Transcript
Greetings. Welcome to the U.S. Energy Corporation Fourth Quarter and Full Year 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to Mason McGuire, Director of Corporate Development. Thank you. You may begin.
Thank you, operator, good morning, everyone. Welcome to U.S. Energy Corp.'s fourth quarter and year-end 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; and our Chief Financial Officer, Mark Zajac, will give a more detailed review of our financial results. After the market closed yesterday, U.S. Energy issued a press release summarizing operating and financial results for the year ended December 31, 2023. This press release, together with accompanying presentation materials, is available in the Investor Relations section of our website at www.usnrg.com. Today's discussion may contain forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to 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. Further, please note that non-GAAP financial measures may be disclosed during this call. A full reconciliation of GAAP to non-GAAP measurements is available in our latest quarterly earnings release and conference call presentation. With that, I would 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 share with you some of the strong highlights from this year and quarter as well as provide an update on our strategic outlook. Our year-end results reflect the dedication and consistency of our entire team. We achieved annual net daily production of greater than 1,700 barrels of oil equivalent per day, which takes into effect our fourth quarter asset divestitures, which I will discuss later, marking an increase from the comparable period of 2022. Oil production accounted for 63% of our total production, with the remainder consisting of approximately even split of natural gas and NGLs. I'm particularly proud to highlight our substantial achievements in cost management. Our lease operating expense came in at $3.1 million, or $22.38 per BOE, representing a significant reduction compared to both the prior quarter as well as the fourth quarter of 2022. This impressive reduction underscores our commitment to operational efficiency and has achieved the continued backdrop of high interest rates which flows through to everything including elevated service costs. That being said, I should mention that while some costs have remained elevated compared to historical levels, we have begun to see cost reductions in certain materials that we often use across our operations. Of significant note, during the fourth quarter, the company closed on approximately $7.3 million of asset divestitures. The assets represented the majority of our non-operated properties and represented roughly 11% of company production. All proceeds from the divestitures went to debt reduction, putting us at our current attractive leverage profile. As borrowing rates continue to increase throughout the year, and in my belief, a USEG equity valuation that is trading at less than what will be realized through certain asset divestitures, the USEG Board made the decision to explore monetizing our non-operated properties to pull forward real, tangible value. We had good buyer interest across four or five separate packages that were being offered, ranging from North Dakota to South Texas, and I was extremely satisfied with the results of the process. Looking ahead, I do believe that our geographically diverse asset base, which does have its challenges to manage, offers some opportunities in the future to take advantage of any company perceived valuation disconnect to be able to pull value forward. Moving into 2024, our capital will be spent on maintaining the production profile of our existing asset base, reducing outstanding debt, maintaining the company's share repurchase plan, and taking advantage of organically driven opportunities. While equity valuations and borrowing costs have really made smaller scale M&A tough recently, allocating capital to oil-weighted projects in the company's existing portfolio remains highly economic. We have had these assets under control for about two years now, and with the first year plus just really figuring out what we have from an asset optimization standpoint. Since that time, we have really been able to explore and engineer opportunities that we believe can add value in a much more capital or accretive way than any third-party M&A. These are projects that we are always currently evaluating, and we plan on sharing more on them as they come to fruition throughout the year. We believe that U.S. Energy stands out from other oil and gas producing companies of our size in this backdrop of both current macro industry dynamics and a relatively stable oil 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 positions us and allows us to deliver market fluctuations and capitalize on opportunities, making us well prepared to navigate the always evolving energy landscape. Our focus at U.S. Energy remains on operational efficiency, balance sheet discipline, and responsible resource management, underscoring our commitment to driving sustainable value creation. As we move forward, we remain dedicated to capitalizing on current market conditions and leveraging our strengths to deliver continued growth and shareholder returns. To that end, during the fourth quarter, we continued our previously announced $5 million share repurchase program. We restarted our share repurchase activity during December 2023, post the closing of our non-operated divestitures, and since that point and up until the normal first quarter trading window limitations, we have repurchased nearly 0.5 million shares or approximately 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 high rate of return opportunity that I currently see in the marketplace. In summary, 2023 and the fourth quarter was strong in terms of production, cost control and the results of capital allocation decisions made earlier in the year. These achievements set the stage for our growth initiatives, while positioning us to take advantage of oil prices that help generate steady, high-margin cash flow. The company's goal remains to continue expanding our scale through both being selectively advantageous in the M&A market, while also growing our assets with initiatives to complement our core operating areas. By increasing our scale and maintaining our shareholder returns initiatives, we believe we can unlock greater equity value for all of our shareholders. Now, I would like to introduce Mark Zajac, our Chief Financial Officer, who will provide a detailed update on the financial results for the quarter.
Thank you, Ryan. Hello, everyone. Let's delve into the financial details for the fourth quarter and year end of 2023. Total oil and gas sales for the quarter amounted to approximately $7.3 million, reflecting a decrease from $10.4 million in the same period last year. This decline was attributed to a 21% reduction in volumes and a 10% reduction in realized prices. It is important to note that this quarter's production was significantly impacted by the non-operated divestments made during the quarter. 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 fourth quarter was approximately $3.1 million, equivalent to $22.38 a BOE, indicating an impressive 28% reduction in total lease operating expense compared to the fourth quarter of 2022. This reduction can be attributed to fewer one-time workovers and the divestment of higher cost non-operated assets during the recent quarter. Severance and ad valorem taxes for the fourth quarter of 2023 totaled approximately $0.5 million, reflecting a decline from $0.7 million in the same period last year. As a percentage of total oil and natural gas sales revenue, these taxes accounted for approximately 6% during the quarter. Cash general and administrative expenses reached approximately $2.2 million for the fourth quarter of 2023, compared to roughly $2.4 million in a similar period of 2022. This decrease of aggregate expenses was primarily attributed to higher professional fees incurred in 2022 prior to high grading several accounting and finance positions. Turning to our net financial performance, the company reported a net loss of $19.8 million in the fourth quarter of 2023. The fourth quarter loss is largely attributed to an oil and gas impairment expense of $20.2 million, driven by the impact of lower SEC pricing on the company's reserve report. Our adjusted EBITDA, excluding the impact of hedges, stood at $1.4 million in the fourth quarter of 2023, compared to $2.7 million in the same period last year, influenced most notably by the decline in commodity prices and production from the prior period. Let's briefly touch upon our balance sheet. As of December 31, 2023, the company held outstanding debt of $5 million on a $20 million revolving credit facility. Our cash position stood at $3.4 million. We plan to continue allocating a portion of free cash flow to debt reduction and maintain the flexibility to react to market conditions on that front. In conclusion, we are pleased with our operating performance and the financial results that enable us to support the company's initiatives in a way that maintains full balance sheet integrity. I'm leading the charge to ensure the company's reporting processes maintain 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. Our first question is from Charles Meade with Johnson Rice. Please proceed.
Good morning, Ryan, to you and the whole USEG team.
Good morning, Charles. Thanks for calling.
Ryan, I want to clarify something from your prepared comments to ensure I understood you correctly. I believe you mentioned that you see higher return investment opportunities or growth initiatives within your portfolio compared to any external M&A opportunities. Is that accurate? Could you share more about what those organic growth initiatives might be?
Yes, that's correct. Good question. There are several aspects to consider. I'll address a few key points, and if I miss anything, please let me know. Borrowing costs are high, and equity valuations aren’t strong. This situation makes some acquisitions in the energy sector challenging. When managing the company on a daily basis and for long-term value creation, the goal is to maintain production levels and possibly increase them slightly while financing improvements from cash flow. It's crucial to allocate just enough cash flow to support our repurchase program and reduce debt. From a cost of capital and risk-reward perspective, we see opportunities within our existing portfolio that offer better returns in this current oil and gas market compared to acquiring new assets, which requires extensive diligence. We have been managing these assets for over two years, thoroughly analyzing their potential for productive investment. Throughout 2023, we have been working on identifying internal opportunities within our portfolio while adapting to the changing market conditions. As borrowing costs increased and M&A activity slowed, we shifted our focus from acquisitions to divestitures. In the latter half of last year, we established and executed a divestiture program. So, day-to-day, I believe we have more opportunities internally than what is available in the market. I will provide further updates in our next quarterly call, as we plan to start executing on these initiatives in April and May. I believe there are unexplored potential within our assets that previous owners may not have fully utilized due to various factors. We are confident in our portfolio of opportunities that will enable us to achieve our daily goals, which include moderate production growth, returning value to shareholders, and reducing debt through the assets we already own.
Got it. With oil prices over $80, many opportunities are emerging. Ryan, you've mentioned the A&D market quite a bit, so I want to address that directly. From my perspective, while large equity-to-equity deals are still occurring, it seems like cash transactions in the A&D space have slowed down. This appears to be because buyers have lowered their price expectations while sellers have not adjusted accordingly. I'm curious if you see it the same way and if you could elaborate on the current state of smaller A&D opportunities.
Yes, you're correct, and I'll explain further. The larger deals you're mentioning don’t really apply to the mid and small-cap sectors. The larger companies with healthy equity valuations are engaging in stock-for-stock deals and proposing hostile stock-for-stock transactions for the same reasons as always: to scale operations, reduce costs, and grow. For the smaller companies, the challenges you highlighted are relevant, particularly with public equity valuations being low in this segment. When public-to-private transactions occur, the private entities must account for the public discount immediately. Typically, private companies report their valuations significantly higher than those of the smaller micro-cap public companies. Furthermore, higher borrowing costs make it much harder to finance these deals, with rates now exceeding 9% compared to the previous 3%. Regarding seller interest, we definitely observe it. Although oil properties remain valuable, the gas component significantly influences the incremental worth for sellers, making it less viable for a company of our size to commit to optimistic future commodity price forecasts. Additionally, the regulatory landscape, while slightly improved from a media perspective, remains quite severe. States are closely monitoring corporate activities and small producing wells more than ever before. Many smaller transactions historically had substantial plug and abandonment commitments associated with them. Companies would often find ways to delay these obligations, but that strategy is coming to an end. It's not a question of if, but when, and this reality has become a critical factor in transaction considerations, alongside the other points I made.
Thank you for all that added detail, Ryan.
Our next question is from Tim Moore with EF Hutton. Please proceed.
Thanks. We really appreciate that asset growth initiatives color as you wrap up the optimization effort there, and geographically, it makes sense why that would take so long. But any other comments maybe you can give us for a sneak peak on strategic alternatives over your commentary, Ryan, and we assume they're going to be mostly oil-weighted assets?
Yeah. So good question. I think, as you know, as the Board and management look at strategic alternatives, like it always carries complexity historically, especially in the oil and gas business. But where we're sitting and where we’re sitting, when we announced it, I believe it was in November, is a delevered balance sheet and what I call significant balance sheet value that is not flowing through to equity valuations. I know we're not the only small micro-cap oil and gas company that represents that. But I do think we're one of the larger examples out there. So I think how we look at it is my job, and when I focus on day-to-day, we have a very good team here that handles our day-to-day operations in the field and accounting, etc. But it's really finding the right, I'll say, project or transaction or initiative that transfers what I think is extremely significant balance sheet value at this company and have it flow through to something that helps expand our equity valuation. I know that's a very obvious comment, but it's a tricky thing to do, especially in the oil and gas space for the last few years. So I think it can take several forms. As I think you mentioned on your oil projects, we're always going to probably trend towards oil and looking at M&A transactions. I thought we understand it more, and it doesn't seem to be as volatile as gas. I know it's easy to say sitting here now. But I do think that, Tim, we're at a size now and we're in a valuation now to where all options are on the table for us. We have a very concentrated shareholder base, and a lot of those shareholders sit on our board. The goal of the company is to make the stock price go up as simplistic as that sounds. So I think in terms of the strategic alternatives, everything is on the table. Of course, we're going to transact and venture into areas that we already know well, and we're an oil and gas company. So I'll let you put those two together. But it's still just as active as it was. And when there is something that comes out of that process, we will announce it at that time. But no, it's still an ongoing process. We look at it the same way as we did when we announced it back in November.
Good. That's helpful. Now we're looking forward to more on that front. Yes, for lease operating expenses, that decreased nicely, as you mentioned, to $22 BOE averaged something like 25 in the first nine months of a year. How much lower do you think you can squeeze that out? Is there more potential there?
I believe there is some potential for cost reductions, as certain expenses have decreased. While they remain historically high, prices for steel and related piping have started to decline. Labor costs and availability are also showing slight improvements, particularly in Houston, Texas, which suggests a shift towards favoring employers. I think as inflation eases and the industry becomes healthier, we might see further reductions in costs. However, with a high single-digit decline rate for our conventional assets, we do face slightly increased lease operating expenses. I am satisfied with our current position and believe there is still some potential for further reductions from what we experienced in the fourth quarter. Much of the significant improvement since acquiring the assets has already been achieved, with some of those gains being one-time adjustments.
Thanks for being candid on that. Yeah, you made some great progress. And Ryan and Mark, I know you don't give guidance, but in PE, if crude oil prices stayed above $70 for the rest of the year, what type of production growth do you think you could achieve maybe on an organic basis? Let's exclude that divestiture of the 11% to 12% production decline. I mean, should you be up high single-digits, just looking at this year for production volumes?
Yeah. I mean I think that could be a fair assumption, Tim. And not to be coy, but like some of the what I call day-to-day smaller scale organic projects. Those are real, and we're still kind of getting our arms around that and starting to begin those. I think we'll have more color on the next call or incrementally in between now and then on some of those projects and kind of what we expect to do from a CapEx perspective and a production profile perspective. But I do think just, again, from a high level, and our model, I think, historically, we've always shown this, that we can keep production flat or close to flat with a very low single million CapEx number on our current assets.
Great. That's really good color. And one last question for Mark maybe. I know you did the $20 million impairment in the fourth quarter and $6.5 million in the third quarter. If the prices stay fairly flattish or not down too much. I mean would you expect you could be done with impairments for the rest of this year?
In our filing we made last night, I think we're projecting one in the first quarter of 2024. The issue ultimately is the SEC rolling prices. And so if prices decrease on a comparative basis as the quarters roll in, there’s a potential for impairment, and that's what we're dealing with. We're dealing with retrospective prices relative to current prices.
Yeah. No, I figured that. I just think maybe we got past March, could be not as much of an issue. But thanks a lot. I appreciate all the color and the answers.
Great. Thanks, Tim.
With no further questions in the queue, we will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.