U.S. Energy Corp. (NASDAQ:USEG) Q4 2023 Earnings Call Transcript

U.S. Energy Corp. (NASDAQ:USEG) Q4 2023 Earnings Call Transcript March 27, 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. Welcome to the U.S. Energy Corporation Fourth Quarter and Full Year 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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: Thank you, operator, 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 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 our latest quarterly earnings release and conference call presentation. With that, I would turn the call over to Ryan Smith.

Ryan 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 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 has achieved 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. 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 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, a USEG equity valuation that is trading at less than what will be 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 four or five 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 some 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 remains highly economic. We have had these assets under control for about two 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 or 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 deliver 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 rate of return opportunity that 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 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.

Mark Zajac: 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 one-time 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 high grading several accounting and finance positions.

Turning to our net financial performance. The 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 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 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. Thank you for your participation this morning. We are now ready to take your questions.

Operator: Thank you. [Operator Instructions] Our first question is from Charles Meade with Johnson Rice. Please proceed.

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Q&A Session

Charles Meade : Good morning, Ryan to you and the whole USEG team.

Ryan Smith : Good morning, Charles. Thanks for calling.

Charles Meade: 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 a 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 : 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 US Energy, that makes some of the acquisitions, asset-level acquisition, 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 greatly simplify it, but take your existing assets, keep production flat, maybe a little bit up and to the right and fund that out of cash flow at a small enough 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 that even acquiring an asset and doing extremely thorough diligence on it. We’ve had these assets now for a little over two 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 the rates increasing, which flowed through to M&A slowing down, flow 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, areas that they like, 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 three categories of production — moderate production growth, shareholder returns, and debt reduction through the existing assets that we have in our portfolio.

Charles Meade: Got it. Well, look, $80-plus oil, a lot of stuff will work. And Ryan I wondered just — you’ve made a lot of comments about the A&D market. I just wonder 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 seemed to have slowed down mostly because there’s — it looks like 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: 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. 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.