Hemisphere Energy : Q2 - 2022

OVERVIEW

During the second quarter of 2022, Hemisphere achieved record adjusted funds flow from operations (AFF)1 of $14 million and lowered net debt1 to $3.7 million. Hemisphere was also active in the field with five new wells drilled in the Atlee Buffalo area, which were brought onstream throughout July. The Company continues to optimize both production and injection operations at its polymer and water flood pools in the area and anticipates further production growth through the year. A second drilling program will take place in September with up to four additional wells planned.

QUARTERLY VARIABLE DIVIDEND

With significant free funds flow1 of over $8 million in the quarter, Hemisphere's board of directors has approved a quarterly variable dividend of $0.025 per share, to be paid on September 7, 2022 to shareholders of record as of the close of business on August 31, 2022. The dividend is designated as an eligible dividend for income tax purposes.

Q2 2022 HIGHLIGHTS

• Produced a record quarterly average of 2,883 boe/d, a 61% increase over the second quarter of 2021.
• Attained record quarterly revenue of $30.6 million, a 203% increase over the second quarter of 2021.
• Delivered an operating field netback1 of $71.25/boe, 82% higher than in the second quarter of 2021.
• Realized record adjusted funds flow from operations (AFF)1 of $14.0 million ($0.14 per diluted share), a 232% increase over the comparable period in 2021.
• Achieved free funds flow1 of $8.2 million, ($0.08 per diluted share), representing a 250% increase over the comparable period in 2021.
• Lowered net debt1 at the end of the quarter to $3.7 million from $18.5 million at the end of June 2021, representing an 80% reduction year-over-year.
• Exited the quarter with a net debt to annualized AFF ratio1 of 0.07.
• Paid Hemisphere's inaugural quarterly variable dividend of $0.025 per share.
• Acquired 656,500 Hemisphere shares as part of the corporate NCIB at an average price of $1.62.

CORPORATE UPDATE

Since the second quarter of 2021, Hemisphere has organically grown production by approximately 75% to an average of 3,150 boe/d in July 2022 (99% heavy crude oil). Over the same period, Hemisphere reduced its net debt to annualized AFF ratio1 to less than 0.1. In June, Hemisphere commenced a variable dividend program targeting approximately 30% of annual free cash flow to be paid to shareholders quarterly. Additionally, over a million total shares have been purchased under Hemisphere's Normal Course Issuer Bid (NCIB) to date in 2022.

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

2 Q2 2022 HIGHLIGHTS

2022 FINANCIAL AND OPERATING HIGHLIGHTS

		Three Months Ended June 30		Six Months Ended June 30
($000s except per unit and share amounts)		2022		2021		2022		2021
FINANCIAL	$	30,608			$	53,463
Petroleum and natural gas revenue	$	10,087	$	17,976
Operating field netback(1)		18,695		6,375		34,156		11,773
Operating netback(1)		16,148		5,579		28,145		10,877
Cash flow provided by operating activities		14,926		4,741		23,136		7,944
Adjusted funds flow from operations (AFF)(1)		14,031		4,230		25,070		8,272
Per share, basic(1)		0.14		0.05		0.26		0.09
Per share, diluted(1)		0.14		0.05		0.25		0.09
Free funds flow(1)		8,249		2,356		17,493		5,316
Net income (loss)		4,131		(3,594)		8,749		(1,826)
Per share, basic and diluted ($/share)		0.04		(0.04)		0.09		(0.02)
Capital expenditures(1)		5,782		1,874		7,577		2,956
Net debt(1)		3,662		18,529		3,662		18,529
Net debt to annualized AFF(1)		0.1		1.1		0.1		1.1
Bank Debt		3,529		-		3,529		-
Gross term loan(2)	$	-	$	21,999	$	-	$	21,999
Average daily production		2,856				2,741
Heavy oil (bbl/d)			1,758			1,698
Natural gas (Mcf/d)		165		169		153		131
Combined (boe/d)		2,883		1,786		2,766		1,720
Oil weighting		99%		98%		99%		99%
Average sales prices	$	117.37			$	107.45
Heavy oil ($/bbl)	$	62.78	$	58.25
Natural gas ($/Mcf)		6.93		2.93		5.81		2.90
Combined ($/boe)	$	116.65	$	62.06	$	106.78	$	57.73
Operating netback ($/boe)	$	116.65			$	106.78
Petroleum and natural gas revenue	$	62.06	$	57.73
Royalties		(34.14)		(10.73)		(27.31)		(8.58)
Operating costs		(8.88)		(9.46)		(8.91)		(8.85)
Transportation costs		(2.39)		(2.65)		(2.33)		(2.49)
Operating field netback(1)		71.25		39.22		68.22		37.81
Realized commodity hedging gain loss		(9.71)		(4.90)		(12.01)		(2.88)
Operating netback(2)	$	61.54	$	34.32	$	56.21	$	34.93
Adjusted funds flow from operations(1)
($/boe)	$	53.47	$	26.03	$	50.07	$	26.57

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.
2. Gross term loan is calculated as the total USD draws on the term loan translated to Canadian Dollars at the period end exchange rate.

	Six months ended June 30
	2022	2021
SHARE CAPITAL	102,458,939
Common shares outstanding	87,914,802
Stock options outstanding	4,045,000	6,759,000
Warrants outstanding	-	13,750,000
Fully Diluted	106,503,939	108,423,802
Weighted-average shares outstanding - basic	95,991,789	87,782,752
Weighted-average shares outstanding - diluted	98,487,278	87,782,752

Q2 2022 MANAGEMENT'S DISCUSSION AND ANALYSIS

3

MANAGEMENT'S DISCUSSION AND ANALYSIS

Dated as at August 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 six months ended June 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 six months ended June 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 6,560 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 $14.0 million ($0.14/share) during the second quarter of 2022, as compared to $4.2 million ($0.05/share) during the second quarter of 2021. AFF for the six months ended June 30, 2022 increased to $25.1 million ($0.25/diluted share) from $8.3

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

Hemisphere Energy Corporation

4 Q2 2022 MANAGEMENT'S DISCUSSION AND ANALYSIS

million ($0.09/share) for the same period in 2021. The increase in AFF from operations for three months and six months ended June 30, 2021 is due primarily to a respective 88% and 85% increase in the combined average realized sales price, and a 61% increase in production, over the respective comparable periods in 2021.

For the three and six months ended June 30, 2022, the Company reported net income of $4.1 million ($0.04/share) and $8.7 million ($0.09/share), respectively, compared to net losses of $3.6 million

($0.04/share) and $1.8 million ($0.02/share) for the three and six months ended June 30, 2021. This increase of $10.6 million in the first half of 2022 is generally the result of an increase in operating field netback of $22.4 million, offset by an increase in depletion of $1.8 million, current and deferred tax expenses of $1.0 million and $3.8 million, and realized hedging losses of $5.1 million.

Production

	Three Months Ended June 30	Six Months Ended June 30
By product:	2022	2021	2022	2021
Oil (bbl/d)	2,856	1,758	2,741	1,698
Natural gas (Mcf/d)	165	169	153	131
Total (boe/d)	2,883	1,786	2,766	1,720
Oil weighting	99%	98%	99%	99%

In the second quarter of 2022, the Company's average daily production was 2,883 boe/d (98% oil) representing a 61% increase from 1,786 boe/d (98% oil) over the comparable quarter in 2021. For the six months ended June 30, 2022, the Company's average daily production was 2,766 boe/d (99% oil), representing a 61% increase from 1,720 boe/d (99% oil) for the same period in 2021. This increase is mainly attributed to the success of its 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.

Average Benchmark and Realized Prices

		Three Months Ended June 30		Six Months Ended June 30
		2022		2021		2022		2021
Benchmark prices	$	108.41			$	101.35
WTI ($US/bbl)(1)	$	66.03	$	61.94
Exchange rate (1 $US/$C)		1.2763		1.2276		1.2715		1.2466
WTI ($C/bbl)		138.37		81.06		128.86		77.21
WCS Diff ($C/bbl)		16.29		14.08		17.31		15.01
WCS ($C/bbl)(2)		122.08		66.98		111.56		62.20
AECO natural gas ($US/Mcf)(3)		7.26		3.09		6.01		3.11
Average realized prices		117.37				107.45
Crude oil ($C/bbl)			62.78			58.25
Natural gas ($C/Mcf)		6.93		2.93		5.81		2.90
Combined ($C/boe)	$	116.65	$	62.06	$	106.78	$	57.73

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.

Q2 2022 MANAGEMENT'S DISCUSSION AND ANALYSIS

5

The Company's oil and natural gas sales 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 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 88% to $116.65 from $62.06/boe during the comparable three months ended June 30, 2021. The Company's combined average realized price increased by 85% from $57.73/boe to $106.78/boe during the six months ended June 30, 2022. This increase is the result of a higher realized WTI price, offset by increases of $2.21/bbl and $2.30/bbl respectively in the differential between the WCS and WTI pricing for the three and six month ended June 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	Put Spread	725 bbl/d	US$30.00(put sell)/US$40.00(put	WTI-NYMEX	Apr. 1, 2022 - Aug. 31, 2022
			buy), net cost US$1.65/bbl
Crude oil	Sold Call	200 bbl/d	US$78.25(call sell), net premium	WTI-NYMEX	Apr. 1, 2022 - Aug. 31, 2022
			US$1.65/bbl
Crude oil	Sold Call	100 bbl/d	US$78.70(call sell), net premium	WTI-NYMEX	Apr. 1, 2022 - Aug. 31, 2022
			US$1.65/bbl
Crude oil	Sold Call	200 bbl/d	US$82.10(call sell), net premium	WTI-NYMEX	Apr. 1, 2022 - Aug. 31, 2022
			US$1.65/bbl
Crude oil	Sold Call	100 bbl/d	US$86.50(call sell), net premium	WTI-NYMEX	Apr. 1, 2022 - Aug. 31, 2022
			US$1.65/bbl
Crude oil	Sold Call	125 bbl/d	US$88.40(call sell), net premium	WTI-NYMEX	Apr. 1, 2022 - Aug. 31, 2022
			US$1.65/bbl
Crude oil	Put Spread	575 bbl/d	US$50.00(put sell)/US$60.00(put	WTI-NYMEX	Sep. 1, 2022 - Sep. 30, 2022
			buy), net cost US$3.55/bbl
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

At June 30, 2022, the commodity contracts were fair valued as a liability of $3.1 million recorded on the balance sheet, and an unrealized gain of $0.4 million for the three month period and an unrealized loss of $1.7 million for the six month period ended June 30, 2022, respectively (June 30, 2021 - loss of $3.2 million and $3.3 million respectively).

Hemisphere Energy Corporation