US Energy Corp

NASDAQ:USEG

Earnings Call Analysis

U.S. Energy Corp Eyes Growth in Helium Production

In its most recent earnings call, U.S. Energy Corp detailed progress on its Montana helium project, recording successful well completions and a reduced drilling cost, expected to decrease from $1.8 million to about $1.1 million per well. The company anticipates substantial ongoing development, with a full processing plant operational by October 2025. Projections for helium pricing range from $400 to $600 per unit, with an emphasis on securing direct end-user contracts to maximize returns. The firm aims for $5-6 million in annual EBITDA from the plant, positioning Montana as a strategic industrial gas platform while considering divesting legacy oil and gas assets.

A Transformative Quarter with Helium Potential

U.S. Energy Corp. marked the third quarter of 2024 with strategic progress, particularly in its helium project in Montana. The completion of the first industrial gas well is a pivotal step, setting the foundation for what the company anticipates as a transformative year in 2025. Helium concentrations tested up to 1.5% are promising, and a second well is scheduled for early 2025. Initially projected drilling costs of $1.8 million for the first well are expected to decrease significantly by up to 30% in future wells, showing enhanced operational efficiency.

Mixed Financial Results: Sales Decline but Cost Management Improves

Financially, U.S. Energy reported total oil and gas sales of approximately $5 million, a decline from $8.7 million in Q3 2023, primarily due to a 30% drop in production volumes. However, the increase in realized prices by 18% partially offset this decrease. The company managed to reduce cash G&A expenses by 27% year-over-year, contributing to a narrower net loss of $2.2 million compared to $8.8 million in the previous year, indicating better financial health despite revenue challenges.

Strong Balance Sheet and Strategic Share Repurchases

U.S. Energy's balance sheet remains robust, concluding the quarter with no debt on its $20 million credit facility, alongside a cash position of $1.2 million. The company is actively engaging in a share repurchase program, having bought back approximately 886,000 shares at an average price of $1.17 each, representing about 3% of outstanding shares. This strategy demonstrates confidence in the company's value and aims to enhance shareholder returns.

Guidance for the Future: Helium Revenue and Strategic Growth

Looking ahead, U.S. Energy anticipates that the full-cycle helium production could generate an EBITDA in the range of $5 to $6 million annually starting next year, marking a significant growth avenue. The company is also prioritizing the development of its helium processing plant to begin production by Q4 2025, with opportunities to optimize cash flow and capitalize on favorable market conditions in the helium sector, where prices are currently expected to range between $450 and $600 per unit.

M&A Strategy: Streamlining Operations for Growth

Management's strategic direction includes a focused M&A activity aimed at expanding the company’s industrial gas platform. The recent divestiture of South Texas properties for $6.5 million, while reducing overall production capability, aligns with this strategy, allowing for reinvestment into core growth projects. Future acquisitions will primarily target industrial gas assets rather than upstream E&P, indicating a definitive pivot towards refining the company’s operational focus.

Conclusion: A Bright Outlook Amidst Challenges

Despite current challenges marked by reduced revenues, U.S. Energy Corp. is strategically positioning itself for future growth driven by the helium market and improved balance sheet management. The focus on operational efficiency, strategic share repurchases, and a robust M&A pipeline, mixed with increasing helium production potential, suggests an encouraging trajectory for the upcoming period. Investors can expect U.S. Energy to maintain disciplined financial management while exploring new avenues for value creation.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and welcome to the U.S. Energy Corporation Third Quarter 2024 Results Conference Call. [Operator Instructions] Please note, today's event is being recorded.

I would now like to turn the conference over to Mason McGuire, Vice President of Finance. Please go ahead.

[Mason McGuire, executive]

Thank you, operator, and good morning, everyone. Welcome to U.S. Energy Corp.'s Third Quarter 2024 Results Conference Call. Ryan Smith, our Chief Executive Officer, will provide an overview of our operating results and discuss the company's strategic outlook; and our Chief Financial Officer, Mark Zajac will give a more detailed review of our financial results.

After the market closed yesterday, U.S. Energy issued a press release summarizing operating and financial results for the quarter ended September 30, 2020. The press release, together with accompanying presentation materials are available in our Investor Relations section of our website at www.usnrg.com.

Today's discussion may contain forward-looking statements about the future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to the various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, please note that non-GAAP financial measures may be disclosed during this call. A full reconciliation of GAAP to non-GAAP measurements are available in our latest quarterly earnings release and conference call presentation.

With that, I would like to turn the conference call over to Ryan Smith.

[Ryan Smith, executive]

Good morning, everyone, and thank you for joining us today. I'm pleased to share with you our results from this quarter as well as provide an update on our strategic outlook.

Turning to our quarterly results. These reflect the dedication and resilience of our operational team as well as the positive momentum from our recent business development efforts. Focusing on our recently acquired Montana project, we made significant progress this quarter with the completion of our first industrial gas well in late October. We're currently evaluating the results and finalizing plans to target what we believe are economically promising production zones, which have been independently tested to show nonhydrocarbon helium concentrations of up to 1.5%.

Looking ahead, we plan to commence drilling a second well in early 2025 with additional developments throughout the year aimed at similar zones where we anticipate similar helium concentrations. Importantly, our initial well came in below our projected drilling costs, and we expect these costs to decrease as we move forward with our drilling program next year. We remain highly enthusiastic about this opportunity, confident that the Montana project not only stands as a substantial value driver for U.S. Energy on its own but also serves as a foundational step towards building a robust industrial gas platform. This initiative represents an efficient and economically compelling use of our existing capital while positioning U.S. Energy with heightened relevance in the capital markets.

Based on the data gathered so far, we continue to anticipate that these wells will drive highly economic development of our asset base both in the field and at the infrastructure level, supported by a realistic and achievable capital spending plan that can be funded from U.S. Energy's existing balance sheet. This is advantageous for several clear reasons with positive impacts expected to flow directly into our realized economics.

Looking ahead, our 2025 wells will not only further define the productive parameters of the asset base but will also enable us to confidently forecast our planned development and strategically execute on our production time line. Lastly, I want to highlight an essential aspect of our recent transaction and the strategic background of our Kevin Dome assets in Montana. It's important to note that the vast majority of helium production in the United States is hydrocarbon-based largely as a byproduct of natural gas extraction. In contrast, the helium and industrial gas streams from U.S. Energy's new assets are nonhydrocarbon-based positioning this project as one of the lowest environmental footprint initiatives of its kind in the country. We are extremely encouraged by the initial results from our first well, and we'll continue to provide regular updates on our drilling and completion progress as we advance.

Turning to our legacy oil and gas assets. We completed the sale of our South Texas properties at the end of July for a purchase price of approximately $6.5 million. Adjusting for this divestiture, which included roughly 100 barrels of oil equivalent per day, our third quarter net daily production reached 1,149 barrels of oil equivalent per day, a sequential improvement over both the first and second quarters of 2024. This progress underscores the dedication and effectiveness of our operations team who successfully managed to remediate the effects of significant flooding across East Texas and the Gulf Coast earlier in the year.

For the third quarter, oil accounted for 58% of our total production, with the remainder consisting of a balanced mix of natural gas and NGLs.

As we close out 2024, the majority of our capital will be allocated efficiently towards completing our recently drilled industrial gas well, supporting the production profile of our legacy asset base advancing the company's share repurchase plan and maintaining strong balance sheet integrity. Additionally, we remain poised to capitalize on organically generated M&A opportunities that align with our industrial gas growth strategy. As we head into 2025, we will continue to strategically monetize our legacy assets while deploying that capital into our Montana project and maintaining disciplined balance sheet management. We believe the execution of these efforts will make 2025 a truly transformative year for U.S. Energy.

While any development project, of course, requires development capital, we are in an exceptionally strong position compared to our peers with significant access to internally generated nondilutive capital derived from both operational cash flow and asset sales. We firmly believe that U.S. Energy stands apart from other energy companies of similar scale in today's evolving energy landscape. With a highly economic and scalable development project alongside legacy E&P assets that require minimal capital to maintain steady production we're generating and deploying predictable cash flow that allows us to strategically allocate capital for maximum returns. Our approach positions us to withstand market fluctuations and seize emerging opportunities ensuring that we are well prepared to navigate the complex and ever-evolving dynamics of the energy industry. At U.S. Energy, our focus remains steadfast on operational efficiency, balance sheet discipline and responsible resource management, underscoring our commitment to sustainable value creation.

As we look ahead, we are dedicated to capitalizing on favorable market conditions and leveraging our core strengths to drive continued growth and deliver meaningful returns to our shareholders. In the third quarter, we intensified our previously announced share repurchase program. To date, the company has repurchased approximately 886,000 shares at an average price of $1.17 per share, representing 3% of our outstanding shares. This share repurchase activity alongside meaningful and consistent insider buying by executive management underscores our conviction that repurchasing our stock at current valuations is both prudent and one of the highest return opportunities available for our free cash flow.

We plan to continue this activity as we move forward. A strong balance sheet is always a top priority for U.S. Energy, and I'm pleased to report we ended the quarter with 0 debt outstanding on our credit facility. Importantly, despite recent asset sales, our borrowing capacity remains unchanged, a testament to the solid value foundation of our company's platform and underlying asset base.

In closing, U.S. Energy is uniquely positioned at the forefront of a true first-mover advantage as a growth-oriented non-hydrocarbon industrial gas-focused public company in the United States. The majority of competitors in this space are constrained by complex equity structures, stressed balance sheets, limited capital access and exchange listings that deter institutional investors. U.S. Energy is free from these hurdles, and we are confident that as our distinctive position gains recognition in the marketplace, further actionable, scalable and highly accretive growth opportunities will emerge.

Now I would like to introduce Mark Zajac, our Chief Financial Officer, who will provide a detailed update on the financial results of the third quarter.

[Mark Zajac, executive]

Thank you, Ryan. Hello, everyone. Let's delve into the financial details for the third quarter of 2024. Total oil and gas sales for the quarter amounted to approximately $5 million, reflecting a decrease from $8.7 million in the same period last year. This decline was attributed to a 30% reduction in volumes partially offset by 18% increase in realized prices. It's important to recall that prior quarter's production was impacted by severe weather events in several of our key operating areas. This quarter's production demonstrates our ability to bring weather-related production issues back online, offset by our South Texas divestiture, which closed early in the third quarter.

Sales from oil production contributed 88% of our total revenue for the quarter demonstrating our continuing focus on optimizing our oil assets. Our lease operating expense for the third quarter was approximately $3 million, consistent with prior quarter, equivalent to $28.95 per BOE versus $27.69 per BOE in the second quarter. The increase in the LOE per BOE quarter-to-quarter is due to repair costs associated with prior weather events and reduction in daily production volumes from divestitures. Severance and ad valorem taxes for the third quarter of 2024 totaled approximately $0.3 million, reflecting a decline from $0.6 million in the same period last year. As a percentage of total oil and gas sale revenue, these taxes accounted for approximately 6% during the quarter.

Cash, general and administrative expenses was $1.6 million for the third quarter of 2024 and a reduction of 27% when compared to the same period of 2023. Year-to-date, cash general and administrative expenses have decreased $1.8 million when compared to the same period from a year ago. This decrease reflects lower compensation and a variety of overhead costs as we divest properties and focus on our helium project.

Turning to our net financial performance. The company reported a net loss of $2.2 million in the third quarter of 2024, an improvement of $6.6 million when compared to the third quarter of 2023 due to a significant reduction in operating costs, partially offset by reduced revenue. Our adjusted EBITDA stood at $1.1 million in the third quarter of 2024 compared to $1.7 million in the same period last year, influenced most notably by a reduction in total cash, general and administrative expense and receipt of hedge proceeds from the prior period.

Let's briefly touch on our balance sheet. As of September 30, 2024, there was no debt outstanding on our $20 million credit facility, and our cash position stood at $1.2 million. In conclusion, we are pleased with our operating performance and financial results that are able to support the company's initiatives in a way that demonstrate our balance sheet discipline and maintains a full balance sheet integrity. My objective is to ensure that the company's reporting process maintains a high standard of excellence, and we feel confident in our ability to support any growth initiatives we may entertain going forward.

Thank you for your participation this morning. We are now ready to take your questions.

[Operator]

[Operator Instructions] Today's first question comes from Jesse Sobelson with D. Boral Capital.

[Jesse Sobelson, analyst]

Good to hear the great progress on the balance sheet. I'm just curious, can you remind investors of what is anticipated that you'll be able to bring these helium assets online and what needs to happen between now and then?

[Ryan Smith, executive]

Yes. Good question. So as you know, the ultimate goal is to get a processing plant in place to process the streams and then you'll ultimately start selling helium, et cetera. So walking through a time line, we think at this point, that's somewhere between 3 and 5 wells drilled, some light gathering lines laid for the gas streams ultimately feeding to a plant, there's a pretty wide range of expectations on how long it's going to take the plant to get built. It's looking like it will probably be sooner than what we originally thought.

So right now, we're still sticking to that very early fourth quarter of next year to have full cycle production to sales. I do think there's a little a significant chance that, that time line can get moved up based on the plant being delivered and commissioned sooner. But right now, we're looking at kind of an over-under on October 1 of next year.

[Jesse Sobelson, analyst]

Awesome. It sounds like things are going pretty well there. I think just another additional follow-up question here on the M&A side of things. In your prepared comments, you did mention a continued focus on M&A with what appears to be the open consideration of both acquiring new assets and selling legacy ones. Is the angle here to be a pure-play industrial gas company? Or are you guys still expecting to hold on to specific oil and gas assets over the longer term? And that's it for me.

[Ryan Smith, executive]

Yes. So the goal for it is to ultimately create and run this industrial gas platform kind of full stop. On the legacy E&P asset side, no secret, small mid-cap E&Ps trade at pretty ugly valuations. The M&A market, at least the public M&A market on bigger deals is very tough to get done with equity valuations and the public-private disconnect. That being said, what I'll call the smaller -- I mean, and I'll define smaller sub-20 type of million dollar range on these assets, whether it's funded by small private family offices, et cetera, is still very active. I view if we can pull forward value on assets on, again, give or take, a future 4-year cash flow type of number and redeploy that into industrial gas assets in the near term Montana, it's a very good trade-off for us. So I think that you continue to see us -- you will continue to see us kind of pick off our noncore E&P advantageously to sellers. I expect that to continue ultimately leaving us with our industrial gas project in Montana and our E&P assets in Montana.

We like those now because it's all oil. It's close by to where all of our operations are -- it has strong margins, it covers overhead, et cetera. Eventually, I think all of the E&P assets go, just to streamline the message and the platform that we have. In terms of the acquisition side, I probably should have been more specific. I don't think you see us acquire E&P assets going forward anymore. That's just not what we're looking at, the type of assets that you acquire at this level usually aren't what I'll call, fitting the public company model more smaller-scale stuff where I do think you see us make strides on the M&A front is expanding the industrial gas platform, whether it be on the producer side or on the infrastructure side because they kind of go hand in hand. So we're definitely active in looking at further like-kind acquisitions to the ones that we made this summer and then just repeating myself a little bit opportunistically divesting our legacy E&P.

[Operator]

And our next question comes from John Davenport of Johnson Rice.

[John Davenport, analyst]

I was curious if you would be able to give us either a time line on when some additional data points on helium concentrations might be available or at the time line on a helium reserve report might be?

[Ryan Smith, executive]

Yes, John. So in terms of data points, we kind of gave our first 1 here a couple of weeks back. Right now, we're setting up operations up in Montana to complete this well will flow back from the targets that we have analyzed and deemed the most economic. Ultimately, we're going with this first phase that we think is going to be able to feed a plant as soon as possible. So I think the next data point, we always put out a pretty big ops update at the very first part of the year, just post Christmas time. I think that's going to be when we do it again. I kind of against multiple incremental data points every couple of weeks, just whenever you can get something more fulsome out there. So I think that sometimes whether it's early December or early January, we have more public data release from the completion of this well that goes everything from helium content to further data on the respective zones to flow rate, et cetera.

And then on the reserve report side, they kind of run hand in hand just as we get more data Ryder Scott is our third-party group that is doing the reserves for this asset. I think they probably come in around the same time, whether it's very early, very mid-January on the reserve side. But we're working with them on a daily basis now, and I expect that to be forthcoming in relatively short order.

[Operator]

And our next question comes from [ Tom Kurtz from Investment Research ].

[Unknown Analyst]

Can you follow up on the helium full cycle, like you mentioned, everything goes to plan, you have 3 or 5 wells, processing plant finished in October. Looking for the next 12 months and without giving guidance, can you tell us what that may mean for revenues or EBITDA just from the helium program.

[Ryan Smith, executive]

Yes. So I think on that time line, we have a fairly good feel for where that is going to shake out at we're still working on an offtake agreement. I personally want to see where we get to on that, right, before we get it.

[Unknown Analyst]

Okay. So you don't want to -- okay.

[Ryan Smith, executive]

I think -- yes, I mean I think a full cycle plan for this first one, and I'm stalling a little bit on you just because there's ranges of the plant size that we haven't determined yet. And that's based on flow rates, that's based on helium content, that's based on the zones we go after. And all that requires the capital allocation to get that, right? I think a fair number to use, and this isn't a formal guidance number, but we kind of see this first plant, assuming it's a nitrogen-based plant, coming in at the $5 million, $6 million give or take EBITDA type of number range. And again, once we tightened that number down, we'll give a formal guidance and time line on that. But right now, I think that's a fairly accurate and conservative number to give on an annual run rate that begins next year.

[Unknown Analyst]

Got it. And on the well cost, you said it keeps going down. Is that still about $1 million per helium well drilled?

[Ryan Smith, executive]

That's probably about right. This first one, we had an AFE for, I think it was right around $1.8 million. Undoubtedly, this first well we knew going in was going to be the most expensive well, just setting up operations up there, getting our first well drilled, the internal mandate was to literally Cadillac this process to make sure that there wasn't a corner cut saving dollars just to make sure that we got a very good lay of the land, drilled the 3 zones and drilled -- I think it was a 22-day drill.

Going forward, once we start going after singular zones, probably upgrading our rig a little bit now that we know we need one with a little more power we see that number coming down significantly, 1, 1.1. There's always a little swag in that number, but I think it's going to come down 30-plus percent from the realized cost on this first one.

[Unknown Analyst]

Got it. And can you kind of give us a primer on helium pricing? I know a lot of it is contract based, but where does that look now? Can you look into 2025 and see how that looks? What's sort of outlook for that or how you guys look at the helium pricing?

[Ryan Smith, executive]

Yes. No, great question, right? So the numbers we have modeled and kind of the number that I gave you is based on what we see on the low end, which and I apologize, I don't know the exact number, but call it in the $400 to $450 range. Spot helium isn't necessarily the best way to look at it because so much of this is based on offtake agreements. Historically, the producer has contracted with a broker and the broker has middle manned a deal with the larger end user. You've seen a couple of groups, I'll say, kind of get smart on that process and cut out the broker because there's only so many end users here, which significantly improves the price that you're realizing because you're not paying the middleman.

So $450 to $600 type of number is what we see in the market. We model to the low end of that, we forecast into the low end of that. I think there's significant upside to that number, at least varying towards the high end of the range going directly to an end user, which is what we're going to try to do. But that's kind of the range we're seeing now. There is some -- depending on who you ask, there's forecast out there that have it going higher, have it going a little bit lower. But we're comfortable in that range, especially keeping our forecasting number in that low to mid-$400 type.

[Unknown Analyst]

It sounds good. One more for me, quick one. The oil and gas PV10, has that changed much from the July numbers? Or will it be in the 10-Q, a new number?

[Ryan Smith, executive]

It will be in the materials. I don't think we filed our actual reserve number in the SEC filing. It's around $35 million now, give or take a little bit with where pricing is post -- I'm sorry, that's a wrong number. It's right around $51 million. I just got corrected.

[Unknown Analyst]

Okay. I was going to say that's a big drop.

[Ryan Smith, executive]

Yes.

[Operator]

Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks.

[Ryan Smith, executive]

This is Ryan Smith. We thank you for joining us. We're excited about what we're doing here. We think we have a very big year coming in 2025 with the project and the new projects we have on deck and that we're working on and we look forward to updating the market on our results and speaking on our next call. Thank you.

[Operator]

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.