US Energy - Q2 2024

Transcript

Operator (participant)

Greetings. Welcome to the U.S. Energy Corporation's Second Quarter 2024 Results Conference Call. At this time, all participants are in listen-only mode. The question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll hand the conference over to Mason McGuire. Mason, you may now begin.

Mason McGuire (Head of Investor Relations)

Thank you, Operator, and good morning, everyone. Welcome to U.S. Energy Corp.'s Second Quarter 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, and 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 operating and financial results for the quarter ended June 30, 2024. This press release, together with accompanying presentation materials, is available in the Investor Relations section of our website at www.usenergy.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 the various risks and uncertainties included in 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 the non-GAAP financial measures may be disclosed during this call. A full reconciliation of GAAP to non-GAAP measurements is available in our latest quarterly earnings release and conference call presentation. With that, I'd like to turn the 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 operational team, as well as the results of the company's business development efforts. To begin, we closed our initial transaction targeting helium and other industrial gases in late June, as well as entered into a letter of intent for a complementary and contiguous acreage position to the transaction that is already closed. The assets are located across the Kevin Dome structure in Montana, an area with an extensive presence of vast CO2, nitrogen, and helium resources.

These new assets, of which we have closed on one and expect to close on the other during the fourth quarter of 2024, represent a tremendous development opportunity for U.S. Energy and immediately move to the front of our corporate line in competing and ultimately demanding capital allocation. As we undertake our near-term drilling activity, of which we have two initial wells being drilled in September with potential further development in the late fall, we have many data points on productive zones while still believing the helium-dominant pay zones have largely virgin reservoir pressure, resulting in what we expect to be highly productive wells with minimal declines at modest capital costs of $1.2-$1.8 million due to their relatively shallow and conventional nature.

The expected size and minimal decline rates of the newly drilled wells are expected to support highly economic development of the asset base, both at the field and associated infrastructure level, without the need to undertake an unrealistic and unfundable capital spending plan. This is advantageous for numerous obvious reasons, and the effects will ultimately show up in our realized economics. Additionally, our wells in the initial period will target our areas of high confidence while also bringing additional clarity to the productive parameters of the asset base. We plan to have results from the first two wells during the fourth quarter and plan on sharing these results on our fourth quarter earnings release.

My final point on our recent transactions and a very critical aspect on the background summary of the Kevin Dome, Montana assets is the vast majority of helium production in the United States is hydrocarbon-based, driven by being a byproduct of natural gas. The helium and industrial gas sources across U.S. Energy's new assets are non-hydrocarbon-based and part of industrial gas streams, making this project as low of an environmental footprint as any of its type in the United States. Turning to our legacy oil and gas assets, we achieved net daily production of approximately 1,221 barrels of oil equivalent per day, an increase over the first quarter of 2024, with oil production representing approximately 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. While this is the second large weather system to hit the Gulf Coast this year and nearly identical effects were felt during the first quarter, primarily all of the affected production is located on our lesser producing areas and has been brought back online. There are no long-term issues expected by the weather, and the company's core asset focus areas were unaffected 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 $3.1 million, representing a decrease in total expense to the prior quarter.

A majority of our LOE is fixed at this point, and our per barrel metric is highly sensitive to any variations in production. Our per barrel cost for the second quarter was $27.69 per BOE, a 5% decrease from the first quarter. The weather-driven loss production, combined with additional expenses on the same areas, combined for the elevated metric. We believe our per barrel LOE will revert back to the low $20 per barrel range or significantly lower than what was realized. As we continue moving through 2024, the majority of our capital will be spent efficiently on developing our recent transactions and highest return projects, combined with supporting the production profile of our legacy asset base, continuing the company's share repurchase plan, maintaining balance sheet integrity, and being advantageous of organically generated M&A opportunities. U.S. Energy has historically targeted being a growth platform that aggregated oil and gas assets.

While oil prices have been more supportive over the last couple of years than were previously experienced, the challenges facing public small and mid-cap E&Ps are real, specifically when managing current costs of capital and executing on meaningful transactions that are truly accretive to existing shareholders. We have grown the platform here at the company when applicable. We have also targeted asset sales when we felt the market was tilted in the seller's favor, as shown by our last two asset sales, the most recent representing our exit from our South Texas properties. These transactions have left us with an ideal balance sheet, extremely low levels of simple bank debt, and a clean cap structure that is able to support development.

While any development project will, of course, need development capital, U.S. Energy sits in a highly enviable position relative to any perceived peer of having significant sources of internally generated non-dilutive capital. Whether it's cash flow from existing operations or, more meaningfully, opportunistic asset sales, having that lever to pull forward significant cash value is a huge advantage, particularly with a highly desirable and immediate use of proceeds. We believe that U.S. Energy stands out from other energy companies of our size in this backdrop of current energy industry dynamics. We now have a highly economic and scalable development project, and our remaining E&P 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 and shareholder returns. To that end, during the second quarter, we continue to accelerate our previously announced share repurchase program. During the quarter, the company repurchased approximately 200,000 shares, bringing our year-to-date repurchase total to approximately more 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. We expect to continue this activity going forward. In conclusion, U.S. Energy sits at the beginning of what I believe is a true first-mover advantage in this space, which I define as a growth-focused, non-hydrocarbon, industrial gas-focused company in the United States. The existing small-scale companies in the space are hindered by burdensome and convoluted equity structures, ugly balance sheets, and listed on exchanges that are avoided by most institutional investors. U.S. Energy faces none of these hurdles, and we believe further corporate opportunities will present themselves as this becomes apparent in the marketplace.

Now, I would like to introduce Mark Zajac, our CFO, who will provide a detailed update on the financial results for the second quarter.

Mark Zajac (CFO)

Thank you, Ryan. Hello, everyone. Let's delve into the financial details for the second quarter of 2024. Total oil and gas sales for the quarter amounted to approximately $6 million, reflecting a decrease from $8 million in the same period last year. This decline was attributed to a 38% reduction in volumes and partially offset by a 22% increase in realized prices. It is important to note that this quarter's production was significantly impacted by severe weather events in several of our key operating areas. Sales from oil production contributed 91% of our total revenue for the quarter, demonstrating our continued focus on optimizing our oil assets. Our lease operating expense for the second quarter was approximately $3.1 million, equivalent to $27.69 per BOE, indicating an impressive 18% reduction in total lease operating expense compared to the second quarter of 2023.

This reduction can be attributed to asset sales, fewer one-time workovers, and our continued effort to increase operating efficiency. Severance and ad valorem taxes for the second quarter of 2024 totaled approximately $400,000, reflecting a decline from $500,000 in the same period last year. As a percentage of total oil and gas sales revenue, these taxes account for approximately 6.1% during the quarter. Cash general and administrative expenses was $1.6 million for the second quarter of 2024, a reduction of 43% when compared to the same period of 2023. The second quarter saw a significant reduction in accounting and professional fees, and compensation and benefits when compared to the same period a year ago. Turning to our net financial performance, the company reported a net loss of $2 million in the second quarter of 2024, an improvement of $500,000 when compared to the second quarter of 2023.

Our adjusted EBITDA stood at $1.1 million in the second quarter of 2024 compared to $900,000 in the same period last year, influenced most notably by the reduction in total cash operating expenses from the prior period. Let's briefly touch upon our balance sheet. As of June 30, 2024, the company held outstanding debt of $7 million on our $20 million revolving credit facility. Our cash position stood at $2.2 million. Subsequent to the quarter end, we paid down $5 million of our credit facility, leaving $2 million of debt outstanding as of today. In conclusion, we are pleased with our operating performance and financial results that we are able to support the company's initiatives in a way that maintain full balance integrity.

My objective is 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 initiative 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'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Jesse Severson with EF Hutton. Please proceed with your question.

Jesse Severson (Analyst)

Hi, everyone. Thanks for taking my question today. I was just curious. I heard the commentary on LOE per BOE moderating, looking forward here as operations are more normalized. I'm curious, though, when it comes to the acquisition of these additional assets in Montana and noticed in the press release the commentary on the wells being spudded in the third quarter here, how should we look at G&A going forward? Thank you.

Ryan Smith (CEO)

Hey, Jesse. It's Ryan. Good morning. Thanks for the question. Good question. So I guess two parts on our legacy oil and gas assets, as we kind of explained yesterday in the release, but just verbalizing, I think most people are aware at least. Heavy, heavy weather in the second quarter, Hurricane Beryl came through and took a lot of our Gulf Coast production offline, most of that being in Liberty, which is just east of Houston. So obvious comment, but removing producing barrels and then adding the expenses to handle the weather-related events, et cetera, kind of inflated that per barrel metric in the second quarter. It's the same. Even though it was a little bit less in the first quarter, it's the same reason.

Going forward on an LOE basis on our oil and gas assets, outside of another, I would love to say we'll never expect another weather event on the Gulf Coast, that's probably not accurate. But where we stand right here, right now, going forward over the next couple of quarters, we're confident that we'll get that per barrel metric back to the numbers that we saw kind of late last year. From a what to expect on our upcoming drilling, we're not ready to give out specific guidance on those wells yet. I think that's coming in the intermediate term on our next quarterly earnings, just because it's our first well to drill up there. Of course, we have some thoughts. We believe these wells are going to come in around $1.5, $1.6, $1.4 million of capital costs.

First well is probably going to be a little bit more than that, just while we really make sure that everything we want to do is going on. But on a metric basis, on the new development, I don't think we're ready to give those numbers out yet until we have our first well drilled and producing. From a G&A perspective, I do think our G&A is going to continue to trend down. As we look at our portfolio here of our legacy oil and gas assets, I think we have multiple opportunities in the current price environment, even lower prices than now, to really pull forward some value with those assets. And pulling forward value on assets, obvious comment, isn't just the cash we receive now. It's that use of proceeds, what's the corporate overhead synergies we can realize with doing that.

Ultimately, I believe that we can optimize our platform here to where the G&A and the professionals that we bring on with the new development is more than offset by the G&A optimization efficiently running our legacy assets. I don't believe that we will see any inflated G&A numbers. At the point, if there is an absolute G&A increase, I think it would be on a per metric basis, significantly less than what we realize now.

Jesse Severson (Analyst)

Thank you. Thanks for the details on the financial operations there on both design items. And then I'll ask this last question, then leave it to the rest of the call. But in terms of looking at legacy asset sales, are we still expecting to potentially line up some future sales of some of these assets to fund maybe this build-out, or are we comfortable with our liquidity position today and looking elsewhere and just more so focusing on the operations of the business? Thank you.

Ryan Smith (CEO)

Yeah. Of course. Great question. And I'll kind of start at the end of the question and work my way through it. I'm perfectly comfortable with our liquidity position today to develop, call it the first phase of our new project. With our asset sale that we completed in July, paid down another significant portion of our debt. I think we have $2 million outstanding today, a little more than $2 million cash on the balance sheet with the $18 million available on our revolver. So with all the normal premises of keeping our cash structure clean, keeping our leverage profile down, I'm very comfortable with where we are from a liquidity perspective. That being said, and just kind of diving back into my previous answer, like the vast majority of companies, there is no doubt optimization we can do on our legacy assets.

When U.S. Energy came together over the last couple of years, we had an asset base. We have an asset base that is geographically diverse. Not all of those assets are equal. As I look at them going forward, if we can pull forward 4 or 5 years of projected cash flow at current commodity prices opportunistically in a process that gets 4, 5, 6 bids, that's always something that we're going to look at. It's just where we trade at right now, the equity valuations, if we can monetize that cash at a very significant increase from where we trade and allocate that capital to what we believe is an extremely high rate of return project with our new acquisitions and development, it's kind of a no-brainer. It's definitely on the radar. It's definitely something we're focused on. We'll be opportunistic about it.

It's not something that's necessary to fund things going forward, though.

Jesse Severson (Analyst)

Okay. Great. Thank you very much.

Ryan Smith (CEO)

Thanks.

Operator (participant)

Our next question is from the line of Charles Meade with Johnson Rice. Please proceed with your questions.

Charles Meade (Equity Research Analyst)

Yes. Good morning, Ryan. I want to say I appreciate the mid-year oil and gas PDP update there. I think it was just under $51 million. It really highlights your value. But I want to go back to, I think you discussed this on your last or really the last call discussing the acquisition. What is the timing to get a similar kind of PDP or third-party resource estimate on your helium assets? I know, or at least I believe you said you're going to have one after you drill these two wells, but are you going to have one before on the existing wells?

Ryan Smith (CEO)

Yeah. Great question, Charles. Good morning. Where we stand right now on the acreage that we've closed, we have our internal data. We have a large resource report from a very well-known third-party engineering firm. Again, in the world of SEC reporting and 1P reporting, resource reports aren't usually filed. They're kind of investor presentation materials. I think once we drill this first well coming up, I think I believe we spun it on September the 9th. We'll have our data on that well, let's call it by October 1st. And then I think in the fourth quarter, we have both of those items.

We have our larger kind of resource overview reserve report, and then once we have a well drilled and operating under the assumption that we close our transaction that we're under LOI on and the producing well that they have, I believe that we'll have our, let's call it 1P reserves because processing, et cetera, kind of makes PDP and PDNP very similar by the end of the year. Hopefully by fourth quarter earnings. I know that's kind of a six-week window there, fourth quarter earnings and end of the year. But that's my expectation. We're working with two of the largest reserve engineering firms in the world right now on getting this done. So it's something on our plate and will be here by the end of the year.

Charles Meade (Equity Research Analyst)

Got it. And so if I'm understanding you correctly, Ryan, we're kind of going to get two reports or two numbers. One on the total resource and then the second on here's what's proved developed with these wellbores. Is that the right understanding?

Ryan Smith (CEO)

Absolutely. And I mean, just another way to say it, just a 1P, 2P, 3P resource report, and then the SEC report that shows up on our 10-K.

Charles Meade (Equity Research Analyst)

Got it. Got it. Okay. And then secondly, you've covered this, I think, a bit in your last call, you said that you'd be able to fund any development internally, whether it's asset sales or cash flow. But can you give us a sense? You've given us an estimate for what each of these first two wells costs. I think your number is $1.4 million. But what is the follow-on CapEx in the success case? And over what timeframe does it play out?

Ryan Smith (CEO)

Yeah. No, that's a great question. And I could go through this for an hour, but I'll try to keep it concise and not look like 5 years out. And I'll also preface this by saying we look at this right now as phases, right, phase I, phase II, phase III. So phase II gets bigger as phase I gets successful, and phase III gets bigger as phase I and II get successful. So I'm not going to sit here and say from here to eternity, you don't ever need outside capital. But as we look at, I'll call it the next 12-18 months, what do we need to start, I'll call it selling our industrial gases? We need to drill two or three wells, and we need to put in a processing plant. Right now, we think these wells, I'm going to call them $1.5 million.

I think the first one comes in a little bit higher. I think the next one's coming a little bit lower just as we continue to learn what we're doing. It's very easy for me to say in my seat, but it's very simple drilling compared to, I think, what most folks are historically familiar with in terms of horizontal shale drilling, shallow conventional wells. So we look at it at, at that two or three excuse me, at that two or three well number, $3 million-$4.5 million of drilling capital over the next we're drilling two now. We'll probably have 1 at some point in time before the next summer. And then the processing plant for these wells, we're forecasting it around $8 million-$9 million bucks.

I think from a perfect corporate finance perspective and a how do you come up with a capital structure on that type of infrastructure, it's very simple. I think it's half equity, half debt. And so you start looking at what are the equity needs for U.S. Energy over the next 12 months to where we are processing and selling meaningful amounts of industrial gases out of Montana. It's an $8 million-$10 million kind of equity capital need from U.S. Energy. Another way to put equity capital need would just be a cash need.

Whether that comes from cash on hand, cash from operations, a bit of credit facility debt, asset sale proceeds, I think right now, at least from everything that we've seen and the processes that we've run on the divestiture side, that's a number that I'm not overly concerned about right now being able to fund. The legacy, just piggybacking on your comment a second ago, our legacy balance sheet, which still has $50 million or so of proved oil and gas reserves, really gives us that flexibility to where we're not going out to the market hat in hand willing to take any kind of transaction. We don't need to do that, again, for this initial get off the ground phase of proving our concept. So I think it's a mixture of that. I mean, I don't have the exact answer right now.

We're in a flexible position to be opportunistic on these type of assets and these type of transactions. Our main assets remaining right now on the oil and gas side are in Montana and in East Texas. But if you look at our map, we have a lot of straggler stuff in between those two areas. And in situations where hypothetically we can clear $2 million on a small asset sale, take off 2x that of ARO on our balance sheet, and combine another $300,000-$500,000 annually on, I'll call it, corporate overhead synergies ranging from insurance, G&A, et cetera, those dollars go straight to our new project. And that's how I look at the funding. And so far, the deals we've done, the capital has been highly accessible.

Charles Meade (Equity Research Analyst)

Got it. Thank you for all that elaboration of your thinking, Ryan. It's helpful.

Ryan Smith (CEO)

Absolutely. Thanks, Charles.

Operator (participant)

Thank you. At this time, we've reached the end of the question and answer session, and I'll turn the call over to Ryan Smith for closing remarks.

Ryan Smith (CEO)

Yes. I thank everybody for calling in this morning. Thank you for your time. We're very excited about the transactions that we're undertaking and we're developing right now. We look forward to rejoining you on our next call and giving market updates on the activity in the interim.

Operator (participant)

This concludes today's conference. We disconnect your lines at this time. Thank you for your participation. Have a wonderful day.