Transcript
Welcome to the EON Resources Inc. Third Quarter 2025 Earnings Call. It is now my pleasure to turn the floor over to your host, David Smith. The floor is yours.
Good afternoon everyone. I'm David Smith, General Counsel for the company. I'm glad to join you this afternoon. Before we begin, I'd like to go over our safe harbor statement regarding today’s conference call. Please be aware that during this call, we will be making forward-looking statements under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations and assumptions, which could be affected by risks and uncertainties. They reflect our views only as of today and should not be considered representative of our views on any future date. We do not have any obligation to update or publicly release the results of any revisions to these forward-looking statements based on new information or future events. There are various risks and uncertainties that could lead to actual results differing significantly from our expectations. For more information on these risks, please refer to our annual report on Form 10-K for the fiscal year ending December 31, 2024, and our other filings with the U.S. Securities and Exchange Commission. Today, I would like to introduce our presenters, which include our executive management team. If you're watching the webcast, you'll see on the slide Dante Caravaggio, our CEO; Mitchell Trotter, our Chief Financial Officer; myself; and Jesse Allen, our Vice President of Operations. To start, I want to highlight some points about the third quarter. It was an exceptional quarter for us with record net income of $5.6 billion. We fully retired $41 million of senior and seller debt, as well as $27 million of preferred shares. Additionally, we increased shareholder equity by $22.7 million. We also acquired a 10% override with the original seller group related to the Grayburg-Jackson Field and the company that owned it. Moreover, we managed to farm out the San Andres formation for a Horizontal Well Drilling Program, retaining a 35% working interest in this initiative, which will not impact our ongoing wells and production from formations other than San Andres. It’s essential to note that all of this was completed by September 9, and we incurred no additional debt to achieve these results. Looking ahead, the drilling program I mentioned will take place over the next five years, during which we expect to drill as many as 92 wells while maintaining our 35% working interest. Our acreage has multiple pay zones, not limited to San Andres, and we aim to develop these resources as much as possible. Currently, production is primarily from the Seven River formation and our waterflood. We are already seeing positive effects from our improved balance sheet due to this transaction. Our capacity to raise capital has significantly increased, giving us the feel of a new company. We are actively pursuing acquisition opportunities and working to enhance our reserves, with our primary focus always being to elevate the stock price, which motivates us daily. Those are the key highlights. I'm excited about our future and pleased to hand it over to Dante Caravaggio to continue from here. Dante, please go ahead.
Well, thank you, David. And I'll just start off by saying happy Thanksgiving and Merry Christmas because this, I believe, is our last shareholder earnings call until next year, and I think the main thought we want to leave with everybody is, let's get the party started. So we really had a mountain to climb. We wanted to fulfill all the promises and commitments that we made to our shareholders. And really, as David said, on September 9, we really did that, and we didn't leave a mess. So the balance sheet is clean. The debt story is a good one. So we're attractive for investors that will help us raise capital, buy new properties and kind of off we go. And I think the other thought I'll leave you with is inventory. This deal we did with Virtus, we've got in there the potential of drilling 92 horizontal wells. You have to really look hard at a lot of oil companies much larger than us to find 92 drillable wells in inventory. Well, we've got them, and these are going to be big wells. The other thing we've got, again, I'll use that word inventory. We've got 350 producers sitting there at Grayburg-Jackson, waiting for us to stimulate them, perforate them and make them do better than they're doing. And we're now in a position where the cash is there, we can invest in these things and get that to go, and our primary focus with regard to that is the conversion of another 150 SVR waterflood patterns. And by way of history, this field at one point was down to 300 barrels a day. It made it up to over 1,000 barrels a day primarily by converting current wells to SVR injectors and producers. Well, we're going to continue doing that same thing. The other thing we added to, I'll say, inventory of workovers, is the purchase of the South Justis field. So that field was down to 50 barrels a day. It's got 200 wells on it. We're going to activate those wells, and those wells, on average, make double or triple on a per well basis, the oil per day that Grayburg-Jackson does. So if I recap this, yes, we raised $45 million. We cleaned up the balance sheet with that. We sold an interest to Virtus to do some drilling in the San Andres, included in that is a $2 million fund, to do some experimental workovers to test their theory of completions in the San Andres. So that's going to give us a near-term kick in production. The Farmout, I think we discussed that, and then going forward from that, we've got an awful lot of work just to increase production, I believe, by 500 barrels a day without drilling over the next 6 to 9 months, not counting what Virtus is going to be, and that includes completing the water injection line, you're going to hear Jesse talk about that, continuing to bring on wells that are offline by using the 4 rigs that are running and then through stimulations. So with that, I'm going to turn it over first to Mitchell Trotter to talk about the finances.
All right. Please advance to the financing highlights. Good. Well, thank you, Dante, and hello, I am Mitchell Trotter, the CFO, and I thank all of you for attending today. And as Dante and David so articulated, the September 9 funding resulted in major improvements to our Q3 financials. This highlight slide, it's the same one, that's in the funding call deck. We've been through it before. I have it there mainly for reference so that you have the deck, and it can help you understand as I go through the parts of the financials. The sources of the $40.5 million of volumetric/ORRI funding and the $5 million from the Farmout agreement, they have many parts with different GAAP treatments. So we'll kind of go through that a little bit, and the same thing for the uses where we retired the senior debt, we acquired the seller ORRI, and we retired those preferred shares, all those major impacts flew through the balance sheet and some of the income statement. So let's move on to the balance sheet slide, and then let me kind of show where some of the big parts are, on that. Again, this is a major improvement. I can't say it more times. But the slide you have here is a condensed version of what's actually in the 10-Q, and it best illustrates the impacts. So how do we clean up the balance sheet with respect to debt, which has by far the largest impact. Again, we retired $21 million of senior debt, and with that, we have a $1.5 million reduction in the debt that you will see comes through as a gain on the income statement, and I'll explain that in a little bit. We also retired that senior debt of $15 million with the seller, and it also eliminated a $5 million accrued interest, and we did all that for $7 million, thus creating a $13 million gain that you'll also see when we go through the income statement in a minute. Do note that the convertible notes, they're still there, but we reduced them to $5.4 million from the original $9.8 million that was private loans and warrant obligations by the end of the quarter. So the end result of all of this cleaning up of debt is, we only have $1 million left of current debt and the other $4.4 million is long-term debt, and we have a huge drop in our accrued liabilities. So that was all good. Now shareholder equity, that's also been transformed as well. The preferred shares, as David stated, that had a $27 million redemption value and it was retired for only 1.5 million common shares, that we announced back on September 9. And this eliminated all the minority interest. So our equity is cleaned up with respect to all the miscellaneous things. The end result of our shareholder equity, the end result of the financing, the elimination of the debt instruments, the related gains and all of that flowing through, our shareholder equity went up by over $22 million from Q2 to Q3. So with that, let's go ahead and move on to the income statement slide, please. And then this, too, is a condensed version, just like the balance sheet to hopefully let you see things a little bit better. And this, again, is a reset of our P&L going forward. The Q3 net income was the highest level to date of $5.6 million for the quarter. While most of that net income came from below the line, those gains were definitely earned by all the hard work we did. And David did a really good job of articulating how we got there. So what does that mean below the line? There's that $13.4 million of gain. That's a combination of the seller note reduction, how the various ORRIs and all the related costs relating to that are recorded for GAAP purposes. And then there's that $1.8 million gain, and that comes from the senior debt retirement plus a gain from settling an old fee. Now offsetting these gains, there's $1.1 million of one-time expenses that GAAP has us include up in the G&A versus down below the line. GAAP retired required this grouping of the $1.1 million one-time charges in G&A, which personally I think is misleading, but that's where it is. The actual recurring G&A expenses continue to decline quarter-over-quarter, and that's a huge improvement. That's what we've been talking about all year long, and we're pleased to say that. Another cost reduction, as we stated on the Funding Call, is a decrease of interest expense of up to $500,000 a month. Most of the interest for September was eliminated with the September 9 funding, and you can see that in the reduction of about $1.7 million down to $1.2 million interest expense for the quarter. And as always, I will tell you, we'll take questions at the end of this presentation and willing to have individual discussions as well. With that, reach out to Mike Porter, our Investment Relations guy, and we'll do that. We've done that plenty of times with many of you. So with that, I do want to move on to Jesse to review operations. So please advance to Jesse's slide.
Thank you. Good afternoon. I'm Jesse Allen, VP of Operations. Today, I'll discuss some third quarter highlights from an operations perspective, focusing on our daily operations, and I will also comment on the San Andres Farmout to Virtus and its details. Safety is our top priority. This quarter, we had no reportable incidents, and we've maintained an incident-free record since taking over operations in November 2023. Our combined production remains steady at over 1,000 gross barrels of oil per day across the Grayburg-Jackson field and the South Justis field. Currently, we are operating four well service rigs, with three in the Grayburg-Jackson field near Loco Hills, New Mexico, and one in the South Justis field area near Jal, New Mexico. One significant ongoing project is the installation of two miles of injection pipeline. We are currently in the pressure testing phase and connecting the injection wells and their headers. Now, regarding the San Andres Farmout to Virtus, this was a beneficial deal for both parties, signed on September 9, 2025. Notably, horizontal drilling is set to begin in 2026, likely in the second quarter, depending on the time it takes to secure BLM permits. For more detailed information, please visit our website, eon-r.com, where you can find our horizontal drilling presentation. Highlights from the Virtus Farmout include a cash consideration of $5 million, with a post-deal working interest of 65% for Virtus and 35% for EON. We plan to drill 10 to 20 wells per year over the next five years, anticipating initial production from each well to be between 300 and 500 barrels of oil per day, with drilling costs expected to be in the range of $3.5 million to $4 million per well. Now, I will turn the call back over to Dante Caravaggio, our CEO and President.
Thank you, Jesse. So, what's next? Some of you may wonder if we are a one-trick pony or if this third quarter's results will be repeated. The answer is no. We have not become complacent since finalizing the deal, and sometimes we may need to extract more information from David, so we're working on that. We are not satisfied with our costs; we aim to reduce our lease operating expenses by $200,000 a month and cut another $200,000 from G&A expenses. As Mitch mentioned, we experienced several one-time charges in Q3 that increased those costs, but those charges are now behind us. You may ask what those charges were; we had a lot of assistance from brokers and attorneys who did an excellent job, but those costs are no longer on our payroll. Returning to what's next: we have the inventories I discussed earlier. We believe we can drill 92 wells across our two fields and have 500 producers available for workovers. We won't complete all of this in one or two years, but over the next three years, we will be very busy. This will lead to increased production, and unlike many oil fields which are in decline, we are not a melting ice cube. We are a company rich with opportunities, and we are raising capital to seize these chances. We expect to see increased production every quarter. As highlighted in my presentation, we plan to improve our financials through increased production until 2026 and expect growth well beyond 2030. In the short term, we need to energize the waterline. Jesse mentioned that within 90 days, we should see an uptick in oil production as our waterflood has been water-starved due to a non-operating 4-inch supply line for a year. You haven't noticed the impact because Jesse has effectively managed well stimulation, but once this line is operational, we will see significant benefits. We also plan to make a substantial acquisition in the first half of next year. I can share that we foresee considerable numbers without incurring debt or selling shares, allowing us to creatively acquire properties. We are exploring these opportunities, which are confidential at this moment, but we are diligently working out our operational and funding strategies without diluting shares or taking on debt. We are excited about discussing this when the time comes. Horizontal drilling is expected to start in the second quarter of next year, and you'll get a preview when Virtus undertakes some workovers, anticipated within the next 60 days. While some details may remain confidential, we are eager to share our progress. On the downside, oil prices are currently weak, and we would prefer them to stay above $60. We encourage everyone to drive safely, fill up with premium, and enjoy their journeys. Being mostly debt-free gives us an advantage during tough times; with lower oil prices and income, we can save about $400,000 a month since we don't have interest expenses. Increasing production will also help maintain our position if oil prices drop. Gas prices are on the rise, which is positive, but we face challenges selling all our gas due to midstream buyer issues. We appreciate the shareholders who have approached us about potentially using gas-fired turbines to generate power, which could save us $70,000 a month. These turbines could also power data centers or Bitcoin mining, similar to what our competitors are doing. While we lack the funds for experimentation, we plan to utilize proven solutions. To conclude, we are excited about our position. We are not a melting ice cube and have a solid inventory that will carry us through the rest of the decade. I will now turn it back over to David and Matt.
And this is David here. Thank you, if you will go forward with a question-and-answer period that we've arranged.
This is David here. If you will go forward with the question-and-answer period that we've arranged. Your first question is coming from William Peters.
Great balance sheet cleanup. Your stock appears to be a hidden gem. My question was already addressed, but I wanted to emphasize the importance of supplying energy to data centers, AI, mining, and more. It looks like the company has a promising future if they can establish some kind of partnership. I understand that funds are limited, but having that connection would be beneficial moving forward.
William. Yes, thank you. The only note I'd say there is we just don't know enough yet. We're dabbling in it. We don't have a proposal, but we're asking for proposals, for people who know how to take our gas and monetize it. So thank you for bringing that up.
That concludes our verbal Q&A. I will now turn the call over to Mitchell Trotter for remaining questions.
All right. Thank you, Matthew. The first two questions are very similar, and I think we've answered, but I am going to read through them or paraphrase them, so Dante can answer a little bit more, if needed. Just so the questions are to you, Dante. When do you expect the first horizontal drilling to start up? And with respect to the future and exploring the reserves that we've identified in the past and opportunities with this drill?
Yes. So once a month, Jesse or I are meeting with Lance Taylor and his team, and they've pretty much picked out the locations where they want to go, I'll say the first dozen. So the steps they have to go through is, go ahead and get those permitted, and as a lot of folks know, the BLM was shut down and the Trump Administration is saying, he's going to put the pedal to the metal to get drilling permits approved. But my best guess, and I base it on the feedback I have from my colleagues at Virtus, is that the permitting should get into the Feds this year and then hopefully, it gets approved the end of first quarter and then maybe the end of second quarter next year, we're drilling. We should see results, we think, in June or July of '26. And by the way, the plan is to drill 10 to 20 wells a year, starting out with maybe 6 wells start out, something like that. And these things are not decided yet. And we do want a healthy oil price above $60 a barrel, it's a no-brainer. Below $60, we have to do some hard thinking. So that's the best indication I can give you.
Thank you, Dante. The next question, I will say is for me. And the question is that EON warrants, they have two different expiration dates at two separate brokerage accounts. Any idea why? Well, there is only one expiration date, and that's 5 years from when we became the public company in November. We have found that more than two brokers have, whatever they keyed in the wrong date into people's accounts, as to when the expirations of the warrants go. So it is November of '28. So we can't control the brokers, but that's what they've done. We've reached out to them.
Let's hold off on that question for now, Mitch. I want to discuss it with Matt, our SEC Attorney, to verify the details. I apologize for thinking out loud during this call. From what I recall, some warrants were issued to investors before our public offering, and I'm uncertain if the dates were affected based on when we purchased them prior to going public.
They've all been eliminated. This concerns the IPO warrants from the initial public offering. The brokerage accounts have acknowledged their mistake. We will confirm the date again, and I believe that's important.
I'm a bit confused, and I appreciate the question. Let's make sure to post this on the website so everyone, including myself, is informed, as it's not quite clear in my mind. I apologize for the confusion.
Yes. No, no, that's fair. And just so everyone knows, we have an FAQ under our website on the Investor page. I think it's under the Governance or the Documents that's up on the right. We'll just add that FAQ to it and so that we can then answer it there, so people can go look at it. Okay. Good point. So okay. I think, Dante, you've answered this one, but I'll give it to you again. At what barrel price does EON Resources start making money?
We are currently losing about $100,000. Mitch and I review this regularly. I've instructed Mitch, who oversees general and administrative expenses, and Jesse, who manages lease operating expenses, to each reduce costs by $200,000. We have a plan in place for this. I believe we can be profitable at present oil prices. If oil reaches $65 or $70, our situation will improve significantly, and if we make additional acquisitions that won't increase our general and administrative costs, it will boost our performance even more. I'm targeting high-quality, profitable properties that will benefit us, but right now, we can achieve profitability with better cost management, which is attainable. We have already eliminated a $700,000 principal and interest payment, giving us flexibility to work with, and we are still reducing debt. However, we did rely too much on our line of credit, which led to an increase in shares. Our goal is to manage production effectively and limit new share issuance while trying to make one or two acquisitions in the next six to nine months. I hope that clarifies things.
Thank you. And let me give this one to Jesse. What issues are you facing selling the gas?
We are currently producing about 600 to 700 Mcf per day, which is equivalent to 700,000 standard cubic feet per day, for the Maljamar Plant. It's an older facility, and they have been conducting significant maintenance on their gas treating trains, as well as installing new lines. This situation is affecting not just us, but also all the other operators delivering gas to that plant. The Maljamar Plant operator has recently brought another plant online and is currently setting it up. Therefore, we expect that in the near future, we will not have issues disposing of our gas. I believe your question stemmed from concerns about what we would do with increased gas production once we start drilling horizontal wells. That gas will be sent to the same plant, but by then, we anticipate that most of the maintenance issues will be resolved. Additionally, some of that gas will go to the new plant. Thus, we do not foresee any gas sales challenges in the future. I hope this addresses your question.
It sounds like it does. Okay. This one, Dante, is for you. Congratulations on the great third quarter with regards to the first 3 wells by Virtus. We'll be drilling by mid-'26. In your agreement with them, are they required to drill at least these first 3 wells regardless of the oil price at the time?
It's their choice when to drill. The first three wells are very valuable to us because we don't have to pay anything upfront; they cover all the costs. I believe they will continue to drill as long as oil prices remain stable. I can't say for sure if $55, $50, or $45 is acceptable, but they have five years to drill 18 wells to maintain rights to our San Andreas formation, and we feel confident about that. In my view, if oil prices drop significantly below $60, drilling becomes unattractive for anyone, leading to a shutdown among drillers and producers, which causes production to decline. Consequently, oil prices are likely to rise as production decreases. This creates a self-regulating cycle: if oil prices fall, drilling slows, production decreases, and then oil prices eventually increase. As prices rise, drilling activity picks up, production increases, and prices fall again. Finding this balance is what everyone is trying to predict. The equilibrium price will likely be just above the level at which most would drill, and many are hesitant to drill at $60. Our formation appears promising, so we believe our economics are sound at that price. Many can't drill profitably without prices around $70. In summary, I think oil prices will hover between $60 and $70, with occasional fluctuations above and below that range. That's my best assessment.
We have time for a few more questions. This one is for me. Which convertible notes have been redeemed and which have not? How did you determine the order for redemption? Historically, we've discussed converting private loans and warrant obligations into convertible notes since the end of 2024. As we've mentioned every quarter, our goal is to resolve this by the end of the year, particularly regarding non-insiders, and we are nearly finished with that. All these private loans originated from individuals who supported us when we were a SPAC and had no source of income. To date, we have redeemed all but $250,000 of non-insider loans, while the remaining under $2 million is from insiders, which we are unable to redeem right now. That explains our selection process for redemption.
Yes. I want to add something to that. As a management team, we take great pride that nobody who has invested with us has lost a dime. And we view that as a sacred trust with our investors and shareholders. And for those that hold the shares, trust me, I'm one of those that paid north of $2 for these shares. And I'm not going to rest until this stock is really, Joe and I talked about it, $100 a share. Now am I going to get that done this year? Probably not. In fact, I almost bet I won't get that done this year. But I think before the end of the decade, that's my goal. I'm just going to say that.
I have about three more questions that we have time for. The next two will be for me, but the first one is related. What is the dilution risk from the current notes converting or other factors? Regarding the $250,000 in convertible notes at $0.50 a share, that translates to about 0.5 million shares. While that's not significant overall, we are mindful of it. As Dante mentioned, we have the ELOC that we've been discussing since October 2022, which we utilize very cautiously in small amounts without pushing anything. That's the dilution risk we consider. When we evaluate acquisitions, we carefully assess the appropriate balance of debt, whether through volumetric funding or equity, and ensure it’s beneficial. For example, the shares we removed from the preferred shares made sense because it eliminated $27 million in redemption value for a relatively small number of shares that could have been converted. That's our approach to managing this.
The next question is for me. What is the crude oil price value you expect to hedge for 2026? We have hedged a quarter of our production through the first quarter of 2026 at $62.50, and we are monitoring it. We might reach up to 50% or even 70%. If prices increase significantly, we could approach 70%. I keep a daily check on it, and if the price rises enough to justify locking in more than $62.50, I might consider it, but I prefer it to be much higher. We need to observe market conditions and our situation to ensure we are adequately covered. We do not have any bank covenants that require us to do this, which is our current stance on hedging.
And this will be a good one for you to finish, Dante. So this will be the last question, I believe. An acquisition by a big player, can that be considered?
I don't understand the question. Can we be acquired by a big player?
I'm guessing that's what it's saying, but are we willing to be acquired or are we looking to acquire someone else?
Yes, I can address that. If the offer were at $1 trillion, we would consider it. However, the market is quite knowledgeable and typically won't provide the true value of our assets. Very few buyers will pay the fair value of the oil in the ground; they'll usually compensate based on the oil that has been extracted recently. Given our substantial inventory of drilling and workovers, we don't expect anyone to offer us our true worth. We won't sell unless we receive a fair price. For bargain hunters, we are not for sale, but for those seeking drilling opportunities and a capable management team that can operate without excessive stock sales or debt, we could consider it at the right price. Nonetheless, we believe in prioritizing our shareholders by continuing our strategy of acquiring quality assets with significant inventory, paying just for the developed proven reserves and generating strong returns. Our outlook remains optimistic, and we feel we are in a strong position. Our management has remained stable with minimal turnover, our employees appear satisfied and safe, and collectively, this suggests we are a solid investment. I'll now hand it back to Matthew to conclude.
Thank you. And everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.