U.S. Energy Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 12, 2023

There are 5 speakers on the call.

Operator

Greetings. Welcome to the U. S. Energy Corp. 1st Quarter 2023 Results Conference Please note this conference is being recorded.

Operator

I will now turn the conference over to Maci McGuire, Director of Corporate Development. Thank you. You may begin.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to the U. S. Energy Corp. Q1 2023 results conference call.

Speaker 1

Brian Smith, our Chief Executive Officer, will provide an overview of our financial and operating results and discuss the company's strategic outlook. After the market closed yesterday, U. S. Energy issued a press release summarizing operating and financial results for the 3 months ended March 31, 2023. The press release, together with the accompanying presentation materials, are available in the Investor Relations section of our website at at www.usnrg.com.

Speaker 1

Today's discussion may contain forward looking statements about future business and financial Call. Actual results may differ significantly from those projected in today's forward looking statements due to various to risks and uncertainties, including 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.

Speaker 1

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

Speaker 2

Thanks, Mason. Good morning, everyone, and Thank you for your interest in U. S. Energy and for joining us today for our Q1 2023 earnings call. As the company has continued to carry forward Into the Q1, the strong operational momentum realized throughout 2022.

Speaker 2

During the Q1, We sold approximately 91,300 barrels of oil and 384,000,000 cubic feet of natural gas for a total of 155,000 a 29% increase over the Q4 of last year when we averaged 13.41 BOE per day. Specific to our regional focus areas, our Rockies production grew approximately 4% during the quarter, our Mid Con and East Texas assets grew approximately 14% and our West Texas and Gulf Coast assets grew approximately 8%. Unfortunately, our South Texas assets, Specifically, some of our highest margin properties in Karnes County experienced some significant downtime related to, I would say, normal but unplanned well maintenance that was undertaken during the quarter, of which those wells have since come back online. Realized prices during The quarter before derivatives were approximately $77.70 per barrel of oil and $3.06 per Mcf of natural gas or a blended cost of $53.25 per BOE, which was approximately 28% lower than our realized pricing in the prior period of $73.50 per BOE. This resulted in financial performance that was below that of the Q1 of last year despite significantly higher production volumes.

Speaker 2

Moving on to revenue, we recorded $8,300,000 in the first quarter, down approximately 7% from the $8,900,000 in the Q1 of last year, mostly driven by the previously mentioned pricing decline and 86% of our net sales came from oil. Turning now to more significant expense line items on the income statement. Our lease operating expense in the Q1 was approximately $4,500,000 or $29.12 per BOE compared to $2,700,000 or $22.66 per BOE in the prior year period. Our absolute LOE increase due to the acquisition of the additional producing properties in 2022 and our per unit cost increased primarily because of the unplanned maintenance on our South Texas properties, which of course affected both production and the cost profile. Looking forward, we expect to recognize further operating cost efficiencies as we fully integrate All of the acquisitions that we made in 2022 ended the portfolio and we forecast LOE to average approximately $3,500,000 per quarter or around the low $20 per BOE during 2023.

Speaker 2

Production taxes were About $500,000 or $3.35 per BOE, our tax rate as a percentage of revenue has held steady at approximately 6%. Our cash G and A, excluding share based compensation, was approximately 2,000,000 versus $1,400,000 for the prior year period. The increased G and A expenses are due to the modest but necessary additions to personnel that came with or acquisitions that were made throughout 2022. We expect G and A to average approximately $2,000,000 per quarter in 2023 and management maintains focus on continuing to optimize that number moving forward. Looking at our adjusted EBITDA, U.

Speaker 2

S. Energy recorded $1,200,000 in the Q1 compared to $4,100,000 in the Q1 of 2022 As lower realized prices largely negated the 28% improvement in sales volumes, Quickly touch on our hedge book. We are approximately 50% hedged on our expected oil volumes in 2023, with the majority being collars, all with a weighted average floor of right around $60 per barrel. We did have some gas hedges that rolled off in the Q1, So we are unhedged on gas moving forward. Where we sit now, we're comfortable with where our 2023 hedge program currently sits from a risk management perspective, and we will continue monitoring the Ford oil strip as we evaluate 2024.

Speaker 2

Under the assumption that we're in a pricing environment similar to the one that we are in today, The level of hedging we may do around any potential future acquisitions will likely be commensurate with the amount of debt capital used in that transaction. Touching briefly on our balance sheet, at quarter end, we had $12,000,000 outstanding on our revolving credit facility and about $2,400,000 of cash on hand. With an additional $8,000,000 available under the revolver plus our cash, we had total liquidity of a little bit greater than $10,000,000 While we feel totally comfortable where our leverage profile stands today, we do continue to intend to continue paying down our outstanding balance with a portion of our free cash flow going forward. Now I would like to turn to our 2023 outlook, which is set against the backdrop of macroeconomic uncertainty and the recent volatility in commodity prices. Since the start of the year, there's been a pullback in commodity prices with the 20232024 oil strips declining by 11% and 9%, respectively.

Speaker 2

All that to say that volatility is a fact of life in the energy business And we have avoided the temptation to lever up chasing growth in the good times because we have all seen the other side of that. We're very cautious with our balance sheet and that gives us a lot of assurance in the face of any potential recessionary environment that our Capital light, low decline business model is the right one. With our healthy liquidity profile that we have, our low leverage balance sheet And our high quality producing assets, we are positioned to capture significant value in an upcycle environment, while remaining confident that we can successfully, weather a downturn in commodity prices. While we do not put out official guidance, I would like to set some Expectations as we head deeper into 2023, from an operation standpoint, we're very pleased with the performance of our producing assets. Given the conventional nature of these wells and their production history, our corporate decline rate is in the upper single digit percentages.

Speaker 2

And what does that mean? It means our maintenance capital required to hold production flat is minimal and it can easily be funded from a portion of the company's free cash flow at current and significantly lesser commodity prices than we're experiencing today. So based on our current assets, we expect capital expenditures $5,000,000 during 2023, which reflects investments in various highly economic return to production opportunities that we have throughout the portfolio as well as infrastructure investments to optimize the daily operating cost structure of several existing assets. As I mentioned earlier, we do expect to see continued improvement in lease operating expenses, Driving that line item continuously down to a steady run rate in the low $20 per BOE, Generally flat production taxes and flat improving cash G and A throughout 2023. While running a bare bones business would definitely lower our G and A run rate, I do think it should be noted that the company is We are expected to realize true cost synergies around future asset acquisitions with the current professionals we have that make up our workforce right now.

Speaker 2

And finally, let me spend a couple of minutes on the strategic outlook for our business. Our priorities are threefold. 1st, we operate our assets and allocate our investors' capital responsibly. This means we take Environmental Stewardship seriously and are proud of where and how that we work, and we acknowledge that every dollar invested must have a positive return. 2nd, we smartly allocate that capital to primarily grow the company through acquisitions, understanding that increased scale brings both production and cost efficiencies and ultimately a more profitable business.

Speaker 2

We've already seen the rewards of the strategy in 2022 with significant increases to improve reserves value, and the company's operating margins. And third, we're committed to returning capital to shareholders, both through a sustainable dividend and our recently announced $5,000,000 share repurchase program, 2 initiatives that I believe demonstrate the underlying strength in the business and the company's Board's determination to create long term value for our shareholders. We believe that our strategy has resulted in significant increase to the underlying value of the company, thanks to strategic acquisitions and targeted development activities over the past 18 months on our existing acreage, we've improved developed producing reserves to 7,800,000 BOE from just 1,400,000 BOE and have seen the value of those reserves increase 13 times to $173,000,000 at year end pricing over the same time period, far above our current enterprise value. And while the M and A market has been challenging and may continue to be given the economic uncertainties, I have great confidence in our ability to drive value no matter the environment. U.

Speaker 2

S. Energy has a motivated and disciplined team of professionals, an an extensive network in the oil and gas community and a mandate to strategically grow the company. We offer our potential partners a strong balance sheet, The ability to evaluate and close quickly and a proven track record of value creation along with a post deal history of quality asset stewardship. We fully believe that the continuous and efficient growth of the company is achievable and we focus on that task every single day. I want to thank you all again for your interest and your support of U.

Speaker 2

S. Energy. We believe we offer a unique value proposition to those looking for exposure to the current energy cycle, of which we believe we are in the early innings. There is no other public oil and gas producer of our size that offers the balance sheet strength and the downside risk reduction with the growth trajectory that we do. Management, along with the rest of our team, are highly incentivized to create, maintain and grow shareholder value, and that mandate remains at the forefront of every decision that is made at the company.

Speaker 2

With that, operator, I'll turn it over to Q and A.

Operator

Thank Our first question is from Charles Meade with Johnson Rice. Please proceed.

Speaker 3

Good morning, Ryan, to you and the whole U. S. Energy team there.

Speaker 2

Hey, Charles. Good morning.

Speaker 3

Ryan, you I want to go back to what you said in your prepared comments about the downtime In Karnes County, and I think you I think I like the way you framed it. It was normal, but not expected. Can you give a little bit more detail on what the nature of the work that was needed and really What I'm aiming at is whether this is a kind of a one time fix that we're That we're not going to have to handle again or whether this is going to this could be the kind of thing that crops up again?

Speaker 2

Yes. No, great question. So I would say it's more of the former. So our digressing just a little bit on the question, As you know, our asset base is highly conventional older wells that we've acquired and we clean up and lower costs. To that point, right, like What is probably the number one thing that we focus on right outside of cost, it's run time.

Speaker 2

We've done a great job keeping run time up. We're always going to have a percentage of wells go down. I would say this quarter has been This past quarter has been as good as any quarter that we've had. Unfortunately, the wells that went down were Our highest producers in Karnes County and also Liberty County. So, it was nothing that was unexpected in terms of like, oh, we have some tubing issues or, oh, we need to pull something out of the hole and As much as it was like standard work, I could probably dive into A likely LOE question on how we're seeing services in this comment as well.

Speaker 2

But So the expected is they're expected to go down once every 18 months or so hopefully. The unexpected is Once you kind of cross that 12 month mark, you know it's coming. You just don't know exactly when it's coming. So we don't expect these Higher interest wells to need maintenance for quite a while now. If our run rate stays the same In terms of run time on these wells, I would expect our production to Increase naturally and then on a look back basis on an annual probably come out in the wash on what we were kind of originally looking at Free first quarter.

Speaker 3

Got it. So I think you kind of anticipated my second question there, which is Should we expect a sequential increase in 2Q production? I mean, we think I'm really interested in talking about just what happens in 2Q, but what it indicates for the trajectory overall. But We should be looking for a small increment in 2Q?

Speaker 2

I do. I do. Another way to put it would be The quarter over quarter decrease had nothing to do with like changing of type curves or underperformance. It was just well maintenance issues On high revenue properties. So once those and they're all back online now.

Speaker 2

So I think that's a fair assumption.

Speaker 4

Got it.

Speaker 3

Maybe one other and then we'll I'll see if there's Anyone else in the queue? But some other companies who are on the acquisition, hunt right now Have said that their opportunity set is as good as it's been in years. And I'm curious what it looks like What the opportunity set looks like from your seat?

Speaker 2

Yes. No. So I definitely see where people are coming from With that comment, and I kind of agree. I mean, there's kind of a caveat. I'll hit the positive points first.

Speaker 2

I would say A lot of the deals that went off, of course, not all the deals, but I would say, especially related to U. S. Energy, a lot of the deals that have gone off, call it, And 2021 2020 maybe early 2022 We're guys that needed to sell. Again, not all of them, but when you saw the 24 month, 30 month type of cash flow deals, Those usually were people that in some form or fashion were kind of distressed and you can get stuff done. And then what we're seeing now is After a major slowdown over, call it, ballpark the last 6 months is A whole lot of deals that hit the market a year ago, I mean, literally like decks with April 2022 dates on them, When we were first on the Russia, Ukraine spike and everybody ran to the market They tried to monetize their assets, right?

Speaker 2

They weren't distressed. They were just opportunistically selling. There was so much volatility during that time that most of those deals did not make. They pulled their assets back, just ran them, cash flowed them. And a lot of those guys are they're back in the market, right?

Speaker 2

They're not distressed sellers, but they're opportunistic sellers. They're we see it a lot with private companies, Like true privates, not kind of portfolio companies. And then again, we also see a lot of portfolio companies and what I'll call unnatural Equity holders, I. E. Debt funds that through the cycle ended up owning equity.

Speaker 2

And these guys have a mandate to do something with these portfolio companies. So I think the opportunity set, At least from U. S. Energy's perspective is definitely robust and we see a lot of deals. Capital is still scarce.

Speaker 2

There is no doubt, I would say that would be the hindrance to most of these transactions. Of course, everybody knows rates have gone up and that's complicated everything. We've Very, very big public hiccup in the banking markets. The really big banks are kind of very, very tough to have Relationships and Access With. So that leaves the vast majority of the small cap world in the regional and smaller Commercial Banking environment.

Speaker 2

And while that's, I would say, very strong right now and it's as strong at the beginning of this year As I've seen it in quite a while, there's a finite amount of that kind of debt capital, Keep your balance sheet sub one times levered type of groups out there. So the opportunity set is robust. The challenge, which I think we're very good at, is sourcing the capital in a smart Accretive way that doesn't blow up your balance sheet.

Speaker 3

That's helpful commentary. Thank you, Ryan.

Operator

Our next question is from Ignacio Bernalz with EF Hutton. Please proceed.

Speaker 4

Good morning, Ryan, and thank you for your time today. You mentioned on the call more infrastructure investments in 2023. If you could just kind of give us some more color on how we should be thinking about the impact of that and CapEx spend overall, that'd be really helpful. Thank you very much.

Speaker 2

Yes. Good morning. So I would I'll answer the second part first. I think that we've kind of Told the market that we have about a $5,000,000 expected CapEx spend this year. I believe we were a hair below that on our run rate for the Q1, but very close to that.

Speaker 2

And I think we're confident on that number. What does that $5,000,000 give us? That $5,000,000 gets us our production staying flat because of The low decline nature of the asset base, which I know wasn't your question. And secondly, it does allocate some capital to what we're calling infrastructure investments. On some of our gassier assets, there was probably Some more work that we could have done, and I'll get into that in a little bit, that the price drop really doesn't make sense right now.

Speaker 2

And then there's some stuff that makes sense no matter the price environment. And it kind of goes into like the cost inflation question and what are we seeing. In some costs, we're seeing Flattening and even a pullback. It's a lot of it's geographic driven, but on certain pipe and certain Just wellbore and other ancillary equipment, they don't really teach this in economics class, but the prices have stabilized. The availability is still a little bit rocky, but we're in a much better situation there than we were a while back, where we see The biggest, I'll call it waste of money is in rental equipment.

Speaker 2

A good example would be like a compressor in East Texas. And I'm going to ballpark some numbers for you here, but they're close enough to accurate and size and performance and price of compressors can range the full spectrum. But If we're renting if we buy an asset and we're renting a compressor, the legacy person is renting a compressor for $100,000 a month And we can buy the compressor for $1,000,000 right, like Corporate Finance will tell you, you should do that deal. But that's a big number, right? I don't want to part with There's other stuff that we can do to with that money.

Speaker 2

But again, it still makes sense. It lowers our LOE Very significantly because that original rental cost gets buried into LOE. So That CapEx number kind of circling back that I mentioned at the beginning, I think we're still comfortable with that number. And that's a maintenance production to keep our production profile flat. And About, I would say, 20% of that number, maybe a little bit less is going to infrastructure investments Got a really low hanging fruit, simple type of projects, from an engineering perspective, not pipeline, etcetera, type of things.

Speaker 2

Compressor, either acquiring it or acquiring a new one and installing it, the stuff that the folks here can do pretty easily. So

Speaker 4

That was really helpful. Thank you, Ryan.

Operator

There are no more questions at this Time. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Speaker 2

Thank you, everyone.

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Earnings Conference Call
U.S. Energy Q1 2023
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