U.S. Energy Q4 2023 Earnings Call Transcript

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March 27, 2024

There are 6 speakers on the call.

Operator

Greetings. Welcome to U. S. Energy Corporation 4th Quarter and Full Year 2023 Results Conference Call. At this time, all participants are in a listen only mode.

Operator

A question and answer session will follow the formal presentation. Please note this conference is being recorded. 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 U. S. Energy Corp's 4th quarter year end 2023 results conference call. Brian Smith, our Chief Executive Officer, will provide an overview of our operating results and discuss the company's strategic outlook.

Speaker 1

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 accompanying presentation materials, are available in the Investor Relations section of our website at www.usnrg.com.

Speaker 1

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 conference call materials.

Speaker 1

With that, I will turn the call over to Ryan

Speaker 2

Smith. 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 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 1700 barrels of oil equivalent per day, which takes into effect our 4th quarter asset divestitures, which I will discuss later, marking an increase from the comparable period of 2022.

Speaker 2

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 $3,100,000 or $22.38 per BOE, representing a significant reduction compared to both the prior quarter as well as the Q4 of 2022. This impressive reduction underscores our commitment to operational efficiency and was achieved in 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 reductions in certain materials that we often use across our operations.

Speaker 2

Of significant note, during the Q4, the company closed on approximately $7,300,000 of asset divestitures. The assets represented the majority of our non operated 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 less more we realized through certain asset divestitures, the USEG Board made the decision to explore monetizing our non operated 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.

Speaker 2

Looking ahead, I do believe that our geographically diverse asset base, which does have its challenges to manage, offers up opportunities

Speaker 3

in the future to take advantage

Speaker 2

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 and A tough recently, allocating capital to oil weighted projects in the company's existing portfolio remains highly economic. We have had these assets under control for about 2 years now and with the 1st 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 and A.

Speaker 2

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 current macro industry dynamics and a relatively stable oil pricing outlook. Our current assets require minimal maximize our returns on capital.

Speaker 2

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.

Speaker 2

To that end, during the Q4, we continued our previously announced $5,000,000 share repurchase program. We restarted our share repurchase activity during December 2023 post the closing of our non operated divestitures and since that point and up until the normal Q1 trading window limitations, we have repurchased nearly 500,000 shares or approximately 2% of the company's outstanding shares. We continue to believe that repurchasing equity at current valuation levels is prudent and one of, if not the best, allocations of free cash flow along with as high of a rate of return opportunity as I currently see in the marketplace. In summary, 2023 and the 4th 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.

Speaker 2

Company's goal remains to continue expanding our scale through both being selectively advantageous in the M and A market, while also growing our assets with initiatives to 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.

Speaker 4

Thank you, Ryan. Hello, everyone. Let's delve into the financial details for the Q4 year end of 2023. Total oil and gas sales for the quarter amounted to $7,300,000 approximately, reflecting a decrease from 10 $4,000,000 in the same period last year. This decline was attributed to a 21% reduction in volumes and a 10% reduction in realized prices.

Speaker 4

It is important to note that this quarter's production was significantly impacted by the non operated investments 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 4th quarter was approximately $3,100,000 equivalent to $22.38 a BOE, indicating an impressive 28% reduction in total lease operating expense compared to the Q4 of 2022. This reduction can be attributed to fewer one time workovers and the divestment of higher cost non operated assets during the recent quarter. Severance and ad valorem taxes for the Q4 of 2023 totaled $500,000 reflecting a decline from $700,000 from the same period last year.

Speaker 4

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 $2,200,000 for the Q4 of 2023 compared to roughly $2,400,000 in a similar period of 2022. This decrease of aggregate expenses was primarily attributed to higher professional fees incurred in 2022 prior to high grading several accounting and finance positions. Turning to our net financial performance, the company reported a net loss of $19,800,000 in the Q4 of 2023. The 4th quarter loss attributed to an oil and gas impairment expense of $20,200,000 driven by impact of lower SEC pricing on company's reserve report.

Speaker 4

Our adjusted EBITDA excluding the impact of hedges stood at $1,400,000 in the Q4 of 2023 compared to $2,700,000 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 $5,000,000 on a $20,000,000 revolving credit facility. Our cash position stood at $3,400,000 We plan to continue allocating a portion of free cash flow to debt reduction and maintain the flexibility to maintains full balance sheet integrity. I'm leading the charge to ensure the company's reporting processes maintain a high standard of excellence, and we feel confident in our ability to support any growth initiatives we may entertain going forward.

Speaker 4

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

Operator

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

Speaker 3

Good morning, Ryan, you and the whole USCG team.

Speaker 2

Good morning, Charles. Thanks for calling.

Speaker 3

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 or growth opportunities or growth initiatives inside your portfolio that are better, that are higher returns than any outside M and A opportunities. Was that did I hear and interpret that correctly? And wonder if you can elaborate to the extent that you're able to right now and what those growth initiatives kind of organic growth initiatives are?

Speaker 2

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.

Speaker 2

So from a and this also could go into type of a catalyst type of answer as well. It's no secret, barring costs are high, equity valuations aren't great. And on a smaller scale M and A like relative to U. S. Energy, that makes some of the acquisitions, asset level acquisitions, risk reward basis tough.

Speaker 2

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 the 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 small 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, bringing 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.

Speaker 2

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 flow through to M and A slowing down, flow through to borrowing costs increasing, we really pivoted mid year 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 May.

Speaker 2

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 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.

Speaker 3

Got it. Well, look at 80 plus dollar oil, a lot of stuff will work. And Ryan, I wondered if you just you've made a lot of comments about the A and D markets. I just want to kind of 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 and 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.

Speaker 3

I'm curious, is that the way it seems to you or maybe just elaborate a little bit more on the character of the kind of the smaller scale A and D opportunity set right now?

Speaker 2

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, 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 costs and get bigger.

Speaker 2

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 of 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 small and micro cap public guys get marked at every single day. Barring costs, it's a lot tougher to underwrite these things at 9 percent or significantly greater than 9% as it was 3% for the last several years.

Speaker 2

And then on the seller appetite, we absolutely see it. And even though oil properties are 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 these sellers. And it just 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 4th one on.

Speaker 2

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 companies' activities and companies' very small producing wells and P and A obligations way more than they ever have. And U.

Speaker 2

S. Energy stays on top of that very much. But a lot of these smaller deals historically have always had a significant P and 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.

Speaker 2

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 three items that I mentioned.

Speaker 3

Thank you for all that added detail, Ryan.

Operator

Our next question is from Tim Moore with E. F. Huttin.

Speaker 5

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?

Speaker 2

Yes. So good question. I think as you know as the Board and management look at strategic alternatives, right, like it's always carries 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.

Speaker 2

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, etcetera. 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 it flow through to something that helps expand our equity valuation, right? I know it'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 and A transactions.

Speaker 2

I thought we understand it 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 at a valuation now to where all options are on the table for us, right. We have a very concentrated shareholder base. A lot of those shareholders sit on our board and the goal of the company is to make the stock price go up as simplistic as that sounds.

Speaker 2

So I think in terms of the strategic alts, 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.

Speaker 2

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.

Speaker 5

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 1st 9 months of the year. How much lower do you think you can squeeze that out?

Speaker 5

Is there more potential there?

Speaker 2

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, etcetera that we use very often, prices have started to trend down, labor costs and availability have started to trend down a little bit. It's starting 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 digit ish corporate decline rate on our assets on a conventional asset base is a little bit higher LOE.

Speaker 2

So I'm happy where we were. I think there is some room to still reduce some of what you saw in the Q4. But I think the really big jump that we made from when we initially bought the assets to Q4, a lot of that is going to be one time stuff that's removed. So we still do have some improvement, but a lot of that improvement has been

Speaker 5

Thanks for being candid on that. Yes, you made some great progress. And so 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?

Speaker 2

Yes, I mean I think that 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 $1,000,000 CapEx number on our current assets.

Speaker 5

Great. That's really good color. One last question for Mark maybe. I know you did a $20,000,000 impairment in the Q4 and $6,500,000 in the Q3. If the prices stay fairly flattish or not down too much, I mean, would you expect you're pretty could be done with impairments for the rest of this year?

Speaker 4

In our filing we made last night, I think we're projecting 1 in the Q1 of 'twenty four. 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

Speaker 2

to current

Speaker 5

prices. Yes, I figured that. I just think maybe we could test March could be not as much of an issue, but thanks a lot. I appreciate all the color and the answers.

Speaker 2

Great. Thanks, Jim.

Operator

With no further questions in the queue, we will conclude today's conference. You may disconnect your lines at

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Earnings Conference Call
U.S. Energy Q4 2023
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