Again in July, I argued Hemisphere Power (TSXV:HME:CA) (OTCQX:HMENF) was an fascinating dividend candidate because of its sturdy dividend coverage. The corporate is paying a quarterly dividend of C$0.025 per share which represented an 8% dividend yield, however Hemisphere’s dividend coverage bases the dividends on the working money movement. Because the oil value was going up (and subsequently continued to extend all through the third quarter) I argued the dividend would doubtless be elevated. This has now occurred. And though the Q3 outcomes clearly nonetheless must be reported, Hemisphere has simply introduced a C$0.03 particular dividend, bringing the anticipated dividend for the yr is C$0.13 for a yield of in extra of 10%. I needed to have one other take a look at the inventory to determine how sturdy the third quarter can be.
The Q2 outcomes permit us to run the numbers on Q3
Earlier than diving into my expectations for the third quarter, it is necessary to have a more in-depth take a look at the Q2 outcomes as that would be the place to begin for my Q3 projections.
As Hemisphere Power primarily produces heavy oil (representing in extra of 99% of the full oil-equivalent manufacturing), the WCS value and the differential between mild oil and heavy oil is essential for the corporate (and its shareholders).
Throughout the second quarter of the present monetary yr, Hemisphere reported a median realized value of C$73 for its heavy oil and about C$2.36 for the very small quantity of pure fuel that was produced in the course of the quarter. This resulted in a median acquired value of C$72.48 per barrel of oil-equivalent and this meant the full netback was C$42.41 per barrel of oil-equivalent, excluding hedge losses. The best working value wasn’t the pure manufacturing value or the transportation expense, however the royalties. As you’ll be able to see beneath, the royalties made up about 50% of all manufacturing prices.
The entire income reported by Hemisphere within the second quarter was roughly C$19M and about C$15M after taking the royalty funds into consideration. The entire internet income of C$14.8M additionally included about C$0.2M in hedging losses.
And the earnings assertion clearly additionally gives proof of the low value nature of the manufacturing. The entire manufacturing prices had been lower than C$4M and depletion and depreciation bills made up about 30% of all working bills. That is nice as this meant the pre-tax earnings got here in at C$7.7M representing a internet revenue of C$5.8M after protecting a C$1.9M tax invoice. This implies the EPS within the second quarter was roughly C$0.06 and this clearly additionally means the quarterly dividend of C$0.025 per share could be very nicely coated because the payout ratio is lower than 50%. And that was primarily based on a median realized value of simply C$73 per barrel for the heavy oil.
This wasn’t simply an accounting revenue as the corporate’s money movement assertion seems to again up the sturdy internet revenue.
The picture beneath exhibits the corporate generated about C$9.4M in working money movement, however after deducting the C$1.5M contribution from working capital modifications and the C$0.2M in lease funds, the adjusted working money movement was C$7.7M. The entire capex and capitalized exploration money outflow was C$4.5M, leading to a internet free money movement of C$3.2M or C$0.032 per share.
Whereas this nonetheless totally coated the quarterly dividend, the free money movement end result was considerably decrease than the web earnings. This was predominantly brought on by the excessive capex and capitalized exploration which got here in at greater than twice the depreciation bills. This additionally was greater than the normalized capex as Hemisphere remains to be guiding for a full-year capex of C$14M, representing C$3.5M per quarter. And even when you would use C$4M per quarter, the free money movement end result would clearly nonetheless be sturdy.
Now we have now established how sturdy the outcomes had been within the second quarter, let’s take a look at what we could anticipate from the third quarter.
Oil costs continued to extend and it is necessary to notice the heavy oil value is growing as nicely. The WCS value was C$83 in July, C$87 in August and can doubtless exceed C$95 for September. This implies we are able to anticipate the typical realized value for the quarter to exceed C$85 per barrel and it might even are available nearer to C$90/barrel.
Assuming C$88/barrel as common realized value for the quarter, Hemisphere’s income per barrel will elevated by roughly C$14 in comparison with the second quarter. And after deducting the royalties and tax funds, the web working money movement ought to enhance by roughly C$7/barrel. At a manufacturing fee of three,000 boe/day, this represents an extra internet free money movement of C$21,000/day or C$1.8M for the quarter.
A particular dividend is underway
Which suggests the Q3 free money movement end result could very nicely are available at C$5.5M within the third quarter (utilizing a normalized capex of C$4M) and that might symbolize about C$0.055 per share.
The corporate’s dividend coverage requires a payout ratio of 30% of the adjusted funds movement. At a median heavy oil value of C$88/barrel, the annualized adjusted funds movement can be roughly C$38M which suggests the annual dividend ought to be roughly C$0.12 per share. That is topic to high quality adjustment issue per barrel of oil.
That additionally was what I used to be anticipating within the earlier article. However earlier this week, Hemisphere Power introduced it’s going to pay a particular dividend of C$0.03 per share in November. Mixed with the traditional quarterly dividends of C$0.025 per quarter, the full-year dividend will are available at C$0.13.
And this reconfirms Hemisphere’s standing as a small-cap oil firm with dividend potential. As of the top of June, the corporate had no gross debt and a internet money place of roughly C$4M, so it is sensible the corporate continues to deal with retaining its shareholders pleased. I am trying ahead to seeing the Q3 outcomes and I would not be stunned to see an adjusted working money movement of C$10M and a normalized free money movement results of C$6M. In the intervening time, I am barely extra conservative and I’ll use an anticipated free money movement of C$5.5M primarily based on a median WCS value of round C$88/barrel. However be mindful the present WCS oil value is now greater than 10% greater at roughly C$100/barrel.
I’ve a protracted place in Hemisphere, and though I am primarily specializing in capital positive factors, I am very proud of the beneficiant dividend funds.
Editor’s Notice: This text discusses a number of securities that don’t commerce on a serious U.S. change. Please concentrate on the dangers related to these shares.