U.S. Energy Q2 2023 Earnings Call Transcript

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August 14, 2023

There are 5 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to U. S. Energy Corp's Second Quarter 2023 Results Conference Call. This call is being recorded on Monday, August 14, 2023. I would now like to turn the conference over to Mason McGuire.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to U. S. Energy Corp. 2nd quarter 2023 results conference call.

Speaker 1

Brian Smith, our Chief Executive Officer, will provide an overview of our operating results and discuss the company's strategic outlook. Our Chief Financial Officer, Mark Zajac, will provide a more detailed review of our financial results. U. S. Energy issued a press release summarizing operating and financial results for the 3 months ended June 30, 2023.

Speaker 1

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 the 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 risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update the forward looking statements. Further, please note that non GAAP financial measures may be disclosed during this call.

Speaker 1

A full reconciliation of GAAP to non GAAP measurements are available in the latest quarterly earnings release and conference call presentation. With that, I would like to turn the call over to Ryan Smith.

Speaker 2

Good morning, everyone, and thank you for joining us today. I'm pleased to share with you some of the strong highlights from this quarter as well as to provide an update on our strategic outlook. Our second quarter results reflect the dedication, resiliency and consistency of our team here at U. S. Energy.

Speaker 2

We achieved net daily production of just under 2,000 barrels of oil equivalent per day, marking a 10% increase over the same quarter in 2022. Notably, our oil production accounted for 64% of our total production. I'm particularly proud to highlight our substantial achievements in cost management. Our lease operating expenses came in at $3,900,000 or $21.75 per BOE, representing a significant 10% and 24% reduction respectively compared to the Q2 of 2022. This impressive reduction underscores our commitment to operational efficiency and was achieved against the continued backdrop of increased rates, which flows through to everything, including elevated service costs.

Speaker 2

We continue to believe that U. S. Energy Corp. Stands out Other oil and gas producing micro cap companies in this backdrop of both improving industry dynamics and a stronger macro 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.

Speaker 2

Our approach also allows us to weather market fluctuations and capitalize on opportunities, making us well prepared to navigate the evolving energy landscape. Our focus at U. S. Energy remains clear, operational efficiency, balance sheet discipline and responsible resource management, all of which underscores our commitment to drive sustainable value creation. As we move forward, we remain dedicated to capitalizing on these favorable market conditions and leveraging our strengths to deliver continued growth and shareholder returns.

Speaker 2

In the further adoption of these initiatives, during the Q2, we bolstered our shareholder returns program through the initiation of our $5,000,000 share repurchase program. While we only began the repurchase program mid quarter, we repurchased greater than 0.5% of our outstanding shares and are pleased with the share response that we witnessed in the market. Ultimately, our mandate is to allocate capital to our highest return projects that generate most positive results and our shareholder returns program is no different. To that end, I'm pleased to announce we plan to accelerate our share repurchase program By reallocating capital through the halting of the company's dividend to the acceleration of our repurchase program and continued debt repayment, The consistent and steady repurchase of the company's shares at current valuation levels is as high of a return opportunity as I see in the marketplace and something we will continue to pursue. In summary, the Q2 was exceptional in terms of production, cost control and positive results of capital allocation decisions that were made earlier in the year.

Speaker 2

These achievements set the stage for our growth initiatives while positioning us emphasizes maintaining an attractive leverage profile, opportunistically repurchasing our common stock and our continued commitment to utilizing our equity capital efficiently. Our goal remains to continue expanding our scale through the acquisition of assets that align with our core operating areas. By increasing our scale and bolstered by our shareholder return initiatives, we believe we can unlock greater equity returns for all of our shareholders. Now, I would like to introduce Mark Zajac, our new Chief Financial Officer, who will provide a detailed update on the financial results for the Q2. Mark brings to our team many years of leadership experience in energy and finance, primarily as a partner at KPMG and has been a wonderful addition to our team.

Speaker 2

With that, I'll turn it over to Mark.

Speaker 3

Thank you, Ryan. Hello, everyone. Let's delve into the financial details for the Q2 of 2023. Total oil and gas sales for the quarter amounted to approximately $8,000,000 reflecting a decrease from $13,500,000 in the same period last year. This decline was primarily attributed to a 46% reduction in realized prices.

Speaker 3

It's important to note that this quarter's realized pricing Was the most significant event of the quarter relative to last year. Looking forward, we have seen improved prices in the Q3 that we don't see the realized Pricing environment we experienced in the Q3 of 2022. 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 Q2 was approximately $3,900,000 Equivalent to $21.75 per BOE indicating an impressive 24% reduction in per unit costs compared to the Q2 of 2022. This reduction can be attributed to the successful integration of acquired assets and the completion of necessary workover programs. Severance and ad valorem taxes for the Q2 of 2023 totaled approximately $500,000 Reflecting a decline from $900,000 in the same period last year.

Speaker 3

As a percentage of total oil and natural gas sales revenue, these taxes accounted for approximately 7 Cash, general and administrative expenses reached approximately $2,800,000 or 15 point $0.48 per BOE for the Q2 of 2023 compared to roughly $2,000,000 or $12.53 per BOE in the prior period. This increase was primarily attributed to professional fees incurred in the early part of the second quarter related to the filing of our Form 10 ks. Turning to our net financial performance. The company reported a loss of $2,500,000 or a loss of $0.10 per diluted share in the Q2 2023, this contrasts with net income of $100,000 or $100,000 or effectively breakeven or $0 per share Reported in the Q2 of 2022. Our adjusted EBITDA, excluding the impact of hedges, stood at $800,000 In the Q2 of 2023 compared to $5,100,000 in the same period last year influenced most notably by the decline in commodity prices from the prior period.

Speaker 3

Let's briefly touch on our balance sheet. As of June 30, 2023, the company held outstanding debt of $12,000,000 on the revolving credit facility With an available credit line of $8,000,000 Additionally, our cash position stood at $1,200,000 In conclusion, we're pleased with our operating performance given the pricing headwinds that under normal circumstances would have resulted in outstanding financial results. I'm leading the charge to ensure that the results each quarter are reported to a high standard of excellence and accuracy, and we feel confident in our ability to meet our interim and annual reporting timelines. We remain committed to our strategic goals and believe in our ability to navigate market conditions. Thank you for your participation this morning.

Speaker 3

We are now ready to take your questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer First question comes from Tim Moore at I. F. Hutton. Please go ahead.

Speaker 4

Thank you. Good move on suspending the dividend and accelerating the share buyback for better ROI. I think that was quite brilliant. You can make a better impact there. Great decision.

Speaker 4

Can Mark maybe just starting out, maybe can Mark share a little bit more of his insights so far learned? I know it's only been 10 weeks. But I'd love to hear maybe what you think you might enhance or focus a bit more on given his KPMG background?

Speaker 3

Yes. Thanks, Tim, for the question. Quite a bit has been undertaken in the last 10 weeks, Looking at our people, assessing opportunity and M and A opportunities as well, improving processes and building relationships and Forming really a tighter team across all of the functional silos, whether it be financial or operations or individuals in the field. It's been a great experience, great team working with Mason and with Ryan. Look forward to the future, lots of opportunities ahead of us.

Speaker 4

Great. That's helpful, Mark. And just maybe a higher level question. How do you think about 3rd quarter production? Obviously, the prices are up on WTI oil, but do you think you could See a small sequential increase from the Q2 into the Q3 for production?

Speaker 2

Hey, Jim. This is Ryan. 3rd quarter, I mean, we're pretty close to Halfway through now, I'm not going to guide like to an increase right now. I think we're pretty comfortable where we're at just the asset base, the runtime, Etcetera kind of leads to those unfortunately sometimes like 5% -ish, 3% -ish decreases as well as increases like we saw this quarter. It ends up run rating pretty consistently over the course of the year.

Speaker 2

So I would expect this to kind of maintain the ballpark of where we've been. I wouldn't expect a significant step up.

Speaker 4

Great. That makes sense. That's even better than I think some of the peers even if it's consistent. And maybe Ryan and Mark, how should we think about cash G and A expense? Do you think it will be consistent maybe $13,500,000 going forward?

Speaker 4

I'm just trying to think, you could probably get some pretty darn good Operating scale leverage off of that to drive better incremental operating margins going forward. But is cash G and A pretty fairly locked in now?

Speaker 2

Yes. I mean, I think that number was an all in number, which I know all in is all in, but I think there was some stock in that number. So I think our cash G and A, It's been at the run rate that it's been pretty consistently since we did our larger transaction in January of 2022. And It's just been a bunch of kind of one time items that have continually popped up as we've 5 exercise of the company, SEC filings, growth, etcetera. I think we've finally hit that point Where all of the one or most of the one time items are behind us, so where we can kind of smooth out Our operation and some of the unexpected spend and then not to answer for Mark, but I will on this one.

Speaker 2

He and his team are very good now. As he mentioned, focusing on Specific silos and specific buckets and really getting those costs down, where do we see the most savings there? Professional services, smooth Quarterly and annual Q and K filings, which we've kind of already experienced this past quarter. So I think there's a lot of room for improvement on our current cash run rate G and A, probably 20% plus that I expect us to be realizing relatively soon. A lot of the stuff we've kind of implemented during the Q3, so it might not be a catchall.

Speaker 2

But as we move Absolutely, on a whole quarter basis, beginning in the Q4, I expect those savings to show up On the income statement. Great.

Speaker 4

That's I mean, that's very wonderful to hear. Even if you get anywhere close to 20%, That'd be nice flow through to the operating profitability and the cash flow. So Ryan, I'm kind of curious, just maybe shifting gears to your inorganic growth side with And what are you seeing in the last few months in terms of asking prices valuations from targets? Have they come down a bit more reasonable? I mean, I know some of the private targets are I don't know, twice what your stock and the public guys are at the smaller end.

Speaker 4

But how are you seeing that? And is the bottleneck More reasonable valuation or is there something else that maybe would make you delay maybe doing an acquisition in the near term?

Speaker 2

Yes. So I guess, first part of that question and I apologize if I sound a little raspy, I'm a little under the weather. The first part of the question, what do we see and where has the asking price has gone? We still see a lot of deal flow Up and down the lines, dollars 5,000,000 to $10,000,000 transactions all the way to much, much, much larger than that. I think a lot of the weaker handed sellers have sold in the last They've been out of the market, but call it between 6 18 months ago, a lot of those folks have left.

Speaker 2

I think the sellers now, what I see is the willingness to take equity has Definitely dropped. I think there's good value deals to be had out there For buyers that have access to that kind of capital. And that goes to your next question, where do I see any bottlenecks? I really don't think it's on valuation. There is a very big discrepancy as You said between the private guys marking their books and the public guys who are marking their equities daily, The biggest bottleneck I see is capital out there right now.

Speaker 2

The equity markets aren't Open necessarily for energy companies. And as everybody knows, Rates have gone up significantly. The borrowing credit facilities depending on most people size within reason ranges around 7% to 9%. And when that's your top line of capital source, it gets pretty expensive. So I think creative structuring To get around that is kind of what we're focused on.

Speaker 2

And I don't think it's necessarily a bottleneck. It's just something you need to know Going into it ahead of time to make sure you don't come out of this hypothetical M and A deal Over levered, right? And just give away the farm for an incremental deal With a 12% to 13% cost of capital on the U. S. Energy balance sheet, that's not something that I think you see us do.

Speaker 4

Good. That's really helpful, Ryan. And just one last follow-up question, I'll turn it over to whoever's next. Just related to that Leverage, it makes sense, you don't want to overly lever. But can you maybe remind us of what your maybe your max debt leverage might be for comfort?

Speaker 4

Are we talking maybe 1.5000000, 1.6000000 net debt to EBITDA for an ideal acquisition, something like that?

Speaker 2

Yes. I mean, on the ideal pro form a, I guess, right, I'll hedge my bet, no pun intended a little bit here on the asset profile, right? If we are buying something that is a little More of a mature profile or conventional wells. I think we probably have a little More flexibility to be exposed to the strip while hedging some stuff, if we go and buy an unconventional package. I think you see us hedge that type of asset out.

Speaker 4

Great. I really appreciate this and that's it for my questions. I'll turn it back over to the operator.

Operator

Thank you. There appear to be no further questions. You may proceed.

Speaker 2

This is Ryan Smith, again with U. S. Energy. If there's no further questions, I thank you for calling in and

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and we ask that you please disconnect your lines.

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U.S. Energy Q2 2023
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