US Energy Corp

NASDAQ:USEG

Earnings Call Analysis

U.S. Energy Corp. Scores in Production and Cost Control

U.S. Energy Corp. reported a productive year-end with annual net daily production over 1,700 barrels of oil equivalent per day, surpassing 2022 levels despite Q4 asset divestitures. Cost control was a highlight with a lease operating expense of $3.1 million or $22.38 per BOE, a significant decrease from Q4 2022. The divestitures, totaling approximately $7.3 million, predominantly involved non-operated properties and were directed towards debt reduction, yielding an appealing leverage profile. Going into 2024, capital will focus on sustaining production, reducing debt, and share repurchases. The CFO noted Q4 oil and gas sales at around $7.3 million, a decline due to reduced volumes and prices, and a net loss of $19.8 million majorly due to an impairment expense. The adjusted EBITDA was $1.4 million. With $5 million in debt and $3.4 million in cash, the company plans to use free cash flow for further debt reduction.

Introduction to Fourth Quarter Performance

U.S. Energy Corporation's fourth quarter conference call provided investors an opportunity to glean insights into the company's recent performance and strategic decisions. Mason McGuire, the Director of Corporate Development, introduced the call, giving the floor to CEO Ryan Smith and CFO Mark Zajac, who delved into operational results, financial health, and future company direction.

Operational Achievements and Asset Optimization

Ryan Smith highlighted the company's annual net daily production exceeding 1,700 barrels of oil equivalent per day, an uptick from the previous year even after accounting for recent asset divestitures. Oil production stood at a dominant 63% of total production. Smith underscored significant leaps in cost management, particularly in lease operating expenses which reduced to $3.1 million or $22.38 per BOE. These improvements were made despite high interest rates and heightened service costs, signaling effective operational efficiency and strategic cost containment.

Asset Divestiture and Debt Reduction

The fourth quarter saw the company close on $7.3 million in asset divestitures, primarily from nonoperated properties, which formed about 11% of company production. Proceeds directly facilitated debt reduction, enhancing the company's leverage profile significantly. The strategic disposal of these assets came in response to rising borrowing rates and a perception of undervalued USEG equity compared to the assets' worth. This move reflects a firm commitment to balance sheet strength and strategic financial management.

Capital Allocation and Growth Initiatives

As for future capital use, Smith stated priorities include upholding production levels, further reducing debt, supporting the share repurchase plan, and seizing growth opportunities. Emphasis is placed on investing in the company's existing oil-weighted portfolio, considered more economically viable than small-scale mergers and acquisitions. The narrative outlined was one of careful, measured, and strategic capital deployment aimed at realizing value from existing assets and maintaining robust returns on investment.

Share Repurchase Program and Market Positioning

U.S. Energy pursued its $5 million share repurchase program during the fourth quarter, following the close of nonoperated divestitures. The program led to nearly 0.5 million shares being repurchased, about 2% of outstanding shares, underscoring the company's belief in its own undervalued stock and the potential for high returns on these reinvestments. Smith portrayed U.S. Energy as distinctive among similar-sized oil and gas companies, ready to endure market volatilities and leverage conditions for continued growth and shareholder returns.

Financials at a Glance

Total oil and gas sales declined to approximately $7.3 million from $10.4 million year-over-year. The company did manage to shrink severance and ad valorem taxes from $0.7 million to $0.5 million, while cash, general, and administrative expenses settled at $2.2 million for the quarter. U.S. Energy recorded a net loss of $19.8 million, largely due to a one-time oil and gas impairment expense of $20.2 million. Adjusted EBITDA for the quarter was tallied at $1.4 million, a dip from $2.7 million in the previous year.

Debt and Liquidity Status

The company's year-end debt stood at a contained $5 million on a $20 million revolving credit facility. This underscores a stable liquidity position and a conservative debt profile, aligning with the strategic focus on strengthening the balance sheet and supporting growth initiatives.

Earnings Call Transcript 2023-Q4

[Operator]

Greetings. Welcome to U.S. Energy Corporation Fourth Quarter and Full Year 2023 Results Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Mason McGuire, Director of Corporate Development. Thank you. You may begin.

[Mason McGuire, executive]

Thank you, operator, and good morning, everyone. Welcome to U.S. Energy Corp.'s Fourth Quarter and Year-End 2023 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 year ended December 31, 2023. This press release, together with the accompanying presentation materials are available in the Investor Relations section of our website at www.usnrg.com. Today's discussion may contain forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to 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 measures are available in our latest quarterly earnings release and con-call materials. With that, I will turn the call over to Ryan Smith.

[Ryan Smith, executive]

Thank you, Mason, and good morning, everyone, and thank you for joining us today. I'm pleased to share with you some of the strong highlights from this year and quarter as well as provide an update on our strategic outlook. Our year-end results reflect the dedication and consistency of our entire team. We achieved annual net daily production of greater than 1,700 barrels of oil equivalent per day, which takes into effect our fourth quarter asset divestitures, which I will discuss later, marking an increase from the comparable period of 2022. Oil production accounted for 63% of our total production, with the remainder consisting of approximately even split of natural gas and NGLs.

I'm particularly proud to highlight our substantial achievements in cost management. Our lease operating expense came in at $3.1 million or $22.38 per BOE representing a significant reduction compared to both the prior quarter as well as the fourth quarter of 2022. This impressive reduction underscores our commitment to operational efficiency and was achieved against the continued backdrop of high interest rates, which flows through to everything, including elevated service costs. That being said, I should mention that while some costs have remained elevated compared to historical levels, we have begun to see cost reduction on certain materials that we often use across our operations.

Of significant note, during the fourth quarter, the company closed on approximately $7.3 million of asset divestitures. The assets represented the majority of our nonoperated properties and represented roughly 11% of company production. All proceeds from the divestitures went to debt reduction, putting us at our current attractive leverage profile. As borrowing rates continue to increase throughout the year and in my belief, the USEG equity valuation that is trading at less than what we realized through certain asset divestitures, the USEG Board made the decision to explore monetizing our nonoperated properties to pull forward real tangible value. We had good buyer interest across all 4 or 5 separate packages that were being offered, ranging from North Dakota to South Texas, and I was extremely happy with the results of the process. Looking ahead, I do believe that our geographically diverse asset base, which does have its challenges to manage, offers up opportunities in the future to take advantage of any company perceived valuation disconnect to be able to pull value forward.

Moving into 2024. Our capital will be spent on maintaining the production profile of our existing asset base, reducing outstanding debt, maintaining the company's share repurchase plan and taking advantage of organically driven opportunities. While equity valuations and borrowing costs have really made smaller-scale M&A tough recently, allocating capital to oil-weighted projects in the company's existing portfolio remained highly economic. We have had these assets under control for about 2 years now and with the first year plus just really figuring out what we have from an asset optimization standpoint. Since that time, we have really been able to explore and engineer opportunities that we believe can add value in a much more capital accretive way than any third-party M&A. These are projects that we are always currently evaluating, and we plan on sharing more on them as they come to fruition throughout the year.

We believe that U.S. Energy stands out from other oil and gas producing companies of our size in this backdrop of both current macro industry dynamics and a relatively stable oil pricing outlook. Our current assets require minimal capital to maintain a steady production profile, leading to predictable cash flow and allowing us to effectively allocate dollars to maximize our returns on capital. Our approach positions and allows us to weather market fluctuations and capitalize on opportunities, making us well prepared to navigate the always evolving energy landscape. Our focus at U.S. Energy remains on operational efficiency, balance sheet discipline and responsible resource management, underscoring our commitment to driving sustainable value creation. As we move forward, we remain dedicated to capitalizing on current market conditions and leveraging our strengths to deliver continued growth and shareholder returns.

To that end, during the fourth quarter, we continued our previously announced $5 million share repurchase program. We restarted our share repurchase activity during December 2023 post the closing of our nonoperated divestitures and since that point and up until the normal first quarter trading window limitations, we have repurchased nearly 0.5 million shares or approximately 2% of the company's outstanding shares. We continue to believe that repurchasing our equity at current valuation levels is prudent and one of, if not the best, allocations of free cash flow along with this high of a rate of return opportunity as I currently see in the marketplace. In summary, 2023 and the fourth quarter was strong in terms of production, cost control and the results of capital allocation decisions made earlier in the year. These achievements set the stage for our growth initiatives while positioning us to take advantage of oil prices that help generate steady, high-margin cash flow.

Company's goal remains to continue expanding our scale through both being selectively advantageous in the M&A market while also growing our assets with initiatives that complement our core operating areas. By increasing our scale and maintaining our shareholder returns initiatives, we believe we can unlock greater equity value for all of our shareholders. Now I would like to introduce Mark Zajac, our Chief Financial Officer, who will provide a detailed update on the financial results for the quarter.

[Mark Zajac, executive]

Thank you, Ryan. Hello, everyone. Let's delve into the financial details for the fourth quarter and year-end of 2023. Total oil and gas sales for the quarter amounted to $7.3 million approximately, reflecting a decrease from $10.4 million in the same period last year. This decline was attributed to a 21% reduction in volumes and a 10% reduction in realized prices. It is important to note that this quarter's production was significantly impacted by the nonoperated divestments made during the quarter. Sales from oil production contributed 88% of our total revenue for the quarter, demonstrating our continued focus on optimizing our oil assets.

Our lease operating expense for the fourth quarter was approximately $3.1 million, equivalent to $22.38 a BOE, indicating an impressive 28% reduction in total lease operating expense compared to the fourth quarter of 2022. This reduction can be attributed to fewer onetime workovers and the divestment of higher-cost non-operated assets during the recent quarter. Severance and ad valorem taxes for the fourth quarter of 2023 totaled approximately $0.5 million, reflecting a decline from $0.7 million in the same period last year. As a percentage of total oil and natural gas sales revenue, these taxes accounted for approximately 6% during the quarter. Cash, general and administrative expenses reached approximately $2.2 million for the fourth quarter of 2023 compared to roughly $2.4 million in a similar period of 2022. This decrease of aggregate expenses was primarily attributed to higher professional fees incurred in 2022 prior to highgrading several accounting and finance positions.

Turning to our net financial performance. Company reported a net loss of $19.8 million in the fourth quarter of 2023. The fourth quarter loss is largely attributed to an oil and gas impairment expense of $20.2 million, driven by an impact of lower SEC pricing on the company's reserve report. Our adjusted EBITDA, excluding the impact of hedges, stood at $1.4 million in the fourth quarter of 2023 compared to $2.7 million in the same period last year, influenced most notably by the decline in commodity prices and production from the prior period.

Let's briefly touch upon our balance sheet. As of December 31, 2023, the company held outstanding debt of $5 million on a $20 million revolving credit facility. Our cash position stood at $3.4 million. We plan to continue allocating a portion of free cash flow to debt reduction and maintain the flexibility to react to market conditions on that front. In conclusion, we are pleased with our operating performance and the financial results that enable us to support the company's initiatives in a way that maintains full balance sheet integrity. I'm leading the charge to ensure the company's reported processes maintain 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] Our first question is from Charles Meade with Johnson Rice.

[Charles Meade, analyst]

Ryan, in your prepared comments, I want to go back and make sure I heard you correctly, and I'm interpreting it the right way. I think I heard you say or I seem to recall you saying that you feel like you have investment opportunities or growth opportunities or growth initiatives inside your portfolio that are better, that are higher returns than any outside M&A opportunities. Was that -- did I hear and interpret that correctly? And I wonder if you can elaborate to the extent that you're able to right now, what those growth initiatives -- kind of organic growth initiatives are.

[Ryan Smith, executive]

Yes, of course. Good question. And there's kind of a lot of layers to that question. So I'll pick out a few of them. And if I don't answer all of them, just please let me know. So from a -- and this also could go into type of a catalyst type of answer as well. It's no secret, borrowing costs are high, equity valuations aren't great. And on a smaller scale M&A like relative to U.S. Energy, that makes some of the acquisitions -- asset level acquisitions, risk/reward base is tough. And as we look at running the company both on a day-to-day basis and then a long-term value creation basis. I think on a day-to-day basis, where it comes down to -- I'll greatly simplify it, but take your existing assets, keep production flat, maybe a little bit up into the right and fund that out of cash flow at a smaller portion of that cash flow that you can still keep your repurchase program going and you still keep debt reduction going.

And so when it comes to, I'll call it, bring on production or bringing on barrels from a cost of capital perspective, from a risk reward perspective, from a likelihood of getting it done perspective I think we have those opportunities in our existing portfolio that, again, in this macro oil and gas environment, are a much higher rate of return. And then obviously, since we own it in areas that we feel much more comfortable about than even acquiring an asset and doing extremely thorough diligence on it. We've had these assets now for a little over 2 years. And we spent a long time.

We have assets from almost the Canadian border to the southern border and everywhere in between, really getting our arms around it, seeing where productive capital could be spent and where capital should not be spent going forward. And we made discoveries on both sides of that aisle. So we've really spent, I would say, the majority of 2023, the first half, starting to really engineer potential internal opportunities and the assets that we already have in our portfolio. And with rates increasing, which flowed through to M&A slowing down flowed through to borrowing costs increasing. We really pivoted midyear from an acquisition mindset to a divestiture mindset and spent the second half of last year, setting up and then executing our divestiture program.

So a long answer on a day-to-day basis, I think we have more internally than what I see in the market. I'll talk about more on that on our next quarter call because a lot of that, that we're going to start doing is going to take place in April and May. And it's not a big secret. I won't go into what areas we're working on just quite yet because there's a lot that goes into that. But it's work that basically new eyes, new technology, new engineering can go back and look at the assets at the previous owners, whether it's the direct previous owners or even before that, on areas that they liked the geology is good and maybe just for whatever reason, whether it was capital or whether it was technology, some of that upside that wasn't exploited in the past. So we feel confident that we have a pretty thorough portfolio of opportunities that can get us where we need to go on a day-to-day basis. Again, I define that by hitting those 3 categories of production -- moderate production growth, shareholder returns and debt reduction through the existing assets that we have in our portfolio.

[Charles Meade, analyst]

Got it. Well, look, at $80-plus oil, a lot of stuff will work. And Ryan, I wanted to just -- you've made a lot of comments about the A&D market. I just wondered, can we go at that directly. From my seat, the big deals, equity to equity are still happening but kind of the cash deals in the A&D seem to have slowed down mostly because there's -- it looks like that there's no -- the sellers -- buyers have moved down what they're willing to pay and sellers haven't. I'm curious, is that the way it seems to you or maybe just elaborate a little bit more on the character of the -- of the kind of the smaller scale A&D opportunity set right now?

[Ryan Smith, executive]

Yes, you're exactly right, and I'll elaborate, but you hit it spot on, right? Like the bigger deals out there, which I know you're not saying they are, but those really aren't applicable to the mid- and small cap and lower universe. So guys that are still -- the bigger guys who still have healthy equity valuations that you see stock-for-stock deals, you see proposed hostile stock-for-stock deals. And those are for all the same reasons that people have always done those, right, to scale up, cut cost and get bigger. On the smaller side, I think it's totally related to the things you said, in addition to the public equity valuations are depressed at these size of companies in this industry. And whenever a public to private, which used to be a larger multiple transacts, now you're forcing the private to take on the public discount right out of the gate. And in every single situation that I've seen bar none, the private company, no big surprise, is marking their book at a significantly higher number than what the smaller micro cap public guys get marked at every single day.

Borrowing costs, it's a lot tougher to underwrite these things at 9% or significantly greater than 9% as it was 3% for the last several years. And then on the seller appetite, we absolutely see it. And even though oil properties -- or oil properties, they still have a lot of gas in them. And where gas has gone really drives that kind of incremental value for some of the sellers, and it doesn't make sense from a risk/reward basis for a company our size to underwrite optimistic commodity price projections going forward. And I'll even add a fourth one on, again, no secret, the regulatory environment, while I would say from like a media perspective, it's gotten a little bit better.

It's still very serious. It's still very tough states are still coming down and monitoring company's activities and company's very small producing wells and P&A obligations way more than they ever have. And U.S. Energy stays on top of that very much. But a lot of these smaller deals historically have always had a significant P&A component, shut-in component that came along with them. And there was always some tricks that people and companies would do to kind of kick that can down the road. I think you still see people doing that now. But that game is ending. It's not if, it's when. So it's really become as much of a part of the transaction calculus as the other 3 items that I mentioned.

[Operator]

Our next question is from Tim Moore with EF Hutton.

[Timothy Moore, analyst]

We really appreciate that asset growth initiatives color as you wrap up the optimization effort there. And geographically, it makes sense why that would take so long. But any other comments maybe you can give us for a sneak peek on the strategic alternatives review commentary, Ryan. And we assume they're going to be mostly oil-weighted assets.

[Ryan Smith, executive]

Yes. So good question. I think, as you know, as the Board and management look at strategic alternatives, right, like it always carry such a nasty word historically, especially in the oil and gas business. But where we're sitting and where we were sitting when we announced it, I believe it was in November, is a delevered balance sheet and what I call significant balance sheet value that is not flowing through to equity valuations. I know we're not the only small micro cap oil and gas company that represents that. But I do think we're one of the larger examples out there.

So I think how we look at it is my job and what I focus on day to day, we have a very good team here that handles our day-to-day operations in the field and accounting, et cetera. But it's really finding the right I'll say, project or transaction or initiative that transfers, what I think is extremely significant balance sheet value at this company and have that flow through to something that helps expand our equity valuation, right? I know that's a very obvious comment, but it's a tricky thing to do, especially in the oil and gas space for the last few years.

So I think it can take several forms. As I think you mentioned on your oil projects, we're always going to probably trend towards oil and looking at M&A transactions. I thought we understand more, and it doesn't seem to be as volatile as gas. I know it's easy to say sitting here now. But I do think that, Tim, we're at a size now and we're in a valuation now to where all options are on the table for us, right? We have a very concentrated shareholder base. A lot of the shareholders sit on our board. And the goal of the company is to make the stock price go up as simplistic as that sounds. So I think in terms of the strategic odds, everything is on the table. Of course, we're going to transact and venture into areas that we already know well -- and we're an oil and gas company. So I'll let you put those 2 together. But it's still just as active as it was. And when there is something that comes out of that process, we will announce it at that time. But no, it's still an ongoing process. We look at it the same way as we did when we announced it back in November.

[Timothy Moore, analyst]

Good. That's helpful. Now we're looking forward to more on that front. Yes, for lease operating expenses, that decreased nicely, as you mentioned, to $22 BOE, it averaged something like $25 in the first 9 months of the year. How much lower do you think you can squeeze that out? Is there more potential there?

[Ryan Smith, executive]

I mean I think on an absolute basis, there's a little bit of potential like some costs have come down. They're still historically high, but -- and again, like I'm talking recent times in the graph here, but like steel and the associated pipe, et cetera, that we use very often, prices have started to trend down. Labor costs and availability have started to trend down a little bit. It feels like it's starting to sway in the employer's favor for the first time in quite a while, at least down in Houston, Texas, it feels like that. So I do think that incrementally as inflation tapers off, and the industry becomes more healthy. There's probably some continued reduction to those costs.

That being said, the flip side to having a high single-digitish corporate decline rate on our assets on a conventional asset base, a little bit higher LOE. So I'm happy where we were. I think there is some room to still reduce some of what you saw in the fourth quarter. But I think the really big jump that we made from when we initially bought the assets to our fourth quarter, a lot of that is going to be onetime stuff that's removed. So we still do have some improvement, but a lot of that improvement has been realized.

[Timothy Moore, analyst]

Yes, you made some great progress. And Ryan and Mark, I know you don't give guidance, but in theory, if crude oil prices stayed above $70 for the rest of the year, what type of production growth do you think you could achieve maybe on an organic basis, let's exclude that divestiture of the 11% to 12% production decline. I mean, should you be up high single digits just looking at this year for production volumes?

[Ryan Smith, executive]

Yes. I mean, I think that could be a fair assumption, Tim. And not to be coy, but like some of the what I called day-to-day smaller scale organic projects. Those are real, and we're still kind of getting our arms around that and starting to begin those. I think we'll have more color on the next call or incrementally in between now and then on some of those projects and kind of what we expect it to do from a CapEx perspective and a production profile perspective. But I do think just again, from a high level -- and our model, I think historically has always shown this, that we can keep production flat or close to flat with a very low single million CapEx number on our current assets.

[Timothy Moore, analyst]

Great. No, that's really good color. And one last question for Mark maybe. I know you did the $20 million impairment in the fourth quarter and $6.5 million in the third quarter. If the prices stay fairly flattish or not down too much, I mean, would you expect you could be done with impairments for the rest of this year?

[Mark Zajac, executive]

In our filing, we made last night. I think we're projecting one in the first quarter of '24, the issue ultimately is the SEC rolling prices. And so if prices decrease on a comparative basis as the quarters roll in, there's a potential for impairment, and that's what we're dealing with. We're dealing with retrospective prices relative to current prices.

[Timothy Moore, analyst]

Yes. No, I figured that. And I just think maybe we get past March could be not as much of an issue, but I appreciate all the color and the answers.

[Mark Zajac, executive]

Great. Thanks, Tim.

[Operator]

With no further questions in the queue, we will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.