US Energy - Q1 2024

Transcript

Operator (participant)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mason McGuire, Director of Corporate Development. Thank you, sir. You may begin.

Mason McGuire (Director of Corporate Development)

Thank you, operator, and good morning everyone. Welcome to U.S. Energy Corp.'s Q1 2024 results conference call. Ryan Smith, our Chief Executive Officer, will provide an overview of our operating results and discuss the company's strategic outlook. Our Chief Financial Officer, Mark Zajac, will give a more detailed review of our financial results. After the market closed yesterday, U.S. Energy issued a press release summarizing the operating and financial results for the quarter ended March 31, 2024. This press release, together with the accompanying presentation materials, are available in the investor relations section of our website at www.usnrg.com. Today's discussion may contain forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission.

Except as required by law, we undertake no obligation to update our forward-looking statements. Further, please note that non-GAAP financial measures may be disclosed during this call. A full reconciliation of GAAP to non-GAAP measurements are available in the latest quarterly earnings release and conference call presentation. With that, I'd like to turn the conference call over to Ryan Smith.

Ryan Smith (CEO)

Good morning, everyone, and thank you for joining us today. I'm pleased to share with you our results from this quarter, as well as provide an update on our strategic outlook. Our quarter end results reflect the hard work and resiliency of our team. We achieved net daily production of greater than 1,200 barrels of oil equivalent per day, representing the first full quarter since our asset divestitures, which closed at various points during the Q4 of 2023. Oil production accounted for 62% of our total production, with the remainder consisting of an approximately even split of natural gas and NGLs. As explained in our release yesterday, our operations were heavily impacted by severe flooding that made national news throughout East Texas and the Gulf Coast during the quarter.

Nearly all of the affected production was brought back online in late March, and while there are no long-term issues expected by the weather, I would expect certain of the same assets, primarily along the Gulf Coast, to be impacted in the Q2 by additional heavy rains, which have been experienced recently. The company's other core asset focus areas were unaffected during the quarter and continue to perform to our expectations. I'm particularly proud to highlight our substantial achievements in cost management in the face of adverse weather conditions. Our lease operating expense came in at $3.2 million, representing a flat total expense to the prior quarter and a reduction to the Q1 of 2023. A majority of our LOE is fixed at this point, and our barrel metrics are highly sensitive to any variations in production.

Our per barrel cost for the Q1 was approximately $29 per BOE. While this per barrel metric amount is higher than we have recently experienced, had we averaged our March exit production for the entire quarter, also said as once our weather-related production issues were resolved, our per barrel LOE would be in the low $20 range or significantly lower than what we realized. Moving through 2024, our capital will continue to be spent efficiently on supporting the production profile of our existing asset base, continuing the company's share repurchase plan, maintaining balance sheet integrity, and taking advantage of organically generated M&A opportunities. While equity valuations and borrowing costs have made small-scale M&A tough recently, allocating capital to oil-weighted projects and the company's existing portfolio remains highly economic.

We've had these assets under control for about two years now, and with the first year plus, just really figuring out what we have from an asset optimization standpoint. Since then, we've been able to really explore and engineer opportunities that we believe can add value in a much more capital accretive way than any upstream M&A that I see in the market. These are projects that we are always currently evaluating, and we will share more as they come to fruition as we move throughout the year. We believe that U.S. Energy Corp. stands out from other oil and gas producing companies of our size in this backdrop of both current macro industry dynamics and a relatively stable oil pricing outlook.

Our current assets require minimal capital to maintain a steady production profile, leading to predictable cash flow and allowing us to effectively allocate dollars to maximize our returns on capital. Our approach positions and allows us to weather market fluctuations and capitalize on opportunities, making us well prepared to navigate the always evolving energy landscape. Our focus at U.S. Energy remains on operational efficiency, balance sheet discipline, and responsible resource management, underscoring our commitment to driving sustainable value creation. As we move forward, we remain dedicated to capitalizing on current market conditions and leveraging our strengths to deliver continued growth in shareholder returns. To that end, during the Q1, we extended our previously announced $5 million share repurchase program through June 2025.

We continued our share repurchase activity during the Q1, and since restarting our repurchase activity in late December of 2023 and through the Q1, we've repurchased more than 500,000 shares or greater than 2% of the company's outstanding shares. We continue to believe that repurchasing our equity at current valuation levels is prudent and one of, if not the best, allocations of free cash flow, along with as high of a return opportunity as we see in the marketplace. I expect to continue this activity going forward. In summary, the Q1 was strong in terms of operational resiliency to highly adverse weather, cost controls, and the results of capital allocation decisions made earlier in the year.

These achievements set the stage for our growth initiatives while positioning us to take advantage of oil prices that help generate steady, high-margin cash flow. The company's goal remains to continue expanding our scale through both being selectively advantageous in the M&A market, while also growing our assets with initiatives that complement our core operating areas. By increasing our scale and maintaining our shareholder returns initiatives, we believe we can unlock greater equity value for all of our shareholders. Now, I would like to introduce Mark Zajac, our Chief Financial Officer, who will provide a detailed update on the financial results for the Q1.

Mark Zajac (CFO)

Thank you, Ryan. Hello, everyone. Let's delve into the financial details for the Q1 of 2024. Total oil and gas sales for the quarter amounted to approximately $5.4 million, reflecting a decrease from $8.3 million in the same period last year. This decline was attributed to a 29% reduction in volumes and an 8% reduction in realized prices. It is important to note that this quarter's production was significantly impacted by the non-operated investments made during the Q4 of 2023 and severe weather events in several of our key operating areas. Sales from oil production contributed 88% of our total revenues for the quarter, demonstrating our continued focus on optimizing our oil assets.

Our Lease Operating Expense for the Q1 was approximately $3.2 million, equivalent to $29.02 per BOE, indicating an impressive 28% reduction in total Lease Operating Expense compared to the Q1 of 2023. This reduction can be attributed to fewer one-time workovers and our continued effort to increase operating efficiency. Severance and Ad Valorem Taxes for the Q1 of 2024 totaled approximately $300,000, reflecting a decline from $500,000 in the same period last year. As a percentage of total oil and natural gas sales revenue, these taxes accounted for approximately 6% during the quarter. Cash, general, and administrative expense was $2 million for the Q1 of 2024. This expense is flat when compared to the same period of 2023.

The Q1 traditionally includes some lumpy annual cash G&A expenses that have a greater impact on our cash balance, but smooth out throughout the rest of the year. Turning to our net financial performance, the company reported a net loss of $9.5 million in the Q1 of 2024. The Q1 loss is largely attributable to an oil and gas impairment expense of $5.4 million, driven by the impact of lower SEC pricing on the company's reserve report and wells temporarily shut in for the quarter. Workovers are currently ongoing to bring some of these properties back to production. We are currently not projecting an impairment for the Q2 of 2024.

Our Adjusted EBITDA stood at $0.2 million for the Q1 of 2024, compared to $1.2 million in the same period last year, influenced most notably by the decline in commodity prices and production from the prior period. Let's briefly touch upon the balance sheet. As of March 31, 2024, the company held outstanding debt of $5 million on our $20 million revolving credit facility. Our cash position stood at $2 million, and we plan to continue allocating a portion of free cash flow to debt reduction and maintain the flexibility to react to market conditions on that front. In conclusion, we are pleased with our operating performance and financial results that are able to support the company's initiatives in a way that maintain full balance sheet integrity.

I am leading the charge to ensure that the company's reporting process maintains a high standard of excellence, and we feel confident in our ability to support any growth initiatives we may entertain going forward. Thank you for your participation this morning. We are now ready to take your questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, if you would like to ask a question, press star one at this time. Thank you. Our first question comes from the line of Charles Meade with Johnson Rice. Please proceed with your question.

Charles Meade (Research Analyst)

Good morning, Ryan, to you and the whole U.S. Energy team there.

Ryan Smith (CEO)

Good morning, Charles. You too.

Charles Meade (Research Analyst)

I wanna ask you to elaborate a little bit more on the weather impact in 1Q, and but more specifically, how it's gonna carry into or not carry into 2Q. It seemed like when I was reading the release last night, it was, you know, like much or most of the production would come back. And listening to you this morning, it seems you're closer to all.

So I guess I'm what I'm asking, in my imagination, I think, you know, if you guys, you know, you could have some bad floods, you know, wash out a lease road or something like that, and you look at it and you're like: Well, it's gonna cost us, you know, $500,000 to build that road back, and we only have a value of, you know, 200 on that well, and so maybe that well doesn't come back.

But I wonder if you could just kind of talk about if there's anything—if there's any assets that you're gonna kind of permanently lose and, and then, and what kind of magnitude we should be thinking about for. I think you mentioned the Gulf Coast. There, there's some-

Ryan Smith (CEO)

Yeah

Charles Meade (Research Analyst)

... some bloody impacts in 2Q as well.

Ryan Smith (CEO)

Yeah. No, great, great question. So there's a few parts to that, and it was really kind of two weather effects that, you know, we should discuss. I think it was early January. It might be mid-January, but East Texas and the Gulf Coast experienced extremely, extremely heavy rains. I mean, national emergency declared level of activity. And that affected our, kind of, I guess, more northern East Texas assets a bit, but it really affected our Gulf Coast and our Liberty County assets quite a bit. The good news is that long term, we don't expect to see any effects from it. But the early in the quarter flooding was very significant.

A lot of our assets in Liberty County are very close to the Trinity River, and, you know, for those in the, the Gulf Coast area, that river has been overflowing nonstop for, you know, quite a, quite a bit of time now. Very good comment on lease roads. You know, if you, if you took an aerial view of the flood, it, the water recedes pretty quickly. But we definitely had our main lease road washed away, and it's not catastrophic to our operations because it's pretty cheap, and it's pretty easy to put some stuff around it. But it does stop everything. I mean, safety is the number one concern. You know, with a lease road washing away like that and, and flooding, I mean, you're looking at loss of life if you start sending people out there. So it automatically gets shut down.

The vast majority of that production started getting brought back online in, I'll call it, mid to late March. And then, you know, over the last month in April, unfortunately, the same area received even more rain, you know, a couple feet of rain over the-

Charles Meade (Research Analyst)

A double dip

Ryan Smith (CEO)

-over the course of a week. A double dip, right? So the same thing happened. It wasn't as much on our northern East Texas. It was more specifically Gulf Coast, so that will bring that number down from what is shut in. You know, I think it's a fair... It'll be a shorter period of time, so I think, you know, we're still assessing half to maybe a third of the production that was affected in the Q1 being affected in the Q2. But we don't expect any long-term issues from, you know, productivity or integrity of the wells, or any type of environmental issues from the weather.

Charles Meade (Research Analyst)

Got it. So if I understand you right, Ryan, it's the duration is still a little bit in question, but whether the assets will come back is not?

Ryan Smith (CEO)

Correct.

Charles Meade (Research Analyst)

Okay. And then one follow-up question. I wanna make sure I heard this right in your prepared comments. I was taking notes. I think you said that you're looking at a number of projects that are more attractive than traditional upstream M&A opportunities. Did I hear that right? And is there anything you want to add to that?

Ryan Smith (CEO)

Yeah, I mean, again, everything's relative to the U.S. Energy platform. So, you know, a lot of the, I would say, the small cap focus type of asset sales, whether that's M&A or, or usually more of a asset acquisition level in our core areas at the size of deals that, that we look at, right? Like, a lot of those have to be evaluated for ARO, environmental concerns. A lot more goes into it now, I know you know this, than it, than it did in the past. So whenever we see packages, a lot of these packages, I mean, commodity prices being strong have, have helped, but a lot of them, once you, once you bake in the mandatory P&A and the mandatory ARO assumptions, a lot of these assets are really liabilities.

Even the ones that aren't, again, I'm not talking about the cream of the crop, Delaware Basin, Midland Basin type of assets, but everywhere else carries a pretty big P&A, ARO liability. So as we look at, you know, adding incremental barrels, if you will, in this market, we don't see, at least, very rarely do we see opportunities that are lower risk, easier achievable and higher rates of return than what we already have in our existing portfolio, right? The challenge there is we have a very large asset base that ranges from almost, you know, Canada to the southern border. And it's finding the right candidates to go in and spend the resources, spend the work.

You know, I think you've seen in a lot of these unconventional basins, again, across the lower 48, a lot of recompletion, refrac work go on. That's what we're looking at. A lot of our East Texas and Mid-Con stuff, we think that there are multiple, at a minimum, candidates that we have in the portfolio that could reasonably be looked at as high-value refrac candidates. We executed on one on our East Texas property in the Q4. It's early, so we don't have announceable results yet, but we're encouraged by the results that we've seen so far, and we're going to do more. So as you think about U.S. Energy, we're always looking for the larger projects, always looking for initiatives that we'll be able to take and we'll be able to scale.

But, you know, in between those things, bringing on barrels from our existing portfolio is extremely attractive in the interim.

Charles Meade (Research Analyst)

Got it. That, that is a helpful elaboration and kind of gives me a better sense of, of what you're meaning. Appreciate it. Thanks.

Ryan Smith (CEO)

Of course. Thanks, Charles.

Operator (participant)

Next question comes from line of Tim Moore with EF Hutton. Please proceed with your question.

Tim Moore (Managing Director)

Thanks, and good morning, Ryan and team. You know, Ryan, I'm just kind of curious, have you given any thoughts or, you know, maybe rough estimate of what you think the BOE net production daily average exit rate could be, or maybe what it could get to this year, you know, beyond the 1,200?

Ryan Smith (CEO)

Yeah, I mean, very smart way of asking what I think some recompletion activity will do. You know, I think if you look at our PDP curve, again, the assets that make up the vast majority of our asset base are assets that we acquired in 2022, and most of those are conventional. So we don't have, I'll call it super steep declines that most people experience. So, we lost some barrels in the Q1 because of weather. It won't be as big of a number, but we'll lose a little bit of barrels in the Q2. Adding those barrels back and then taking into consideration what we sold on our non-op divestitures, that brings it around to a, you know, call it a 1,400 BOE per day number.

I'm assuming you mean exit at the end of the year, you know, if we have 8%-10% declines on numbers like that, I think, you know, 1,400-1,300 is kind of a range that isn't unreasonable from our existing PDP curve. I think there's upside to that number just from the organic activity that we've kind of started undertaking, but I think we'll more earnestly start undertaking it as we move through the year, assuming, you know, oil prices stay strong, of which we're pretty comfortably hedged at the moment.

Tim Moore (Managing Director)

Great. Great, thanks for that color. The next question is, you know, I'm kind of curious, where are you spending kind of the incremental CapEx? You know, you mentioned you have some refrac candidates. Just kind of curious, as you look out the rest of this year, you know, what properties or areas do you think the CapEx is going to?

Ryan Smith (CEO)

Yeah, no, great question. And, you know, we look at this as... I guess if you go back and you look at our numbers for the Q1, we had a very low capital spend, and that was by design. And, you know, part of my job and Mark's job is really identifying the high-cost production that we have and the low-cost production we have. And that sounds simple, but we have a lot of wells, so we're constantly looking at where those dollars need to go, and if it makes economic sense to, you know, save a dollar, yet have a barrel of production not go online. And in a lot of scenarios, just on high-cost production, that makes sense.

So, you know, we're being super disciplined on where we deploy our capital, and these projects are really going to have to fight to get that capital deployed to it. So where do I see it now? The first refrac candidate we did was in East Texas. So obviously, that's probably an area that we feel pretty confident about to continue to put more capital. We like our assets in Montana a lot. Very steady, very low decline oil, and we have some projects up there we can do. Our Mid-Con, you know, no secret, gas-heavy, or gasier than our other assets with gas prices, you know, coming back from just the lowest of the low where they've been for the last couple of months, really opens up opportunities for us up there.

So kind of a generic answer on, you know, our key areas or where you're going to see us spend most of our capital. But that is where you'll see us spend most of our discretionary capital, and again, it's already begun on our East Texas assets.

Tim Moore (Managing Director)

Yeah, that's helpful pinpointing. I'm just kind of curious, you know, the workovers drag, you know, what do you think, you know, as you look at this June quarter and maybe even the September quarter, is the workover drag, you know, this quarter and next quarter, you think it, the timing is gonna be more of a drag than last year was? Or how does it kind of stack up against last year, you know, for you guys?

Ryan Smith (CEO)

Yeah. I mean, I think it's gonna be, in terms of like, in terms of timing, if you mean on a calendar year, I don't see us having any issues on, like, when we want to go do activity. Some of the workover, you know, again, this is just the boring day-to-day business aspect of the company, but, like, some of the workover activity we would have done was delayed by weather, on this same area. You'll see an incremental kick-up in production at some point in time. I don't know if that extra workover activity is gonna be in late June, if it's gonna be in early August yet. We're still kind of working through all that. But so from a timing standpoint, I don't...

Or availability of crews or anything like that, I don't see any issue of this year versus last year on us being able to accomplish that. From a, you know, we're always doing workover activity. It's one of our biggest line items, so it's something we stay on top of. So yeah, I don't see it being any issue on a calendar or a timing basis for us in 2024.

Tim Moore (Managing Director)

Great. Great. And my, my last question, Ryan, is, you know, I have to bring this up. You know, I noticed an increase in the insider ownership. There was a big purchase last month by the chairman's family office entity, and I think, I think the officer himself probably owned, I don't know, 29% of shares maybe. Anything you can share on that, any commentary or any, any thoughts on that? And, is there anything tied into that for, like, the strategic alternatives?

Ryan Smith (CEO)

Yeah, good question. So, yes, our largest shareholder acquired a significant amount of shares during the quarter. I believe that he owns about a third of the outstanding common stock now. You know, I'll give you the answer, that it's a sign of support in the company. Is it part of the strategic alternatives process? You know, everything we do is, right? Like, this isn't a desperate strategic alternatives process. It's a up and to the right process, where we're really trying to find something and unlock value. So I definitely am much happier that he bought an extra 12% and didn't sell 12%.

But in all seriousness, I think it's a very good sign of support for somebody that's already very much in the equity bucket to, you know, get even deeper into that. And, you know, the strategic alternatives process, I know those are very black boxy. It's something that we're always working on, something that we're always evaluating. Everything that we've done, whether it be high-grading our asset base through asset sales that we've undertaken or explore in the future, every M&A initiative we take, et cetera, all the way down the line to, you know, our shareholder roster, kind of goes into that strategic alternatives process. So, I don't think that, you know, if it was something extremely direct, it would be something that he had to file and report, which, you know, wasn't done outside of a 13D.

So there would be nothing there from that angle, but it does encourage me as a sign of support to have insiders, you know, deploying significant capital and acquiring more shares.

Tim Moore (Managing Director)

That's helpful to hear, and I'll catch you at our annual conference next week in New York.

Ryan Smith (CEO)

Absolutely. Thank you.

Operator (participant)

Thank you. We have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments.

Ryan Smith (CEO)

Yeah. Thank you, everybody, for joining us this morning. We appreciate your time and looking-