Q3 2022 US Energy Corp Earnings Call
Ladies and gentlemen, greetings and welcome to the U S Energy Corporation third quarter 2022 results conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host James Master.
Please go ahead.
Thank you operator, and welcome U S Energy Corp, third quarter 2022 results conference call.
After the market closed yesterday U S energy issued a press release summarizing operating and financial results for the three and nine months ended September 32022.
This press release together with accompanying presentation materials.
All in the Investor Relations section of our website at Www Dot U S and the RG Dot 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.
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 now like to turn the conference call over to Ryan Smith CEO of U S energy for his prepared remarks.
Thank you James Good morning, and thank you for joining US synergies first quarterly results conference call.
With this being our first call together I wanted to spend a few minutes, providing an overview of our business along with our strategy for profitable growth going forward.
U S energy is one of the fastest growing independent oil and gas producers in the United States, having completed a highly accretive acquisitions of increasing size in the last 24 months.
Since late 2019, we've increased our proved producing PV 10 by more than 14 times with current PDP reserves well in excess of our current enterprise value today.
Today, we operate in four prolific U S onshore oil regions. The Rockies in North Dakota, the mid continent, South, Texas Gulf Coast, and West, Texas. These assets, representing a diversified portfolio that protects the company from being tied to regional pricing or operational disruptions.
Our assets contain 8 million barrels of oil equivalent of long life oil weighted proved producing reserves that have a low decline profile.
Our current annual PDP decline is just around 11%, which affords us the flexibility of investing minimal incremental capital into the existing business to maintain healthy cash flows.
Even though we have grown quickly we've maintained our capital disciplined allocating free cash flow towards debt reduction a stable quarterly cash dividend and organic and inorganic investments.
As of September 32022, our debt balance stood at $12 $5 million with a year to date annualized EBITDA of nearly $17 billion, putting our leverage ratio at approximately <unk> six times net debt to EBITDA are very healthy and manageable level for an E&P company of our size.
Given the general volatility of the broader commodity markets, we regularly regularly hedge our production targeting greater than 50% of our expected oil volumes in the current year.
Thereby ensuring relative stability in our cash flow generation.
From an M&A perspective, we stayed very active and opportunistic pursuing mature assets with consistent production growth high margin cash flows and measurable operating efficiencies in.
In summary, we believe that U S energy provides investors commodity exposure through a micro cap E&P story that provides the growth potential return of capital elements and balance sheet stability that is demanded in today's environment.
Next I'd like to spend a few minutes discussing our roadmap for growth going forward.
U S energy today operates a portfolio of mature producing assets that provide high margin free cash flow that is critical to maintaining a strong balance sheet and supporting a stable quarterly cash dividend.
Despite having completed eight transactions in 24 months and which we would have acquired assets at significant discounts to PDP PV 10, and have increased the value of our proved reserves by over 10 times. We do remain in the early innings of a multi step expansionary phase of the company.
And the energy business scale is critical to sustained profitability. So our strategy is to continue rolling up high quality assets and rapidly growing our platform, which will achieve the operating leverage required to drive continuous profitable growth going forward.
And to that end as our cash flow scale with new asset additions, we do see the potential to develop a more robust return of capital program over time.
And finally, while economic returns are always top of mind, we do balance these priorities, while maintaining a high level of regulatory discipline and environmental compliance across our entire organization.
Before turning to our third quarter results allow me to summarize while we do believe that U S. Energy remains the most compelling E&P Microcap story first our asset profile, we have a low decline oil weighted producing assets across four of the most important and prolific oil basins in the United States Secondly, our free cash flow generation.
Given the maturity of the production in our asset base, our reinvestment needs are relatively low which allows us to harvest greater amounts of cash flow from the assets and be strategic about how we want to allocate that capital to create and return shareholder value.
This leads us to the third point, which is our focus on profitable growth drove has become somewhat of a dirty word in our sector because some operators drew themselves right into the ground during the last several cycles in years ultimately, losing their capital discipline. However, we do think growth done right at least a high free cash flow conversion and superior shareholder return.
We intend to grow the scale of our business focusing on high margin cash flow, while maintaining our base level of profitability.
Turning now to our third quarter results production for the third quarter averaged approximately 1752 Boe per day of which approximately 59% was oil. This compares to the second quarter, which averaged 1783 Boe per day of which 66% of the production was oil.
Oil volumes declined during the quarter, because we shut in wells on recently acquired West, Texas properties to performed planned and necessary maintenance. When we did close our January 2022 acquisition. We knew we would have to spend some workover capital in the future in order to maximize the production efficiency of the assets.
Going forward.
Much of the work was completed during the third quarter and the wells were turned to production.
We expect good contribution from these wells going forward in the fourth quarter.
Gas volumes increased during the quarter due to the integration of our most recent east Texas acquisition that we closed in the third quarter in July .
Total oil and natural gas revenues in the third quarter were approximately $11 $8 million compared to $13 $5 million in the second quarter.
Realized prices for the quarter were as follows oil received $94 81 per barrel and natural gas received $7.10 per Mcf for a total realized price of $73.36 per barrel of oil equivalent. This compares to the second quarter, where we received $105 74.
<unk> per barrel of oil $6 55 per Mcf of natural gas and $83.09 per barrel of oil equivalent and total realized prices declined by 12% in the third quarter.
Lease operating expense for the third quarter was approximately $5 4 million compared to $4 6 million in the second quarter. The increase in L. O is primarily due to the increased workover expense incurred in west, Texas that I previously discussed.
Production taxes of $900000 during the quarter were approximately six 9% of total sales revenue, which is essentially flat quarter to quarter.
Cash G&A for the third quarter totaled $2 $2 million, which is slightly higher than the second quarter of $2.0 million. The increase in cash G&A expenses, primarily due to an increase in nonrecurring professional and advisory fees related to the Companys January 2022.
<unk> and the associated share registration statements filed throughout the third quarter.
Adjusted EBITDA in the third quarter was approximately $3 $1 million compared to $5 $1 million for the third second quarter.
As just mentioned the decrease in third quarter was attributable to the lower oil volumes increased workover expenses and lower realized oil prices.
Now to touch on hedging we are approximately 73% hedged for the balance of 2022 and approximately 54% hedged in 2023, when it comes to our anticipated oil volumes given.
Given the gas revenue makes up a lesser percentage of our overall revenues, we have taken a more patient approach to hedging that commodity.
For the balance of 2022, we are hedged in gas approximately 17% and carrying no gas hedges after the first quarter of 2023.
Finally, I'd like to give a quick update on the balance sheet before we turn the call over to Q&A.
In connection with closing our East, Texas acquisition in July the borrowing base on our revolving credit facility was increased from $15 million to $20 million post transaction, we have $12 5 million outstanding on our revolver, which represents the only debt that we carry.
As of September 30th U S energy had approximately $3 1 million of cash on hand for resulting net debt balance of $9 $4 million.
As we have previously discussed we plan to continue using excess cash flow to work the balance down over the next few quarters as well to fund our quarterly dividend payment.
Since the current management took over in late 2019. The goal here has been to build a company of scale and I'm very proud of the progress that we've made thus far.
During our 10 year U S energy has grown proved reserves from 1 million to 8 million Boe.
Production from 300 BOE per day to over 1800 BOE per day currently over that same period the value of our proved producing reserves has increased 14 times to more than $175 million or approximately $6 60 per share more than double where the shares are trading today.
On behalf of the entire team I want to thank you all again for joining US This morning and for your continued interest in U S Energy Corp.
We consider the initiation of a quarterly conference call with investors a strong step in providing more access to the company and disclosure to our investors. It's a compelling story and one that we're all very excited to be a part of.
As one of the few high quality Microcap stories that combines low risk income yield with meaningful upside through M&A. We believe this is an opportunity worth sharing.
With that I'll turn the call back to the operator for questions.
Thank you.
Ladies and gentlemen at this time, we will be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the stock east.
Ladies and gentlemen, we will wait for a moment, while we poll for questions.
Our first question comes from the line of Charles Meade from Johnson Rice. Please go ahead.
Good morning, Ryan to you and your whole team there.
Hey, Charles Good morning.
Brian I wanted to ask I wanted to ask two questions about your.
Your volume trajectory and ended up the underlying dynamics and three going into <unk> first on natural gas you. Obviously, you got a big uptick in <unk> and a big piece of that.
Is the is the east, Texas acquisition, but can you give can you give us a sense or are you know what what it looks like from your point of view on how that asset package is performing versus your acquisition case on the natural gas side and how much that that may be played into it.
You know how <unk> worked out and what he is going to look like.
Yeah.
No problem so we.
Closed the.
Acquisition, we made in East, Texas in late July of the.
The third quarter, so for accounting purposes. It only showed up for August and September .
And the.
July portion of it was a closing statement adjusted but so far it has been.
Wonderful for US we went into it evaluating we have some wells in the area already from.
The January 2022, this year acquisition that we made.
So we already had a lot of familiarity within the area with the gas prices, where they've been and this year. Obviously it makes these gas projects much more compelling.
So it was already an area that we are looking at and.
Yeah, we thought we bought the asset right on a very attractive cash flow multiple I believe one seven times.
And so far we've had no hiccups I would say.
It's performed better but better within a range of probably 5% than what we were forecasting so its definitely been in line.
It's produced.
The net cash flow if you will off of the asset as we forecasted for us to amortize down our credit facility, which we drew on to make the acquisition. So it's been strong so far.
It's been very low maintenance I think going into 2023.
You know our plan on it as you know on one hand, if it's not if it's not broke don't.
Don't try and fix it and let it keep producing.
Okay 400 to 450.
BOE per day, with 60% gas and you know as we continue to learn more about it and get our arms around it I do think.
Down the road and when I say down the road I call down the road 2023.
There are some.
Potential re completion opportunities and yeah.
A number I'd say the majority of.
The well bores that we acquired in the deal that early stage, we see some upside more engineering needs to be done on it but it is part of our evaluation in 2023 planning and budgeting process that we're going through right now.
Got it that's helpful. Ryan and then and then on the oil side and I think you I think you addressed this a bit here you you maybe you hinted at it in your prepared remarks.
The Workover program you guys were doing on your your those I believe are there.
Conventional Permian assets in West Texas.
Or is this are we what kind of production response do you expect to see your should we expect to see or war was where was this workovers board just kind of cleaning things up as opposed to improving rate.
Unfortunately, I would say the latter it's definitely a mix, but I think it's kind of a.
A two part answer the first half of the year the capital that we spent on our west Texas assets were.
Call. It you know returned to production type of.
Capital.
We had fairly decent results there we didn't have a chance to.
Fulfill the whole program I would say the most recent capital that we've spent especially the stuff that showed up in the third quarter was.
The vast majority of that capital it was maintenance capital that.
It took some of that returned to production production offline.
Right now I think.
I don't think I know a lot of that production has come back in the fourth quarter, we're still spending some money on the same project to finish it up were almost done now.
But I expect that production to come back online what hasnt already.
Throughout the fourth quarter, So you know.
Naturally.
Spending.
Workover capital on maintenance hurt your your field level economics for the year, but we do believe here that you know once kind of it shakes out on a on an annual look back basis. The capital is being spent in west Texas to bring to bring wells back online will ultimately be.
Economic with.
A much higher run time going forward with this maintenance work that we're doing right now.
So Brian so if I understand correctly.
The volumes will go up because basic because wells are coming back online, but but it's not but it's not the case the wells are coming back online at higher rate. It's more just there'll be an uptick because of the because of uptime as opposed to improve rate is that the right read.
I think it's I think it's both I mean, taking like flush production out of the equation.
A lot of the return to production wells. We're doing work that were doing were wells that were.
<unk> when we acquired them. So I think it's a mix of both.
Got it okay.
Got it.
Oh I have another question, but if theres anyone else in the queue. You cannot you can go to them.
You can go ahead and you can go ahead and health care and how if you want I don't Alright and chart. So I'm sorry, I wanted to ask about how the what the what the A&D opportunity set looks like for you right now.
And I Wonder if you could address it from two perspectives.
Number one what do you see like how how how is the opportunity set changed either for the better for worse or what's what's new and different and then and then on the other side of it or what have you seen in the way of up.
Competition from from other possible buyers on on the opportunity said you're after.
Yes.
Great question.
Complicated and very fluid as you well know in the M&A markets right now I think.
At least what what I see and what we see here is like a very very clear line I can't give you an exact dollar amount or value amount where that line is but over the last couple of months I think the larger type of deals and larger to relative to the U S energy not relative to to Exxon right. I think we have seen kind of a REIT.
<unk>.
Calibration of.
Of stellar and especially buyer.
And what they'll attribute value to add.
I've seen when you know over the last several months, if you will or maybe last several months beginning in maybe June or June or July people talking about paying for upside or giving any credit to upside would get you thrown out of a room I think we've seen I think we've seen a few transactions that if.
There is real near term drilling real being you have permits in hand, you have a rig in hand, if crew in hand, you have the million things right. Now that are are tough to get and you have your arms around and this is really development drilling and not.
Step out exploration drilling.
Credit assigned to that near term drilling is it dollar for dollar Reserve report credit of course, not but.
I think we are seeing a a PDP plus with that plus representing.
<unk>.
Some upside drilling locations.
Flipping a full 180 on you what we see on the kind of call it asset level.
Truer asset level deals just asset bolt ons ranging from very small to.
Call. It I'll say 20, or 30 million, but again that number is very is very rangy right are still straight cash flow multiples.
Whether it's 24 27 type of month deals.
And we haven't seen as much seller and buyer recalibration in that market, because I think commodity prices right a private seller.
Doesn't have a lot of hedges is probably cash flow in their asset.
Pretty pretty strong definitely stronger than it's been in a long time and.
A lot of those folks don't.
Don't want to sell at 24, 27 months cash flow right. They would just rather rather keep it so.
We've seen a slowdown in that market and kind of a head butting in that market it hasn't it hasn't really changed.
But again, that's just a challenge that that we overcome so that's kind of where we see that the deals sure.
Taking out and the values being attributed in terms of.
<unk>.
Competition I mean.
No doubt there is theres a lot of competition out there I would say.
On the asset level deals.
We don't run into.
As much public company competition, just because of there's not that many.
Smaller scale entities out there that are out bidding and if they do I would say the exist some of the existing smaller scale entities are probably focused on.
Singular areas and then the larger guys right they need to do stuff that that moves the needle on the private side.
On the asset level.
Type of deals, we see a lot of competition from.
Private true privates are called true privates, not private equity portfolio companies.
True privates and family office type of funded capital, especially in that in that world.
There's a lot of that money.
Facing assets.
So it is competitive but again the bid ask right now on the smaller asset side.
At least from what we see is.
Hasn't hasn't budged much over the last few months.
Got it.
It's all good color. Thank you Ryan.
Thanks Al.
Thank you.
Our next question comes from the line of Ignacio <unk> from Hudson. Please go ahead.
Hey, good morning, congratulations on the quarter and thanks for the time today I'm, calling on behalf of been ticket with two questions here just to start I guess, just an update on re completion opportunities in Montana.
How that's going.
Yeah.
For sure. So all in all expanded a little bit because I think it's kind of a more of an asset based question on Montana, specifically, we have not done a ton of recompete.
Our recompete work on the Montana assets that we acquired in January of 'twenty, two just because it's been a really good asset for us it's been a high run time, we have a really great team.
Up there in Cutbank, Montana that is running it. So it's really been just like a class cash flow generation machine for us right now.
I think on the on the true re completion side.
We have participated in some on a non op basis in North Dakota two.
I would say mixed but.
Fairly decent results small working interest type of stuff on as I mentioned earlier on the earlier question I think that probably our most near term re completion opportunities at least where we're spending a lot of time on is on our newly acquired east, Texas assets going back into the Rhodessa formation and then.
On our South Texas assets.
Which are non op, but we have a very high working interest some as high as 50%.
We're working with our partner and we think there is.
Some Austin chalk re complete activity on a fair amount of our holdings down there. So I think that you see.
Activity in these areas for us in 2023, like I mentioned, we're still kind of going through and formulating our our 2023 budget but.
We do think that there is.
Upside over a significant portion of our asset base on Recompete opportunities and I think we start.
In Texas, both in East, Texas, and kind of our South Texas acreage.
That's fair.
Really helpful. Thank you and I know it was mentioned before.
It's been talked about but just any other color on the M&A funnel, maybe some broader trends youre seeing anything would be helpful. There. Thank you.
Yeah, I mean, I think I'll kind of reiterate what I, what I already mentioned and maybe add a little more color to how we how we do it we have a very.
Strong business development team here and evaluation process and we are very.
I would say in the market on all sizes of deals small and large so I do think that we have a a good pulse on the market.
I see a bigger.
GAAP like I mentioned between the larger scale deals in the smaller scale of deals.
And the way that they are valued I know there are always valued a little bit different when the scale is that wide but.
The way that they are being valued the way.
Companies and entities are looking at them just seem to be very par apart from.
Our PDP pain for some upside as well and then.
Our cash flow deal.
And I think that's why we've seen outside of the really really big guys.
M&A slowdown in less.
Their respective transactions gave some upside to the sellers and I think <unk> seen two or three transactions over the last call it six weeks or so.
Reflect that so I do think it's something that.
And the investing community is going to.
Eventually recognize that inventory is going to come to the forefront of the conversation for companies now when it hasn't been at the forefront of the conversation for a little while and I think that this trend of.
Giving.
Attributing value to.
Real locations in real near term drilling that in this business you can put as much certainty around results as you, possibly can I think youre going to see.
Deals.
Start going off more and more with value attributed to those locations.
That's perfect. Thank you guys and congrats on the quarter.
Thanks.
Thank you.
Ladies and gentlemen, we have reached the end of the question answer session.
And now I would like to turn the conference Ryan Smith CEO for closing comments.
Thank you everybody I appreciate your time this morning and for your continued interest in U S energy I'll look forward to speaking again next quarter. Thank you.
Thank you the conference of U S Energy Corp has now concluded.
Thank you for your participation you may disconnect your lines.
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Okay.
Yes.
Okay.
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