U.S. Energy Corp.

Good day and welcome to the U.S. Energy Corporation third quarter 2024 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Mason McGuire, Vice President of Finance. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to U.S. Energy Corp's third 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. And our Chief Financial Officer, Marcus Ajak, 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 quarter ended September 30, 2024. The press release, together with accompanying presentation materials, are available in our 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 the 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 like to turn the conference call over to 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. Turning to our quarterly results, these reflect the dedication and resilience of our operational team as well as the positive momentum from our recent business development efforts. Focusing on our recently acquired Montana project, we made significant progress this quarter with the completion of our first industrial gas well in late October. We're currently evaluating the results and finalizing plans to target what we believe are economically promising production zones, which have been independently tested to show non-hydrocarbon helium concentrations of up to 1.5%. Looking ahead, we plan to commence drilling a second well in early 2025 with additional developments throughout the year aimed at similar zones where we anticipate similar helium concentrations. Importantly, our initial well came in below our projected drilling costs, and we expect these costs to decrease as we move forward with our drilling program next year. We remain highly enthusiastic about this opportunity, confident that the Montana project not only stands as a substantial value driver for U.S. energy on its own, but also serves as a foundational step towards building a robust industrial gas platform. This initiative represents an efficient and economically compelling use of our existing capital while positioning U.S. energy with heightened relevance in the capital markets. Based on the data gathered so far, We continue to anticipate that these wells will drive highly economic development of our asset base, both in the field and at the infrastructure level, supported by a realistic and achievable capital spending plan that can be funded from U.S. Energy's existing balance sheet. This is advantageous for several clear reasons, with positive impacts expected to flow directly into our realized economics. Looking ahead, our 2025 wells will not only further define the productive parameters of the asset base but will also enable us to confidently forecast our plant development and strategically execute on our production timeline. Lastly, I want to highlight an essential aspect of our recent transaction and the strategic background of our Keven Dome assets in Montana. It's important to note that the vast majority of helium production in the United States is hydrocarbon-based, largely as a byproduct of natural gas extraction. In contrast, the helium and industrial gas streams from U.S. Energy's new assets are non-hydrocarbon-based, Positioning this project is one of the lowest environmental footprint initiatives of its kind in the country. We are extremely encouraged by the initial results from our first well and will continue to provide regular updates on our drilling and completion progress as we advance. Turning to our legacy oil and gas assets, we completed the sale of our South Texas properties at the end of July for a purchase price of approximately $6.5 million. Adjusting for this divestiture, which included roughly 100 barrels of oil equivalent per day, our third quarter net daily production reached 1,149 barrels of oil equivalent per day, a sequential improvement over both the first and second quarters of 2024. This progress underscores the dedication and effectiveness of our operations team, who successfully managed to remediate the effects of significant flooding across East Texas and the Gulf Coast earlier in the year. For the third quarter, oil accounted for 58% of our total production with the remainder consisting of a balanced mix of natural gas and NGLs. As we close out 2024, the majority of our capital will be allocated efficiently towards completing our recently drilled industrial gas well, supporting the production profile of our legacy asset base, advancing the company's share repurchase plan, and maintaining strong balance sheet integrity. Additionally, we remain poised to capitalize on organically generated M&A opportunities that align with our industrial gas growth strategy. As we head into 2025, we will continue to strategically monetize our legacy assets while deploying that capital into our Montana project and maintaining disciplined balance sheet management. We believe the execution of these efforts will make 2025 a truly transformative year for U.S. Energy. While any development project, of course, requires development capital, we are in an exceptionally strong position compared to our peers with significant access to internally generated non-dilutive capital derived from both operational cash flow and asset sales. We firmly believe that U.S. Energy stands apart from other energy companies of similar scale in today's evolving energy landscape. With a highly economic and scalable development project, alongside legacy E&P assets that require minimal capital to maintain steady production, we're generating and deploying predictable cash flow that allows us to strategically allocate capital for maximum returns. Our approach positions us to withstand market fluctuations and seize emerging opportunities, ensuring that we are well prepared to navigate the complex and ever evolving dynamics of the energy industry. At U.S. Energy, our focus remains steadfast on operational efficiency, balance sheet discipline, and responsible resource management, underscoring our commitment to sustainable value creation. As we look ahead, we are dedicated to capitalizing on favorable market conditions and leveraging our core strengths to drive continued growth and deliver meaningful returns to our shareholders. In the third quarter, we intensified our previously announced share repurchase program. To date, the company has repurchased approximately 886,000 shares at an average price of $1.17 per share, representing 3% of our outstanding shares. This share repurchase activity alongside meaningful and consistent insider buying by executive management, underscores our conviction that repurchasing our stock at current valuations is both prudent and one of the highest return opportunities available for our free cash flow. We plan to continue this activity as we move forward. A strong balance sheet is always a top priority for U.S. Energy, and I'm pleased to report we ended the quarter with zero debt outstanding on our credit facility. Importantly, despite recent asset sales, our borrowing capacity remains unchanged, a testament to the solid value foundation of our company's platform and underlying asset base. In closing, U.S. Energy is uniquely positioned at the forefront of a true first-mover advantage as a growth-oriented, non-hydrocarbon, industrial gas-focused public company in the United States. The majority of competitors in this space are constrained by complex equity structures, stressed balance sheets, limited capital access, and exchange listings that deter institutional investors. U.S. Energy is free from these hurdles, and we are confident that as our distinctive position gains recognition in the marketplace, further actionable, scalable, and highly accretive growth opportunities will emerge. Now, I would like to introduce Mark Zajac, our Chief Financial Officer, who will provide a detailed update on the financial results of the third quarter.

Thank you, Ryan. Hello, everyone. Let's delve into the financial details for the third quarter of 2024. Total oil and gas sales for the quarter amounted to approximately $5 million, reflecting a decrease from $8.7 million in the same period last year. This decline was attributed to a 30% reduction in volumes, partially offset by 18% increase in realized prices. It's important to recall that prior quarter's production was impacted by severe weather events in several of our key operating areas. This quarter's production demonstrates our ability to bring weather-related production issues back online, offset by our South Texas divestiture, which closed early in the third quarter. Sales from oil production contributed 88% of our total revenue for the quarter, demonstrating our continuing focus on optimizing our oil assets. Our lease operating expense for the third quarter was approximately $3 million, consistent with the prior quarter, equivalent to $28.95 per VOE, versus $27.69 per BOE in the second quarter. The increase in the LOE per BOE quarter to quarter is due to repair costs associated with prior weather events and reduction in daily production volumes from divestitures. Severance and ad valorem taxes for the third quarter of 2024 totaled approximately $0.3 million, reflecting a decline from $0.6 million in the same period last year. As a percentage of total oil and gas sale revenue, These taxes accounted for approximately 6% during the quarter. Cash general administrative expenses was $1.6 million for the third quarter of 2024, a reduction of 27% when compared to the same period of 2023. Year-to-date cash general administrative expenses have decreased $1.8 million when compared to the same period from a year ago. The decrease reflects lower compensation and a variety of overhead costs as we divest properties and focus on our helium project. Turning to our net financial performance, the company reported a net loss of $2.2 million in the third quarter of 2024, an improvement of $6.6 million when compared to the third quarter of 2023 due to a significant reduction in operating costs partially offset by reduced revenue. Our adjusted EBITDA stood at $1.1 million in the third quarter of 2024 compared to $1.7 million in the same period last year. influenced most notably by a reduction in total cash general and administrative expense and receipt of hedge proceeds from the prior period. Let's briefly touch on our balance sheet. As of September 30, 2024, there was no debt outstanding on our $20 million credit facility, and our cash position stood at $1.2 million. 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 demonstrate our balance sheet discipline and maintains a full balance sheet integrity. My objective is 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.

Thank you. We will now begin the question and answer session. If you have a question, please press star then 1 on your telephone keypad. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from Jesse Sobolson with DeBorough Capital. Please go ahead.

Hello, everyone. Good to hear the great progress in the balance sheet. I'm just curious, can you remind investors of when it's anticipated that you'll be able to bring these helium assets online and what needs to happen between now and then?

Yeah, good morning. Good question. So, you know, as you know, the ultimate goal is to get a processing plant in place to process the streams and ultimately start selling helium, etc. So, you know, walking through a timeline, we think, you know, at this point, that's somewhere between three and five wells drilled, some light gathering lines laid for the gas streams, ultimately feeding into a plant. You know, there's a pretty wide range of expectations on how long it's going to take the plant to get built. It's looking like it'll probably be sooner than what we originally thought. So, you know, right now we're still sticking to that, you know, very early fourth quarter of next year to have, you know, full cycle production to sales. I do think there's a little significant chance that that Timeline can get moved up based on the plant being delivered and commissioned sooner. But right now, we're looking at kind of an over-under on October 1st of next year.

Awesome.

It sounds like things are going pretty well there. I think just another additional follow-up question here on the M&A side of things. You know, in your prepared comments, you did mention a continued focus on M&A with what appears to be the open consideration of both acquiring new assets and selling legacy ones. Is the end goal here to be a pure play industrial gas company, or are you guys still expecting to hold on to specific oil and gas assets over the longer term? Thanks. And that's it for me.

Yeah. So, the goal for it is to ultimately, you know, create and run this industrial gas platform kind of full stop. On the legacy E&P asset side, no secret, small, smid cap E&Ps trade at pretty ugly valuations. The M&A market, at least the public M&A market, on bigger deals is very tough to get done with equity valuations and the public-private disconnect. That being said, what I'll call the smaller, I mean, I'll define smaller, sub-20 type of million-dollar range on these assets, whether it's funded by small privates, family offices, et cetera, is still very active. I view, if we can pull forward value on assets on, you know, again, give or take a future four-year cash flow type of number, and redeploy that into industrial gas assets in the near term, Montana, it's a very good trade-off for us. So I think that you continue to see us, you will continue to see us kind of pick off our non-core E&P advantageously to sellers. I expect that to continue. Ultimately, leaving us with Our industrial gas project in Montana and our EMP assets in Montana, we like those now because it's all oil, it's close by to where all of our operations are. It has strong margins, it covers overhead, et cetera. Eventually, I think all of the EMP assets go just to streamline the message and the platform that we have. In terms of the acquisition side, I probably should have been more specific. I don't think you see us acquire EMP assets going forward anymore. That's just not what we're looking at. The type of assets that you acquire at this level usually aren't what I'll call fitting the public company model, more smaller scale stuff. Where I do think you see us make strides on the M&A front is expanding the industrial gas platform, whether it be on the producer side or on the infrastructure side, because they kind of go hand in hand. So we're definitely active in looking at further like-kind acquisitions to the ones that we made this summer. And then just repeating myself a little bit, opportunistically divesting our legacy EMP.

Great. Thanks for the detail there. It's exciting to watch the transformation at work. I'll jump back in the queue.

Thank you. And our next question today comes from John Davenport of Johnson Rice. Please go ahead.

Hi. Good morning, guys. Thank you for taking my question. I was curious if you would be able to give us either, you know, a timeline on when some additional data points on helium concentrations might be available or the timeline on a helium reserve report might be. Thank you.

Yeah, good morning, John. So, in terms of, you know, data points, we kind of gave our first one here a couple weeks back. You know, right now, We're setting up operations up in Montana to complete this well. We'll flow back from the targets that we have analyzed and deemed the most economic. Ultimately, we're going with this first phase that we think is going to be able to feed a plant as soon as possible. So I think the next data points, we always put out a pretty big offset date at the very first part of the year, just post-Christmas time. I think that's going to be when we do it again. I kind of am against, you know, multiple incremental data points every couple of weeks, just whenever you can get something more fulsome out there. So I think that, you know, sometime, whether it's early December, early January, we have more public data release from the completion of this well that goes everything from helium content to further data on the respective zones to flow rate, et cetera. And then on the reserve report side, they kind of run hand in hand just as we get more data. You know, Ryder Scott is our third-party group that is doing the reserves for this asset. You know, I think they probably come in around the same time, you know, whether it's, you know, very early, very mid-January on – on the reserve side, but we're working with them on a daily basis now, and I expect that to be forthcoming in relatively short order.

Okay. Got it.

Thank you all. That's all from me.

Thank you. And our next question comes from Tom Kerr. It's Action Investment Research. Please go ahead.

Good morning, guys. Can you follow up on the helium full cycle like you mentioned? You know, everything goes to plan. You have three to five wells, a processing plant finished in October. Looking for the next 12 months and without giving guidance, can you tell us what that may mean for revenues or EBITDA just from the helium program?

Yeah. Good morning, Tom. So I think, you know, on that timeline, you know, we have – a fairly good feel for where that is going to shake out at. You know, we're still working on an offtake agreement. You know, I personally want to see where we get to on that right before we get it.

Okay, so you don't want to, okay.

Yeah, I mean, I think a full cycle plant for this first one, and I'm stalling a little bit on you just because there's ranges of the plant size that we haven't determined yet, and that's based on flow rates, that's based on helium content, that's based on the zones we go after, and all that requires the capital allocation to get that, right? I think a fair number to use, and this isn't a formal guidance number, but we kind of see this first plant, assuming it's a nitrogen-based plant, coming in at the $5, $6 million, give or take EBITDA type of number range. And again, once we tighten that number down, we'll get formal guidance and timeline on that. But right now, I think that's a fairly accurate conservative number to give on an annual run rate that begins next year.

Got it. And on the well cost, you said it keeps going down. Is that still about a million dollars per helium well drilled?

That's probably about right. This first one, we had an AFE for, I think it was right around 1.8 million. Undoubtedly, this first well we knew going in was going to be the most expensive well, just, you know, setting up operations up there, getting our first well drilled, you know, the internal mandate was to, you know, literally Cadillac this process to make sure that, you know, there wasn't a corner cut saving dollars just to make sure that, you know, we got a very good lay of the land. Drilled the three zones and, you know, drilled, you know, I think it was a 22 day drill, going forward, once we start going after singular zones, probably upgrading our rig a little bit now that we know we need one with a little more power, we see that number coming down significantly. One, 1.1, there's always a little swag in that number, but I think it's going to come down 30 plus percent from the realized cost on this first one.

Got it. And can you kind of give us a primer on helium pricing. I know a lot of it's contract-based, but where does that look now? Can you look in the 2025 and see how that looks? What's sort of the outlook for that or how you guys look at the helium pricing?

Yeah, great question. So the numbers we have modeled and kind of the number that I gave you is based on what we see on the low end, which, and I apologize, I don't know the exact number, but call it in the $450 range. You know, spot helium isn't necessarily the best way to look at it because so much of this is based on offtake agreements. Historically, you know, the producer has contracted with a broker and the broker has middle manned a deal with the larger end user. You've seen a couple of groups, I'll say, kind of get smart on that process. and cut out the broker because there's only so many end users here, which significantly improves the price that you're realizing because you're not paying the middleman. So a $450 to $600 type of number is what we see in the market. We model to the low end of that. We forecast into the low end of that. I think there's significant upside to that number, at least varying towards the high end of the range. going directly to an end user, which is what we're going to try to do. But that's kind of the range we're seeing now. There's some, depending on who you ask, there's forecasts out there that have it going higher, have it going a little bit lower. But we're comfortable in that range, especially keeping our forecasting number in that low to mid $400 type.

It sounds good. Thanks. One more for me, quick one. The oil and gas PV-10, has that changed much from those July numbers, or will it be in the 10Q, a new number?

It'll be in the materials. I don't think we filed our actual reserve number in the SEC filing. It's around $35 million now, give or take a little bit with where pricing is post – I'm sorry – That's a wrong number. It's right around 51. I just got corrected.

Okay, thanks. That's a big drop.

That's all I have to say.

That's all I have to say. I'll get back to you.

All right, I appreciate it. Thank you.

Thank you. And, ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to the management team for any closing remarks.

This is Ryan Smith. We thank you for joining us. We're excited about what we're doing here. We think we have a very big year coming in 2025 with the project and the new projects we have on deck and that we're working on. And we look forward to updating the market on our results and speaking on our next call. Thank you.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.