Q2 2020 Highlights
- Achieved revenue of $2.5 million.
- Realized an operating netback of $2.7 million, including hedging gains of $1.4 million.
- Attained quarterly adjusted funds flow from operations of $1.4 million or $0.02 per share (basic).
- Increased quarterly production by 20% to 1,645 boe/d (100% heavy crude oil), over the second quarter of 2019.
- Reduced operating and transportation expenses to $7.64/boe, a 50% decrease from the second quarter of 2019.
- Achieved an operating netback of $17.74/boe, including a $9.33/boe hedging gain.
- Lowered net debt to $30.9 million, a $2.3 million decrease from the end of the first quarter 2020.
- Increased corporate Liability Management Ratio (LMR) with the Alberta Energy Regulator to 12.19 as of the end of the second quarter of 2020.
During the second quarter of 2020, Hemisphere was impacted by the significant drop in oil prices due to the demand reduction caused by the COVID-19 pandemic. Despite these challenges, Hemisphere managed to achieve positive operating netback of $17.74/boe and funds flow from operations of $1.4 million by adapting quickly to the changing market conditions. The Company shut-in its highest operating cost wells, deferred all but essential capital spending, and took on additional oil hedges to keep the majority of its operations running while protecting against the risk of negative oil prices.
Hemisphere’s production averaged 1,645 boe/d (100% heavy crude oil) through the second quarter, after shutting in some of its higher cost wells. With a sharp focus on maximizing netbacks, Hemisphere was able to lower its operating and transportation costs for the second quarter to $7.64/boe. This reduction is a result of diligent work by the operations team and proactive rate reductions from our core vendors and service providers. Since bringing most of its wells back on, Hemisphere’s corporate production to date in August is currently averaging approximately 1,725 boe/d (field estimate for Aug 1-24, 99% heavy crude oil and 1% conventional natural gas). Fuel gas issues in Atlee Buffalo have impacted the ability to fully optimize production, and plans to construct a small pipeline to connect into a gas system are underway.
With limited capital spending, the Company was able to lower net debt at the end of the second quarter by $2.3 million or 7% as compared to the end of the first quarter. Hemisphere also proactively entered into an agreement with its lender in April 2020 to temporarily waive the application of and compliance with its two financial covenants (being the interest coverage ratio and total leverage ratio covenants), two reserve-based covenants (being the PDP coverage ratio and total proved reserve coverage ratio covenants), and production covenant that are included in the credit agreement with the lender, in each case for the fiscal quarter ending June 30, 2020. Hemisphere continues to have a very positive relationship with its lender and still has over two years remaining of its five-year term loan, with a maturity date of September 15, 2022.
Hemisphere intends to continue its conservative approach to capital spending during the second half of 2020 with a focus on maximizing cash flow, minimizing capital spending, and lowering net debt. Should commodity pricing and volatility significantly improve, Hemisphere will be ready to quickly execute development plans on its existing assets. Hemisphere is currently moving forward applications which, if approved, will allow for conversion of its Atlee Buffalo waterflood assets into polymer flood projects. The Company is encouraged by the higher WCS oil prices experienced to date during the third quarter and the oil supply versus oil demand outlook heading into 2021.
Financial and Operating Summary
| Three Months Ended
| Six Months Ended
|Average daily production|
|Natural gas (Mcf/d)||0||295||96||291|
|Oil and NGL weighting||100%||96%||99%||96%|
|Average sales prices|
|Natural gas ($/Mcf)||0||(6)||(2.14)||1.97||2.41|
|Operating netback ($/boe)|
|Petroleum and natural gas revenue||$||16.38||$||59.44||$||22.52||$||55.65|
|Operating field netback(1)||8.41||35.02||12.00||34.73|
|Realized commodity hedging gain (loss)||9.33||(3.92)||6.77||(3.74)|
|Petroleum and natural gas revenue||$||2,452,793||$||7,396,095||$||7,415,993||$||13,831,347|
|Operating field netback(1)||1,259,856||4,357,767||3,950,664||8,632,028|
|Cash flow provided by operating activities||826,988||2,536,247||4,194,249||3,162,906|
|Adjusted funds flow from operations(3)||1,363,913||2,559,898||3,528,406||5,194,882|
|Per share, basic and diluted||0.02||0.03||0.04||0.06|
|Net income (loss)||(3,187,206)||2,812,582||(1,034,211)||1,923,356|
|Per share, basic and diluted||(0.04)||0.03||(0.01)||0.02|
|Gross term Loan(5)||$||33,940,000||$||34,036,600||$||33,940,000||$||34,036,600|
(1) Operating field netback is a non-IFRS measure calculated as the Company’s oil and gas sales, less royalties, operating expenses and transportation costs on an absolute and per barrel of oil equivalent basis.
(2) Operating netback is a non-IFRS measure calculated as the operating field netback plus the Company’s realized commodity hedging gain (loss) on an absolute and per barrel of oil equivalent basis.
(3) Adjusted Funds Flow From operations is a non-IFRS measure that represents cash generated by operating activities, before changes in non-cash working capital and adjusted for any decommissioning expenditures, and may not be comparable to measures used by other companies.
(4) Net debt is a non-IFRS measure calculated as current assets minus current liabilities including gross term loan, and excluding fair value of financial instruments and lease liabilities.
(5) Gross term loan is calculated as the total USD draws on the term loan translated to Canadian Dollars at the period end exchange rate.
About Hemisphere Energy Corporation
Hemisphere Energy Corporation is a producing oil and gas company focused on developing low risk conventional oil assets for minimal capital exposure through developing known pools of oil and optimizing waterflood projects. Hemisphere plans continual growth in production, reserves, and cash flow by drilling existing projects and executing strategic acquisitions. Hemisphere trades on the TSX Venture Exchange as a Tier 1 issuer under the symbol “HME”.