Conference Transcript - BSIN 2026-05-07

Speaker 4

Good morning, and welcome to U.S. Energy Corp.'s first quarter 2026 earnings conference call. All participants are in listen-only mode. Following management's prepared remarks, there will be a question-and-answer session for analysts. Today's call is being recorded, and a replay will be available on the Investor Relations section of the company's website at usnrg.com. Before we begin, I would like to remind everyone that today's discussion will include forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the company's most recent SEC filings included in the Form 10-Q filed today and the Form 10-K for a discussion of these risks. Statements made on this call speak only as of today, and the company undertakes no obligation to update them. Joining us this morning are Ryan Smith, President and Chief Executive Officer, and Mark Zajac, Chief Financial Officer. I will now turn the call over to Mr. Ryan Smith.

Ryan Smith, CEO

Thank you, Mason, and good morning, everyone. Thank you for joining U.S. Energy's first quarter 2026 earnings call. I appreciate your time, and more importantly, I appreciate the engagement we've had with so many of you over the past few months as our story has come into clearer focus. I want to start by framing what this quarter actually represents, because the context matters for our investors to evaluate our reported results. The first quarter reflects a company in the middle of a deliberate transition. We've intentionally divested non-core legacy oil and gas assets. We have intentionally redirected the proceeds into the largest organic development project in our company's history. And we've intentionally accepted near-term financial optics that don't reflect a legacy EMP business because the U.S. energy of 2027 and beyond is not a legacy EMP. It's an integrated industrial gas, energy, and carbon management platform anchored by one of the most distinctive geologic assets in the country. So while the headline numbers reflect the company in the build phase, we believe the business is more clearly positioned around Big Sky than at any point in this transition. In the past 90 days alone, we have reached final investment decision on our Big Sky Carbon Hub processing facility, executed a fixed scope EPC contract with Canusa, completed our phase one cap stack to a March equity offering in an expanded senior secured credit facility, formerly suspended our equity line of credit and signed a five-year, 100% take-or-pay helium offtake agreement with an investment-grade global industrial gas counterparty. Each of these, on its own, would be a meaningful catalyst. Together, they materially advanced U.S. Energy's transition from a legacy E&P company toward an integrated industrial gas, energy, and carbon management platform. I'd like to walk through this morning in four parts. First, the operational and strategic progress at Big Sky. Second, the helium offtake and what the broader industrial gas and carbon market backdrop means for us. Third, our capital structure, where Mark will take a few minutes. And fourth, the path from here, near-term catalyst, phase two, and the value creation opportunity ahead. Let me start with operational progress because this is where the work gets done. On March 18th, we announced final investment decision on the phase one processing facility at the Big Sky Carbon Hub and executed a fixed scope engineering procurement and construction agreement with Canusa EPC, an experienced engineering firm with a track record in gas processing energy infrastructure. This was the pivotal milestone that moves us from a development stage project to a project under construction. Capital is now flowing into the project. Long lead equipment is on order. The plan is designed for approximately 8 million cubic feet per day of inlet capacity, targeting roughly 14 million cubic feet of high-purity helium and approximately 125,000 metric tons of refined CO2 per year at initial operations. Commercial operations remain targeted for the first quarter of 2027. I want to be very specific about what FID actually means at U.S. Energy, because in our part of the market, the term is sometimes used very loosely. For us, FID was supported by completed engineering, completed permitting, a fixed scope EPC contract with a credible counterparty, a fully funded phase one cap stack, and a contracted helium offtake. That is the institutional standard, and we hold ourselves to it. On the field side, drilling and completions wrapped in August of 2025 with three successful drilled wells, plus two that we acquired. Two Class II permitted injection wells, which are the standard wells used for CO2 injection and oil field operations, are operational. Gathering infrastructure installation is scheduled for this summer, with facility commissioning targeted for the third quarter, and first gas through the plant in the first quarter of 2027. The modular plant design materially limits on-site complexity, which is one of the reasons we have confidence in our schedule and budget. On the regulatory side, both of our monitoring, reporting, and verification submissions at Big Rose and Cut Bank are an active EPA review. Based on our interactions to date, we have not identified any material issues, and we continue to expect approvals during the summer of 2026. These approvals are required to access the Section 45Q tax credit framework that underpins approximately $130 million of credit value over the first 12 years of Phase I operations alone. I want to pause on that number for a moment, $130 million in federal tax credits from a single phase one facility for a company with a market capitalization that is a fraction of that figure. That represents a policy-backed, commodity-independent revenue stream that sits underneath everything else that we're building. And under the Inflation Reduction Act, the 45Q credit at $85 per metric ton has bipartisan support and is currently available for 12 years for projects that begin construction before the year 2033. Our base case uses today's rate, and any future enhancement is pure upside. With that foundation in place, I'd like to now turn to our recent helium commercial agreements, which underpins our initial revenue profile. On April 27th, we announced the execution of a five-year helium sales agreement with an investment-grade global industrial gas company, a leading helium distributor for the sale of contained helium produced to Big Sky. The contract is structured as 100% taker pay over a five-year initial term. Phase I capacity is up to 1.2 million cubic feet per month, or roughly 14.4 million cubic feet per year, at a fixed plant gate price of $285 per MCF, with CPI-linked escalation beginning March 1, 2028, and a year three pricing redetermination that preserves upside. I want to be very direct about what this contract does. It eliminates volume risk, it eliminates demand risk, and it establishes helium as the initial contracted day one revenue stream of our multi-revenue platform. And it converts what was, until April, a commercial assumption into a signed agreement with an investment grade counterparty. It also says something about how the broader market views our asset. Investment-grade industrial gas companies do not sign five-year, 100% take-or-pay agreements with development-stage projects without extensive technical and commercial diligence. This is, in effect, a third-party validation of the Big Sky resource, the development plan, and our ability to execute. Now let me put this in the context of the broader market, because the macro backdrop for what we are building has gotten more favorable since we set out on this path. Global helium supply remains structurally constrained. Geopolitical disruption, including ongoing instability in the Middle East and uncertainty around long-term supply from Russia, Algeria, and Qatar has tightened an already tight market. Helium is a non-substitutable critical input for semiconductors, MRI machines, fiber optics, aerospace, and the entire AI data center build out. Demand is inelastic and domestic supply is limited. Our pricing of $285 per MCF, while excellent, is in our view conservative relative to current market dynamics, which is why we incorporated a potential three-year reprice into our offtake agreement. And crucially, U.S. Energy is an American domestic producer of a critical industrial gas with all the policy tailwinds that implies. Beyond helium, the carbon management side of our business is equally important. Section 45Q has bipartisan support and was reaffirmed and extended under the IRA. The market for carbon management services is forecast to grow more than 145 times from 2023 captured volumes through 2050. Today, there are roughly 20 operational CCUS projects in the United States. We will be the 17th largest by capacity, and uniquely, we are the first U.S. project that does not depend on natural gas processing, ethanol fermentation, ammonia, power generation, or direct air capture as the source of CO2. Our CO2 is the byproduct of helium extraction. There is no combustion. There is no fermentation. There is no energy-intensive capture step. That is a structural cost advantage that very few projects in the world can claim. And that, in turn, connects directly to how we're approaching the remaining oil business. CutBank continues to provide low-decline, established cash flow that supports the platform build-out, but more importantly, CutBank has approximately 70 million barrels of incremental recovery potential through phase CO2-enhanced oil recovery, with feedstock supplied internally by Big Sky, eliminating third-party CO2 supply risk. Our 170-plus permitted Class II injection wells provide a low incremental CapEx path to a multi-decade production tail. We have approached the oil business with discipline. We're not adding incremental rigs or chasing growth for growth's sake. We're using CutBank as the captive CO2 outlet that completes our integrated value chain. With that operational and commercial picture in place, I'd like to turn it over to Mark to walk through the capital structure, where we've made significant progress this quarter.

Mark Zajac, CFO

Thanks, Ryan, and good morning, everyone. I want to keep my remarks focused on the capital structure, because that is where the most consequential financial work has happened this quarter. There are three pieces I'll cover, the Phase 1 capital stack, the equity line of credit, and the path forward. first the phase one capital stack is now complete in march we executed an equity offering that brought in capital needed to fund development and strengthen the balance sheet on april 20 we amended our senior secured credit agreement doubling the borrowing base to 20 million dollars fixing the interest margin at 200 basis points over the alternative base rate and importantly suspending quarterly financial covenant testing through the physical quarter ending march 31 2027 the facility allows revolving borrowings through its may 31 2029 maturity with no pre-mainment penalties these are favorable terms for a project under construction and they provide the flexibility to execute construction without covenant pressure during the build phase this capital stack will take us through completion of phase one and into revenue generation second on the equity line of credit we have not drawn on the eloc since march 2nd and concurrent with the closing of the expanded debt facility, we have formally suspended further use of the ELOC. We took this step deliberately to address a perceived dilution overhang associated with the facility. The message is clear. The equity capital structure is set for Phase 1, and the focus from here is execution, not further dilution. Third, the path forward as we transition from Phase 1 build to Phase 1 operations and begin positioning for Phase 2, the multi-stream nature of our platform opens capital avenues that were not available to us as a legacy EMP. Project finance debt becomes more accessible as we de-risk through our MRV approvals and contracted offtake. The 45Q tax credit stream itself becomes a financeable asset, either through a transferability or a structured monetization, representing a potential non-dilutive capital source not currently in our base case. Longer term, are existing senior secure facilities appropriately sized today? We expect to transition to a larger, longer data facility as revenues and credit profile matures. From a near-term liquidity standpoint, we have the capital we need to deliver phase one into commercial operations in the first quarter of 2027. From here, the focus on capital side is optimization and pre-positioning rather than funding the build. With that, I'll hand it back over to Ryan. Thanks, Mark. Let me close with

Ryan Smith, CEO

how we see this path forward because I think this is where the gap between intrinsic value and where the stock trades is most apparent. Looking out over the coming quarters, we have a sequence of identifiable independent de-risking events. MRV approvals are anticipated this summer. Gathering an EOR prep installation is scheduled across this summer and fall. Plant commissioning is targeted towards the end of 2026 with first gas and first revenue in the first quarter of 2027. And alongside the operational catalysts, we are beginning to advance commercial discussions on direct merchant CO2 sales, a second monetization path beyond sequestration credits, and one we believe could meaningfully enhance unit economics with very modest incremental capital. Beyond those near-term milestones, the next layer of value is in how the platform scales. Phase two is the first step in that scaling, and it is entirely excluded from our base case financial model. Phase two is a second processing plant on the same footprint, leveraging the same infrastructure, the same regulatory approvals, the same field operations, and the same commercial relationships. Our acreage, our permitted wells, and our geology already support two to three times the phase one capacity with no new land and no new approvals. Because the heavy lifting is already done, the incremental capital required to execute phase two is meaningfully lower on a per-unit basis. And as our credit profile matures and the asset de-risks, we would also expect the cost of capital to improve. When you compound these two effects, lower per unit CapEx and a lower cost of capital, across a second standardized unit, the project economics become quite compelling. Our internal modeling supports Project NPV that is multiples of where Phase 1 stands today and equity returns that fundamentally re-rate the company. Alongside that operational scaling, there is also a financial dimension to how value can be realized. I mentioned $130 million of 45Q credit value across the first 12 years of Phase I operations. Under current rules, those credits are transferable. We have a credible pathway to monetize a significant portion of that stream ahead of the underlying schedule, either through a transferability transaction or a structured credit sale. That is a non-dilutive capital acceleration that, again, is not in our base case. We are working that work stream now, and we will share more as transactions advance towards execution. When you step back, those operational and financial elements ultimately shape how the market should evaluate this business. I'd like to close with a candid observation about valuation because it gets to the heart of why we made the strategic pivot in the first place. Small cap E&P companies traded roughly three times trailing EBITDA in today's market. Small and mid-cap midstream and gas processing companies have traded roughly eight times. Blue-chip industrial gas companies trade at roughly 17 times or significantly higher than that. Those are not our forecasts. Those are public market multiples that anyone can verify. Once Phase I is operating, U.S. Energy is no longer a small-cap EMP. We're an industrial gas producer with a contracted offtake, a regulated carbon management business with policy-backed revenue, and a low-declined oil business that is integrated into the platform as the captive CO2 outlet. We don't need every part of that re-rating to happen for shareholders to do very well from here. Today, we traded a meaningful discount to our internally calculated Phase I NAV against a forward EBITDA multiple that is well below where any of those referenced categories trade. The arithmetic of closing even a portion of that gap is very significant. Our job between now and Phase I commissioning is to keep executing the operational and commercial milestones that allow the market to make that re-rating. To put a fine point on the quarter, we reached FID, we executed our EPC, we completed the phase one cap stack. We signed a five-year take-or-pay helium offtake. Construction is underway. The commercial operations countdown is months and not years. And the macro backdrop for helium, for carbon management, and for American energy production has rarely been more favorable than it is now. I'm more confident in the business plan today than at any point since we set out on this path. I want to thank our team in Houston and Montana and across our partner network for outstanding execution this quarter, and I want to thank our shareholders for their continued support and patience as we transition through the build phase into the cash flow phase. We have a tremendous amount of work ahead of us, but the path is clearer today than it ever has been. Operator, with that,

Operator

please open the line for questions. Thank you. We will now begin the question and answer session. To ask a question, please press star, then the number one on your touchstone phone. If you wish to remove yourself from the queue, please press star, then the number two. We ask the analysts to limit themselves to one question and one follow-up. Your first question comes from the line of John Devenport from Johnson Rice. Please go ahead.

John Devenport, Analyst — Johnson Rice

Hey, good morning, Ryan and team, and thanks for taking my question this morning. I wanted to start on the CO2 side. You had mentioned that, you know, you're evaluating the revenue stream outside of just the tax credits and doing some research on our own. We've seen, you know, it's the spot market for CO2 is trading as high as $900 per ton. So I'm curious what you guys have been evaluating there, maybe how much of that 125,000 million tons per annum you might sell outside of tax credits and just some more information on that.

Ryan Smith, CEO

Hey, John. Yeah, no, that's a great question. And those numbers that you just laid out are accurate. I think just backing up a little bit, it was very important for us to be able to, you know, forecast our base case projections on phase one of this project to what we can control, right? We can control our helium sales. We can control our carbon sequestration, aka CCUS activities. We can control our oil field. So everything that we've talked about, that we've modeled out, that we've underwritten internally to reflects that $85 per metric ton of CO2 sequestration and utilization numbers. That being said, everything you said is spot on. The end user, call it, whether it's food beverage grade, whether it's other industrial users, the pricing for that market is robust. The end user, which, you know, it would be tough for us to distribute to the end users. You'd have to go through a distributor similar to how we do it with Helium. But being able to call it reallocate that CCUS CO2 into a, again, large scale, long term investment grade counterparty CO2 distributor, especially to one of the coasts or the Midwest, the numbers are extremely compelling. Even if you take that $850, $900 in-use number and cut it in half, that's four to five times on a pretty conservative basis of revenue selling into that market. So right now, our initial plant, which we plan on capturing 125,000-plus metric tons a year of CO2 for sequestration and EOR purposes, not all of that CO2 that comes off of that plant is the same. roughly two-thirds of it is a higher purity CO2 grade that would need a little bit of incremental capital to kick up that purification for industry and food beverage. But two-thirds of 125, it's a big number, right? It's about ballpark 80,000 metric tons a year, a little over 200 metric tons a day. So running those numbers at a fairly conservative $350 to $400 per metric ton price, it increases our revenue profile something like three or fourfold right out of the gate. So one thing I think that we're currently working on now is, one, understanding that market and who the big players are, similar to our helium offtake, it's very important to me to have the highest quality counterparty on the other side of those transactions. We've started discussions early stage with a couple of them, and it's something that we're going to pursue heavily in the second half of this year. And then going forward, as we grow So the platform from phase one to phase two, which would be multiples of phase one, getting that CO2 into the end user industrial merchant markets is an absolute goal for us. It takes this from extremely attractive economics to something much, much greater than that if we could accomplish that. So you're spot on. It's an extremely attractive market, similar to helium. It's structurally short in the United States, similar to helium. It goes to industries that are growing and constantly need it. So it's a big focus for us going forward.

John Devenport, Analyst — Johnson Rice

Okay. And so if I heard you right, basically the stream of CO2 that's produced wouldn't be able to go directly to those industrial users. there would have to be some incremental processing before that can happen. Obviously, it would be worth it to get, you know, 10, 20 times the tax credit price. But I just wanted to make sure I had that correct.

Ryan Smith, CEO

It would be either – it could be two things, right? It depends on the end user and the distributor. It would be either a little bit of extra equipment on our site. I would say nothing overly meaningful, maybe a mid-single-digit capital increase on the whole project. Or some of the end users have their next-stage purification facilities at their distribution sites, whether it's in the Gulf Coast, whether it's in the West Coast, whether it's in the Midwest. So, I guess it could be ready for straight distribution. It would really just depend on economics and what the distributor wanted us to do.

John Devenport, Analyst — Johnson Rice

Okay. All right. Got it. I believe that that is all for me. Thank you.

Speaker 7

Thanks, John.

Operator

Your next question comes from the line of Tom Kerr from Zach's Small Cap Research. Please go ahead.

Tom Kerr, Analyst — Zacks Small Cap Research

Good morning, guys. On the new helium offtake agreement, are you able to talk about the pricing and how that was determined or achieved? Some of the helium spot prices are higher than that. The Middle East conflict have risen prices a little bit. Are you able to talk about how you arrived at that price, the $285,000, I think?

Ryan Smith, CEO

Yeah, I mean, I think from a high level, absolutely, and good to hear from you, Tom. Thanks for the question. You know, we had an offtake agreement on my desk to sign for a couple of weeks before the Middle East stuff kicked off. And, you know, I don't sign stuff when it shows up the same day, so we kind of sat on it for a while and made sure that all the numbers were right. And then, you know, either fortunately or unfortunately, all the stuff in the Middle East kicked off. So we immediately kind of reopened negotiations and pricing. So, you know, pricing ended up going up 50 plus percent kind of overnight on the production side, meaning, you know, the producers that drill and process and deliver gaseous helium. And, you know, so that, I guess, simplistically, like, I would call it 50% or so was what was realized by that happening. I think it's important as part of our agreement to understand that, you know, we signed for 285 escalates CPI every year over five years. So call it, you know, 300 and change over the life of the contract. our our counterparty is coming and picking it up at the plant and you know that's our bottom line number that we're getting something that you see quite often I would say the vet the vast majority of the time is companies that announce their helium pricing are giving a top line number and they're still responsible for tolling fees for transporting it a couple thousand miles on their own nickel. And those costs are extremely significant. I've seen ranges from $125 to $175 all in from what is being deducted from the top line price that people announce. So if you're comparing our announcement with some other announcements out there, I think a more promotional way to think about our price would probably be in the low $400 range from where you've seen other people announce it. Transportation was something that I was very concerned about, not taking on that risk on our side. Driving a tube trailer over the Rocky Mountains in the winter was something that doesn't seem like it has a lot upside to me with the size of our counterparty and their just ingrained infrastructure on their level as well as owning all the, you know, further down the supply chain, liquefaction and distribution capabilities, it just made a whole lot of sense for us to have them pulling up to our plant a couple times a month and paying us on the spot. So that's kind of how I would look about price. In regards to term, you know, we had all kinds of choices, options in front of us on term, ranging from, you know, one year to 10 years. and, you know, we settled on five, as you know, with a revisit pricing after three years, which was something that was extremely important to us. And to be honest, I'm not sure we could have gotten it before the Middle East kicks off, right? Like, we're optimistic about helium prices going forward. At some point in time, the Middle East will slow down. Some of these supplies will come back online, but, you know, I do believe that all of the in-the-news industries, whether it be AI, semiconductors, healthcare, national defense, aerospace, et cetera, like that demand for helium is not going anywhere but up and to the right, and I believe the analysis shows that the demand is going to grow significantly more than the supply options, both on a global basis and then extremely more on a domestic basis. If the Middle East tensions that have happened over the last few months have shown both the end users and the distributors anything, It's that a molecule of helium coming from the United States is worth a whole lot more than something coming from Qatar, Russia, or Algeria. So I think there's kind of a two-step value thesis on helium going forward based on domestic supply and then just market demand.

Tom Kerr, Analyst — Zacks Small Cap Research

Got it. That makes more sense. One more quick one for me. Can you update us a refresher memory on sort of the all-in CapEx for the projects, you know, for all three projects? I know it's in the $20 million to $30 million range. And just how much have we spent and how much is left to spend at this point in time?

Ryan Smith, CEO

Yeah, great question. And that's always kind of a moving number just because, I mean, of course, we have it pinned down. But, like, building out this infrastructure is very phased, right? I mean, it's a 14 different timeline thresholds for payment and construction going forward. I would say the way to think about it at the beginning was it was in the low $30 million for all of the kind of go-forward infrastructure that we hadn't already spent money on. We've made a significant dent in that number so far. We started ordering our long lead time items and equipment whenever we announced it, a few, I don't know when exactly the FID announcement was, maybe a month ago or so. But I think that we cut our first big check on the remainder that same week. We've done it recently. We probably have another $25 million or so to spend over the project. A lot of that is front-weighted here. over the next, call it two or three months, and then a little bit of a kind of a trickle on the remaining 25% between then and the end of the year. Got it. Okay. Thanks for the update. That's

Operator

all I have for now. All right. Thanks, Tom. Your next question comes from the line of Dennis Richter from Security, Pricing, and Research. Please go ahead. Dennis Richter, your line is

Speaker 7

now open. Once again, Dennis, your line is now open. Oh, I'm sorry. Mark, Ryan, good morning.

Speaker 5

Good morning, Dennis. Good morning. I apologize. I had you on mute there. My question is regarding if there are shut-in opportunities with the cut bank field. I mean, it's a legacy old oil field, and obviously you're looking to inject CO2 starting in first quarter next year, are there currently opportunities in terms of bringing back wells that have maybe not been economic at past prices, but now at the $90, $100 level could basically provide incremental cash flow until you got the phase one accomplished? And then kind of a follow-up question to that, could you talk about your Montana field office and your staffing and in terms of people that are implementing, you know, these capital infrastructure aspects and your experience there or the folks that are experienced there?

Ryan Smith, CEO

Yeah, no, great question. So on the first one, I think there is, and we've done some of them on available opportunities on shut-in wells. I think that backing up a little bit, you know, understanding that oil asset is paramount to answering that question. It's an older, proven, legacy oil field. It has a lot of wells on it. The wells are vertical wells. And a lot of those have been shut in. Until you kind of, I'll call it, build slash rebuild that reservoir pressure through tertiary recovery, i.e. injecting CO2 like we're going to be doing, turning legacy vertical wells back on, it's not overly attractive. Because, you know, you'll get some barrels out of the ground right off the bat, but without increasing the reservoir pressure from legacy levels to something more enhanced, you're probably looking at like a one or a two barrel a day type of steady state once they're back and flowing. And then, you know, to get something that's meaningful, i.e. adding, you know, a million, a couple million dollars to our bottom line, doing the level of that work, going and working over those wells, I'm not sure that – I know we would make money on it, but I'm not sure that it's a compelling enough return to kind of spend that capital. um so some some of the some of the you know proverbial like very low hanging fruit turning some wells back on that we normally would not have done we've already done that we've added 40 to 50 barrels a day over the last month um just just doing that and you know i think that again not not a huge number but just you know if you can pick up a few dollars laying on the ground with low capital expense. That's always something that we'll do and we'll continue to evaluate. But without a doubt, most of the upside comes from those wells that I'm discussing, getting the reservoir pressure up, turning them back on. And instead of having one or two barrels a day come out of 10 wells, you have 10 or 15 plus coming out of those shut-in wells. On the Montana operation side, great question. And I think you might be the first person that's asked me that. We absolutely have a, again, relative to the size of the area, a fairly large presence in Montana. I think we're the third largest employer up there after local municipal healthcare and school districts. We have roughly 13 to 15 people that run our day-to-day operations that are up there. They've been with this asset ever since Quicksilver and Blackstone owned it and we inherited them with a deal. And I mean, there's not 15 people more familiar with this asset in the world than the folks that are up there. This is their sole focus. This is their sole job because it's what they do every day. And like everything else, we have a field office up there under our subsidiary in a nice little building that looks like a small insurance company and we have an equipment yard a little bit outside of town just for staging and holding equipment etc. So from a day-to-day operations perspective it would be very hard in my opinion if not impossible to improve that just due the familiarity with the asset that these folks have. And then, of course, we have, you know, our a little more senior on the corporate chain people here in Houston, along with one of our senior guys who's based out of Denver, that's ex-EOG, ex-ANIDARCO, that kind of oversees them and spends a lot of the time

Speaker 7

in the field as well. Appreciate it. I'll go back into the queue. I have a follow-up question, but I think...

Ryan Smith, CEO

You can go ahead and ask it now if you want.

Speaker 5

In terms of accelerating to phase two, Mark, you mentioned in terms of getting the EPA approvals for the 45Q credits. Some of these credits you mentioned can be monetized. Could you kind of talk about what provides more color on your, you know, options once you get that approval, you know, as you expect in, you know, that summertime period? And what would be the hurdles to get Phase 2 implemented earlier?

Ryan Smith, CEO

Yeah, another good question. This is Ryan.

Mark Zajac, CFO

I'll address that because I'm pretty close to that situation.

Ryan Smith, CEO

So I'm going to answer them in a different order than you asked. I'm going to answer the second one first. So our phase two hurdles, of course, you always have operational and technical stuff you need to do. But by far, our phase two hurdle is optimal capital stack for that phase two. So much of what we're doing is infrastructure-heavy costs, right? Phase one is 90% of the capital we've spent on this project so far is on the infrastructure side. And I expect phase two to be very similar. You know, our resource there is extremely proven, resource meaning resource under the ground, helium, CO2, et cetera. And it's so large that the deliverability risk of, you know, feedstock into perpetuity for these phases is extremely low. The caveat there is the infrastructure costs are very significant. So our phase two, which we're already working on early stage, right? Like it's not anything that's new from phase one. It's just bigger. So all of the work that we've done on the technical side, on the engineering side, on the processing side has materially been completed. So really just coming up with the blueprint for phase two and all the little things that come into that and getting everything on a piece of paper, if you will, to plan that process out and get it going. And we're working on that now. If the money fairy put all the money I needed on my desk today to do that project, we could start on it today. But I don't think that's going to happen. So, you know, how do we come up with the right mixture of capital to fund that is concurrently what, you know, we spend a lot of time on here. I mean, I think that's twofold. One, you know, just like you've seen in midstream companies and, you know, gas processing companies with so much value on the infrastructure, on the pipelines, on the plant facilities, these things are tailor-made to add debt capital to, right? Like, I mean, you see some of the big midstream companies run at six to seven times leverage. I would never do that here. But I do think once, you know, phase one is up and running, we've been very conservative about applying leverage to this. We over-equitized it on the front end on this first phase just because I wanted kind of a 50-50 equity debt capital stack going into it. But, you know, as we get going, I think it's fair to assume, you know, more project finance layered debt to expand is something you'll see. And then, you know, how do you plug that equity piece? I don't want to go out and do a big, giant common equity blast, right? Like, it's not good for the shareholders, of which our board and management team here are extremely significant shareholders. So, you know, we would be wearing that dilution just like everybody else. One avenue, a very attractive avenue is, you know, what I'll call tax equity financing. You've seen a lot of them in wind. You've seen a lot of them in solar of companies that are generating, whether it's 45Z, 45 some other letter, and a little bit on the 45Q side, which is what we are, of a forward selling of those credits over the life of your credit realization forecast to end-user buyers that want that offset. And that ranges from Microsoft and Google to big insurance companies to East Coast institutional funds. So it's a pretty large and pretty dignified group of buyers of those credits. And every one is a negotiation. Every one is a different structure. But I think a way to think about it is a reasonable outcome is whatever your forecasted 45Q credit stream is, nobody's going to pay you 100% of it, 100% for all of it, just because they want to leave a little bit of cushion. But somebody, and there's comps in the market for this, will come in and buy 60% or 70% of your 12-year forecasted 45Q stream at a discount rate of 10%, still pay you to operate it going forward, and then you pull a very meaningful portion of that capital forward. So, you know, one thing, I've talked about this a little bit, probably maybe not in this much detail, that we're looking at concurrently with phase two on, you know, capital optimization is forward selling through a tax equity financing, phase one, 45Q credits, getting that capital up front, and then, you know, on a dollar for dollar basis, recycling that capital straight into the ground for phase two development. development. It makes a lot of sense, you know, from a financial projection perspective, from a rate of return, from a ROCE perspective. It's really a no-brainer, pulling 12 years of value forward on day one and redeploying that capital into, you know, something that scales up and to the right on a nonlinear basis compared to phase one. I appreciate that. Yes. I mean, that forward

Speaker 5

pulling those credits i mean i see this with other companies it's almost become self-financing i mean it's it's a fantastic setup uh and i don't think uh i think your comments earlier from both mark and you ryan about that the market doesn't really appreciate what you have accomplished and what you have put you know these assets you have put together um i i have to kind of uh you know could you know i totally agree in terms of having valued companies for 25 years the disconnect between the value that you are creating here and have already and and the market price is just uh it's just uh significant so i applaud you for what you have accomplished i appreciate it and uh yeah

Operator

i'm going to jump off now all right thanks there are no further questions at this time i will now turn the call over to Mr. Ryan Smith, CEO, for closing remarks. Yeah, I want to thank everybody

Ryan Smith, CEO

for joining us this morning. I thank you to everybody that asked questions. I was happy to answer them. And I want to thank our shareholders for sticking with us through this process. We've made a lot of tangible progress over the last two months. That was kind of the fruition of the work we've been doing for the last 18 months. And we have a lot of stuff in front of us that we expect to accomplish this year before getting this project online in the first quarter of next year. So the board and management here are very excited and very confident about the value we are building at this company. And we look forward to continue sharing it with you, both on a daily basis as people reach out to me and on calls quarterly going forward.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. you may now disconnect.