Transcript
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. 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 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 quarter ended June 30, 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 included in the risks described in our periodic reports as filed with the Securities and Exchange Commission. As required by law, we undertake no obligation to update our forward-looking statements. Further, please note that the 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'd 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 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, represent a tremendous development opportunity for U.S. 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 have as low 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 affected production is located on our lesser producing areas and has been brought back online. There are no long-term issues expected from 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 in 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, while 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 capital structure that is able to support developments. While any development projects will, of course, need 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 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, 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 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 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, unattractive balance sheets, and listings 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 Zajac, our CFO, who will provide a detailed update on the financial results for the second quarter.
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 was 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 were $1.6 million for the same quarter of 2024, a reduction of 43% 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 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 maintains 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. We will now be conducting the question-and-answer session. 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 your question. Regarding our legacy oil and gas assets, as we mentioned yesterday, many are aware that heavy weather impacted us in the second quarter, specifically Hurricane Beryl, which affected a lot of our Gulf Coast production, particularly in Liberty, just east of Houston. This meant removing producing barrels and incurring additional expenses to manage the weather-related issues, which inflated our per barrel metric in the second quarter. Although it was somewhat less in the first quarter, the reasoning remains consistent for the future regarding our oil and gas assets. While I’d like to say we won’t face any more weather events on the Gulf Coast, that wouldn't be realistic. However, as we look ahead over the next couple of quarters, we are confident that we can return that per barrel metric to the levels we saw late last year. Concerning our upcoming drilling, we aren't ready to provide specific guidance on those wells yet, but we anticipate sharing more details in the near future during our next quarterly earnings call since this will be our first well drilled in that area. We estimate that the capital costs for these wells will be around $1.5 million to $1.6 million, with the first well likely costing a bit more as we ensure all elements are properly implemented. For the new development metrics, we aren’t prepared to release those figures until our first well is drilled and producing. From a general and administrative perspective, I believe our G&A will continue to trend downwards. Given our portfolio of legacy oil and gas assets, we see multiple opportunities in the current pricing environment, even at lower prices, to create value with those assets. Importantly, pulling value from these assets isn't just about the immediate cash; it also involves how we utilize proceeds and the corporate overhead synergies we can achieve. I am confident we can optimize our operations so that the G&A costs associated with new development are more than compensated for by efficiently managing our legacy assets. I do not expect inflated G&A numbers, and should there be any increase, I believe it would be significantly less on a per metric basis compared to what we currently experience.
And then I'll ask this last question and 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, we 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 and 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 U.S. 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, five, or 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.
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 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 believe we spudded on September 9. We'll have our data on that well let's call it by October 1. Then I think in the fourth quarter we have both of those items: 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 processing, etc., 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's what's proved developed with these wellbores? Is that the right understanding?
Absolutely. I mean just another way to say it: just 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 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 an excellent question. I could elaborate on this for an hour, but I’ll try to be brief. We are currently viewing this process in phases: Phase 1, Phase 2, and Phase 3. Phase 2 expands as Phase 1 succeeds, and Phase 3 grows with the success of both Phases 1 and 2. I won't say that we will never need outside capital, but looking ahead to the next 12 to 18 months, we aim to begin selling our industrial gases, which will involve drilling two or three wells and establishing a processing plant. We estimate that these wells will cost about $1.5 million each; the first may be slightly higher and the second slightly lower as we continue to learn through the process. Drilling is quite straightforward compared to traditional horizontal shale drilling and shallow conventional wells. For our drilling capital, we anticipate needing between $3 million to $4.5 million for the two or three wells we are currently focusing on. We expect to add another well before next summer. The processing plant for these wells is projected to cost around $8 million to $9 million. Ideally, from a corporate finance standpoint, we would look at a capital structure that's half equity and half debt. Therefore, assessing the equity needs for U.S. Energy over the next year as we begin processing and selling significant amounts of industrial gases from Montana suggests an equity capital need of about $8 million to $10 million. This could come from available cash, operational cash flow, some credit facility debt, or early asset sales. Based on our current evaluation and our experiences with divestitures, I don't see this funding as a concern at the moment. Additionally, our legacy balance sheet, which still holds around $50 million in proved oil and gas reserves, provides us with the flexibility to avoid unnecessary transactions in the market. We don't need to go that route for this initial phase of proving our concept. While I don't have a precise answer right now, we are positioned to be opportunistic regarding these assets and transactions. Our primary remaining assets in the oil and gas sector are located in Montana and East Texas, although we have additional smaller assets in between those areas. If we can manage to clear $2 million through a small asset sale, reduce our asset retirement obligations on our balance sheet, and achieve annual overhead synergies of $300,000 to $500,000 from areas like insurance and general administrative expenses, that capital would directly support our new project. Thus far, the capital we’ve needed for deals has been readily available.
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 that 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.
This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation. Have a wonderful day.