USEG - NASDAQ

Greetings. Welcome to the U.S. Energy Corporation's Second Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, I'll hand the conference over to Mason McGuire. Mason, you may now begin.

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

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 has 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 represented tremendous development opportunity for US Energy and immediately move to the front of our corporate line 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 million to $1.8 million due to the relative shallow and conventional nature. The expected size and minimal decline rates at 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 effective 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 a 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 in 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 cost 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 developments. While any development projects 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, 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 continued 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 and 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 this higher rate of 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 this 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

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 same 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 $0.5 million 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 initiatives we may entertain going forward. Thank you for your participation this morning. We are now ready to take your questions.

Thank you. We will now be conducting the question-and-answer session. [Operator Instructions] Our first question comes from the line of Jesse Sobelson with EF Hutton. Please proceed with your question.

Hi everyone. Thanks for taking my questions today. I was just curious, I've 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 I noticed in the press release the commentary on the wells being spud in the third quarter here, how should we look at G&A going forward? Thank you.

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 in our oil and gas assets outside of another. I would love to say, we'll never expect the other 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 million, $1.6 million, $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. And 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. So I don't believe that we will see any inflated G&A numbers. And 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 realized now.

And then I'll ask this last question then, I'll 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 more so focusing on the operations of the business? Thank you.

Great question. Yes. 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, I'm 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 US 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. And as I look at them going forward, if we can pull forward, four or five years of projected cash flow at current commodity prices, opportunistically in a process that gets four or five, six 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. So 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

Okay. Great. Thank you very much.

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

Yes, good morning, Ryan. I want to say I appreciate the midyear oil and gas PDP update there of 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 the last – 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?

Yes. Great question, Charles. Good morning. So 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 we – I believe we spudded on September 9. We'll have our data on that well let's call it by October 1. 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 closed 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 is 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.

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 is what's proved developed with these wellbores is that the right understanding?

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

Got it. Okay. And then secondly, you've covered this I think a bit on 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 these 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 time frame does it play out?

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 five years out. I'll also preface this by saying we look at this right now as phases, right? Phase 1, Phase 2, Phase 3, right. Phase 2 gets bigger as Phase 1 gets successful. Phase 3 gets bigger as Phase 1 and 2 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 to 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. I think the first one comes in a little bit higher. I think the next one is coming a little bit lower, just as we continue to learn what we're doing. It's very -- it's 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 like horizontal shale drilling, shallow conventional wells. So we look at it at, I thought, two or three -- excuse me -- that two or three well number, $3 million to $4.5 million of drilling capital over the next -- we're drilling two now, we'll probably have one at some point in time before the next summer. And in the processing plant for these wells, we're forecasting at around $8 million to $9 million. Yeah. I think from a perfect corporate finance perspective and how do you come up with a cap structure on that type of infrastructure, it's very simple. I think its 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 to $10 million kind of equity capital need from U.S. Energy. Another way to put equity capital need would just be a cash need. And whether that comes from cash on hand, cash from our operations, a bit of credit facility debt, asset sale pull-forwards, I think right now, at least from everything that we've seen and the processes that we've grown 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. It's -- we're in a flexible position to be opportunistic on these types of assets and these types 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 out of ARO on our balance sheet and combine another $300,000 to $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.

Got it. Thanks for all that elaboration you think. And it is helpful.

Absolutely. Thanks, Charles.

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

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.