U.S. Energy Corp. Q1 2023 Earnings Call
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Greetings and welcome to U S Energy Corp, first quarter 2023 results conference call. At this time, all participants are in a listen only mode.
<unk> 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.
Please note. This conference is being recorded I will now turn the conference over to nation Mcguire director of corporate development. Thank you you may begin.
Thank you operator, and good morning, everyone welcome to the U S Energy Corp. 's first quarter 2023 results Conference call, Brian Smith, Our Chief Executive Officer will provide an overview of our financial and operating results and discuss the company's strategic outlook. After the market closed yesterday U S energy issued a press release summarizing operator.
<unk> financial results for the three months ended March 31 2023.
Press release together with the accompanying presentation materials are available in the Investor Relations section of our website at Www Dot U S and Archie 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 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 now like to turn the conference call over to Ryan Smith.
Thanks Nathan.
Good morning, everyone and thank you for your interest in U S energy and for joining US today for our first quarter 2023 earnings call as the company has continued to carry forward into the first quarter with strong operational momentum realized throughout 2022.
During the first quarter, we sold approximately 91300 barrels of oil and 384 million cubic feet of natural gas for a total of 155000 barrels of oil equivalent or approximately an average of 1726 Boe per day, a 29% increase over the fourth.
Order of last year, when we averaged 1341 Boe per day.
Specific to our original focus areas our Rockies production grew approximately 4% during the quarter, our mid Con and East, Texas assets grew approximately 14% and our west, Texas and Gulf Coast assets grew approximately 8%.
Unfortunately, our south Texas assets, specifically some of our highest margin properties in Karnes County experienced some significant downtime related to a I would say normal, but unplanned well maintenance that was undertaken during the quarter of which those wells have since come back online.
Realized prices during the quarter before derivatives were approximately $77.70 per barrel of oil and $3.06 per mcf of natural gas or a blended cost of $53 25 per Boe.
Which was approximately 28% lower than our realized pricing in the prior period of $73.50 per Boe.
This resulted in financial performance that was below that of the first quarter of last year.
Significantly higher production volumes.
Moving onto revenue, we recorded $8 3 million in the first quarter down approximately 7% from the $8 9 million in the first quarter of last year.
Mostly driven by the previously mentioned pricing decline.
86% of our net sales came from oil.
Turning now to more significant expense line items on the income statement or at least operating expense in the first quarter was approximately $4 $5 million or $29 12 per Boe.
Paired with $2.7 million or $22 60 per Boe in.
In the prior year period.
Absolute LOE, we increase due to the acquisition of the additional producing properties in 2022 and our per unit cost increased primarily because of the unplanned maintenance on our south Texas properties, which of course affected both production and cost profile.
Looking forward, we expect to recognize further operating cost efficiencies as we fully integrate all of the acquisitions that we made in 2022 and as a portfolio and we forecast low to average approximately $3 5 million per quarter or around the low $20 per Boe.
During 2023.
Production taxes were about half a million dollars or $3 35 per Boe.
Our tax rate as a percentage of revenue it's held steady at approximately 6%.
Our cash G&A, excluding share based compensation was approximately two point.
Zero million versus $1 4 million for the prior year period. The increase G&A expenses are due to the modest but necessary additions to personnel that came with our acquisitions that were made throughout 2022, we expect G&A to average approximately 2 million per quarter in 2023.
And management maintains focus on continuing to optimize that number moving forward.
Looking at our adjusted EBITDA U S energy recorded $1.2 million in the first quarter compared to $4 1 million in the first quarter of 2022 as lower realized prices largely negated the 28% improvement in sales volumes.
Quickly touch on our hedge book, we are approximately 50% hedged on our expected oil volumes in 2023 with the majority being collars.
All with a weighted average floor of right around $60 per barrel. We did have some gas hedges that roll off in the first quarter. So we are unhedged on gas moving forward.
Where we sit now we're comfortable with where our 2023 hedge program. Currently sits from a risk management perspective, and we will continue monitoring the Ford oil strip as we evaluate 2024.
Under the assumption that we're in a pricing environment similar to the one that we are in today the level of hedging we may do around any potential future acquisitions will likely be commensurate with the amount of debt capital used in that transaction.
Okay.
Briefly on our balance sheet at quarter end, we had $12 million outstanding on our revolving credit facility and about $2.4 million of cash on hand.
With an additional 8 million available under the revolver plus our cash we had total liquidity of a little bit greater than $10 million.
While we feel totally comfortable.
Where our leverage profile stands today, we do continue to intend to continue paying down our outstanding balance with a portion of our free cash flow going forward.
Now I would like to turn to our 2023 outlook. What you said against the backdrop of macroeconomic uncertainty and the recent volatility in commodity prices since the start of the year, there's been a pullback in commodity prices with the 2023 and 2024 oil strips are declining by 11.
And 9%, respectively, all that to say that volatility is a fact of life in the energy business and we have avoided the temptation to lever up chasing growth in the good times, because we have all seen the other side of that.
We're very cautious with our balance sheet and that gives us a lot of assurance in the face of any potential recessionary environment that are capital light low decline business model is the right one with our healthy liquidity profile that we have our low leverage balance sheet and our high quality producing assets, we are positioned to capture significant value in an up cycle environment.
While remaining confident that we can successfully weather a downturn in commodity prices.
While we do not put out official guidance I would like to set some expectations as we head deeper into 2023 from an.
<unk> standpoint, we're very pleased with the performance of our producing assets.
Given the conventional nature of these wells and their production history, our corporate decline rate is in the upper single digit percentages.
What does that mean it means our maintenance capital required to hold production flat is minimal and it can easily be funded from a portion of the company's free cash flow at current and significantly lesser commodity prices than we're experiencing today.
So based on our current assets, we expect capital expenditures of approximately $5 million during 2023, which reflects investments in various highly economic returned to production opportunities.
That we have throughout the portfolio as well as infrastructure investments to optimize.
The daily.
Operating cost structure of.
Several existing assets as I mentioned earlier, we do expect to see continued improvement in lease operating expenses are driving that line item continuously down to a steady run rate in the low $20 per Boe.
Generally flat production taxes and flattened improving.
Cash G&A throughout 2023 wild.
While running the bare bones business would definitely lower our G&A run rate.
I do think it should be noted that the company is expected to realize true cost synergies around future Atwood asset acquisitions.
With the current professionals, we have that make up our our workforce right now.
And finally, let me spend a couple of minutes on the strategic outlook for our business.
Our priorities are threefold first we.
Operator, our assets and allocate our investors' capital responsibly the streams, we take environmental stewardship seriously and are proud of where and how that we work and we acknowledged at every dollar invested must have a positive return.
We smartly allocate that capital to primarily grow the company through acquisitions.
Understanding that increased scale brings both production and cost efficiencies.
And ultimately a more profitable business, we've already seen the rewards of the strategy in 2022 with significant increases to approved reserves value cash flow and the company's operating margins.
And third we're committed to returning capital to shareholders, both through a sustainable dividend and our recently announced $5 million share repurchase program two initiatives that I believe demonstrate the underlying strength in the business.
And.
The company's boards determination to determined to create long term value for our shareholders.
We believe that our strategy has resulted in significant increase to the underlying value of the company.
The strategic acquisitions and targeted development activities over the past 18 months on our existing acreage we've increased.
Develop producing reserves to 7.8 million V O E. I'm, just 1.4 million Boe and I've seen the value of those reserves increased 13 times to $173 million at year end as you see pricing over the same time period.
Our above our current enterprise value.
While the M&A market has been challenging and may continue to be given the economic uncertainties I have great confidence in our ability to drive value no matter the environment U S. Energy has a motivated and disciplined team of professionals and extensive network in the oil and gas community and a mandate to strategically grow the company, we offer our potential partners and strong balance sheet.
The ability to evaluate and close quickly and a proven track record of value creation, along with a post deal history of quality asset stewardship.
We fully believe that the continuous and efficient growth of the company is achievable and we focus on that task every single day.
I want to thank you all again for your interest and your support of U S. Energy. We believe we offer a unique value proposition to those looking for exposure to the current energy cycle of which we believe we are in the early innings, there's no other public oil and gas producer of our size and offers the balance sheet strength and the downside risk protection with the growth trajectory that we do.
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Management, along with the rest of our team are highly incentivized to create maintain and grow shareholder value and that mandate remains at the forefront of every decision that is made at the company.
With that operator, I'll turn it over to Q&A.
Thank you.
I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is another question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
Our first question is from Charles Meade with Johnson Rice. Please proceed.
Good morning, Ryan to you and in the whole U S energy team there.
Hey, Charles Good morning.
Ryan you you I want to go back to what you said in your prepared comments about the the downtime.
In Karnes County, and I think you are I think I like the way you framed it it was a it was normal but not expected can you give a little bit more detail on what the nature of of the of the work that was needed and really what I'm what I'm.
What I'm aiming at is whether.
You know this this is a kind of a one time fix that were.
That we're not gonna have to handle again or whether this is a given that you know this could be the kind of thing that crops up again.
No great questions. So I would say, it's more of the former so.
Our.
Digressing just a little bit on the question as you know our asset base is.
Highly conventional.
Older Wells that that we've acquired and you know, we clean up and lower costs.
To that point right like what is probably the number one thing that we focus on right outside of costs. It's run time, we've done a great job keeping.
Keeping runtime up we're always going to have a percentage of wells go down I would say this quarter has been this past quarter has been as good as any quarter that we've had unfortunately are the wells that went down were.
Our highest producers in Karnes County, and.
Also Liberty County, So it was nothing that was unexpected in terms of like.
Oh, we have some we have some tubing issues are oh, we need that we need to pull something out of the hole and check it out.
As much as it was like standard work.
I could probably dive into.
A likely L. O question on how we're seeing services and this and this comment as well but.
You know.
So do you expect that they're expected to go down you know once every 18 months or so hopefully unexpected as you know once you kind of cross that 12 month, Mark you know whats come in you just don't know exactly when it's coming so we don't expect these higher interest wells too.
Need maintenance for quite a while now if our run rate stays the same.
In terms of run time on these wells I would expect you know our production too.
Increase naturally and then on a look back basis on an annual probably come out.
And the wash on what you know we were kind of originally looking at.
<unk> first quarter.
Got it so I think you kind of anticipated my my second the second question, there which is oh.
Should we expect a sequential increase in <unk> production.
Thank you.
You know I'm I'm really yes, so much it just what happens to queue, but the the you know what it indicates for the trajectory overall, but we should be looking for small increments into Q.
I do I do I have a another way to put it would be.
The quarter over quarter decrease had nothing to do with like changing of type curves or underperformance. It was just you know what well maintenance issues.
On high high high revenue property, so what those are and they're all back online now so.
I think that's a fair assumption.
Got it.
Maybe maybe one other and then I'll see if there's there's a.
Anyone else in the queue, but.
Some other companies who are on the acquisition a hunch right now have said that that their opportunity set is a is as good as it's been in years.
And I'm curious what what it looks like what the opportunity set looks like from your seat.
Yeah, no. So I definitely see where people are coming from with that comment and and I kind of agree I mean, there's there's kind of a caveat I'll hit the the positive points first I would say you know a lot of the deals that went off of course, not all the deals, but I would say, especially related to U S energy a lot of the deals that have gone off call.
Let you know.
And 2000 and in 'twenty, one and 'twenty, maybe early 'twenty two.
Uh huh.
Our guys that needed to sell again, not not all of them, but when you saw the 24 months 30 months type of cash flow deals.
Those usually where people that in some form or fashion, but kind of distressed and you can get stuff done and then you know.
What we're saying now is.
After a major slowdown over you know call.
Six months is.
A whole lot of deals that hit the market a year ago, I mean literally like decks with April 2022 dates on them when we were first.
On the Russia, Ukraine Spike.
And everybody ran to the market to try to monetize their assets right. They weren't distress. They were just opportunistically selling there was so much volatility during that time that most of those deals did not make you know they pulled their assets back it's ran them broad cash flow to them and a lot of those guys are but they're back in the market right theyre not distress sellers or other opportunistic.
Sellers.
There, we see it a lot with.
Private companies by true privates, not kind of portfolio of companies and then again, we also see a lot of portfolio.
So companies in what I'll call, a natural equity holders I E debt funds that you know through the cycle ended up owning equity and these guys.
Have a mandate to do something with these portfolio companies. So.
I think the opportunity set.
At least you know from the U S entities perspective is definitely robust and we see a lot of deals capital still scarce. There is no doubt I would say that would be the hindrance to.
Most of these transactions are of course, everybody knows rates have gone up and that's complicated everything.
We've seen.
Very very big public hiccup in the banking markets.
The really big banks or are kind of a very very tough to have relationships and access with so that leaves the vast majority of the small cap world.
In the regional and smaller.
Commercial banking environment.
And while that's.
I would say very strong right now and it's as strong at the beginning of this year as I've seen it in quite a while.
There's a finite amount of that kind of you know that.
Debt capital keep your balance sheet sub one times Levered type.
Type of type of groups out there so the opportunity set is robust.
The challenge, which I think we're very good at is you know sourcing the capital in a smart accretive way that doesn't blow up your balance sheet.
That's a helpful commentary thank you Ryan.
Yes.
Our next question is from Ignacio bring all does with ESI and please proceed.
Good morning, Ryan and thank you for your time today.
You mentioned on the call more infrastructure investments in 2023.
Just kind of give us some more color on how we should be thinking about the impact of that and capex spending overall that'd be really helpful. Thank you very much.
Yeah good morning.
So I would Oh I'll answer the second part first I think that we've kind of.
Told the market that we have about a $5 million expected capex spend this year.
I believe we were a hair below that on our run rate for the first quarter, but very close to that and I think we're confident on that number one is that $5 million get us at.
$5 million gets us.
Our production staying flat because of.
The low decline nature of the asset base, which I know wasn't your question and secondly, it does allocate some capital to what we're calling infrastructure investments.
On some of our gassy your assets there was probably.
So more work that we could've done and I'll get into that.
Really doesn't make sense right now and then there is some stuff that makes sense to them out of the price environment and it kind of goes into like the cost inflation.
Question, what are we saying in some costs we're seeing.
Flattening and even a pullback.
It's a lot of its geographic driven but you know uncertain pipe in certain.
Just a wellbore and other ancillary equipment.
They don't really teaches us in economics class, but the prices have stabilized the availability is still a little bit rocky.
But we're in a much better situation there than we were.
A while back where we see the biggest.
I'll call it what waste of money is in rental equipment. A good example would be like a compressor in east, Texas and I'm going to ballpark some numbers for you here, but they're close enough to Akron.
Size and performance and price of compressors can range the full spectrum, but.
If we're running if we buy an asset and we're running a compressor the legacy Parsons Renee air compressor for $100000 a month.
And we can buy the compressor for $1 million right like corporate finance or tell you you should do that deal.
But that's a big number right I don't want to part with $1 billion. There's other stuff that we can do to with that money, but again, it's still makes sense it lowers our LOE.
Very significantly because that original rental costs gets buried in the low <unk>.
So that.
That capex number kind of circling back that I that I mentioned at the beginning I think we're still comfortable with that number.
And you know that's a maintenance production to keep our production profile flat.
And.
About you know I would say.
20% of that number maybe a little bit less is going to infrastructure investments that are really low hanging fruit simple type of projects from an engineering perspective, not not pipeline et cetera type of things.
Compressor.
Either acquiring or acquiring anyone installing it.
The stuff that the folks here can do pretty easily so.
That was really helpful. Thank you Ryan.
There are no more questions at this time. This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Thank you everyone.
Okay.
Okay.
Yeah.
Yes.
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