Earnings Call Transcript - EONR Q1 2025

Operator, Operator

Good day, everyone, and welcome to the EON Resources Inc. Announces First Quarter 2025 Earnings Call on Thursday, May 22, 2025. At this time, all participants have been placed on a listen-only mode. It is now my pleasure to turn the floor over to your host, Michael Porter. Sir, the floor is yours.

Michael Porter, Host

Thank you, Matthew. Good afternoon, ladies and gentlemen, and welcome to the EON Resources first quarter earnings call. This call comes under the forward-looking statements rules of the Private Securities Litigation Reform Act of 1995, which involves risks and uncertainties that could cause results to differ materially from what is expected. Words such as expect, believe, and anticipate indicate such forward-looking statements. In the absence of these words, it does not mean that a statement is not forward-looking. Any results and changes that are material to the company's expectations are disclosed in the company's documents filed from time to time with EDGAR and with the Securities and Exchange Commission. And without further ado, I'd like to introduce Dante to you. Dante, the floor is yours.

Dante Caravaggio, CEO

Thank you, Mike. All of you, thank you for dialing in. It's a warm day in Houston here in the afternoon. I just got my air conditioner fixed, so I'm in a very nice way to be speaking with each of you. We just spoke to all of you 30 days ago for our year-end financial results. So, the focus of this call is what's happened in Q1. I'm going to do this as a good, bad, good sandwich here. So, the good, of course, is we've got this wonderful asset. We all believe in it. This management team is committed to making this thing much bigger and much more profitable than it is today. We've made a lot of progress on the things we mentioned a month ago, advancing the financing to retire all of our senior debt and our seller debt. We'll talk a little bit about that. We've made great advances to find a driller that will bring money and drill. We put this out on our website: 50 San Andres horizontal wells. I was delighted to hear that one of our potential drilling partners said, oh, no. It's not 50. It's 90. And these are big wells. We're talking about 400 plus barrels a day per well. So, those kinds of things jump way up to the top of the list of the good. On the bad side, in the last quarter, oil prices have been down. Our stock has been down. Our debt has stayed about the same. We continue to pay down our debt, but we still have high debt. We don't make money each month, but we've been reducing our costs to cut the amount of loss we have each month. That's kind of a good story out of a bad story. We are short of capital. We need to invest more money than we are in the field, but right now, our priority is just to pay our bills. A lot of our cash goes to that. So, onto the slide you have is Slide 1. We're trending in the right direction. If you compare what we did year-end last year to what we did in Q1, we lowered our cost, and we lowered our loss per quarter. I'm figuring if you cut through all the accounting rules and get to our cash loss per month, we're close to probably $400,000 right now as a run rate that we need to find, either through increased production or reduced costs. I mean, sorry, increased production or reduced costs. And that's almost twice as good as it was this time last year. A lot of these cuts were in response to lower commodity pricing, even though we're hedged. We're hedged at 70% plus, meaning we get $70 a barrel, even if today, oil prices are $55 or $60 or $62 or whatever they are. The financing to retire our big debt is worth talking about. That's occupying most of my time and a lot of our team's time. We met with Enstream in Dallas this past week. We're on track to get the financing needed to retire our senior debt. We've reported that to our bank and the timing to get that all taken care of is end of June, middle of July, and that's about the best forecast I can give for that. Part of the Enstream financing is also to give us $9.5 million to do workovers. I've previously mentioned we have 45 workovers approved. It's a mixed bag of injectors and producers. We are a waterflood producing field, which means we need producers that are completed in our waterflood zone, which right now, the Seven Rivers is our dominant zone. At the same time, we need water injectors injecting water in those same zones. So, you're going to hear Jesse when he gets on talking about that. In parallel with that, we accelerated our search for a drilling partner and we've got one LOI in hand, and we expect additional ones to come in. The format of these things is a little bit of a leasehold payment, a sharing of production, and a sharing of drilling costs. We're looking for an experienced driller familiar with the formation in our area. I'm delighted to report we have keen interest in that regard. This is where we're going to make the big move to the upside. I already mentioned that New Mexico's state OCD has approved 45 workovers for us. That's a milestone. It gives us a big backlog of work to do once the funding is in place. I'm also delighted to report that our asset stimulations, a new formulation cooked up by Jesse Allen, our VP of Ops, have doubled and tripled production. We've done this before where we executed simple asset stimulations, which doubled and tripled production, but it was short-lived. We had to go back to the drawing board to find a better formulation that would hold up. In conclusion, I believe all this hard work that hasn't put money in the bank for us yet has positioned us for launch. As we continue to do these workovers and refine our formulas for sand fracs, acid jobs, and drilling, I believe we're in terrific position to take off in Q3 and Q4 of this year. With that, for the details, I'm going to turn it over first to Mitch Trotter.

Mitch Trotter, CFO

Thanks, Dante. Hello, I'm Mitch Trotter, the CFO. Welcome to the newcomers and those we've talked to before. We appreciate you joining us today. In this call, I'll provide some insights on the Q1 results. The key takeaways from Q1 are two things: cost reductions are beginning to appear, and efforts to improve the balance sheet are ongoing. Regarding cost reductions, we will discuss G&A cost reductions later. Lease operating expenses have decreased to $683,000 per month in Q1, down from last year's average of $700 to $750 per month. Another area of reduction is interest expense, which has declined by $165,000 for the quarter due to note conversions as part of our balance sheet cleanup efforts. There's something else I'd like to mention. The income statement appears quite varied, as Dante noted. This is because of noncash items that don't accurately reflect the operational aspects of the business. In previous calls, we have examined the various factors affecting these items. They are properly recorded, but when you exclude them, you gain a clearer picture of the actual business. There are two key operational metrics that may be difficult to see, but I want to highlight them. The first is income from operations, which I've mentioned before. This is simply cash-driven revenues minus field-related expenses before G&A and other costs. From the beginning, we have consistently maintained income from operations in the $1.8 million range per quarter. That's positive news, and it's still holding, possibly with a slight increase. The second metric, which is new in this call, is what I'm calling ongoing business income or loss. This is the income from operations minus G&A, excluding all noncash equity-based costs, and also minus interest expense. After removing all other noncash items, Q1 showed a loss of $1.2 million after accounting for interest expenses. Last year, the loss was about $1.5 million on average per quarter. This reflects a $300,000 improvement driven by cost reductions, and you will hear more about that regarding G&A. On the revenue side, production remained stable again this quarter. There was an increase in oil revenue due to market price fluctuations. The good news is that 70% of our oil production is hedged at $70 a barrel, which helps mitigate market volatility, and we have these hedge positions secured through the end of 2025. Additionally, gas revenues increased by $50,000 for the quarter because of higher gas prices. We have a plan in place to reduce G&A costs throughout the year, with some reductions already initiated in Q1. First, salaries and fees decreased by $225,000 in Q1 compared to last year, which translates to an estimated annual run rate savings of about $1 million. Professional fees for legal, audit, and consulting have slightly decreased from last year's average per quarter, and we expect these to drop significantly after Q2. Insurance costs have also declined by $75,000 per quarter due to favorable renewal rates we've negotiated. We're aiming to distribute G&A costs across various growth opportunities this year. With that, I’ll pass it on to Jesse to review operations. Thank you.

Jesse Allen, VP of Operations

Yes. Thank you, Mitch. I am Jesse Allen, the VP of Operations. Today, I will briefly discuss some of the highlights of 2024 and what we're doing currently in Q1 of 2025 to increase our production. First, though, I want to start with safety. For 2024 and into our first quarter 2025, we've had no reportable incidents. Our field operating personnel are doing an excellent job with their daily work routine, noting any possible near misses, and so on. We took over the operations of the Grayburg-Jackson field, and at the beginning of 2024, daily production was in free fall. We were able to stabilize that production with a well service workover rig and maintained production in the 925 to 950-barrel oil per day range. We continue those efforts, of course, and then to stabilize that production, we did several upgrades throughout the field: flow line repairs, electrical repairs, and purchased some key equipment that helped us reduce lease operating expenses. Currently, we're at $683,000 per month for our lease operating expense. In our ongoing efforts to increase production, we've initiated several programs. We've done sand frac treatments using low-temperature resin-coated sand, which helps keep the sand in place. The first couple of wells we've treated resulted in increased production. In addition, we've initiated an acid treatment program with a new formulation that sustains production. We’ve got keen interest in our horizontal drilling program in the San Andres, which Dante mentioned we originally noted 50 locations. However, one of our partners believes there may be 90 locations due to additional intervals within the San Andres available for exploitation. With that, I'll turn it back over to you, Dante, for the wrap-up.

Dante Caravaggio, CEO

I'm here. I apologize for the delay. I'm giving our walkaway points or takeaway points from this quarter. We're positioned for big-time debt reduction. This includes the RBL that is standing close to $20 million and also includes a seller's note that stands close to $18 million or $19 million. We're going to retire both those in the next quarter, along with the preferred shares that are also standing in our capital stack. All three of those are going to go away. We're going to have workover activities next quarter because we already have a solid backlog of approved workovers. This will increase our water injection and oil production. In the last quarter of this year, we're preparing to drill up to 3 to 6 wells. We're also looking into low-cost acquisitions due to the current low oil prices, which frankly, have increased our interest. Although our stock is quite low, we can pursue some very low-cost acquisitions that will benefit our stock and we're currently looking at two. As for the stock price, I believe it can't go any lower than $0.37. I'm feeling optimistic about our future. With that, I'm going to turn it back over to Mike Porter for our Q&A.

Michael Porter, Host

Matt, would you give them any instructions, please?

Operator, Operator

That concludes our dial-in Q&A. I will now turn the call over to Michael Porter for remaining questions.

Michael Porter, Host

Thank you, Matt. Guys, the first question that came over the Internet is can you give us some color on your gas operations and what you think the future in gas will be for the company?

Dante Caravaggio, CEO

Yes. Let me field that one, guys, if I could. First off, gas prices have behaved much better than oil prices, and our gas revenue is up. We're looking at gas opportunities in the U.S. and also in unconventional gas. We like the specialty gas where the price is much higher than what we see with Permian gas. For example, helium costs closer to $400 to $500 per Mcf. If we can acquire a property or a plant that generates helium revenue, we'll be tapping into deep value for our company. Currently, we produce about 900 Mcf per day, and we are investigating opportunities to monetize this gas through ventures like Bitcoin mining. At the moment, we're enjoying a bit more income due to the rising prices of gas, unlike oil and gas, which are experiencing downward pressure. I'll field that one, too. When we first bought this property, we wanted to ensure a good relationship with Durango and Chevron, who are really our clients. They buy the gas, and I’d like to say our relationship is excellent. Chevron has indicated that if we quadruple our oil production, they'll take it all. Currently, we're curtailing around 20% of our gas production in a rolling curtailment because the midstream providers need to catch up with producers. They have a big gas plant set to come online, hopefully by the end of July, but the date has been pushed back, so we are keeping a close eye on that. It looks like the entire deal will likely close all at once. The latest I have is we are trying to hold a June 23rd date. However, it involves the bank, the seller, and a very large investor that backs Enstream. So, I think it would be safe to estimate completion by the end of July. We're pushing hard to get it done in June, but it's a complicated transaction.

Mitch Trotter, CFO

Sure. The hedging program we have consists of swaps where we constituted a range of just over $70. We have 15,000 barrels per month hedged, which represents 70% of our production. So, regardless of the market price, if it's anything like $60, we'll collect our hedge price at the end of the month. We could potentially give some back if it’s above the hedge price but the remaining 30% sees market fluctuations. We aim to mitigate our risk by locking in hedge prices.

Dante Caravaggio, CEO

There's a lot of opinions on that. For us, in the New York strip oil pricing, I believe the Permian has peaked. The rig count is falling. We have exceptionally good Permian rock. I feel confident we won't be phased, even with low prices, but we may need to adjust our focus if prices drop significantly again. My belief is that we will oscillate between $60 and $80, and if we drop below $60, I don't think it will last long. The world can't produce an infinite amount of oil. So for now, we will focus on maintaining production efficiency and managing costs.

Jesse Allen, VP of Operations

Yes, I assume they're talking about a drilling rig. As an operating company, we typically don't want the risk of owning a drilling rig. However, it's a good market to secure a drilling rig at a fair rate. I don't anticipate purchasing our own drilling rig, but there could be potential for us to acquire a workover rig or two.

Dante Caravaggio, CEO

Yes, we are looking at several areas to further lower costs. We have significantly lowered labor and fees and expect to achieve a full $1 million reduction this year over the last. We continue to drive down costs, and we're fairly efficient as is. If we can manage to leverage accounts across potential growth opportunities, we could maintain lower expenses moving forward.

Michael Porter, Host

Thank you. If anybody else has any questions, please feel free to give me a call, and I'll arrange for one of the management people to call you. Dante, that's the end of the questions. I'm turning the meeting back over to you.

Dante Caravaggio, CEO

Yes, I'm going to repeat the takeaways, guys. We've themed this discussion to express that we're ready for launch, laying the foundation to take this company to another level. We're talking about achieving what the analysts have stated should be a $4 or $5 stock. To achieve this, we must get our balance sheet in order by retiring debt and preferred shares. Next, we need to increase our production significantly. We will do this through workovers in the near term and drilling in the long term. We will continue to engage in smart hedging and cost control measures. We think by Q3 and Q4, our shareholders will have much to celebrate. We appreciate everyone for sticking with us during this challenging period. It is painful for us in management to witness this stock down at this level, but we are working diligently behind the scenes to position for growth. Thank you all for dialing in. We look forward to talking to you again soon, and we are very accessible for any inquiries.

Michael Porter, Host

Matt, you can finish off the meeting.

Operator, Operator

Certainly. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.