Transcript
Good morning, ladies and gentlemen, and welcome to U.S. Energy Corp.'s Second Quarter 2023 Results Conference Call. At this time, all lines are in a listen-only mode. This call is being recorded on Monday, August 14, 2023. I would now like to turn the conference over to Mason McGuire. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to U.S. Energy Corp's Second Quarter 2023 Results Conference Call. Ryan Smith, our Chief Executive Officer, will provide an overview of our operating results and discuss the company’s strategic outlook. Our Chief Financial Officer, Mark Zajac, will provide a more detailed review of our financial results. U.S. Energy issued a press release summarizing operating and financial results for the 3 months ended June 30, 2023. This press release, together with the accompanying presentation materials, are available in the Investor Relations section of our website at www.usnrg.com. Today's discussion may contain forward-looking statements about the 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 risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update the forward-looking statements. Further, please note that non-GAAP financial measures may be disclosed during this call. A full reconciliation of GAAP to non-GAAP measurements are available in the latest quarterly earnings release and conference call presentation. With that, I would like to turn the call over to Ryan Smith.
Good morning, everyone, and thank you for joining us today. I'm pleased to share with you some of the strong highlights from this quarter, as well as to provide an update on our strategic outlook. Our second quarter results reflect the dedication, resiliency, and consistency of our team here at U.S. Energy. We achieved net daily production of just under 2,000 barrels of oil equivalent per day, marking a 10% increase over the same quarter in 2022. Notably, our oil production accounted for 64% of our total production. I'm particularly proud to highlight our substantial achievements in cost management. Our lease operating expenses came in at $3.9 million, or $21.75 per BOE, representing a significant 17% and 24% reduction, respectively, compared to the second quarter of 2022. This impressive reduction underscores our commitment to operational efficiency and was achieved against the continued backdrop of increased rates, which flow through to everything, including elevated service costs. We continue to believe that U.S. Energy Corp. stands out from other oil and gas-producing micro cap companies in this backdrop of both improving industry dynamics and a stronger macro pricing outlook. Our current assets require minimal capital to maintain a steady production profile, leading to predictable cash flow and allowing us to effectively allocate dollars to maximize our returns on capital. Our approach also allows us to weather market fluctuations and capitalize on opportunities, making us well prepared to navigate the evolving energy landscape. Our focus at U.S. Energy remains clear: operational efficiency, balance sheet discipline, and responsible resource management, all of which underscores our commitment to drive sustainable value creation. As we move forward, we remain dedicated to capitalizing on these favorable market conditions and leveraging our strengths to deliver continued growth and shareholder returns. In further adoption of these initiatives, during the second quarter, we bolstered our shareholder returns program through the initiation of our $5 million share repurchase program. While we only began the repurchase program mid-quarter, we repurchased greater than 1/2 of 1% of our outstanding shares and are pleased with the share response that we witnessed in the market. Ultimately, our mandate is to allocate capital to our highest-return projects that generate the most positive results, and our shareholder returns program is no different. To that end, I'm pleased to announce we plan to accelerate our share repurchase program by reallocating capital through the halting of the company's dividend to the acceleration of our repurchase program and continued debt repayment. The consistent and steady repurchase of the company's shares at current valuation levels is as high of a return opportunity as I see in the marketplace and something we will continue to pursue. In summary, the second quarter was exceptional in terms of production, cost control, and positive results of capital allocation decisions that were made earlier in the year. These achievements set the stage for our growth initiatives while positioning us to take advantage of increased commodity prices that will help generate steady, high-margin cash flow. Our capital allocation strategy emphasizes maintaining an attractive leverage profile, opportunistically repurchasing our common stock, and our continued commitment to utilizing our equity capital efficiently. Our goal remains to continue expanding our scale through the acquisition of assets that align with our core operating areas. By increasing our scale and bolstered by our shareholder return initiatives, we believe we can unlock greater equity returns for all of our shareholders. Now, I would like to introduce Mark Zajac, our new Chief Financial Officer, who will provide a detailed update on the financial results for the second quarter. Mark brings to our team many years of leadership experience in energy and finance, primarily as a partner at KPMG, and has been a wonderful addition to our team. With that, I'll turn it over to Mark.
Thank you, Ryan. Hello, everyone. Let's delve into the financial details for the second quarter of 2023. Total oil and gas sales for the quarter amounted to approximately $8 million, reflecting a decrease from $13.5 million in the same period last year. This decline was primarily attributed to a 46% reduction in realized prices. It's important to note that this quarter's realized pricing was the most significant event of the quarter relative to last year. Looking forward, we have seen improved prices in the third quarter, though we don't see the realized pricing environment we experienced in the third quarter of 2022. Sales from oil production contributed 88% 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 $3.9 million, equivalent to $21.75 per BOE, indicating an impressive 24% reduction in per-unit costs compared to the second quarter of 2022. This reduction can be attributed to the successful integration of acquired assets and the completion of necessary workover programs. Severance and ad valorem taxes for the second quarter of 2023 totaled approximately $0.5 million, reflecting a decline from $900,000 in the same period last year. As a percentage of total oil and natural gas sales revenue, these taxes accounted for approximately 7% during the quarter. Cash, general and administrative expenses reached approximately $2.8 million, or $15.48 per BOE, for the second quarter of 2023 compared to roughly $2 million, or $12.53 per BOE, in the prior period. This increase was primarily attributed to professional fees incurred in the early part of the second quarter related to the filing of our Form 10-K. Turning to our net financial performance. The company reported a loss of $2.5 million or a loss of $0.10 per diluted share in the second quarter of 2023. This contrasts with net income of $0.1 million or effectively breakeven or $0 per share reported in the second quarter of 2022. Our adjusted EBITDA, excluding the impact of hedges, stood at $800,000 in the second quarter of 2023 compared to $5.1 million in the same period last year, influenced most notably by the decline in commodity prices from the prior period. Let's briefly touch on our balance sheet. As of June 30, 2023, the company held outstanding debt of $12 million on the revolving credit facility with an available credit line of $8 million. Additionally, our cash position stood at $1.2 million. In conclusion, we're pleased with our operating performance given the pricing headwinds that under normal circumstances would have resulted in outstanding financial results. I'm leading the charge to ensure that the results each quarter are reported to a high standard of excellence and accuracy, and we feel confident in our ability to meet our interim and annual reporting timelines. We remain committed to our strategic goals and believe in our ability to navigate market conditions. Thank you for your participation this morning. We are now ready to take your questions. Thank you.
First question comes from Tim Moore at EF Hutton.
Good move on suspending the dividend and accelerating the share buyback for better return on investment. I think that was quite brilliant and will create a bigger impact. Great decision. Can Mark share a bit more of his insights based on his experiences so far? I know it's only been 10 weeks, but I'd love to hear what you think you might enhance or focus on more given his background at KPMG.
Yes. Thanks, Tim, for the question. Quite a bit has been undertaken in the last 10 weeks. Looking at our people, assessing opportunities and M&A opportunities as well. Improving processes and building relationships and forming really a tighter team across all of the functional silos, whether it be financial or operations or individuals in the field. It's been a great experience, a great team, working with Mason and with Ryan. Look forward to the future, lots of opportunities ahead of us.
Great. That's helpful, Mark. And just maybe a higher-level question. How do you think about third quarter production? Obviously, the prices are up on WTI oil. But do you think you could see a small sequential increase from the second quarter into the third quarter for production?
Thanks Tim, this is Ryan. Third quarter, I mean we're pretty close to halfway through now. I'm not going to guide back to an increase right now. I think we're pretty comfortable where we're at, just the asset base, the runtime, etc., kind of leads to those, unfortunately, sometimes like 5%-ish, 3%-ish decreases as well as increases like we saw this quarter. It ends up running pretty consistently over the course of the year. So I would expect this to kind of maintain the ballpark of where we've been. I wouldn't expect a significant step-up.
That makes sense. I think it's even better than some of the peers, even if it's consistent. Ryan and Mark, how should we approach cash G&A expense? Do you believe it will remain consistent, around $13.5 million going forward? I'm considering that you might achieve good operating scale leverage to improve incremental operating margins in the future. But is cash G&A fairly stable now?
Yes, I think that number represents an all-encompassing figure, though there may have been some stock accounted for within it. Our cash general and administrative expenses have remained at a steady run rate since we completed our larger transaction in January 2022. We've encountered several one-time items as we've navigated company operations, SEC filings, and growth initiatives. I believe we've reached a point where most of these one-time items are behind us, allowing us to stabilize operations and manage unexpected expenditures. I won't speak for Mark, but he and his team have excelled in focusing on specific areas and effectively reducing costs where significant savings can be achieved, such as in professional services and quarterly and annual filings, which we've already seen this past quarter. I see considerable potential for improving our current cash run rate for general and administrative expenses—likely over 20% that I expect to materialize soon. Many adjustments have been implemented during the third quarter, so it may not be comprehensive. However, starting in the fourth quarter, I anticipate these savings will begin to reflect positively on the income statement.
Great. I mean, that's very wonderful to hear. If you can get anywhere close to 20%, that would be nice flow through for the operating profitability and the cash flow. So Ryan, I'm kind of curious, just maybe shifting gears to your inorganic growth side with source deals. What are you seeing in the last few months in terms of asking prices, valuations from targets? Have they come down a bit more reasonable? I mean, I know some of the private targets are getting valued at twice what your stock. And the public guys are at the smaller end, but how are you seeing that? And again, is the bottleneck more reasonable valuation? Or is there something else that maybe would make you delay maybe doing an acquisition in the near term?
Yes. I apologize if I sound a bit raspy, as I'm not feeling well. Regarding the first part of your question, we continue to see a steady flow of deals ranging from $5 million to significantly larger transactions. Many sellers who might have been less committed have sold in the last 6 to 18 months and are no longer in the market. Currently, the willingness among sellers to accept equity has decreased. However, there are still valuable deals available for buyers with the necessary capital. In terms of bottlenecks, I don’t believe it lies in valuation. There is a noticeable gap between private companies' valuations and those of public companies that adjust their equities daily. The primary bottleneck I observe is the availability of capital. Equity markets are not fully accessible for energy companies, and interest rates have risen significantly. Borrowing credit facilities for most companies typically range from 7% to 9%. When that’s the main source of capital, it can become costly. Therefore, we are focusing on creative structuring to navigate these challenges. This isn’t necessarily a bottleneck; it’s just critical to be aware of these factors in advance to avoid becoming over-leveraged in a hypothetical M&A deal and sacrificing too much for a deal with a high cost of capital in the U.S. energy sector. That’s not an approach we intend to take.
Good. That's really helpful, Ryan. Just one last follow-up question before I turn it over to whoever is next. Regarding the leverage, I understand you don't want to take on too much debt. Could you remind us of what your maximum debt leverage would be for comfort? Are we discussing around 1.5 or 1.6 net debt to EBITDA for an ideal acquisition, something along those lines?
Yes. On the ideal pro forma, I want to be cautious about the asset profile. If we are purchasing something that is more mature or consists of conventional wells, we may have more flexibility to be exposed to the strip while hedging. However, if we acquire an unconventional package, we would likely hedge that type of asset.
Great. I really appreciate this. And that's it for my questions. I'll turn it back over to the operator.
Thank you. There appear to be no further questions. You may proceed.
This is Ryan Smith, again with U.S. Energy. If there's no further questions, I thank you for calling in and appreciate your continued interest in U.S. Energy. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.