Michael Heim, Senior Vice President, Equity Research Analyst, Energy & Transportation, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
Accelerated drilling is beginning to lead to strong production growth. Production rose 20% year over year and 7% quarter over quarter. After paring back drilling in 2020 when oil prices were low, the company has accelerated its drilling efforts. This has led to a doubling of production since 2020. With an active drilling program planned for the fall, look for production to show similar growth at the end of 2023 and the first quarter of 2024.
But basin differential issues are leading to lower-than-expected pricing. Oil prices fell 19% year over year, but HME’s realized oil price fell 32%. The differential has increased in recent quarters with the last three quarters being significantly larger both in absolute terms and on a percentage basis. We would note that other western Canadian oil producers have reported a similar widening of basin differential. Whatever the reason, it is worth tracking and making adjustments in our models to reflect the widening differential.
Equity Research is available at no cost to Registered users of Channelchek. Not a Member? Click ‘Join’ to join the Channelchek Community. There is no cost to register, and we never collect credit card information.
This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).
*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision.
Michael Heim, Senior Energy & Transportation Analyst, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
Results demonstrate strong production growth and a sharp increase in cash flow and earnings. Production rates (preannounced) increased 55%. Increased production was partially offset by a drop in energy prices. Lower-than-expected prices were partially offset by a decrease in royalty rates. Production costs (excluding transportation costs) remain somewhat elevated as they were in the September quarter. We look for production costs per barrel to decrease modestly as new production comes on line in 2023.
As netbacks rose, so did the company’s Adjusted Fund Flow (AFF). The margin between prices and costs is high. Operating netbacks (realized prices less royalties and operating costs) is leading to strong cash flow which management is turning their focus toward returning to shareholders now that debt is virtually eliminated and drilling programs have been accelerated.
Equity Research is available at no cost to Registered users of Channelchek. Not a Member? Click ‘Join’ to join the Channelchek Community. There is no cost to register, and we never collect credit card information.
This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).
*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision.
Could Small Oil Companies Perform Especially Well With OPEC’s Reduced Output
Earlier this week, OPEC+ announced the cartel’s plans for production cuts. Saudi Arabia and other oil-producing members of OPEC+ defied expectations by announcing they would implement production cuts of around 1.1 million barrels a day. Prices of WTI and Brent crude quickly moved higher in the futures market – energy stocks followed. The increased cost of petroleum directly impacts the price of fuel and plastics and indirectly impacts goods that involve transportation – which is mostly all goods.
The decision by OPEC+ is highly likely to put upward pressure on CPI and PPI inflation measures as early as April. The CPI report for April will be released on May 10, and PPI on May 11. Id there good news for investors in the OPEC decision? What stocks might investors look at as potentially benefiting, assuming the OPEC countries adhere to the new production levels?
Background
U.S. markets were not open when the Organization of Petroleum Exporting Countries announced the large cut of over one million barrels per day. When regular trading resumed in the U.S. on Monday, oil prices jumped up 6.3%, and crude oil prices breached $80. Energy stocks, as measured by the Energy Sector SPDR (XLE) rose 4.5%. The price of crude based on futures contracts and the XLE have remained near these levels.
With change comes opportunity. Investors and traders are now trying to determine if this is the start of a new upward trend for the energy sector and, if so, what specific moves may benefit investors most.
One consideration they may have is that, although OPEC is cutting production, the members aren’t the only producers. Historically, domestic production was increased in N. America when prices climbed. This has been less so in recent years as the number of U.S. rigs operating hasn’t increased as might have been expected.
Will this dramatic price spike now prompt action from domestic producers? In his Energy Industry Report published on April 4, titled Why Domestic Producers Cannot Offset OPEC Production Cuts, Michael Heim, CFA, Senior Research Analyst, Noble Capital Markets, says that oil is produced in the U.S. at around $30-$40 per barrel. Heim says in his report, “If producers had the ability to ramp up drilling, we would have thought they would have done so even at $60/bbl. prices.”
Possible Beneficiaries
According to the Noble Analyst, large producers have been constrained from growing their oil operations which stems from political and even shareholder pressures to move away from carbon-based energy products. However, Heim says in his report, “Smaller producers face less pressure. Companies with ample acreage and drilling prospects are best positioned to take advantage of a prolonged oil price upcycle.”
In a conversation with the analyst, he shared that when oil prices spiked during the second half of the pandemic and later had added upward movement with the start of the Russia/Ukraine war, many small oil companies took in enough additional revenue to strengthen their finances. Some even began paying dividends for the first time, while others increased their regular dividend to shareholders.
These smaller oil producers not in the political spotlight that may reap additional benefits from OPEC’s cut could include Hemisphere Energy (HMENF). This company increased production by 55% in 2022. According to a research report by Noble Capital Markets initiating coverage on Hemisphere (dated April 3, 2023), “proven reserve findings and development costs are less than C$12/barrel, providing an extremely attractive return on investment for drilling.” It continued, “Hemisphere’s finding and development costs are among the lowest of western Canadian producers and reflect its favorable drilling locations and the company’s experience drilling in the area.” The increase in price per barrel could enhance cash flow for this North American producer, allowing it to expand production.
Permex Petroleum (OILCD, OIL.CN) is a junior oil and gas company that already had a significant upside potential before the jump in per-barrel prices. This boost in cash from higher oil prices and a possible uplisting to the NYSE, could work to benefit shareholders.
InPlay Oil (IPOOF) increased annual production last year by 58%. InPlay is an example of a smaller producer that has been able to increase drilling when prices rise. It has used increased cash flow to lower debt levels by 59% and pay shareholders with its first dividend payment.
Indonesia Energy Corporation Ltd. (INDO) is an oil and gas exploration and production company operating in Indonesia. The company plans on drilling 18 wells in the Kruh Block (four have been completed). Covid19 steps in the region where Indo Energy operates have pushed back drilling that was expected in 2023-2024 one year.
Take Away
With change comes opportunity. Higher oil prices will impact all of us that must still occasionally stop our internal combustion engine vehicles at gas stations. But the oil price increase may lead to a melting up of some stocks.
There are arguments that can be made that smaller, more nimble producers, not burdened by the political spotlight and perhaps enjoying a better financial position from the last run-up in oil, are worth looking into. A Channelchek search returned over 200 companies that may fall into this category. This search result is available here.
Michael Heim, CFA, Senior Research Analyst, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
We believe the market is undervaluing Hemisphere Energy’s asset base cash flow generation. We believe the stock price will move towards our price target as the company generates operating cash flow that is used to expand operations and return capital to shareholders. We view the investment as fairly low risk because it is expanding operations is an area that is well known and already providing high returns on investment.
Strong production growth. Production increased 55% in 2022 and management expects production to grow another 10-15% in 2023 in response to the addition of new wells. Unless there is a dramatic drop in oil prices, we believe the company will be able to maintain a double-digit production growth rate for the foreseeable future. Longer-term growth may be dependent upon completing a step-out acquisition to increase the company’s drilling locations.
Equity Research is available at no cost to Registered users of Channelchek. Not a Member? Click ‘Join’ to join the Channelchek Community. There is no cost to register, and we never collect credit card information.
This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).
*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision.
