Earnings Call Transcript - EONR Q2 2025

Operator, Operator

Good day, everyone, and welcome to the EON Resources, Inc. Second Quarter 2025 Earnings Call. It is now my pleasure to turn the floor over to your host, Michael Porter. Sir, the floor is yours.

Michael J. Porter, Host

Thank you, Matt. Good afternoon, ladies and gentlemen. Before I read the hold harmless and forward-looking statement clause let me advise you that this morning, we put two slide presentations on our website. One is our normal corporate presentation that we update quarterly and the second one is the slide presentation for this call. This conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and that involves risks and uncertainties that could cause actual results to differ materially from what is expected. Words such as expect, believe, anticipate, estimate, seek, possibly, should, variation and similar words and expressions are intended to identify such forward-looking statements. But in the absence of these words, it does not mean the statement is not forward-looking. The company also files and expects to disclose in our company documents filed from time to time on EDGAR and under the Securities and Exchange Commission, sec.gov. Without further ado, I'd like to turn the meeting over to our President and CEO. Dante, you may go ahead.

Dante V. Caravaggio, CEO

Thank you, Mike. Thank you, everybody who's dialed in. We really appreciate our shareholders. I want to start by thanking all of you for buying our stock and especially for holding our stock. And to that point, I want to highlight that insiders, which is our management team here, own approximately 3 million shares, and we're looking to add to that position. We are doing so now because today is one of those days where we are allowed to buy the stock. And that means we have revealed to the shareholding public really everything material. So I'll also say that most of my comments are forward-looking. In the rearview mirror is a struggling oil company that bought smartly. We own a very nice property in the Permian in New Mexico with 1 billion barrels, and we have studied this thing and done just about everything to maintain production, getting ready to spend CapEx to double and triple the existing production from the existing wells. On top of that, we've also worked hard to identify a zone, and we published a couple of press releases on it. The San Andres that looks like it could deliver another 40 million barrels in an IP production rate, far in excess of any number any of us have set. The tape will be told once drilling commences, which we're still targeting for late first quarter of '26. So the real story isn't the earnings for the last quarter. You can all see it. It's a little bit better than the previous quarter. The real story with us is what's going to happen in the next 30 days. We've talked about a funding level of between $40 million and $50 million and I'm happy to report we are on track. These funding efforts involve first, the courtship, then the due diligence, which is a lot of engineering, then the preparation of definitive documents, then the funding. We are currently in the definitive document stage. We have passed the test of due diligence in engineering, which is where normally these things would fail if they're going to fail. I can't tell you that we're 90%, we're 99%, we're 80%, but I can tell you we feel good. Almost without exception, the insiders are serving notice they're going to buy stock. Of course, we encourage that all the time. In addition to the funder, we've got signed LOIs that we're not publishing because we decided the market just doesn't react to LOIs. We'll wait until we have the definitive documents signed, which means this thing is a certainty, but we do have signed LOIs from a driller, from a funder, and we have backups that are working through the system in case the funder falls through. We're very pleased with both the funder and the driller. Now going through the slide that you have in front of you, the first slide shows an upward trend in production. Now the upward trend is really an upward trend from a down number. We got as low as 800 barrels a day. We're touching the high 900s, and we're hoping to cross into 1,000 steadily. We're doing that by running rigs. We have three rigs running at our main field Jackson-Grayburg and one rig running at South Justis. South Justis is producing what it was when we bought it, and we're trying to increase it from nominally 120 barrels a day to 350 barrels a day. We're trying to increase Grayburg-Jackson from roughly 950 to hopefully 1,400, 1,500 by the end of the year. We have lower costs and solid income from operations, but the real cash flow is going to come as a result of this funding exercise because it's our intent and hope to retire the senior debt, to retire the seller obligations, the Seller Note and really take roughly $40 million in debt off our balance sheet. With that, you get a sonic boom of cash flow. We anticipate being cash flow positive in Q4 and we anticipate with after amortization and all that accounting rigamarole that we will be a little better than breakeven by the end of 2025. I've talked about the financing, the horizontal drilling. We're working now with the driller to prioritize leases, well locations and how we go along with this. The four wells are running. I couldn't be happier for how we're positioned right now for the future. Our slide says well positioned for '26, but we are well positioned to make money in '25 in Q4. With that, I'm going to turn it over to Mitch.

Mitchell B. Trotter, CFO

Thank you, Dante. Hello, I'm Mitch Trotter, the CFO, and thank you all for attending. So a little bit of a look back, I'll give you insight into the second quarter results. The main takeaways in Q2 are efforts to improve the balance sheet continue, revenues remain level as hedging mitigated the temporary dip in production that Dante mentioned, and cost reductions in LOE and G&A and interest continue even further than where we dropped off in Q1, which is good. On the cost reduction side, G&A cost reductions will be discussed in a later slide. The LOE, as I mentioned, dropped to $665,000 per month in Q2. This is down from last year's $718,000 per month average across 2024. Interest expense dropped another $65,000 for the quarter due to the note conversions in our efforts to clean up the balance sheet. This is a $230,000 per quarter drop from where we were Q4 of 2024. I want to go to the revenue slide, please. The production, as I noted, was a temporary dip, and Jesse will discuss all those items. They want to note that the average price of oil dropped from $70 to $61 per barrel. Well, the hedging mitigated this drop, and we collected during the quarter, $290,000 in cash. The noncash hedging pickup was $600,000, which was due to the drop in oil price, but that kept the overall revenues flat. With that, let's go to the G&A slide. Our plan has been to reduce cost across the year and future into next year as well. The larger tickets in Q2 are salaries, fees and related costs decreased in Q1 and in Q2 by $300,000 a quarter compared to what we were running in the second half of 2024. Q1 and Q2 also had lower professional fees for legal, audit, consulting services, and they're $300,000 per quarter lower than Q4 of last year. These costs are primarily for the public reporting requirements and financing efforts, costs stemming from various trailing legal matters, but we expect these costs to continue to drop as the year progresses. So let's move on to the balance sheet, please. I'm not going to spend a lot of time here, but I do want to mention that the company has made and is continuing to make improvements to the balance sheet. We'll discuss those type items primarily in the debt and equity components on the next slide. So let's go ahead and go to the debt slide. Our senior debt continues to be paid down. It was originally at $28 million, now it's around $21 million. Big thing we have completed our efforts to exchange all the former pre-acquisition, short-term private loans and warrants to now the long-term convertible notes. Warrant liability is gone from the balance sheet. The overall combined liability of those started at $9.8 million, and it has now been reduced by over $4 million and it's about $5.6 million. Now let's go to the equity slide. There's nothing really new here from what I've shown before. The preferred stock will clean up when we close. The warrants have dropped by $4 million, and that came from what we discussed on the debt slide. I will say in the equity section, I've had several questions about the S-1, and most of these are long-term possible versus issued shares. Let me just talk about what's issued. It's South Justis acquisition back in June. There were 2 million shares. And all those were based on market, were up to $1 per share. It was a good deal. The overall price of South Justis, as we've talked in the past, was a very good deal. The only other issued shares were contract fees, and that was only $100,000 and that was between, again, a market-based issuance and $1. All the rest of it, you can call it shelf-type shares. Now forgive my slang, these are not issued. They come in two groups. The convertible note, these are the same as we've been discussing on the debt slide. There's nothing new here. Whatever we put in the S-1 is really a reserve to have if needed. Some will be used, but the number over the next few months is still unknown, and the amount is unknown. The other shelf-type shares of ELOC is again, nothing new. It's been in place since October of 2022. We've discussed this on every call. Currently, not using it. Over the past year plus, we've only used a small percentage of daily volume. We mentioned that on every call. If we use it going forward, it's the same thing. It will only be a small percent. We're not envisioning using a whole lot, but again, this is essentially shelf shares and they're for need, and it just goes with the contract. Let's go on to the next slide, which is a future-looking slide, which plays basically what Dante has already covered and our press releases have kept you informed. I'll just do a quick wrap up. Dante has already noted, we're all contingent on wrapping up the definitive documents. We expect to fund between $40 million and $50 million via one or more volumetric funding instruments. They're not designed by debt or equity. The funds first go to settle the seller agreement, as Dante noted, where we pay $20.5 million in return to get the 10% ORRI back, the $15 million note plus accrued interest in the $5 million range and the preferred shares to clean up the equity section. All the funds from there will go towards paying off our senior debt with FIBT. All in all, as Dante mentioned, the monthly debt amortization of $700,000 is replaced with a much smaller ORRI type payment, volumetric payment. This is a big boost to our cash flow. With that, I want to move on to Jesse to review operations. Please advance to Jesse's slide.

Jesse J. Allen, VP of Operations

Thank you, Mitch. Good afternoon. I'm Jesse Allen, VP of Operations, and I'm going to talk a little bit about our Grayburg-Jackson field, the operations there, and also about our new acquisition, the South Justis field, which is about 100 miles south and east of our Grayburg-Jackson field. Very convenient to our operations. It's also, of course, in the Permian Basin. Let me start off with the Grayburg-Jackson operations there. I always like to start off with safety and over the past quarter and actually, since we've taken over operations there at Grayburg-Jackson, we've had no reportable incidents. Our field operating people are doing their job as far as safety is concerned. As Dante and Mitch have mentioned, we did have a temporary drop in production during that second quarter where we dropped near the 800 barrel of oil per day mark. Currently, we're averaging about 920 barrels of oil a day. You might be asking yourself, what was the drop? Of course, we are in an asset that's declining, but we'd like to do operations to keep that steady or even increase. We have an ongoing issue with a main trunk line on our water injection, one of our water injection facilities, which is key in maintaining production. We're working on those, and that's nearing completion. So hope to have that resolved here pretty quickly. During the second quarter, we initiated 13 asset stimulations. These are bigger jobs than what we did last year. The downtime associated with doing those wells affected production as we shut the wells in for basically 72 hours to let that asset in chemical soap, then we bring them back on and got to recover that fluid. There's always a drop in production as a result as we're doing those. But as we bring them back on and recover all the load in acid water, they start to produce oil. Those 13 wells have seen a steady increase of about 52 barrels of oil a day. To help with that production decline, we contracted a second well service rig there in the Grayburg-Jackson to return idle and inactive wells. Since early June, the first week in June, we've returned 27 inactive wells to production which has given us a steady increase of about 60 barrels of oil a day. If you do the simple math there, that gets you from our 800 number up to our 920 current rate. In addition, we contracted a third service well rig there in the Grayburg-Jackson to return idle injection wells or wells that have failed their mechanical integrity test, and we're repairing those. That will have an impact on production, not typically in the immediate future, but generally a month or two or three down the line as we get those wells back on injection. The most exciting news will be the kickoff of our San Andres horizontal drilling well program. As Dante has mentioned, we have an investor and a driller that we've been talking to. We anticipate first quarter, late first quarter to kick off that program. Very positive news there for Grayburg-Jackson. Let me speak a little bit about the South Justis field, which we acquired with an effective date June 1. It's about 100 miles south and east of our Grayburg-Jackson field. It's located just outside of Jal, New Mexico, not too far from the Texas State border. With that property, it was producing about 88 barrels of oil a day when we acquired it. There were three wells that were down. We contracted a well service rig, got those three back on production. In addition, there are some idle inactive wells, we put three additional idle wells, total six wells with this well service rig, and so current production is about 117 barrels of oil a day. We will continue reactivating idle wells there in the South Justis field. We have a rig running. Our intention by the end of the year is to continue to activate wells that have been down or idle. We are employing lessons we've learned at the Grayburg-Jackson field here, and that gives us a little bit of a production boost just knowing what we're doing in a field that's very similar. One reason we targeted this field is that there's significant horizontal drilling potential here in the South Justis field. That same driller has an interest in possibly doing a project very similar here. With that, I'm going to turn it back over to Dante for the final wrap-up. I thank you all for listening. Dante, are you there?

Dante V. Caravaggio, CEO

Yes, I'm here. I was on mute. So thank you for that. To summarize where I think we're at, we're really at the precipice of going from, I'll say, a very mediocre to poor company to something good. If we were talking in the middle of next year, I would say we've gone from good to great. So that's in the cards. How are we going to get there? It's key. Jesse's technical team found the horizontal drilling opportunities, quantified it, and we used that, put it on our website to recruit using brokers to find the best driller we could, and I believe we've done that. That driller also helped us with the funding. Somebody wants to invest in a field that's got a lot of potential, and we certainly have that. So where we're at, I want to finish up with a thank you to Jesse and his technical team, to Mitch and his accounting team. The bulk of our activity is with David Smith, our General Counsel and his legal team because when you get into definitive documents, it's almost all legal. We have to work with the bank, the seller, the funder, and everybody to make this thing come off smoothly. And so far, so good. We've got regular weekly coordination meetings. I'm getting asked almost at least every other day when is it going to close? Early September. We were trying hard to get it to happen by August 27, but believe it or not, college football is impacting us. We think it's going to be first or second week of September, and that's where we're at. With that, I'll turn it back over to Mike.

Michael J. Porter, Host

Matt, could you start the question-and-answer period, please.

Operator, Operator

Your first question is coming from Brian Orbit from Advanced Logistics USA.

Unidentified Analyst, Analyst

Yes. Team, Dante and the whole team, thank you for being so forthcoming with the shareholders. It's actually enjoyable to get on these conference calls, which doesn't always happen in the markets. I did have a question going forward on oil prices as we go into the winter season, where do you see this leading? Are we going to get back up into the 70s or 80s? Or are we going to hang in the 60s?

Dante V. Caravaggio, CEO

Yes. I mean, it's everybody's guess, and thank you for the question. But peace in Ukraine seems to be dampening oil prices. A lot of analysts are saying lower oil prices ahead, but being one of those people that worked in Saudi, I personally believe the Saudis aren't going to stand for an oil price much below 60. So I think where oil is, is where it's going to be, and it's fine with us. The concern that's going to come up for us is what are the economics telling us about drilling. Right now, we think we need the high 50s, low 60s for an economic limit. But I don't see it affecting our funding because these are long-term outlooks. It may delay drilling, it may slow down drilling, but it isn't going to stop the deal. That's the best I can offer. I don't know if Mitch, do you want to give a different view or Jesse?

Mitchell B. Trotter, CFO

No, I think you're dead on. I wish we knew all the answers.

Dante V. Caravaggio, CEO

Okay, back to you then.

Unidentified Analyst, Analyst

I appreciate that information. And just one quick follow-up, of the oil that you're going to produce from these new wells, hopefully in late Q1 2026. Is Chevron going to be buying all that oil as well?

Dante V. Caravaggio, CEO

They told us they would, but it's a very interesting market for oil buyers, the big guys. They all want to buy crude from a field that's increasing in production. So far, so good with Chevron. We did go to them early on once we bought the field, and we said, we plan to double, triple, quadruple production. Do you have any problem with that? They said you can increase it by tenfold, we'll take the crude. So they want it, but they're not the only ones that want it.

Operator, Operator

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

Michael J. Porter, Host

Thank you, Matt. Dante, I just received a question from a shareholder who would like you to explain the ORRI deals and what it means to the company.

Dante V. Caravaggio, CEO

Yes. An ORRI stands for Overriding Royalty Interest. It's like a royalty. Sometimes it can be a term, ORRI, meaning we get it back, or it could be a perpetual ORRI, meaning they keep it forever. An ORRI is going to be our secret weapon. We only want to talk to those on this call about it. A buyer of an ORRI or a buyer of a royalty will pay two, three, four, or five times the revenue. A bank, however, if we were to go to a bank for a loan, they might give us two times EBITDA. For a little ORRI give up, we get a lot more cash without taking oil risk or production risk on the loan. An ORRI is impossible to default on. We don't have bank covenants or any of the things that are kind of scary about a bank loan, and the money, if you know where to look, is a little more plentiful. We've taken this route to finance what we need to do to retire all debt. We will also continue in this vein to raise CapEx and to raise money for acquisitions. If we use stock as in ELOC, we started this call by saying the insiders own a lot of stock. We don't want to water down our stock by issuing a bunch of shares for $0.30. We'd much rather sell an ORRI, pick up $40 million, or $10 million or $20 million, invest it in the field, delight our shareholders, attract institutional shareholders. When the stock is $10 or $20, yes, we'll tap the gas a little bit and sell some stock with an ELOC. I hope that answered your question.

Michael J. Porter, Host

The next question is, since you started this whole discussion about horizontal drilling, does the management team have expertise in this area? What does the horizontal drilling mean as far as increased production?

Dante V. Caravaggio, CEO

Yes. Jesse, can you field it?

Jesse J. Allen, VP of Operations

Yes, indeed. The management team at EON Resources has extensive horizontal drilling experience. I myself worked almost 10 years at Chesapeake, who was one of the premier horizontal drillers in many of the different basins. I bring that experience to the table. The investor/drilling group that we want to employ are also very experienced drillers and completion experts when it comes to horizontal drilling. I have personally fracked many horizontal wells both on location and remotely via the computer. So yes, we wouldn't be a player in the horizontal drilling arena if we weren't very well versed in that technology. Secondly, horizontal drilling, if you'd like to think of it like this, when we drill a horizontal well, we drill horizontally for 5,000-plus feet or a 1-mile horizontal and pump 30 fracs on it. It's like putting 30 vertical wells. At a fraction of the cost of 40 wells, you get it in one single horizontal. The production impact instead of maybe a 40 barrels a day well, you get a 400 to 600 barrels a day well, somewhere in that range. That's the impact. The rate of return is much higher and you get a bigger bang for your buck by drilling a horizontal well versus an equal number of vertical wells. I hope that answers the question.

Dante V. Caravaggio, CEO

I was going to add one thing to that, and it's buried in all our releases. The forecast for a horizontal well is in the 400 to 500 barrel a day average zone for an average well. Some wells could do 1,000, some wells might do 300. You take those numbers and multiply it times 90. I don't know that the 90 number will hold up in the end, maybe at 70, maybe at 60, but you get a very big number coming out of this oil field if you multiply it out. None of us want to do the math for that because we don't want to jinx it. But we think Jesse has selected a premier drilling group that comes with a full team experienced in our field. I'll leave it at that. Back to you, Mike.

Michael J. Porter, Host

Okay. The next question is for Mitch. Have you started to work on a hedging program for 2026?

Mitchell B. Trotter, CFO

Yes, we have. Actually, we're in discussions and looking at the various pricing options that are presented, and we will be hedging into 2026. Some of it will come after we finish the close and any position we need. Our hedging currently is on the Grayburg-Jackson. We're also going to look at the South Justis and we will put an appropriate level. Just like last year, we'll stage it now. We had a huge benefit in 2024 with a big spike on 2 or 3 days in oil prices. We locked in much longer. Typically, you'll put it in by a quarter or half year. Yes, we're definitely looking at that. That's an important thing to have. It will be done. So go back to you, Mike.

Michael J. Porter, Host

Dante, the question is how important are the four rigs on both properties? What does it mean for the next two quarters?

Dante V. Caravaggio, CEO

All these rigs cost us about $5,000 a day each. It's absolutely critical to kick the production up. We wanted to be sure where the best place was to spend our money. At the moment, when we turn a well on at South Justis, we're getting 5, 6 barrels a day with some flush production upfront. So running a rig over there for the next 3 or 4 months makes a lot of sense. Over at Grayburg-Jackson, we want every well producing. We want every injection well injecting water. It's a question of dollars and cents. Our steady-state view would be probably to run one rig continuously at Grayburg-Jackson and do all the right things so wells stay on once we put them on. That means having the right pump, the right tubing, and the right stimulation. We did a lot of experimentation. Some of it failed, some of it worked to figure out how to frac without getting the Sahara Desert coming on you, what asset job works to give you a good payout. We now feel like we have our feet beneath us. I think in the next 2 to 3 months and possibly through the end of the year, we'll be running 4 rigs.

Michael J. Porter, Host

Okay. The next question is have you looked at doing a competitive bidding an RFP for legal consulting expenses. Is there any chance you can reduce your costs here?

Mitchell B. Trotter, CFO

I'll take that. I don't know if we'll do a formal RFP for everything, but we are looking at everything, and we're discussing all options with everybody. Yes, we definitely see that, and we've driven costs down as we've gone, and we will continue to do that.

Dante V. Caravaggio, CEO

Yes, I'm going to just add legal, accounting and insurance are our three top G&A expenses. We're trying to work with our current providers to grind them down. Some of them tell us we're the problem. We are looking at ourselves to improve what we ask for. They all fit in the category of writing blank checks. You have to be very careful about what you ask for because they'll all do it, and then you get the bill. If we can get this under a lump sum or lower bill rates, yes. That's a very sensitive topic, and yes, we're working it.

Michael J. Porter, Host

Okay. The next question is, what is the largest increase in equity related costs in the third quarter?

Mitchell B. Trotter, CFO

In the third quarter or the fourth quarter? I see a note in there, it says the fourth quarter of last year.

Michael J. Porter, Host

I'm sorry, fourth quarter.

Mitchell B. Trotter, CFO

That's okay. The only big quarter we've actually had. It really comes in two pieces. There was about $1 million that hit the G&A for equity-based costs, about one-third of that $350,000 range was in the category of clearing a lot of payables. We cleared a significant number of payables at $1 of stock, which was higher than the price was going or at the price or below. It was a good deal. Two-thirds of it was really fees relating to settlement and the biggest was clearing out the FPA, getting rid of the FPA where we had to issue a bunch of stock to do that. That was the bulk of that. There were a couple of other small settlements. Yes, that was a one-time hit to everything, the biggest. That $1 million plus $1.1 million was $138,000 or something like that in Q2. That's basically some contract fees. So yes, it's dramatically off. I think I answered that. I’m going to pass it back to you, Mike.

Michael J. Porter, Host

Could you clarify the current situation with the South Justis, which has 58 spaces at 50-acre spacing? Do you anticipate reducing that to the 20-acre spacing used in the Grayburg?

Dante V. Caravaggio, CEO

Yes. I don't know the answer to that question, but we've recently commissioned a study by a third-party engineer. I guess I can give the commercial form. They're the same outfit that does all our work, HOSCO out of Dallas. They're just at the beginning of studying this, but we bought the property based on some rough indications from them. If you infill drill in the Permian, the new wells tend to do half as good as the original wells, just as a general rule of thumb. This field with these wells was doing 6,000 barrels a day in the 60s and early 70s. If we were to infill drill, maybe we'd see 3,000 barrels a day. Again, we have no basis or engineering to support that. We're trying to study that now and we're probably 6 months away from answering that question, but the possibility exists.

Jesse J. Allen, VP of Operations

Let me add, Dante. This is Jesse Allen, that it will probably be a combination of some infill drilling vertical wells and horizontal wells in order to maximize the ultimate recovery and/or the ultimate daily oil rates. In my mind, it's going to be a combination. We'll probably do some vertical wells and then in addition, horizontal wells to fully exploit the reserve potential and daily oil production of both fields, both the Grayburg-Jackson and the South Justis. Mike, back over to you, sir.

Michael J. Porter, Host

Okay, Dante, that was the last question out of the website. Would you like to make any closing remarks?

Dante V. Caravaggio, CEO

Yes, those were all good questions. I want to repeat, thank you to all our shareholders, and thank you to the millions of share buyers this week that should be buying our stock. Thank you to all our employees that work so hard in the field, the technical team, the financial team, the legal team, and all of our contractors and vendors that support us. It feels like we're on the brink of going from mediocre to good. I look forward to talking to all of you again next quarter, the quarter after that when I can say finally, we've gone from good to great. Right now, getting cash flow positive, having capital to invest in these two fields and being able to look forward is really a good feeling. So thank you all. Back to you.

Michael J. Porter, Host

Matt, do you want to close?

Operator, Operator

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