U.S. Energy Corp. (NASDAQ:USEG) Q1 2024 Earnings Call Transcript May 12, 2024

U.S. Energy Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. And welcome to the U.S. Energy Corporation First Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mason McGuire, Director of Corporate Development. Thank you, sir. You may begin.

Mason McGuire: Thank you, Operator, and good morning, everyone. Welcome to U.S. Energy Corp.’s first 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. 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 the operating and financial results for the quarter ended March 31, 2024. 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 measurements are available in the latest quarterly earnings release and conference call presentation. With that, I’d like to turn the conference call over to Ryan Smith.

Ryan Smith: 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. Our quarter end results reflect the hard work and resiliency of our team. We achieved net daily production of greater than 1,200 barrels of oil equivalent per day, representing the first full quarter since our asset divestitures, which closed at various points during the fourth quarter of 2023. Oil production accounted for 62% of our total production, with the remainder consisting of an approximately even split of natural gas and NGLs. As explained in our release yesterday, our operations were heavily impacted by severe flooding that made national news throughout East Texas and the Gulf Coast during the quarter.

Nearly all of the effective production was brought back online in late March, and while there are no long-term issues expected by the weather, I would expect certain of the same assets, primarily along the Gulf Coast, to be impacted in the second quarter by additional heavy rains, which have been experienced recently. The company’s other core asset focus areas were unaffected during the quarter and continue to perform to our expectations. I’m particularly proud to highlight our substantial achievements in cost management in the face of adverse weather conditions. Our lease operating expense came in at $3.2 million, representing a flat total expense to the prior quarter and a reduction to the first quarter of 2023. A majority of our LOE is fixed at this point and our barrel metrics are highly sensitive to any variations in production.

Our per barrel cost for the first quarter was approximately $29 per BOE. While this per barrel metric amount is higher than we have recently experienced, had we averaged our March exit production for the entire quarter, also said is once our weather-related production issues were resolved, our per barrel LOE would be in the low $20 range or significantly lower than what we realized. Moving through 2024, our capital will continue to be spent efficiently on supporting the production profile of our existing asset base, continuing the company’s share repurchase plan, maintaining balance sheet integrity and taking advantage of organically generated M&A opportunities. While equity valuations and borrowing costs have made small-scale M&A tough recently, allocating capital to oil-weighted projects in the company’s existing portfolio remains highly economic.

We’ve had these assets under control for about two years now, and with the first year plus, it’s really figuring out what we have from an asset optimization standpoint. Since then, we’ve been able to really explore and engineer opportunities that we believe can add value in a much more capital accretive way than any upstream M&A that I see in the market. These are projects that we are always currently evaluating, and we will share more as they come to fruition as we move throughout the year. We believe that U.S. Energy Corp. 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 first quarter, we extended our previously announced $5 million share repurchase program through June of 2025. We continued our share repurchase activity during the first quarter and since restarting our repurchase activity in late December of 2023 and through the first quarter, we’ve repurchased more than 0.5 million shares or greater than 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 as high of a return opportunity as we see in the marketplace. I expect to continue this activity going forward. In summary, the first quarter was strong in terms of operational resiliency, the highly adverse weather, cost controls 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. The 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 first quarter.

Mark Zajac: Thank you, Ryan. Hello, everyone. Let’s delve into the financial details for the first quarter of 2024. Total oil and gas sales for the quarter amounted to approximately $5.4 million, reflecting a decrease from $8.3 million in the same period last year. This decline was attributed to a 29% reduction in volumes and an 8% reduction in realized prices. It is important to note that this quarter’s production was significantly impacted by the non-operated investments made during the fourth quarter of 2023 and severe weather events in several of our key operating areas. Sales from oil production contributed 88% of our total revenues for the quarter, demonstrating our continued focus on optimizing our oil assets. Our lease operating expense for the first quarter was approximately $3.2 million, equivalent to $29.02 per BOE, indicating an impressive 28% reduction in total lease operating expense compared to the first quarter of 2023.

This reduction can be attributed to fewer one-time workovers in our continued effort to increase operating efficiency. Severance and ad valorem taxes for the first quarter of 2024 totaled approximately $300,000, reflecting a decline from $500,000 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 expense was $2 million for the first quarter of 2024. This expense is flat when compared to the same period of 2023. The first quarter traditionally includes some lumpy annual cash G&A expenses that have a greater impact on our cash balance but smooth out throughout the rest of the year. Turning to our net financial performance, the company reported a net loss of $9.5 million in the first quarter of 2024.

The first quarter loss is largely attributable to an oil and gas impairment expense of $5.4 million driven by the impact of lower SEC pricing on the company’s reserve report and wells temporarily shut in for the quarter. Workovers are currently ongoing to bring some of these properties back to production. We are currently not projecting an impairment for the second quarter of 2024. Our adjusted EBITDA stood at $0.2 million for the first quarter of 2024, compared to $1.2 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 the balance sheet. As of March 31, 2024, the company held outstanding debt of $5 million on our $20 million revolving credit facility.

Our cash position stood at $2 million and 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 financial results that are able to support the company’s initiatives in a way that maintains full balance sheet integrity. I am leading the charge 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.

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