Hemisphere Energy : Q3 2022 Report

Q3 2022 HIGHLIGHTS

• Paid off all bank debt.
• Produced an average of 2,870 boe/d (99% heavy oil), a 72% increase over the third quarter of 2021.
• Attained quarterly revenue of $23.7 million, a 127% increase over the third quarter of 2021.
• Delivered an operating field netback1 of $49.95/boe, 27% higher than in the third quarter of 2021.
• Realized adjusted funds flow from operations (AFF)1 of $10.6 million ($0.10 per diluted share), a 162% increase over the comparable period in 2021.
• Achieved free funds flow1 of $6 million ($0.06 per diluted share), representing a 725% increase over the comparable period in 2021.
• Lowered net debt1 at the end of the quarter to $0.7 million from $18.2 million at the end of September 2021, representing a 96% reduction year-over-year.
• Paid Hemisphere's quarterly variable dividend of $0.025 per share on September 7, 2022 for an annualized yield based on market price at the time of 6.5%.
• Acquired and cancelled 393,800 Hemisphere shares as part of the corporate NCIB at an average price of $1.55.

CORPORATE UPDATE

During the third quarter of 2022, Hemisphere recorded almost $24 million in revenue and its third highest ever adjusted funds flow from operations (AFF)1 of $10.6 million. Hemisphere also spent $4.6 million on drilling operations and facility improvements, paid off its bank debt, and distributed $2.6 million of dividends to its shareholders.

In September, Hemisphere commenced a drilling program to test potential new pools, pool extensions, and new production technologies. Successful wells are being brought online through the fourth quarter. Additionally, two wells have been converted to injectors in the Atlee G pool to help repressurize the northwestern portion of the reservoir. The Company is also finalizing the construction of its field battery expansion at the Atlee F pool following the start-up of its polymer flood in August.

QUARTERLY DIVIDEND

With the Company realizing free funds flow1 of $6 million in the quarter, Hemisphere's board of directors has approved a quarterly dividend of $0.025 per share, to be paid November 30, 2022 to shareholders of record as of the close of business on November 23, 2022. The dividend is designated as an eligible dividend for income tax purposes.

1 See "Non-IFRS and Other Financial Measures".

2 Q3 2022 HIGHLIGHTS

2022 FINANCIAL AND OPERATING HIGHLIGHTS

		Three Months Ended		Nine Months Ended
		2022	September 30		2022	September 30
($000s except per unit and share amounts)			2021			2021
FINANCIAL	$	23,672			$	77,135
Petroleum and natural gas revenue	$	10,432	$	28,408
Operating field netback(1)		13,188		6,033		47,345		17,806
Operating netback(1)		12,454		5,094		40,601		15,971
Cash flow provided by operating activities		12,959		5,473		36,096		13,417
Adjusted funds flow from operations (AFF)(1)		10,604		4,048		35,675		12,320
Per share, basic(1)		0.10		0.05		0.36		0.14
Per share, diluted(1)		0.10		0.04		0.36		0.13
Free funds flow(1)		6,006		727		23,500		6,044
Net income (loss)		9,315		2,309		18,064		482
Per share, basic ($/share)		0.09		0.03		0.18		0.01
Per share, diluted ($/share)		0.09		0.02		0.18		0.01
Capital expenditures(1)		4,598		3,320		12,175		6,276
Net debt(1)		721		18,231		721		18,231
Net debt to annualized AFF(1)		0.0		1.1		0.0		1.1
Bank Debt		-		16,234		-		16,234
Average daily production		2,838				2,774
Heavy oil (bbl/d)			1,652			1,683
Natural gas (Mcf/d)		189		110		165		124
Combined (boe/d)		2,870		1,671		2,801		1,704
Oil weighting		99%		99%		99%		99%
Average sales prices	$	90.39			$	101.57
Heavy oil ($/bbl)	$	68.39	$	61.60
Natural gas ($/Mcf)		3.98		3.47		5.10		3.07
Combined ($/boe)	$	89.66	$	67.87	$	100.87	$	61.08
Operating netback ($/boe)	$	89.66			$	100.87
Petroleum and natural gas revenue	$	67.87	$	61.08
Royalties		(24.19)		(13.66)		(26.23)		(10.26)
Operating costs		(13.12)		(12.66)		(10.37)		(10.11)
Transportation costs		(2.40)		(2.30)		(2.36)		(2.42)
Operating field netback(1)		49.95		39.25		61.91		38.28
Realized commodity hedging gain loss		(2.78)		(6.11)		(8.82)		(3.94)
Operating netback(1)	$	47.17	$	33.14	$	53.09	$	34.34
Adjusted funds flow from operations(1) ($/boe)	$	40.17	$	26.33	$	46.65	$	26.49

Notes:

1. Non-IFRSfinancial measure that is not a standardized financial measure under International Financial Reporting Standards ("IFRS") and may not be comparable to similar financial measures disclosed by other issuers. Refer to "Non-IFRS and Other Financial Measures" section of the MD&A.

	Nine months ended September 30
	2022	2021
SHARE CAPITAL	103,110,139
Common shares outstanding	88,229,802
Stock options outstanding	3,000,000	6,444,000
Warrants outstanding	-	13,750,000
Fully Diluted	106,110,139	108,423,802
Weighted-average shares outstanding - basic	98,236,537	87,892,439
Weighted-average shares outstanding - diluted	99,912,083	93,050,371

Q3 2022 MANAGEMENT'S DISCUSSION AND ANALYSIS

3

MANAGEMENT'S DISCUSSION AND ANALYSIS

Dated as at November 17, 2022

The following Management's Discussion and Analysis ("MD&A") is a review of the operations and current financial position for the three and nine months ended September 30, 2022 for Hemisphere Energy Corporation ("Hemisphere" or the "Company") and should be read in conjunction with the unaudited interim condensed financial statements and related notes for the three and nine months ended September 30, 2022, and the audited annual financial statements and related notes for the year ended December 31, 2021. These documents and additional information relating to the Company, including the Company's Annual Information Form, are available on SEDAR at www.sedar.comor the Company's website at www.hemisphereenergy.ca.

The information in this MD&A is based on the unaudited interim condensed financial statements which were prepared in accordance with International Financial Reporting Standards ("IFRS") applicable to the preparation of unaudited interim condensed financial statements including IAS 34 "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IASB").

This MD&A contains non-IFRS measures, additional IFRS measures and forward-looking statements. Readers are cautioned that this document should be read in conjunction with Hemisphere's disclosure under "Non-IFRS and additional IFRS Measures" and "Forward-Looking Statements" included at the end of this MD&A. All figures are in Canadian dollars unless otherwise noted.

Business Overview

Hemisphere produces oil and natural gas from its Atlee Buffalo and Jenner properties in southeast Alberta. The Company is headquartered in Vancouver, British Columbia and is traded on the TSX Venture Exchange under the symbol "HME" and on the OTCQX Best Market under the symbol "HMENF".

Atlee Buffalo, Alberta

The Company owns and operates all of its wells in the Atlee Buffalo area. The property is accessible year- round and is located north of Medicine Hat in southeastern Alberta. Hemisphere has a 100% working interest in 9,480 net acres.

Jenner, Alberta

Hemisphere owns and operates all of its wells and has a land position of 7,649 net acres in the Jenner area. The property is accessible year-round and is located 25 kilometers west of the Company's Atlee Buffalo property in southeastern Alberta.

Operating Results

The Company generated adjusted funds flow from operations1 (AFF) of $10.6 million ($0.10/share) during the third quarter of 2022, as compared to $4.0 million ($0.04/diluted share) during the third quarter of 2021. AFF for the nine months ended September 30, 2022 increased to $35.7 million ($0.36/share) from

1 Non-IFRS and other financial measure. Refer to "Non-IFRS and Other Financial Measures" section of the MD&A.

Hemisphere Energy Corporation

4 Q3 2022 MANAGEMENT'S DISCUSSION AND ANALYSIS

$12.3 million ($0.13/diluted share) for the same period in 2021. The increase in AFF from operations for three months and nine months ended September 30, 2021 is due primarily to a respective 32% and 65% increase in the combined average realized sales price, and a 72% and 64% increase in production, over the respective comparable periods in 2021.

For the three and nine months ended September 30, 2022, the Company reported net income of $9.3 million ($0.09/share) and $18.1 million ($0.18/share), respectively, compared to net income of $2.3 million ($0.03/basic share and $0.02/diluted share) and $0.5 million ($0.01/share) for the three and nine months ended September 30, 2021. This increase of $17.6 million in the first nine months of 2022 is generally the result of an increase in operating field netback of $29.5 million, offset by an increase in depletion of $2.7 million and current and deferred tax expenses of $1.3 million and $6.1 million.

Production

	Three Months Ended September 30	Nine Months Ended September 30
By product:	2022	2021	2022	2021
Oil (bbl/d)	2,838	1,652	2,774	1,683
Natural gas (Mcf/d)	189	110	165	124
Total (boe/d)	2,870	1,671	2,801	1,704
Oil weighting	99%	99%	99%	99%

In the third quarter of 2022, the Company's average daily production was 2,870 boe/d (99% oil) representing a 72% increase from 1,671 boe/d (99% oil) over the comparable quarter in 2021. For the nine months ended September 30, 2022, the Company's average daily production was 2,801 boe/d (99% oil), representing a 64% increase from 1,704 boe/d (99% oil) for the same period in 2021. This increase is mainly attributed to the success of Hemisphere's enhanced oil recovery projects, as well as the addition of three new wells in the Atlee G pool in the fourth quarter of 2021 and four new wells brought on production in the Atlee F pool during the first quarter of 2022, plus 3 new G wells and two well reentries in the F pool this summer.

Average Benchmark and Realized Prices

		Three Months Ended September 30		Nine Months Ended September 30
		2022		2021		2022		2021
Benchmark prices	$	91.56			$	98.09
WTI ($US/bbl)(1)	$	70.56	$	64.81
Exchange rate (1 $US/$C)		1.3058		1.2595		1.2827		1.2509
WTI ($C/bbl)		119.55		88.88		125.82		81.07
WCS Diff ($C/bbl)		26.02		17.10		20.27		15.68
WCS ($C/bbl)(2)		93.53		71.77		105.55		65.39
AECO natural gas ($US/Mcf)(3)		4.46		3.58		5.49		3.27
Average realized prices		90.39				101.57
Crude oil ($C/bbl)			68.39			61.60
Natural gas ($C/Mcf)		3.98		3.47		5.10		3.07
Combined ($C/boe)	$	89.66	$	67.87	$	100.87	$	61.08

Notes:

1. Represents posting prices of West Texas Intermediate Oil.
2. Represents posting prices of Western Canadian Select.
3. Represents the Alberta 30 day spot AECO posting prices.

The Company's oil and natural gas revenue and financial results are significantly influenced by changes in commodity prices. The West Texas Intermediate pricing ("WTI") at Cushing, Oklahoma is the benchmark reference price for North American crude oil prices. Canadian oil prices, including Hemisphere's heavy

Q3 2022 MANAGEMENT'S DISCUSSION AND ANALYSIS

5

crude oil, are based on price postings, which is WTI-adjusted for transportation, quality and the currency conversion rates from United States dollar ("USD") to Canadian dollar.

The Company's combined average realized price increased by 32% to $89.66/boe from $67.87/boe during the comparable three months ended September 30, 2021. The Company's combined average realized price increased by 65% from $61.08/boe to $100.87/boe during the nine months ended September 30, 2022. This increase is the result of a higher realized WTI price, offset by increases of $8.92/bbl and $4.59/bbl respectively in the differential between the WCS and WTI pricing for the three and nine month ended September 30, 2022 over the comparable periods in 2021.

As at the date of this MD&A, the Company held derivative commodity contracts as follows:

Product	Type	Volume	Price	Index	Term
Crude oil	Swap	200 bbl/d	US$13.80	WCS Differential	Jun. 1, 2022 - Dec. 31, 2022
Crude oil	Swap	200 bbl/d	US$21.00	WCS Differential	Aug. 1, 2022 - Dec. 31, 2022
Crude oil	Swap	200 bbl/d	US$21.00	WCS Differential	Aug. 1, 2022 - Dec. 31, 2022
Crude oil	Put Spread	125 bbl/d	US$50.00(put sell)/US$60.00(put	WTI-NYMEX	Sep. 1, 2022 - Dec. 31, 2022
			buy), net cost US$2.15/bbl
Crude oil	Put Spread	275 bbl/d	US$50.00(put sell)/US$60.00(put	WTI-NYMEX	Oct. 1, 2022 - Dec. 31, 2022
			buy), net cost US$3.75/bbl
Crude oil	Sold Call	275 bbl/d	US$100.00(call sell), net premium	WTI-NYMEX	Oct. 1, 2022 - Dec. 31, 2022
			US$3.75/bbl
Crude oil	3-Way	300 bbl/d	US$50.00(put)/US$60.00(put)/US	WTI-NYMEX	Oct. 1, 2022 - Dec. 31, 2022
			$85(call)
Crude oil	Put Spread	750 bbl/d	US$50.00(put sell)/US$60.00(put	WTI-NYMEX	Jan. 1, 2023 - Mar. 31, 2023
			buy), net cost US$2.50/bbl
Crude oil	Put Spread	500 bbl/d	US$50.00(put sell)/US$60.00(put	WTI-NYMEX	Apr. 1, 2023 - Jun. 30, 2023
			buy), net cost US$2.95/bbl
Crude oil	Put Spread	500 bbl/d	US$50.00(put sell)/US$60.00(put	WTI-NYMEX	Jul. 1, 2023 - Sep. 30, 2023
			buy), net cost US$3.70/bbl

At September 30, 2022, the commodity contracts were fair valued as a liability of $34 thousand recorded on the balance sheet, and an unrealized gain of $3.1 million for the three month period and $1.3 million for the nine month period ended September 30, 2022, respectively (September 30, 2021 - gain of $0.3 million and loss of $3.0 million respectively).

Revenue

		Three Months Ended September 30		Nine Months Ended September 30
($000s)		2022		2021		2022		2021
Oil	$	23,603	$	10,397	$	76,905	$	28,304
Natural gas		69		35		230		104
Total	$	23,672	$	10,432	$	77,135	$	28,408

Revenue for the three months ended September 30, 2022 increased by 127% from the comparable period in 2021. For the nine months, revenue increased by 172% over the comparable period in 2021. These increases are primarily due to the respective $21.79/boe and $39.79/boe increases in the Company's combined average realized price, combined with 72% and 64% increases in production over the comparable, respective three and nine month periods in 2022.

Hemisphere Energy Corporation