Saturday, January 10, 2015

Hemisphere Energy Corp. Pumping Alberta's Liquid Oil

Hemisphere Energy Corp. (HME.V) drills for liquid oil in Canada.  They are fortunate that Canada is such a friendly place for extractive enterprise.  Canada remains favorably ranked in both the Transparency International Corruption Perceptions Index (10th out of 175) and the Heritage Foundation Index of Economic Freedom (6th out of 178).  Their CEO is a geologist, which I like to see in a junior exploration company.

The company develops two projects in Alberta and one in British Columbia.  Attlee Buffalo and Jenner have somewhat different economics, as far as I can tell from their corporate statements.  It looks like Atlee Buffalo is the more attractive property, so they must preserve their flexibility to adjust production for each well.  I reviewed their annual statement dated April 14, 2014 (found in SEDAR) for some interesting tidbits.  Part of Note 8 on page 43 described an impairment charge of over $5.6M in 2012 for assets whose estimated reserves declined past the threshold of economic recovery.  It stands to reason that announcements of land package deals in the junior exploration space mean less than geological estimates of OOIP.

Hemisphere's most recent financial statements for Q3 2014 describe favorable netbacks and positive net income.  The company achieved these results before the price of WTI crude crashed to below $50/bbl.  I noticed that the line in their financial statement for "Average realized prices for crude" as of Sept. 30, 2014 was $77.97, when the average benchmark WTI for that quarter was $97.17.  The weaker Canadian dollar is a boon for Canadian producers like Hemisphere because Canadian exported oil is cheaper for US refineries even as the WTI price for US-produced oil continues to fall.  Nonetheless, Hemisphere and other juniors will continue to find it challenging to sell at competitive prices in this weak market for oil.

The company's current liabilities were almost eight times as large as their current assets as of Sept. 30.  That is very worrisome given their positive net earnings of only $833K for the quarter.  I do not see how they will be able to cover their liabilities into 2015 without raising significant amounts of new cash.  Raising more capital will dilute existing shareholders.

I will take a pass on this particular company.  Hemisphere's high costs negate its attractive netbacks in an era when WTI is crashing.  The Canadian dollar's weakness against the US dollar won't last forever, so Canadian juniors have a very limited window in which to build either a cash hoard or production growth that will sustain them in the difficult months ahead.

Full disclosure:  No position in Hemisphere Energy at this time.