Transcript
Greetings, and welcome to the U.S. Energy Corporation First Quarter 2024 Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mason McGuire, Director of Corporate Development. Thank you, sir. You may begin.
Thank you, operator, and good morning, everyone. Welcome to U.S. Energy Corp.'s First 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; 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 the operating and financial results for the quarter ended March 31, 2024. 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 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 are available in the latest quarterly earnings release and conference call presentation. With that, I'd like to turn the conference call over to Ryan Smith.
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 team. We achieved net daily production of greater than 1,200 barrels of oil equivalent per day, representing the first full quarter since our asset divestitures, which closed at various points during the fourth quarter of 2023. Oil production accounted for 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. Nearly all the affected production was brought back online in late March, and while there are no long-term issues expected from the weather, I would expect certain of the same assets, primarily along the Gulf Coast, to be impacted in the second quarter by additional heavy rains that we have been experiencing recently. The company's other core asset focus areas were unaffected during the quarter and continued 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 $3.2 million, representing a flat total expense compared to the prior quarter and a reduction from the first quarter of 2023. A majority of our LOE is fixed at this point, and our barrel metrics are highly sensitive to any variations in production. Our per barrel cost for the first quarter was approximately $29 per BOE, while this per barrel metric amount is higher than we have recently experienced. Had we averaged our March exit production for the entire quarter, it could be said that once our weather-related production issues were resolved, our per barrel LOE would be in the low $20 range, or significantly lower than what we realized. Moving through 2024, our capital will continue to be spent efficiently on supporting the production profile of our existing asset base, continuing the company's share repurchase plan, maintaining balance sheet integrity, and taking advantage of organically generated M&A opportunities. While equity valuations and borrowing costs have made small-scale M&A tough recently, allocating capital to oil-weighted projects and the company's existing portfolio remains highly economic. We've had these assets under control for about two years now, and with the first year spent really figuring out what we have from an asset optimization standpoint, since then we've been able to explore and engineer opportunities that we believe can add value in a much more capital accretive way than any upstream M&A that I see in the market. These are projects that we are always currently evaluating, and we will share more as they come to fruition as we move throughout the year. We believe that U.S. Energy Corp. 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 well to weather market fluctuations and capitalize on opportunities, making us well prepared to navigate the ever-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 first quarter, we extended our previously announced $5 million share repurchase program through June of 2025. We continued our share repurchase activity during the first quarter, and since restarting our repurchase activity in late December of 2023 and through the first quarter, we've repurchased more than 0.5 million shares or 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 a high return opportunity as we see in the marketplace. I expect to continue this activity going forward. In summary, the first quarter was strong in terms of operational resiliency amidst the highly adverse weather, cost controls, 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 selectively advantageous positions in the M&A market while also growing our assets with initiatives that complement our core operating areas. By increasing our scale and maintaining our shareholder return 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 first quarter.
Thank you, Ryan. Hello, everyone. Let's delve into the financial details for the first quarter of 2024. Total oil and gas sales for the quarter amounted to approximately $5.4 million, reflecting a decrease from $8.3 million in the same period last year. This decline was attributed to a 29% reduction in volumes and an 8% 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 fourth quarter of 2023 and severe weather events in several of our key operating areas. Sales from oil production contributed 88% of our total revenues for the quarter, demonstrating our continued focus on optimizing our oil assets. Our lease operating expense for the first quarter was approximately $3.2 million, equivalent to $29.02 per BOE, indicating an impressive 28% reduction in total lease operating expense compared to the first quarter of 2023. This reduction can be attributed to fewer one-time workovers in our continued effort to increase operating efficiency. Severance and ad valorem taxes for the first quarter of 2024 totaled approximately $300,000, reflecting a decline from $500,000 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 expense was $2 million for the first quarter of 2024. This expense is flat when compared to the same period of 2023. The first quarter traditionally includes some lump annual cash G&A expenses that have a greater impact on our cash balance but smooth out throughout the rest of the year. Turning to our net financial performance, the company reported a net loss of $9.5 million in the first quarter of 2024. The first quarter loss is largely attributable to an oil and gas impairment expense of $5.4 million driven by the impact of lower SEC pricing on the company's reserve report and wells temporarily shut in for the quarter. Workovers are currently ongoing to bring some of these properties back to production. We are currently not projecting an impairment for the second quarter of 2024. Our adjusted EBITDA stood at $0.2 million for the first quarter of 2024 compared to $1.2 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 the balance sheet. As of March 31, 2024, the company held outstanding debt of $5 million on our $20 million revolving credit facility. Our cash position stood at $2 million, and 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 financial results that are able to support the company's initiatives in a way that maintains full balance sheet integrity. I am leading the charge 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.
Our first question comes from Charles Meade with Johnson Rice.
Good morning, Ryan, and the entire U.S. Energy team. I wanted to ask you to provide more details on the weather impact in Q1 and how it will affect Q2. When I read the release last night, it seemed that much of the production would return, but from what I heard this morning, it sounds like you're closer to saying it will all come back. I'm curious if you think there could be situations, like bad floods washing out a lease road, where fixing the road could cost more than the value of the well, and therefore that well might not return. Can you discuss if there are any assets you might permanently lose? Also, how significant should we expect the impact to be, particularly regarding the flooding issues you mentioned for the Gulf Coast in Q2?
Yes, that's a great question. There are a few components to consider. We should note that there were two significant weather events to discuss. It was either early or mid-January when East Texas and the Gulf Coast experienced extremely heavy rain, leading to a national emergency declaration. This situation impacted our Northern East Texas assets somewhat, but it had a much greater effect on our Gulf Coast and Liberty County assets. The positive takeaway is that we don’t anticipate any long-term impacts from this, although the flooding in the early part of the quarter was substantial. Many of our assets in Liberty County are situated close to the Trinity River, which has been consistently overflowing. Regarding lease roads, if you viewed the flooding from above, you'd see that the water recedes quickly, but we did lose our main lease road. While this isn’t catastrophic for our operations since it's relatively inexpensive and straightforward to restore, it does halt activities. Safety is our top priority when it comes to damaged lease roads and flooding, as the potential for loss of life exists if personnel are sent out there. As a result, operations were automatically suspended. Most of the affected production came back online around mid to late March. However, in April, that same area was hit with more rain—several feet—resulting in another round of flooding. This primarily affected the Gulf Coast region rather than Northern East Texas, which will further reduce our production. I believe the period of impact will be shorter this time. We are currently evaluating about half to a third of the production impacted in the first quarter to see if it will be affected again in the second quarter. However, we don’t foresee any long-term problems regarding productivity, well integrity, or environmental issues from these weather events.
So if I understand you correctly, Ryan, the duration is still somewhat uncertain, but it's clear that the assets will return.
Correct.
And then one follow-up question. I want to make sure I heard this right in your prepared comments, I was taking notes. I think you said that you're looking at a number of projects that are more attractive than traditional upstream M&A opportunities. Did I hear that right? And is there anything you want to add to that?
Yes. Everything is relative to the U.S. Energy platform. Many of the small-cap-focused asset sales, whether through mergers and acquisitions or asset acquisitions in our core areas, need careful evaluation for ARO environmental concerns. There's a lot more to consider now than in the past. When we assess these packages, strong commodity prices have been beneficial, but once we factor in the mandatory P&A and ARO assumptions, many of these assets turn into liabilities. This is particularly true outside of the high-quality assets in the Delaware Basin and Midland Basin, where the liability associated with P&A and ARO is significant. As we look to add more barrels in this market, we seldom find lower-risk, easier-to-achieve opportunities with higher returns than those in our current portfolio. The challenge lies in managing a vast asset base that extends from nearly Canada down to the southern border and identifying the right candidates to invest our resources into. In many unconventional basins across the Lower 48, we are observing significant recompletion and refrac work. We believe there are several high-value refrac candidates within our East Texas and Mid-Con assets. In the fourth quarter, we successfully executed a project on our East Texas property. It's early for results, but we are encouraged by what we've seen so far and plan to do more. When considering U.S. Energy, we continuously seek larger projects and initiatives that can be scaled, while also finding it very appealing to bring in additional barrels from our existing portfolio in the meantime.
The next question comes from the line of Tim Moore with EF Hutton.
Ryan, I'm just kind of curious, have you given any thoughts or maybe a rough estimate of what you think the BOE net production daily average exit rate could be or maybe what it could get to this year beyond the 1,200?
I mean, I guess, very smart way of asking what I think some recompletion activity will do. I think if you look at our PDP curve, again, the assets that make up the vast majority of our asset base are assets that we acquired in 2022, and most of those are conventional. So we don't have, I'll call it, super steep declines that most people experience. We lost some barrels in the first quarter because of weather. It won't be as big of a number, but we'll lose a little bit of barrels in the second quarter, adding those barrels back and then taking into consideration what we sold on our non-op divestitures. That brings it around to a, call it, a 1,400 BOE per day number. I'm assuming you mean exit at the end of the year, if we have 8% to 10% declines on numbers like that, I think 1,400, 1,300 is kind of a range that is not unreasonable from our existing PDP curve, and I think there's upside to that number just from the organic activity. We've kind of started undertaking, but I think we'll more earnestly start undertaking it as we move through the year, assuming oil prices stay strong, of which we're pretty comfortably hedged at the moment.
My next question is, I'm kind of curious, where are you spending kind of incremental CapEx? You mentioned you have some refrac candidates. Just kind of curious as you look out the rest of this year, what properties or areas do you think the CapEx is going to?
Yes. No, great question. And we look at this as, I guess if you go back and look at our numbers for the first quarter, we had a very low capital spend, and that was by design. Part of my job and Mark's job is really identifying the high-cost production that we have and the low-cost production we have, and that sounds simple, but we have a lot of wells. So we're constantly looking at where those dollars need to go. And if it makes economic sense to save $1, yet have a barrel of production that goes online. In a lot of scenarios, just high-cost production, that makes sense. So we're being super disciplined on where we deploy our capital, and these projects are really going to have to fight to get that capital deployed to them. So where do I see it now? The first refrac candidate we did was in East Texas. So obviously, that's probably an area that we feel pretty confident about to continue to put more capital. We like our assets in Montana a lot, very steady, very low decline oil, and we have some projects out there we can do. Our Mid-Con is no secret, gas-heavy or gassier than our other assets, with gas prices coming back from the lows they've been for the last couple of months, it really opens up opportunities for us up there. So kind of a generic answer on our key areas or where you're going to see us spend most of our capital, but that is where you'll see us spend most of our discretionary capital. And again, it's already begun on our East Texas assets.
That's helpful, pinpointing. I'm just kind of curious, the workovers drag. What do you think as you look at this June quarter and maybe even in the September quarter? Is the workover drag this quarter or next quarter going to be more of a drag than last year was? Or how does it stack up against last year for you guys?
I think in terms of timing, if you're referring to the calendar year, I don't anticipate any issues regarding our planned activities. Some of our workover activities were postponed due to weather in the same area, but you will see a gradual increase in production at some point. I'm not certain if this additional workover activity will occur in late June or early August. We are still assessing that. So from a timing perspective or regarding crew availability, I don't see any issues this year compared to last year that would prevent us from accomplishing our goals. Workover activity has always been a significant part of our operations, and we closely monitor it. Therefore, I don't foresee any issues related to timing or the calendar for us in 2024.
Great. And my last question, Ryan, is I have to bring this up. I noticed an increase in insider ownership. There was a big purchase last month by the Chairman's family office. I think that office probably owned, I don't know, 29% of shares maybe. Anything you can share on that, any commentary or any thoughts on that? And is there anything tied into that for like the strategic alternatives?
Yes, good question. So yes, our largest shareholder acquired a significant amount of shares during the quarter. I believe that he owns about 1/3 of the outstanding common stock now. I'll give you the answer that it's a sign of support for the company. Is it part of the strategic alternatives process? Everything we do is right, like this isn't a desperate strategic alternative process. It's an upward process where we're really trying to find something and unlock value. So I definitely am much happier that he bought an extra 12% and didn't sell 12%. But in all seriousness, I think it's a very good sign of support for someone that's already very much in the equity bucket to get even deeper in that. And the strategic alternatives process, I know those are very black box-y. It's something that we're always working on, something that we're always evaluating. Everything that we've done, whether it be high-grading our asset base through asset sales that we've undertaken or exploring the future. Every M&A initiative we take, etc., all the way down to our shareholder roster kind of goes into that strategic alternatives process. So I don't think that if it was something extremely direct, it would be something that he had to file and report, which wasn't done outside of a 13D. So there will be nothing there from that angle. But it does encourage me as a sign of support to have insiders deploying significant capital and acquiring more shares.
That's helpful to hear, and I'll catch you at our annual conference next week in New York.
We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.
Yes. Thank you, everybody, for joining us this morning. We appreciate your time and listening to what we're doing here at U.S. Energy. We're very excited about the future. We have a lot of opportunities in front of us, and we feel good about our position in the market to be able to exploit those opportunities. Thank you, and I look forward to updating you on our next quarter's call.
Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.