USEG - NASDAQ

Greetings and welcome to U.S. Energy Corporation Fourth Quarter and Year End 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] As a reminder, this conference call is being recorded. It is now my pleasure to introduce Mason McGuire, Vice President of Finance and Strategy. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Welcome to U.S. Energy Corp.'s fourth quarter and year end 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 our fourth quarter results, highlight our key accomplishments in 2024 and provide an update on our strategic outlook and operational plans for the year ahead. Our results this quarter reflect the dedication and resilience of our operational team as well as the strong momentum we've built throughout our recent business development efforts. In particular, I want to focus on our Montana project, where we continue to make significant progress. During the fourth quarter, we successfully drilled our first industrial gas well and have spent the past few months analyzing results to refine our development approach. Our focus remains on targeting economically promising production zones, which independent testing has confirmed contains significant non-hydrocarbon helium concentrations. While we initially anticipated further well testing in December and January, we made the strategic decision to wait for warmer weather to optimize operational efficiency. Montana experienced a particularly harsh winter and while existing operations continued without any issue launching new operations in these conditions introduced unnecessary risk both to personnel and to equipment. With improved weather conditions, we're now well positioned to move forward. In early January, we completed another key milestone by acquiring approximately 24,000 net acres in Montana, further expanding our footprint across the most promising portions of the Kevin Dome. This acquisition is a cornerstone of our development strategy targeting CO2 dominant pay zones with significant helium concentrations. Additionally, this transaction included an active producing well with recent gas analysis confirming material flow rates and helium production from the Duperow zone. With this latest acquisition, US Energy now controls the dominant land position across the Kevin Dome, totaling approximately 160,000 net acres. This strategic expansion allows us to control the development of a vast resource base, securing years of future growth potential. While we will continue to opportunistically acquire smaller high value acreage to further optimize our holdings, we are confident that our current position is robust and scalable. Looking ahead, we are gearing up for an active and highly strategic 2025. Beginning in April, we plan to initiate workover operations on two wells, the first being the industrial gas well that we drilled in the fourth quarter and the second being the producing well acquired in our most recent transaction. These operations will provide critical data including flow rates, reservoir characteristics and gas composition. In June, we plan to commence drilling and completing two additional wells, marking the next phase of our development program. By the end of the second quarter, we anticipate having operational results from all four wells providing valuable insights that will inform our full cycle development strategy. Once we analyze this data, we expect to move into the manufacturing phase of our gas processing plant. Our team of internal professionals and highly experienced consultants have spent months refining the plant design and we are confident in our ability to execute this next step once our well development program is complete. Another important initiative underway is the carbon sequestration component of our Montana project. This effort is progressing in tandem with our acreage, delineation and plant development. We have made substantial progress on both the operational and regulatory fronts and we believe our plan meets all necessary requirements to fully leverage federal incentives related to CO2 sequestration. Our focus includes optimizing our existing Class 2 injection permits, identifying and permitting future injection sites, and advancing our monitoring, reporting and verification or MRV process. We expect to provide additional updates on this initiative in the second quarter. We're highly optimistic about the future of this project. Not only does our Montana asset represent a transformational opportunity for US Energy, but it also positions us as a leading player in the industrial gas sector. This initiative aligns with our strategy to create a full cycle industrial gas platform, while efficiently deploying our capital to generate meaningful returns. Based on the data collected thus far, we believe our wells will support highly economic development both at the field and infrastructure levels. Our capital spending plan remains disciplined and achievable, fully funded through our existing balance sheet and supplemented by our successful capital strategy. The development of these wells will further define our resource base and provide the necessary foundation for advancing our processing infrastructure and long-term production plans. It's also important to highlight the unique nature of our Kevin Dome assets. The majority of helium production in the U.S. today is tied to hydrocarbons and produced as a byproduct of natural gas extraction. In contrast, our Montana project is non-hydrocarbon based, making it one of the lowest environmental footprint helium projects in the country. This distinction is a key competitive advantage as we move forward. Turning to our legacy oil and gas assets, 2024 was a very successful year in executing our strategy to monetize these properties and redeploy that capital into our Montana project. In July, we completed the sale of our South Texas assets for $6 million, followed by the sale of certain East Texas properties in December for $6.8 million. These transactions directly benefited US Energy in two ways. First, they enabled us to fully eliminate our outstanding debt, leaving us with a clean balance sheet. And second, they provided additional capital to accelerate our Montana development efforts. These sales were executed with precision, thanks to the expertise of our ops and business development teams, who have skillfully managed our legacy assets to maximize value in the current market. As we move through 2025, we will continue to take a disciplined approach, strategically investing in our Montana project while remaining opportunistic and monetizing non-core oil and gas assets. This measured capital strategy is expected to make 2025 a transformational year for US Energy. Unlike many of our peers, we have access to significant, internally generated, non-dilutive capital, allowing us to fund growth without unnecessary shareholder dilution. US Energy stands apart from other energy companies of similar scale. We have a highly economic and scalable development project supported by legacy E&P assets that require minimal capital to maintain production. This allows us to generate predictable cash flows while making strategic high return investments in our industrial gas development project. Our approach provides resilience against market volatility while positioning us to capitalize on emerging opportunities. Our commitment remains focused on operational excellence, disciplined financial management and responsible resource development. As we look ahead, we are well positioned to drive sustained growth and create long-term value for our shareholders. On the capital allocation front, we continued executing our share repurchase program in 2024. To-date, we have repurchased approximately 1.7 million shares, representing roughly 4% of our outstanding share count. Additionally, our executive team has consistently increased their personal holdings, underscoring our conviction that repurchasing our stock at current valuations represents one of the highest return opportunities for our free cash flow. We expect to continue this strategy moving forward. Maintaining a strong balance sheet remains a top priority. I'm pleased to report that we ended the year and currently sit completely debt-free with zero outstanding borrowings on our credit facility. And importantly, despite recent asset sales, our borrowing capacity has remained unchanged. In closing, U.S. Energy is uniquely positioned as a first moving publicly-traded growth-oriented industrial gas company in the United States. Many of our competitors are constrained by complex equity structures, financial stress and limited capital access. We do not share limitations. As our distinctive position gains broader recognition in the market, we expect to unlock additional scalable and highly accretive growth opportunities. With that, I'll now turn the call over to our Chief Financial Officer, Mark

Thank you, Ryan. Hello, everyone. Let's delve into the financial details for the fourth quarter of 2024. Total oil and gas sales for the quarter amounted to $4.2 million, reflecting a decrease from $7.3 million in the same period last year. This decline was attributed to a 36% reduction in volumes, most notably impacted by a number of divestitures we closed in 2024 as part of our strategy to monetize legacy assets and redeploy capital into our core focus area. Sales of oil production contributed 85% of our total revenue for the quarter, demonstrating our continued focus on optimizing our oil assets. Our lease operating expense for the fourth quarter was approximately $1.8 million, equivalent to $20.58 per Boe versus $22.38 per Boe in the same period last year. The decrease in the LOE, Boe quarter-to-quarter is due mainly to lower property taxes and the mix of properties remaining resulting from the divestitures. Production taxes for the fourth quarter of 2024 totaled approximately $0.3 million. Consistent with historical trends, our taxes have remained approximately 6% of our total oil and gas sales revenue. Cash, general and administrative expense was $1.7 million for the fourth quarter of 2024, a reduction of 23% when compared to the same period of 2023. Cumulative divestitures and organizational cost reductions impacted the change from prior year. Cost reductions have been a focus area and year-to-date cash, general and administrative expenses have decreased $2.3 million when compared to the same period a year ago. The reduction reflects the impact of divestitures and rightsizing of the organization. Turning to our net financial performance. The company reported a net loss of $12 million in the fourth quarter of 2024 compared to $19.8 million when compared to the prior year. Noncash expense items such as DD&A, ceiling test write-downs and loss on disposal represent 98% of our year-to-date loss in 2024. Reduction in production volumes resulting from divestitures and lower year-over-year commodity prices also impacted our results. Our adjusted EBITDA stood at $0.4 million in the fourth quarter 2024 compared to $1.6 million in the same period last year, influenced most notably by a number of factors monetizing our hedges, divestitures and comparatively lower commodity prices. Let’s briefly touch on the balance sheet. As of 12/31/2024, there was no debt outstanding on our $20 million revolving credit facility and our cash position stood at over $7.7 million. We generated an additional $10.5 million in net cash proceeds from our successful equity offering this past January. We are also in talks to renew and extend our credit agreement, which we expect to be completed in the second quarter of 2025. In terms of a shift in CapEx, during 2024, we spent $6.5 million acquiring, drilling and completion work on our industrial gas project while spending $1.4 million on oil and gas properties, which is down from $3.4 million in 2023. Overall, we are pleased with our operating performance and financial results that are able to support the company’s new initiatives while maintaining balance sheet discipline and integrity. My objective continues to be to ensure that the company’s reporting process maintains a high standard of excellence. We feel confident in our ability to support the growth initiatives we currently have underway. Thank you for your participation this morning. We are now ready to take your questions.

Thank you. [Operator Instructions] Our first question is from Jesse Sobelson with D. Boral Capital. Please proceed.

Hi everyone. Thanks for taking my questions. It’s great to see some pretty rapid progress on the industrial gases segment of the business here. I was just wondering, beyond the initial development activities that you’ve planned for the first half of 2025, do you know what the expected timeline is for reaching commercial production from the industrial gas assets?

Hey Jesse, good morning. Thanks for the question. So I mean, we have a good feel for it. As we’ve kind of laid out in the past couple of calls and release materials, we’re going after two zones here. One’s a nitrogen zone, one’s a CO2 based zone. We believe very strongly that the CO2 based zone is just, it’s bigger, it has bigger wells, more resource, et cetera. With that comes, I would say, more confidence around gas flows and more confidence around design of plant. So as I think it was in the release yesterday, our development going forward at least in 2025 is going to be targeting those CO2 zones. CO2 plants are a little bit longer to put up than nitrogen based gas plants just because the equipment’s a little more longer lead time around processing extremely large amounts of CO2 and combine that with Montana winner, I mean, we’re looking at a second quarter blend first quarter and second quarter together because I can’t put an over under on a specific number of days, but in 2026, so call it, give or take 12, 13 months from now.

Okay, great. Yes, I mean, understood weather and then just developing the business. It does take a bit of time. In terms of, I’ll follow-up here just really quickly, it sounds like the sources of where you’re going to be drilling and the concentration of gases is going to determine the size of the processing plant that you guys are going to develop. But in terms of business connections, have you secured any optic agreements similar to others we’ve seen in the industry yet or are you currently in negotiations? And how would current pricing volatility impact potential negotiations for this piece of the business to develop further? Thank you.

Yes, great question. And I’ll kind of answer it in reverse order of how you asked it. Offtake agreements are very, I’ll say, simple to secure and readily available. Helium prices have come down a little bit over the last several months. I’ve loosely had discussions with offtake providers and there’s still a scarcity. So the degree of interest is very high. It’s probably something that takes, I would say, start to finish like six weeks. So we haven’t secured one yet, but that is based on our doing. And then as we get this kind of second quarter of 2025 development work done, working over a couple of wells, getting more data, more confidence around the flow rates of those, drilling and completing two more wells. Our plant size is probably going to be a $16 million to $20 million a day type of processing plant. And then once we really get every one of those variables fine tuned, we’ll start looking into offtake agreements. And there’s your generic offtake agreement that I would say, historically, have mostly been done with the really large, I mean, Fortune 100 level industrial gas companies. And then as certain aspects of the economy, whether it be aerospace, semiconductor, specific medical uses and their needs for helium supply have gone through the roof over the last few years. Going directly to kind of those bespoke end users secures much higher offtake prices than going to your traditional buyers. So obvious comment, our focus is going to be to go to that latter group before we go to the former group. But it’s a very established market and very standard offtake agreement terms with both of those separate groups. So I think that’s probably a second half of 2025 activity. But where I sit now, I have very little concern about being able to secure one – once us at U.S. Energy are even more confident about the specific volumes that we can guarantee.

Sure. Yes. The industry certainly over the longer term definitely still looking at some supply constraints. So we’ll be very interesting to see how things develop. Thanks for taking my questions.

Thanks.

Our next question is from Charles Meade with Johnson Rice. Please proceed.

Yes. Good morning, Ryan, to you and the whole U.S. Energy team there. You actually answered part of my question already in that you said you’re looking at a gross, I think I interpreted it as $16 million to $20 million a day that’s going to gross inlet for the plant. But can you talk about what data points you’re going to get either from these two new completions and the two new drills that’s going to inform you towards – either towards the 16 or the 20? And what are the data points you’re looking for from those wells to help you spec out the plan?

Yes. Great question and good morning. So there’s a few things, right? So we’ve drilled one well and we’ve got a good amount of data from that. This most recent acquisition that we completed, I don’t know when it was the first or second week of January of this year. We acquired a well that it’s TA right now, but it flowed for many days back when it was drilled. So our data sources and our internal geologic modeling has only gotten more and more fine-tuned. So all that’s kind of led up to the locations that we’re going to be drilling here upcoming. And so I guess, from a – like a higher macro level, that data has led us to like very specific spots that we think are like core Tier 1 Kevin Dome acreage. We’re very confident about finding CO2, huge amounts of it. We’re very confident of the gas composition stream, the helium cuts, et cetera. And both of those wells that we’re going to work over and the wells that we’re going to drill, but just even more fine tuning that data through these wells. So one, flow rates, two, the full suite of gas composition. At that point we will have three or four wells drilled, which we believe is, I’ll say more than enough to feed a plant of that size, tying all those wells back to each other, flowing them in the aggregate to really fine tune what these wells will produce and what the gas stream looks like. And then, very importantly, reservoir characteristics for further injection of the CO2 because on the Class II and the monitoring reporting verification, MRV reports, those are mandatory requirements to have a very good feel for those reservoir characteristics and what those injection wells will hold from a CO2 basis. So kind of it’s more of the same data that we’ve already been accumulating, but it’s just really getting the proverbial pencil as sharp as possible before the main portion of the CapEx of this initial phase of the development.

Got it. And then this is maybe a derivative question on that. What are the overall design criteria for these next two wells? And I’m really – I’m wondering, are you designing them to be producers in established zones, like they’re both targeting the Duperow or are there other kind of design criteria in this that perhaps evaluating the helium concentration in some of those other zones that you've highlighted? Or just what is your hope for these wells to be?

Yes. No, I mean, great question. The hope is that they're big producing high helium content wells. But no, you laid it out exactly what we're thinking, right? Like there may be some extra work done. But without a doubt, the primary target for the two new drill wells are Duperow zone, CO2, very, very heavy wells unequivocally. The Duperow in these pay zones is the highest, least shallow, however you want to phrase that zone. So we may go a little deeper initially just for like data accumulation on some of these other zones. But without a doubt, that the plan is to drill, complete and produce from the Duperow. On the workover wells, kind of working backwards, the – one of the wells that we're working over is a well that we acquired, and they produced from the Duperow at large amounts when they flowed it back when it was drilled a few years ago. So that is absolutely going to be a Duperow zone well. In a very good scenario, those three wells are large enough to supply the plant with, call it, a replacement well drilled every 18 months. If not, the second of the two wells that we'll be working over. We're also going to go back in. We did not complete the Duperow the first time. We completed a lower zone that's nitrogen-based. We would go back and we would complete the Duperow, get data from that. That would either be kind of the fourth leg on the stool for producing the plant, but a very high likelihood and what we're looking at is that becoming a Class II injection well. And so a few different answers there. But absolutely, the majority of the targets are going down, testing and producing from the Duperow. And eventually, we're going to need a large injection well, which all of these wells fit that bill. We believe it's going to be able to hold as much injection volumes as we're ever going to need.

Got it.

But we’ll test that as we go.

Well, Ryan, I want to say thank you. I think you’ve done yourself a big service by laying out what this 2025 plan looks like and starting to come into focus. And it looks like the mid part to the back half of this year is going to be a really interesting time for you. So congratulations.

Yes. Thanks, Charles.

[Operator Instructions] Our next question is from Tom Kerr with

Good morning, guys.

Hey, Tom. Good morning.

Good morning. Just following up on that last question. I didn’t hear mention of the cost. Are we still looking at sort of reduction in drilling each well cost in June for those two new ones compared to what they were the first two?

So it’s going to go up a little bit just because going after the CO2 heavy zones cost a little bit more just because of the corrosive nature of CO2 and like the associated equipment versus nitrogen. I would say those wells on a standalone basis end up being 1.6 million, 1.7 million. And then I would back some off of that because all activity, at least I’ll say all forecasted activity now being in this part of Montana, which has like, it has huge advantages around transport and surrounding helium supplies, et cetera. But it’s also still very remote. So mobilizing equipment and crews out there. It can get very expensive and add significant cost to it. So you want to do as much as you can back to back, which is what we’re doing on these wells. We’re working them over back to back, we’re drilling them back to back. That knocks off a few hundred grand on each well and the aggregate cost. So I think that they come in probably about 1.5 million [ph]. So not too much difference from the forecast on the nitrogen zone drilling. But the CO2 wells are much bigger wells. These zones produce much larger volumes than the nitrogen wells do.

But the process you were saying is just the same as helium, it’s just the volumes involved?

Just bigger zones, higher porosity.

Got it. And is the MRV report, is that just the federal permitting type report? Or what does that involve or let you do?

Yes. So I guess on the whole cycle of sequestration, it starts at the state level, which you go after your Class II or your Class VI injection permits. And again those are done at the state level. Class VI are bigger projects, multiyear applications. Class II are a little more simple around traditional injection, both EOR and otherwise. And again, those are approved at the state level. And then after you have your Class II or Class VI permits, your MRV is what's done at the federal level. And that's what enables you to benefit from the federal tax incentives depending on where you are in the earnings chain at the federal level. So a Class II permit is very quick to acquire once you have all of the necessary data. And then that is a supplement to your federal level MRV report, and those are very big reports. They're very established processes with established groups that have been successful in drafting these. But that's really where one part of the big CO2 prizes is getting that MRV started and approved. And we'll start that in the second quarter. We'll have an announcement whenever we get it started. And they take seven, eight months from start to finish. And then once you have both of those things in hand and signed off on everything that you want to be eligible for from a monetary standpoint that's officially when you're across the line on that.

Got it. Got it. Two more quick ones. Just a clarification from a comment you made a few minutes ago about realize 12 to 13 months to realize industrial gas sales. Were you talking just CO2 or helium also? Or was it 12 or 13 months? Sorry?

It's both, right? Excuse me. They move in lockstep. Like once your plant is up and running, you can't sell anything before the gas is processed. So it would be – I'll just I'll call it concurrent.

Okay. But that was a – that's sort of a material change of expectations, correct? Because we had expected stuff in the fourth quarter. I mean, go ahead.

Yes. And I think, yes, it has. And we've talked about it a little bit on previous releases and things that I've done. But going from a smaller nitrogen-based unit to a larger CO2 based unit takes a little more time, just a bigger plant. The equipment is a little bit different. The lead time on some of the CO2 equipment is a little bit longer. And then you mix in the winter months up there, which just to be candid, it's impossible to put a piece of infrastructure in this portion of Montana in the months of December, January, February. It would just lead to problems and significant extra risks. That's the difference in the time.

Well, Montana is always going to have a harsh winter.

It is going to have a harsh winter. Right. It's always, I mean, there's degrees of harshness which this past winter was as bad as it gets. I mean, there's days you wake up when it's in the negative teens and it snowed 24-inches in the last 24-hours. And at that point, it's just hunker down and wait for it to recede.

Yes. Last quick financial question. Can you comment on the current cash position? Was there any big uses of cash in the first quarter? So, we're still looking at, I don't know, $17 million, $18 million in cash as of today or the end of the first quarter?

Yes, it's a little less than that. Just because we had some CapEx that was owed from some December operations, some January operations, and then, we closed our oil and gas asset sale. I mean, it might have been the last day of December. We’ve made that acquisition in January, which was $2 million off the top. So, it's a little bit less than that now, but it's still, and I haven't looked today, but it's still in the lower teen type of number. The lower double digits.

Yes. Okay, that's all I have for today. Thanks.

We have reached the end of our question-and-answer session. I would now like to turn the conference back over to management for closing comments.

Yes. Thank you. I appreciate everybody dialing in. We're excited about what we're working on here. We expect 2025 to really set up the ability of U.S. Energy in 2026 to realize the full economics of our project, which we're very excited about. So, we look forward to giving the market more information over the coming quarters, the coming months. We have a lot of activity going into our 2025 development program and we believe that U.S. Energy is in a true first-mover advantage, both from an asset level and a public markets exposure level on this project and in this emerging industry. So, we look forward to giving the market more information in the coming months.