Transcript
Greetings, and welcome to the U.S. Energy Corporation Second Quarter 2025 Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mason McGuire, VP of Finance and Strategy. Thank you. You may begin.
Thank you, operator, and good morning, everyone. Welcome to U.S. Energy Corp.'s Second Quarter 2025 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 overview of our financial results. Before this morning's market opening, U.S. Energy issued a press release summarizing operating and financial results for the quarter ended June 30, 2025. This press release, together with accompanying presentation materials, are available in our 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 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 like to turn the call over to Ryan Smith.
Good morning, everyone, and thank you for joining us today. I'm pleased to walk you through our second quarter results, highlight key milestones and share a strategic update as we continue advancing U.S. Energy's transformation and growth. As we've discussed in prior quarters, our primary focus is the development of our Montana-based industrial gas project, an asset we believe is uniquely positioned to meet growing demand, deliver strong economics, and achieve meaningful scale in the public markets. This summer, we completed the initial phase of our development program and remain firmly on track to bring operations online. This first phase included drilling 2 new development wells, advancing engineering on an acquired already productive well, flow testing all existing producing wells, reaching a final investment decision on infrastructure and making significant progress on our carbon management strategy. I will walk you through these in more detail now. Starting with upstream development. In the second quarter, we drilled our second and third industrial gas wells targeting the helium and CO2-rich Duperow Formation, both within budget. Including the productive well we acquired earlier this year, peak rates reached approximately 12.2 million cubic feet per day with a premium gas composition of approximately 85% CO2, 5% natural gas, and 0.4% helium. To optimize reservoir performance and maximize value, we subsequently managed production in the 8 million cubic feet a day range with similar compositions. With 3 producing industrial gas wells and 2 injection wells, we are well positioned for near-term cash flow generation. These results validate the quality and scale of our resource, further reinforced by our independent resource report. Following drilling, we engaged Ryder Scott to prepare a volumetric resource assessment of our Montana asset. The report confirmed net contingent resources of 444 billion cubic feet of CO2 and 1.3 billion cubic feet of helium, among the largest known deposits of its kind. We expect to release a commercial resource report once processing facility development plans are finalized. It's worth emphasizing the unique competitive positioning of the Kevin Dome. While most U.S. helium production is tied to heavy hydrocarbon gas streams, our project is sourced from a limited hydrocarbon stream, delivering a lower environmental footprint and aligning with growing market demand for sustainable solutions. With the initial development program concluding in September, we will break ground on our Kevin Dome processing plant. This facility will separate our upstream gas into helium, natural gas, and CO2 streams, each with its own monetization pathway. We expect construction costs of under $10 million funded by our existing balance sheet and a modest strategic use of debt. Importantly, this infrastructure will not only serve our operations, but will also provide a platform to support undercapitalized producers in the region. With control over the majority of the basin's helium supply, we see multiple opportunities to expand our value capture. Lastly, I would like to touch on U.S. Energy's carbon management front. U.S. Energy controls one of the largest CO2 deposits in the U.S. with geology ideally suited for both permanent storage and enhanced oil recovery. Our proximity to the Cutbank oil field just 15 miles away offers a unique and lucrative integration opportunity between CO2 supply and hydrocarbon recovery. We already hold multiple Class II injection permits with additional approvals expected in August. Recent injection testing at 2 disposal wells achieved sustained rates of over 17 million cubic feet a day, supporting a sequestration capacity of approximately 240,000 metric tons of CO2 annually. We've also initiated our EPA monitoring, reporting, and verification plan, targeting submission this September and approval by spring 2026, positioning us to potentially access federal carbon credits under Section 45Q. We are highly optimistic about the road ahead. The Kevin Dome represents a first-mover opportunity in the industrial gas sector and one that cannot be replicated. Our vision is to build a full cycle platform that spans upstream production, midstream processing, and long-term carbon management while maintaining strict capital discipline. The data collected to date supports a highly economic development path, both at the wellhead and infrastructure levels. Initial phases have modest funding requirements with a clear and measured capital plan designed to scale returns over time. Turning briefly to our legacy oil and gas portfolio. Lower commodity prices have weighed on earnings across the sector, including ours. While these assets are no longer our primary focus, they do remain valuable. Our 2024 monetization program eliminated debt and strengthened liquidity, and we remain opportunistic in pursuing value-maximizing divestitures. As we progress through 2025, our strategy remains clear: invest in our core Montana industrial gas project, monetize noncore legacy assets where appropriate, and maintain capital discipline to position 2026 as a breakout year in our transformation. We believe U.S. Energy stands apart with a scalable, high-margin development platform supported by legacy assets that require minimal reinvestment. This structure allows us to pursue high-return growth in industrial gases while reducing exposure to commodity volatility. In short, U.S. Energy is emerging as a differentiated and growth-oriented industrial gas company with exposure across upstream, midstream, and carbon management. Our strong financial position and clean capital structure give us a competitive advantage, and we believe the strategy we're executing today will deliver sustainable long-term shareholder value. With that, I'll now turn the call over to our Chief Financial Officer, Mark Zajac, who will provide an update on our financial results for the quarter.
Thank you, Ryan. Hello, everyone. Let's delve into the financial details for the second quarter of 2025. Our operating results reflect the cumulative impact of our divestitures since the fourth quarter of 2023. Revenue was approximately $2 million, down from $6 million in the same quarter last year, reflecting the impact of divestitures in the second half of 2024. Oil comprised over 90% of the revenue this quarter, reflecting our focus on optimizing our remaining oil assets. Lease operating expense for this quarter was $1.6 million or $32.14 a BOE, compared to $3.1 million or $27.69 per BOE in the same quarter last year. The overall decrease reflects our divestitures since the first quarter of last year and on a BOE basis, the increase is a function of the assets remaining in our portfolio. Cash, general and administrative expense was $1.7 million for the second quarter of 2025, which is in line with our run rate expectations quarterly. We have made significant improvements to our organization and structured the team around our industrial gas development. As for our balance sheet, as of June 30, 2025, there was no debt outstanding on our $20 million revolving credit facility, and our cash position stood at over $6.7 million, reflecting the net proceeds of $10.3 million generated from our successful equity offering during the first quarter. This was offset by $4.6 million of industrial gas acquisition and capital expenditures. We have agreed on terms for the renewal of our credit agreement, extending it to May 31, 2029. We are completing customary closing activities now and expect to execute the amendment in the coming days. The renewed agreement includes covenant waivers for the first quarter of 2026 as we achieve profitability on our industrial gas operations. Overall, our operating performance and financial results reflect our recent divestitures as well as the company's new initiatives. We continue to maintain balance sheet discipline and integrity. My objectives continue to ensure that the company's reporting processes maintain a high standard of excellence, and 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.
The first question comes from Charles Meade with Johnson Rice.
Ryan, I wanted to ask about the resource report; you mentioned being pleased in your press release. Was there anything noteworthy in that? You used the term pleased, which is positive. However, was there anything that caught you by surprise, either positively or negatively, regarding the total resource estimate or the concentrations? Additionally, could you share some insights on how the process unfolded to arrive at the final numbers you provided?
Yes. No, good question. So I am pleased with it. I would say not surprised because those numbers, again, when you're dealing with the quantum of billions of cubic feet, rounding errors can be pretty big numbers. But since we started this process, I don't know, 18 months ago or so and progressed it, we believe that the resource for both helium and CO2, there's a 5% or so natural gas cut in that stream, which we didn't have in the resource report. But we believed from the very beginning that the numbers here were very large, and that's why we went after the project. So having Ryder Scott, which for my money is as good and reputable as any reserve firm in the world, to verify that and get a formal big company third-party stamp of approval for what we already believed internally was very pleasing. It wasn't surprising because we thought it was there. And as we start our core development across the structure, and again, just looking at our maps, which we have on our website, etc., we think there's more upside to go. This is our initial core development area. So I think there's upside to those numbers as we continue to move outward off that structure. But no, I'm very happy with it. It shows the immense running room of what we have as we continue to develop this going forward across multiple streams of that gas stream.
Got it. And that's a good segue to my follow-up question. I recognize it's early, but the question is on the commercial offtake agreements. You talked a little bit about some CO2 going to the Cut Bank field for EOR and 45Q. But can you give us a sense of what your goals are for different offtake streams, whether it's the CO2 or the helium? I guess natural gas is really a rounding error, so that's not important. But what are your goals for those different streams? And what's a timeframe to think about for some kind of resolution or additional information on your commercial offtake arrangements?
Yes, that's a good question. There are several parts to consider. At a high level, we have gaseous helium and CO2, which can be monetized in three ways: permanent sequestration, enhanced oil recovery (EOR), and sales in the merchant retail market. I want to emphasize that I aim to control the offtakes as much as possible. With the recent passing of the Big Beautiful Bill and the equal valuation of CO2 for EOR and permanent sequestration, our Montana assets, dating back to when Chevron and Unicol owned them, were always intended for CO2 tertiary flooding. Previously, the economics were challenging due to oil prices and the cost of CO2. However, that cost has now become a significant revenue stream, prompting us to explore EOR uses for CO2 more seriously, both for economic reasons and because we have leverage in negotiations. Regarding helium, I believe we can reach an agreement by the end of the year, although we are already in a position to do so. We face some challenges; the helium offtake market can be quite opaque, and smaller companies are often at a disadvantage in negotiations. Therefore, we will choose our moments carefully, but I expect to see progress in that area as well. Additionally, we are actively pursuing merchant retail CO2 sales in West Coast markets. While I cannot provide a specific timeframe because it involves working with particular partners, it is something we are focused on. In summary, expect to see intercompany agreements on sequestration and EOR use for CO2 soon, helium offtake agreements with the liquefaction equipment owner by year-end, and ongoing efforts to sell CO2 in the retail market.
The next question comes from Tom Kerr with Zacks.
The helium concentration on the drilled wells, I think in Texas at 0.47, but we had always talked about 0.6 in the last several quarters. Was there anything there or what happened there?
Yes. I mean it's less than our initial well that we acquired and did more work on. And I would love to have like a very dignified reason answer for you. I think the honest answer is when you're dealing with basis points on a gas stream, sometimes it comes in more, sometimes it comes in less. And the numbers were kind of what they were. We think that if we drill another well to get the overall volumes up, we have some ideas and some locations where we think that, that composition is a little bit higher than what some of our subsequent wells produced. But again, we go after the areas we think are prolific enough to defend processing economics, etc. We always expected some variation potentially to the upside or potentially to the downside. Unfortunately, it was a little bit to the downside. I would say that those numbers are still highly economic for us as part of our full cycle program. But they kind of are what they are. So I don't know if that's the answer you're looking for, but I think that's what I've got.
Yes, you just answered my second question, which is still economically viable level in terms of economics and cash flow and that sort of stuff.
Yes, absolutely, right? We look at it starting off each economic driver kind of in its own silo and standing on its own two feet. We don't want to have an uneconomic process in one pocket and then depend on the other pocket to defend activity. So the helium concentrations on our current flows, and so much of it depends on processing and infrastructure, and that goes into the planning as well. The size, etc. What works for us, and then layering on revenues and incentives from CO2 sequestration, EOR usage really enhances those economics extensively on top of what we already have on the helium side.
Got it. All right. That makes sense. And then just on the processing plant, any sort of changes in the complications of developing that or cost levels or changes since we last talked?
I think there are a few changes. We are currently evaluating several design options. The reason for this isn't due to challenges; rather, it's because the incentives from the recent bill regarding Enhanced Oil Recovery and sequestration funds have altered our decision-making process. We have a substantial EOR asset in Montana, which is ideally located. The geography is advantageous, and many of the equipment and processes needed to extract and sell helium and natural gas, as well as to reduce CO2 for EOR purposes, are simpler and less expensive than we initially anticipated. Therefore, if we can achieve the same economic outcomes at a lower cost, we will definitely take that approach. This is the main reason for the delay in starting the plant. We are currently refining our economic model, strategy, construction planning, and determining the most reasonable costs for the processing infrastructure to tap into multiple value chains as quickly as we can.
Got it. All right. Last question, a financial one on the cash SG&A slightly elevated because of some business development in Montana. I think you said it will stabilize. Does that mean we're going to see that level probably in the next 2 quarters of $1.7 million? Or does that drift down because you don't have some of those Montana costs in there?
I think it's the latter. It should drift down. We've spent, I'd say, a fair amount of capital getting the project off the ground. And again, we're not a huge company. So onetime hits show up a lot more than they would with other larger entities. Consultants, both internal and third party, a fair amount of legal work just on the landowner right away, other ancillary charges, getting permits, getting disposal permits, all of that stuff. It's added up over the last couple of quarters. And it will continue to some extent just as we keep pushing stuff forward, but it definitely should lessen here in the very, very near term. It's probably already started to lessen a little bit as we go forward.
Thank you. At this time, I would like to turn the call back over to management for closing comments.
Great. I appreciate everybody for joining this morning and listening to what we have going on. We're excited about our project. We continue to move it forward. We're set up for 2026 to be a stellar year for U.S. Energy as we get this project off the ground and online. I appreciate your time. Thank you.
Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.