USEG - NASDAQ

Welcome to the U.S. Energy Corporation Investor Call [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to Mason McGuire, Director of Corporate Development. Thank you. You may begin.

Thank you, operator. And good morning, everyone. Welcome to U.S. Energy Corp.'s conference call to discuss the company's recent transactions. Ryan Smith, our Chief Executive Officer, will provide an overview and discuss the company's strategic outlook. 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. With that, I'd like to now turn the call over to Ryan Smith.

Thank you, Mason. And good morning, everyone, and thank you for joining us today. I'm pleased to be with you this morning to discuss the company's recent transaction announcements, specifically those targeting helium production and other industrial gases in Montana and share with you a view on our strategic outlook going forward. During this morning's discussions, I plan to highlight the relevancy of three key items related to this transaction: number one, what is the asset and the background behind it; number two, what is U.S. Energy going to do with it; and number three, what does U.S. energy look like going forward and how are we differentiated from the existing market? First, what is the Kevin Dome structure in Montana? From a composition standpoint, the dome is a greater than 100 square mile anticlinal structure, meaning that it rises in the center and dips towards the edges. The formations that make up the dome are highly porous and permeable making them ideal reservoirs for natural resources, both hydrocarbon and non-hydrocarbon. The formations also provide excellent storage capacity, which we believe makes it an ideal candidate for carbon sequestration. The major standout feature of the Kevin Dome with its long proven role of a significant domestic source of CO2 and other industrial gases. Over the years, extensive geological surveys and research have confirmed the presence of vast CO2 reserves within the dome’s rock formations. These formations due to their high porosity and permeability serve as excellent reservoirs, allowing for the accumulation of multiple industrial gases, including the CO2 and nitrogen dominated formations bearing helium. Stepping back briefly, I'd like to touch on the historical time line of development and ownership of these assets. As most on this call know, U.S. Energy owns and operates a large oilfield in Montana. That field was originally developed by [Unocal], who is now Chevron, who held ownership for many, many years. The Kevin Dome is approximately 30 miles in distance from the oilfield and that became understood that the domed held vast CO2 deposits. The owner gain control of both assets with the ultimate intent to eventually initiate a large scale CO2 enhanced recovery of the oilfield. Eventually, the assets were sold to a fairly large public company called Quicksilver Resources who subsequently sold the assets to a Blackstone backed private company called Synergy, which ultimately was bought out by its management and contains two members who sit on the current U.S. Energy Board of Directors. In 2022, the U.S. Energy acquired the oilfield splitting the Kevin Dome and the oil assets up and the Kevin Dome assets under LOI right now at Synergy represent that trail of assets. When the existing wells on the Kevin Dome were first tested for Helium concentrations in 2023, the results were highly encouraging. After watching the evolution of the helium and CO2 markets over the last several years, already having significant operations on the ground in what can be a fairly remote area and after multiple months of as thorough of a diligence process that I've been a part of, U.S. Energy decided to move forward and pursue the opportunity. In doing so, we also began to target surrounding areas that we believe further expanded the resource opportunity and that resulted in both transactions that we released the other day, and the subsequent dominant land position across the dome. To end the first point and a very critical aspect on the background summary of the Kevin Dome, and I'll come back to this in a few minutes, but the vast majority of helium production in the United States is hydrocarbon based being driven by byproducts of natural gas production. The helium sources across the dome are nonhydrocarbon based and they are part of other industrial gas streams, making this project as low of an environmental footprint as any of its type in the United States. Now on to the second point. What is U.S. Energy going to do with the asset? The first thing we must now realize is that U.S. Energy controls a vast land position and resource across the dome. Thankfully, we have long-standing operations and staff in the area, giving us existing boots on the ground and a high degree of familiarity with the necessary materials and services to operate a development program in this part of the country. Initially, and I'll define initially as the next 12 months or so, we are currently in the various stages of planning everything from the drilling of multiple wells over the summer and fall to designing the necessary infrastructure and processing capabilities to securing long term off-take agreements that have highly supportive economics of all development and then ultimately realizing meaningful helium sells at the end of that initial period, which we expect to be in the summer of 2025. As we think about the near-term drilling activity, of which we have two initial wells planned to drill in August and September with likely two more later in the fall, we have many data points on productive zones from shallow conventional oil and gas wells drilled many years ago. That being said, we believe the helium dominant pay zones have largely virgin reservoir pressure, resulting in what we expect to be highly productive wells with minimal declines and modest capital cost of $1.2 million to $1.4 million each, primarily driven by 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 levels without the need to drill hundreds or even several dozens of producing wells. This is advantageous for numerous 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 dome. It's very important to note that while we are focusing operations on the highest return on our near term helium operations, we believe that there are other equally, if not more so, revenue streams associated with the project. While nitrogen as an inert gas can be flared I think everybody is aware that CO2 can't be but the market for sequestering and ultimately monetizing certain types of CO2 sources through various methods has exploded over the last several years and been supported by highly bipartisan legislation. Additionally, whether it’d be the food and beverage market or high-growth tech and automotive processes, the commercialization of reliable domestic and nonhydrocarbon based CO2 sources has grown tremendously and we plan on pursuing all monetization avenues. Finally, to my third and final point, why U.S. Energy and what does the company look like from here going forward. U.S. Energy is always 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 they were previously experienced. The challenges facing public small and mid-cap E&Ps are real. Specifically when managing current cost of capital and executing on meaningful transactions that truly makes sense to existing shareholders. We've grown the platform here at the company when applicable and we've also targeted asset sales when we felt the market was tilted in the seller's favor as shown by our last two announced deals. That’s left us with an ideal balance sheet, extremely low levels of simple bank debt and a very clean cap structure. I've said multiple times in the past, a big part of my job here at U.S. Energy is not to complain about small-cap E&P valuations but to formulate and execute ways that unlock the value of our balance sheet that I believe exists. I think you have seen modestly outsized value realized for our assets in the A&D market through our last two asset sales, which does include our recent announcement and that has been significantly greater than our market cap value on a percentage of company production and reserves sold. While any development project will, of course, need some form of development capital, U.S. Energy sits in a highly enviable position relative to any perceived peer of having significant resources of internally generated nondilutive capital, whether it's cash flow from existing operations or more meaningfully opportunistic asset sales, having that lever to pull for significant cash value is a huge advantage, particularly with a highly desirable and immediate use of proceeds. 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 nonhydrocarbon industrial gas focused company in the United States. The existing micro 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 more apparent in the marketplace. While successful catalysts and sustainable growth will always drive long term equity valuations, simply put, U.S. Energy's focus is creating a domestically focused nonhydrocarbon industrial gas platform that achieves these goals. And our scalable Kevin Dome position we believe that we control a resource that gives us the ability to be the leading small-cap industrial gas focused company with the cleanest environmental footprint in the United States. Looking ahead, we have an incredible opportunity to leverage this to drive growth, enhance our platform and create lasting value for all of our stakeholders. Thank you for your participation this morning. We're now ready to take any questions.

[Operator Instructions] Our first questions come from the line of John White with Roth Capital Partners.

Thank you for that overview of the recent transactions. On your carbon sequestration plans and the CO2 at the dome, is some of the CO2 going to be transported to the oilfield you mentioned and used in a tertiary recovery process?

So as I kind of hit on during the summary, the long-time historical plan in many, many decades was to use the CO2 to flood the oilfield. I think from a plausibility standpoint, like U.S. Energy now controls these two assets, is it something that we're going to thoroughly evaluate in diligence and research, just like we would a internal project we were positive about, absolutely, we're going to do those things. I think where the market is going right now, both, I'll say, just capital markets wise, which is ultimately what we follow as a public company. I think there's probably more valuable avenues to monetize that CO2 stream and kind of keep it on a, what I'll call, a closed loop system on the dome instead of piping it to the oilfield. That being said, I think further down the road, whether it's on the platform we're building out now or some type of other structure where the oil assets may leave the platform but stay owned by the company, I think it's a huge upside opportunity down the road past these initial phases.

And what kind of reserve estimate for the helium on both acreage blocks do you have in place?

I'm going to [punk] that just because we have not signed definitive documents with one of the parties yet, and I don't want to piece mail those numbers, because it's much more simple putting them all out at one time. I will say in terms of PSA signing with the other deal is from a high level, there's no reason for me to change my opinion that we had in the earnings call that we're expecting this deal to close at the end of September. And it's a public deal so you can kind of back into definitive doc date expectations then. And once we do that, we'll have our reserve estimates plus whatever third-party work we've had done at that time. So probably sometime this month, early August.

And the first two drilling locations this summer are going to be on the Wavetec acreage, correct?

Correct.

I have your map on your press release in front of me. Can you generally describe where those locations are?

Yes. No, for sure. I think -- and I'm glad you generally, even though we do have permits. So these are known and out there. The first well we're drilling, again, we're drilling this back to back. So the first and the second aren't really that much of a difference. But the first well is, it's pretty close to the lease line of both the Wavetec and the Synergy acreage. If you look at it at that map, it's probably where the lower right part and the upper left of the Synergy acreage and the upper left part of the Wavetec acreage kind of meet is where the first well is being drilled. So we're excited about not only the prospects of that but the mutually beneficial nature of drilling a well and proving up acreage that really just shows the benefit of these two positions being together. And the second well is further south than that on the WaveTec acreage, both for economic purposes and boundary testing, that second well is being drilled and we're expecting both of those to kick off late August.

So both wells are generally southeast of the Synergy acreage.

Correct.

Our next questions come from the line of Charles Meade with Johnson Rice.

Ryan, I wonder if you can share with us in whatever level of specificity you're comfortable, the price for helium, the per Mcf price you're using to using your valuations and that have led you to the conclusion that this is the best opportunity to deploy your capital?

And that is -- it seems simple, but the way the helium markets work it's not as simple as just what you see on your screen that day. So again Charlie, you know most of this but I'll just say it out loud is the vast majority of helium is sold on long-term off-take agreements. And the spot prices you see on the market aren't necessarily relevant to the economics companies are going to be receiving. And the traditional way outside of the Exxons and the Kinder Morgans of the world to sell your product was to enter into offtake agreements with these large buyers and that's just kind of how it was, that's kind of still how it is and -- or at least a big part of it. And I think I'll say, historically, these amounts have, I'll say, steadily increased over the last seven to 10 years. I mean there's been highs and lows but it's kind of been a steady up and to the right somewhat chart during the absolute peak of, I believe it was Russia, Ukraine and other things driving that. You saw off-take agreements start going off in the $700, $800 NIM range. And those have come down but those are extremely, extremely frothy prices. What do we see now mostly $450 to $500 if I was putting a range on it, you see some that are higher, you see some that are a little bit lower. So I think on the traditional -- yes, it's driven by quality. Applicable to U.S. energy, I think that's kind of where we see that range. Conservatism can drive it lower, optimism can drive it higher. That's the first part. The second part is I personally believe, and we've seen some smaller entities do it that don't have the proper platform to do it almost going directly to new and unique buyers. Of course, you have the SpaceXs and the Blue Origins of the world and these other very well-known companies. But as the CO2 usage expands both just because of the industries and combined with like recent legislation, the avenues to sell, I'll just say your helium -- I'm sorry, I said CO2 earlier, your helium directly to these groups and kind of take out some of the middleman on that pricing, I think, is real, and I think it's something we're going to pursue. And then thirdly, like where do we run our breakevens here. This project is definitely a development project. So you almost find where your breakevens are going to be through your analysis. We're not ready to give that information out just yet, Charles. I will say that internal forecast and all the work we've done under any reasonable assumptions for infrastructure and wells and overhead, et cetera, is significantly lower than that range of prices that I just said for us.

Right, hat's all really helpful. I recognize it's early, but I just wanted to get -- since you made the point well, it's not a liquid and transparent market. It's maybe one of the big but not obvious questions. I have a second question but this is really about more kind of a big picture market structure and where does USEG fit in. But I actually want to start it with picking up on a point you just made about how helium prices spiked to in that Russia-Ukraine war. I can't remember the exact details but I remember there were some -- I remember right in an article that when one of these big steel plants went down for some reason, they were a huge global source of helium, maybe it was from the coal or something like that. But at the time, there was a real scare that people are going to be short helium. And since you come out with your announcement, as you can imagine, our friends at Google are tracking all my searches. And I'm now getting pushed all these articles on helium discoveries, right? And maybe the same thing happening to you, I'm getting to -- but I see these articles about, oh, well, in Minnesota, someone's found about 13% helium discovery. And of course, that's not going to be as well described as Kevin Dome, which has all these oil and gas penetrations, right? So I'm not trying to say it's the same thing or anything. But I want you to give us a sense of how much you've looked at kind of market structure for Helium in the US. And you gave us some new disclosures on Page 7 that in your Kiefer Farms 1 well, you have 0.6% helium. And I think that what I've been able to read the kind of threshold for commercial, commercial healing recovery, at least in traditional hydrocarbon associated accumulation is like 0.3%. And you say that the word choice you used was projected to be as much as 1.2% helium. So can you give a sense of how pleased or not pleased you are? I mean, I think you are pleased. But how you see this project coming in on the cost of supply curve for helium in the U.S. is, I guess, what really boils down to?

Man, that was a big question. I'm sure I'll miss a couple of spots. So just remind me at the end what I don't hit. So I think backing up from the project and where we look at it from. And of course, I'm going to relate this to oil and gas, because most of the companies you cover oil and gas, I'm assuming plenty of the people now into this call are familiar with oil and gas. And there's no doubt in another helium discoveries around the country, around North America. I think -- and I'm not here to throw shade on any of those discoveries. I think the most important thing to look at, especially as a public company looking through it from that lens is just like an oil and gas play, like if you have a very small acreage position and one good well, I'm not sure -- and that's very good news, I guess. But it doesn't fit into the profile of having a scalable and a development level project that's acceptable for the public markets. And of course, there's some much bigger projects in the United States. But those projects are run by companies with names like Exxon and names like Kinder Morgan, and those guys aren't the ones we're talking about here. So as that comment relates to the Kevin Dome project, what's the differentiating factor here? Undoubtedly, it's size. And it's not exactly like this, and I'm just giving my opinion as related to my background, but it feels very like early stage Bakken to me. And it's a vast, vast resource that has a vast, vast amount of well control around it and very, very little capital and technology has been used in this space. And absolutely, nothing has been applied to it with current capital markets and current market dynamics. So that's kind of my high-level comment on that. I would say that the second item is the expected -- just size of these wells, and I don't mean the capital expense side because just quite frankly, that's very, very low of $1.2 million, $1.4 million vertical well is in a very attractive price from where I sit, but the expected size of these wells, and I know I'm just saying words here, but when we have our reserve reports come out, et cetera, I think it will reflect that. We're very excited about it. And the concentrations of helium in the one well that candidly was drilled seven years ago, it wasn't even tested for Helium up until six months ago. And looking back, I'm sure the company that operated that well would do 100 things different, had extremely, extremely stellar results that would move the needle for this company tremendously. And the reserve experts, again, I'm talking about something that's going to come in the future and our third-party engineering consultants believe that that's a very good baseline to use for that entire area. What do I call that entire area, kind of moving into the next thing on what I expect economics to be while these acreage positions are very close to each other, they are [Technical Difficulty] two dominant formation. And our geologists will get mad at me for simplifying it like that. But I think from a capital markets perspective, there's multiple zones that could have multiple things, but what I look at right here right now is CO2 streams with highly economic helium cuts, and I can monetize those CO2 streams, whether it's through carbon sequestration, cooperating with legislation, all the way on the other end of the spectrum to selling CO2 to food and beverage or automotive companies, it makes your whole stream nonhydrocarbon and highly economic. On the Wavetec acreage, it's predominantly nitrogen based. They're smaller -- a little bit smaller wells, a little bit simpler and less capital intensive development. But we believe, again, those helium contents are probably a little bit higher on some of that acreage targeting the nitrogen based zones, that's not saying their project is more economic than the other project. It's just saying strictly on Helium, which really we're underwriting everything on. That's kind of how I look about the development and the different economics for the acreage. And I know that's rambling and if I didn't hit all your questions, I apologize.

I think you did -- I recognize that you're really not going to be able to -- you don't have all the numbers yet to put it down, but the sense you have is that not only are you going to be low on the cost curve but that your -- the scale is a differentiator for you. And I think that's a great point. I hadn't kind of thought about that but it's -- maybe just because I'm dense. But no, I got your point and thank you for the elaboration, Ryan.

[Operator Instructions] Our next questions come from the line of John White with Roth Capital Partners.

On the -- your two acreage blocks, how many helium wells has established production on your acreage or offsetting your acreage?

So it's kind of a complicated question because of the wells haven't been tested for helium. Just like the main well that was on the synergy acreage wasn't tested for helium until late last year. So I mean, the amount of, I'll call it, vertical well control that you could go in and retest these zones, there's dozens of wells proving the formations that we believe hold the helium content. So again, those wells haven't been tested for helium because it's kind of smaller mom-and-pop type operators when helium wasn't on their radar. But in terms of well control for proof of formation, I mean, several dozen, there's just a massive amount. Helium only, there's been some to the north, we control such a large position here. The one that has been drilled and tested for helium is soon to be ours in the middle of that blue block. So definitely an exploratory aspect to it. I mean, I wouldn't sit here and say all 164,000 net acreage that we're going to control are up, we expect them to all be highly economic. But yes, that's the answer.

And those dozens of wells, they have tested for natural gas or CO2 or both?

The vast majority of them were natural gas.

And they're classified as proved undeveloped right now?

I mean a lot of them would still be producing or they're just test wells, but yes.