
<td style="width: 157px;height: 18px">C$</td>
<td style="width: 70px;height: 18px">2022-4Q</td>
<td style="width: 74px;height: 18px">2021-4Q</td>
<td style="width: 71px;height: 18px">2022-3Q</td>
<td style="width: 173px;height: 18px">Noble Est.</td>
<td style="width: 64px;height: 18px">2022</td>
<td style="width: 58px;height: 18px">2021</td>
<td style="width: 84px;height: 18px">Noble Est.</td>
</tr>
<tr style="height: 18px">
<td style="width: 157px;height: 18px">Netbacks (/BOE)</td>
<td style="width: 70px;height: 18px">42.62</td>
<td style="width: 74px;height: 18px">38.24</td>
<td style="width: 71px;height: 18px">49.96</td>
<td style="width: 173px;height: 18px">55.99</td>
<td style="width: 64px;height: 18px">50.38</td>
<td style="width: 58px;height: 18px">3.50</td>
<td style="width: 84px;height: 18px">60.38</td>
</tr>
<tr style="height: 18px">
<td style="width: 157px;height: 18px">AFF (C$ mil)</td>
<td style="width: 70px;height: 18px">11.0</td>
<td style="width: 74px;height: 18px">6.2</td>
<td style="width: 71px;height: 18px">10.6</td>
<td style="width: 173px;height: 18px">10.4</td>
<td style="width: 64px;height: 18px">46.7</td>
<td style="width: 58px;height: 18px">18.5</td>
<td style="width: 84px;height: 18px">46.0</td>
</tr>
<tr style="height: 18px">
<td style="width: 157px;height: 18px">Net Income</td>
<td style="width: 70px;height: 18px">3.3</td>
<td style="width: 74px;height: 18px">5.4</td>
<td style="width: 71px;height: 18px">9.3</td>
<td style="width: 173px;height: 18px">8.4</td>
<td style="width: 64px;height: 18px">21.3</td>
<td style="width: 58px;height: 18px">5.9</td>
<td style="width: 84px;height: 18px">26.5</td>
</tr>
<tr style="height: 18px">
<td style="width: 157px;height: 18px">EPS (Diluted)</td>
<td style="width: 70px;height: 18px">0.03</td>
<td style="width: 74px;height: 18px">0.06</td>
<td style="width: 71px;height: 18px">0.09</td>
<td style="width: 173px;height: 18px">0.08</td>
<td style="width: 64px;height: 18px">0.21</td>
<td style="width: 58px;height: 18px">0.06</td>
<td style="width: 84px;height: 18px">0.26</td>
</tr>
</tbody>
</table>
<p>Below the cash flow line, the company reported strong results, albeit slightly below our expectations. The difference seems to lie in a sharp increase in non-cash costs, notably share-based compensation and depreciation<strong>.&nbsp;<br /></strong></p>
<p><strong>The investment premise remains intact.</strong> The company is well positioned to take advantage of profitable netbacks and is in an enviable position of generating more cash flow than it can put back into operations. We expect the company to continue to accelerate its share repurchase program and increase the common dividend, both of which should help drive the stock price higher. Finding additional drilling opportunities or making a small acquisition would be viewed as an unexpected bonus. We continue to rate the shares <strong>outperform</strong> with a US$2.25 price target (C$3.00 for the shares on the Toronto Exchange).<br />
   </p>


Hemisphere Energy Corp (HMENF)

Hemisphere completed year full of growth

Fundamental Analysis:

Rating: Log in to view

Financial results benefit from fall drilling (HMENF)

Hemisphere releases reserve report (HMENF)

Hemisphere reports production levels near expectations, offers initial 2024 guidance (HMENF)

Estimates finetuned to reflect weak December quarter energy prices (HMENF)

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