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Hemisphere Energy Doubles PDP Reserve Value to $68 Million (Discounted at 10%), and Increases 2P Reserve Value by 71% to $198 Million (Discounted at 10%)


TSX-V: HME

VANCOUVERMarch 26, 2019 /CNW/ – Hemisphere Energy Corporation (TSX-V: HME) (“Hemisphere” or the “Company”) is pleased to announce highlights from its independent reserves evaluation effective as at December 31, 2018 prepared by McDaniel & Associates Consultants Ltd. (“McDaniel”).

During 2018 Hemisphere incurred capital expenditures of approximately $15.5 million, which included capital to drill 11 producing wells, three injector wells, and expand both batteries in the Atlee Buffalo area. This activity resulted in over 100% of Hemisphere’s year-end 2017 Proved plus Probable (“2P”) reserve volumes being converted into year-end 2018 Proved (“1P”) volumes. Reserve and production growth through 2018 is the result of new production from these wells, recognition of better overall well performance due to successful waterflood implementation over the past few years, and an increase in the total expected recovery factor for both waterflood pools.

2018 Reserve Highlights

2P Reserves

  • Increased net present value of future net revenue, discounted at 10%, before tax (“NPV10 BT”) by 71% to $197.9 million.
  • Increased reserve volumes by 48% to 10.6 MMboe (98% oil).
  • Replaced 949% of estimated 2018 production through organic development.
  • Added 3.8 Mboe of reserve volumes, at a finding and development cost (“F&D cost”) of $8.30/boe (including changes in future development capital (“FDC”)), for a recycle ratio of 1.9.
  • Achieved a two-year average F&D cost of $7.85/boe (including changes in FDC) for a recycle ratio of 2.2.
  • Increased NPV10 BT per basic share by 70% to $2.20.
  • Improved net asset value (“NAV”) by 63% to $1.83 per basic share.
  • Reserve life index (“RLI”) of 21.1 years based on annualized 2018 fourth quarter production, representing a low decline, long life asset base in early stages of development.

1P Reserves

  • Increased NPV10 BT by 78% to $142.4 million.
  • Increased reserve volumes by 55% to 7.6 Mboe (98% oil).
  • Replaced 763% of estimated 2018 production through organic development.
  • Added 3.1 Mboe of reserve volumes, at an F&D cost of $9.40/boe (including changes in FDC), for a recycle ratio of 1.7.
  • Achieved a two-year average F&D cost of $9.22/boe (including changes in FDC) for a recycle ratio of 1.9.
  • Increased NPV10 BT per basic share by 77% to $1.59.
  • Improved NAV by 69% to $1.21 per basic share.
  • Reserve life index (“RLI”) of 15.1 years based on annualized 2018 fourth quarter production.

The reserves data set forth below is based upon an independent reserves evaluation prepared by McDaniel dated March 14, 2019 with an effective date of December 31, 2018 and is in accordance with definitions, standards, and procedures contained in the Canadian Oil and Gas Evaluation Handbook and National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (“NI 51-101”). Additional reserve information as required under NI 51-101 will be included in Hemisphere’s Annual Information Form which will be filed on SEDAR on or before April 30, 2019.  Due to rounding, certain totals in the columns may not add in the following tables.  All dollar values are in Canadian dollars, unless otherwise noted.

Summary of Reserves(1)

Heavy Oil

Conventional

Natural Gas

Total

Reserves Category

(Mbbl)

(MMcf)

(Mboe)

Proved

Developed Producing

3,174.8

697.7

3,291.1

Developed Non-Producing

230.2

64.6

240.9

Undeveloped

4,049.4

183.8

4,080.1

Total Proved

7,454.4

946.1

7,612.1

Probable

2,953.0

309.1

3,004.5

Total Proved plus Probable

10,407.4

1,255.2

10,616.6

Note:

(1)

Reserves are presented as “gross reserves” which are the Company’s working interest reserves before royalty deductions and without including any royalty interests.

Summary of Net Present Value of Future Net Revenue(1)(2)

Net Present Value of Future Net Revenue, Before Tax

(M$, except per share amount)

Discounted at (% per Year)

Reserves Category

0%

5%

10%

Proved

Developed Producing

98,392.3

80,818.2

68,416.6

Developed Non-Producing

5,048.8

3,728.2

2,890.5

Undeveloped

115,670.2

89,949.3

71,049.9

Total Proved

219,111.3

174,495.7

142,357.1

Probable

106,578.6

75,010.3

55,575.9

Total Proved plus Probable

325,689.9

249,506.0

197,933.0

Per basic share(3)

Proved

$2.44

$1.94

$1.59

Proved plus Probable

$3.63

$2.78

$2.20

Notes:

(1)

Based on McDaniel January 1, 2019 forecast prices.

(2)

The net present value of future net revenue does not represent the fair market value of Hemisphere’s reserves.

(3)

Based on there being 89,793,302 issued and outstanding shares of the Company as of December 31, 2018.

Future Development Costs (“FDC”)

The following summarizes the development costs deducted in the estimation of the net present value of the future net revenue attributable to 1P and 2P reserves (using forecast prices and costs only).

Forecast Prices and Costs

Year

Proved

 (M$)

Proved plus
Probable

(M$)

2019

13,768

15,158

2020

19,453

23,578

2021

9,243

12,083

Total Undiscounted

42,464

50,819

Total Discounted at 10%

37,030

44,243

2018 Finding and Development Costs and Recycle Ratios(1)(2)

2018

2018 and 2017

2-Year Average

Proved 

Proved plus
Probable

Proved  

Proved plus
Probable

F&D Costs(3)

Exploration and development capital (M$)(4)(5)

15,537.4

15,537.4

23,840.1

23,840.1

Total change in FDC (M$)

13,564.0

16,395.0

23,339.6

28,769.4

Total F&D capital, including change in FDC (M$)

29,101.4

31,932.4

47,179.7

52,609.5

Reserve additions, including revisions (Mboe)

3,095.0

3,847.4

5,117.1

6,698.4

F&D costs, including FDC ($/boe) 

9.40

8.30

9.22

7.85

Recycle Ratio(6)

1.7

1.9

1.9

2.2

Notes:

(1)

All financial information included in this news release is per Hemisphere’s preliminary unaudited financial statements for the year ended December 31, 2018 which have not yet been approved by the Company’s audit committee or board of directors and therefore represents management’s estimates. Readers are advised that these financial estimates may be subject to change as a result of the completion of the independent audit on Hemisphere’s financial statements for the year ended December 31, 2018 and the review and approval of same with the Company’s audit committee and board of directors.

(2)

See “Oil and Gas Advisories” and “Oil and Gas Metrics”.

(3)

F&D costs are calculated as the sum of development capital plus the change in future development capital for the period divided by the change in reserves that are characterized as development for the period. Finding and development costs take into account reserves revisions during the year on a per boe basis and estimated 2018 production of 1111 boe/d.

(4)

The aggregate of the exploration and development costs incurred in the financial year and change during that year in estimated future development costs generally will not reflect total finding and development  costs related to reserve additions for that year.

(5)

The capital expenditures also exclude capitalized administration costs. 

(6)

Recycle ratio is calculated as operating netback divided by F&D costs. Operating netback is calculated as the operating field netback plus the Companys realized commodity hedging gain (loss) per barrel of oil equivalent.  Operating field netback is calculated as the Company’s oil and gas sales, less royalties, operating expenses and transportation costs per barrel of oil equivalent. The Companys estimated operating netback in 2018 was $15.54/boe (unaudited) and the combined two-year average for 2018 and 2017 was $17.36/boe (unaudited).

Summary of McDaniel Pricing as of January 1, 2019

The following table is McDaniel’s forecast pricing and foreign exchange rates as at January 1, 2019 which were used in the preparation of McDaniel’s reserve evaluation. Overall, McDaniel’s forecast of WTI and WCS pricing is down an average of approximately 2% and 1%, respectively, from the January 1, 2018 outlook over the same 15 year period, with a downward change of approximately 17% in the WCS forecast in 2019 specifically.

Oil

Natural Gas

Year

WTI

Crude Oil

Edmonton

Light
Crude Oil

Western
Canadian
Select

Crude Oil

Alberta

AECO Spot

Price

Inflation

US/Cdn

Exchange

Rate

($US/bbl)

($Cdn/bbl)

($Cdn/bbl)

($Cdn/MMBtu)

(%)

($US/$Cdn)

2019

56.50

63.30

47.50

1.85

0

0.750

2020

63.80

74.30

58.00

2.20

2.0

0.775

2021

67.60

78.50

64.40

2.55

2.0

0.800

2022

71.60

83.40

68.40

3.05

2.0

0.800

2023

73.10

85.10

69.80

3.20

2.0

0.800

2024

74.50

86.80

71.20

3.30

2.0

0.800

2025

76.00

88.50

72.60

3.35

2.0

0.800

2026

77.50

90.30

74.00

3.40

2.0

0.800

2027

79.10

92.10

75.50

3.45

2.0

0.800

2028

80.70

94.00

77.10

3.55

2.0

0.800

2029

82.30

95.80

78.60

3.60

2.0

0.800

2030

83.90

97.70

80.10

3.70

2.0

0.800

2031

85.60

99.70

81.80

3.75

2.0

0.800

2032

87.30

101.70

83.40

3.80

2.0

0.800

2033

89.10

103.80

85.10

3.90

2.0

0.800

Thereafter

Escalation Rate of 2%/year

2.0

0.800

Reserve Life Index (“RLI”)

As at December 31

  2018(1)

  2017(2)

Proved Developed Producing

6.5

6.7

Proved

15.1

17.5

Proved plus Probable

21.1

25.5

Notes:

(1)

Calculated as the applicable reserves volume divided by Hemisphere’s annualized 2018 fourth quarter production of 1378 boe/d.

(2)

Calculated as the applicable reserves volume divided by Hemisphere’s annualized 2017 fourth quarter production of 770 boe/d.

Net Asset Value (“NAV”)(1)

As at December 31

2018

2017

(M$ except share amounts)

Proved 

Proved plus
Probable

Proved  

Proved plus
Probable

NPV10 BT

142,357

197,933

80,419

116,673

Undeveloped Land & Seismic

 1,723(2)

  2,287(3)

Net Debt

 (35,561)(4)

(18,558)

Shares Outstanding (basic)

89,793,302

89,793,302

Net Asset Value per share (basic)

$1.21

$1.83

$0.71

$1.12

Notes:

(1)

Based on McDaniel January 1, 2019 forecast pricing.

(2)

Based on an internal evaluation by management of Hemisphere as of December 31, 2018 with an average value of $50 per acre for 23,424 undeveloped net acres, and $0.55 MM for seismic.

(3)

Based on an internal evaluation by management of Hemisphere as of December 31, 2017 with an average value of $50 per acre for 34,703 undeveloped net acres, and $0.55 MM for seismic.

(4)

All financial information as at December 31, 2018 is per Hemisphere’s preliminary unaudited financial statements for the year ended December 31, 2018 which has not yet been approved by the Company’s audit committee or board of directors and therefore represents management’s estimates. Readers are advised that these financial estimates may be subject to changes as a result of the completion of the independent audit on Hemisphere’s financial statements for the year ended December 31, 2018 and the review and approval of same with the Company’s audit committee and board of directors.

Corporate Outlook

Additions to the Company’s independently prepared reserve evaluation were achieved in 2018 due to the recognition of significant development activity and successful waterflood response in the Atlee Buffalo area. Of the 71 MMbbl OOIP mapped by McDaniel across both of these pools, overall aggregate recovery factors of 13% (1P) to 17% (2P) are reflected in McDaniel’s reserve report as at December 31, 2018. Last year, as at December 31, 2017,  recovery factors of just 10% (1P) to 12% (2P) were reflected in McDaniel’s reserve report of the same assets.

  • Analogues to Hemisphere’s Atlee Buffalo pools include the nearby Upper Mannville N2N and YYY pools. These pools have been producing under waterflood since the late 1990’s and have already recovered 16% and 24%, respectively, of Alberta Energy mapped oil in place. After 20 years of waterflood, these pools produced through the fourth quarter of 2018 at approximately 55% and 32% of peak pool oil rates, respectively, and have maintained relatively flat production over the past five years. Management expects these analogue pools to reach recovery factors much higher than those already attained, and in turn anticipates continued increases to McDaniel’s booked recovery factors for the Upper Mannville F and G pools with further development of the pools through 2019.
  • Reserves have been booked in the Atlee Buffalo F pool at a total pool recovery factor of approximately 16% (1P) to 19% (2P) of McDaniel’s mapped 31 MMbbl OOIP. There are currently 13 producing wells in the pool, including four producers drilled in 2018 and one additional well that had been booked as non-producing as of December 31, 2018.
  • Reserves have been booked in the Atlee Buffalo G pool at a total pool recovery factor of approximately 11% (1P) to 15% (2P) of McDaniel’s mapped 40 MMbbl OOIP. There are currently nine producing wells in the pool, including seven producers drilled in 2018.
  • 31 Proved and seven Probable Atlee Buffalo drilling locations have been attributed reserves in McDaniel’s reserve report as at December 31, 2018.

In 2019, Hemisphere plans to deploy capital of approximately $15 million to drill up to 16 wells in order to further expand these waterfloods and optimize both Atlee Buffalo pools. Horizontal drilling, slotted liners, and waterflood have proven to be extremely successful in the growth of production from 60 boe/d at the time when the Atlee Buffalo assets were acquired by the Company to approximately 1400 boe/d to date. The Company expects to see meaningful growth in production and reserves through the year with continued development of its core property.

Hemisphere is also very proud to highlight that its Liability Management Rating (LMR) with the Alberta Energy Regulator (AER) is at 8.85 as of March 2, 2019, which is within the top 10% of all companies evaluated by the AER. Total corporate decommissioning liabilities are estimated at $7.5 million on existing properties, with $3.1 million of those liabilities accounted for in the reserve report. With the recent Supreme Court of Canada ruling on the Redwater case regarding the responsibility for abandonment and reclamation liabilities, Hemisphere believes that having a strong LMR is a critical component of being a successful Canadian oil and gas company.

About Hemisphere Energy Corporation

Hemisphere Energy Corporation is a producing oil and gas company focused on developing conventional oil assets with low risk drilling opportunities. Hemisphere plans continual growth in production, reserves, and cash flow by focusing on existing assets with significant growth potential and executing strategic acquisitions.  Hemisphere trades on the TSX Venture Exchange as a Tier 1 issuer under the symbol “HME”.



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