Description

While I believe this is a very solid low risk & attractive reward situation, I think there is good reason to keep this one brief. That reason is that most of mpk's April 2022 writeup thesis points have remained roughly intact. It's also a fairly simple situation. Let's discuss how the 3 original points have remained intact/evolved & add a 4th point as a sweetener. 

Main points were/are, Hemisphere is cheap while owning a great asset (polymer flood on a conventional, large OOIP, field) and has a talented owner-operator:

1. is highly cash generative (low opex, low capex intensity from being conventional sandstone field & low decline). Reserve value per boe is very high.
2. trades at a material discount to 2P value
3. said 2P value is likely to be understated

See corporate presentation here. 

So what changed? I will compare the YE23 to the YE21 numbers, discuss the 3 original points and add a 4th one:

1. cash cow nature of asset has remained intact (GP & OP margins are still 75% & 50% while growing production), production boepd has increased by 26%, polymer flooding is going well 
2. trades at 42% of 2P, while 48% in mpk's write-up (careful: presented pre-tax, but Canada has attractive O&G fiscal regime with frontloading of deductability of expenses etc)
3. 2P reserve bbl's have remained flat from 15.7 to 16.2 mmboe while 2mmboe of depletion occurred & production has increased. By my numbers, the 2P reserves now imply an ultimate recovery of ~26%

Point 3: 2P understated?

Have a look at mpk's original discussion on this:

On this last point, note that IPCO’s Suffield YYY and UU pools have recovered a cumulative 29% and 50% of Original Oil in Place (OOIP), respectively.  Hemisphere’s current 2P reserves assume only 23% for this same metric.  At the YYY pool’s 29%, 2P reserves would be 30% higher.  At the UU pool’s 50%, reserves would be 2.5x the current level.

Atlee Buffalo field is 20 km from Suffield YYY & UU, producing from same Upper Mannville formation.

I would add 2 bullish points (reading "Essentials of Polymer Flooding" by T. Antoine, I tried to find comparison points between Atlee Buffalo. These are merely points from a "ceteris paribus" POV. Take this with a grain of salt: this is from an outsider with very limited data & no geology background):

1. all Suffield pools have been under waterflood much longer than Atlee Buffalo (1.5 decades vs a few years). Having been under waterflood for long negatively impacts the ultimate recovery rate according to literature. This is supported from empirical literature, but also from first principles. The reason why polymer flooding works better/longer than waterflooding in the first place, is that it avoids adverse phenomena (fingering) that start when waterfloods mature.

2. OOIP at Atlee Buffalo is 3X the Suffield YYY & UU pools combined. Greater scale should allow for more economic/granular ops & hence more extraction

Despite this, Atlee Buffalo 2P reserves imply 25% ultimate recovery today. I wasn't able to independently verify the exact interim Suffield YYY & UU production since mpk's posting (if anyone has a free solution that doesn't involve a day of python coding to extract & transform 100MB regulator csv files let me know), but I did a visual inspection (via Petroninja Free Tier) of every single YYY & UU well historic production chart (YYY & UU = the wells in the south east of block 020-08W4), and the interim decline seems to be negligible since '21 (and perhaps 10% since 2017).  Based on this, I estimate the cum recovery to date vs OOIP at Suffield YYY & UU is ~2 pp higher (31% & 52%), while those fields seem to be declining at a low 1-2% clip a year. These fields are much later life with high water cuts (vs Atlee having only recovered <1/3rd of 2P), but it seems reasonable to assume at least 5 more years of economic operations x ~1 pp of OOIP production a year. This puts conservative EOR of these fields at 36-57%. 

As a rookie, I think it's fair to say there is some upside on 2P estimates. My speculation on why 2P is conservative vs realized (not 2P) analogues: Atlee Buffalo is still early & still increasing production from polymer injection & incremental drilling. It's likely corporations don't plan >5 years ahead, so the conservativism is probably explained from this larger than usual wedge between what is economic & what is already planned (i.e. reserve evaluators weigh concrete plans less conservatively).   

Valuation

At the low end (36% conservative OOIP est. for YYY; while Atlee seems superior from an outsider perspective), plausible remaining economic barrels are 1.9x the 2P reserves. In NPV10 terms this could be maybe 1.2-1.5X the 420 MCAD 2P est pre-tax.

The G&A runs at 5MCAD a year. This is 3 USD/boe. Assuming half of that is from being subscale & capitalizing at 10X, it would add 6 percentage points to the 42% EV/ pre-tax NPV10 valuation ratio to make the valuation like for like with larger peers. However, this is easily made back from the 2P being likely understated at least 20-50% (which would subtract 7 to 14 points to the same valuation ratio).

In summary, the fair LFL EV/NPV10 BT ratio is around 30-40%. This seems low for a highly cash generative and low risk profile asset with great shareholder stewardship (see next). 

High capital returns

Last year saw another ~10% of market cap in capital returns (NCIB, div, and end of year special div). Recent cap returns increased my confidence the owner operator is shareholder friendly.

Sweetener: Manito Lake

Large upside, small downside (upside to downside scenario ratio 30-50X; quantum of upside ~ 1-2x market cap; chance of upside scenario materializing 10-33%)

While the CEO has mentioned he's been on look-out for good land to repeat the success of the polymer flood at Atlee Buffalo, he wasn't able to find it in the last . This changed recently:

While the company has not been that vocal about this project that has yet to be derisked (understandably), the CEO has mentioned the field has similar characteristics (though slightly heavier oil), and the OOIP of this field is >25% larger than Atlee Buffalo. What is interesting is that this project only cost <2 MUSD in land and ~10MUSD in upfront capital & consultant expenses etc. (mostly absorbed by now). The upside is another Atlee Buffalo (aka 0.5-1B CAD in 2P NAV, or 3-6$ p.s.) accruing over the next years if the field response is a success in the next years. In H1 2025 there will be a first reporting on the field response to the pilot polymer flooding ongoing since a few months. 

Catalyst

1. the combo of deep Value (especially risk adjusted) and continued High Returns of Capital is its own catalyst 
2. Manito Lake field response to polymer flood