U.S. Energy Corp.
Q3 2022 Earnings Call Transcript

Published: 11 Nov 2022

[Operator:]

Ladies and gentlemen, greetings and welcome to the U.S. Energy Corporation Third Quarter 2022 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Master [ph]. Please go ahead.

[Unidentified Company Representative:]

Thank you, operator, and welcome to U.S. Energy Corp.'s 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 3 and 9 months ended September 30, 2022. 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 now like to turn the conference call over to Ryan Smith, CEO of U.S. Energy, for his prepared remarks.

[Ryan Smith:]

Thank you, James. Good morning and thank you for joining U.S. Energy's 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 8 highly accretive acquisitions of increasing size in the last 24 months. Since late 2019, we've increased our proof producing PV-10 by more than 14 times, with current PDP reserves well in excess of our current enterprise value. Today, we operate in 4 prolific U.S. onshore oil regions

[Operator:]

[Operator Instructions] Our first question comes from the line of Charles Meade from Johnson Rice.

[Charles Meade:]

Ryan, I want to ask two questions about your volume trajectory end up the underlying dynamics in 3Q going into 4Q. First on natural gas, obviously, you have a big uptick in 3Q, and a big use of that is the East Texas acquisition. But can you give us a sense or 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 of that maybe played into how 3Q worked out and what 4Q is going to look like?

[Ryan Smith:]

No problem. So we closed the acquisition we made in East Texas in late July of the third quarter. So from accounting purposes, it only showed up for August and September and the July portion of it was closing statement adjustment. But so far, it has been wonderful for us. We went into evaluating -- we had 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 there was already an area that we were looking at. And we thought we bought the asset right on a very attractive cash flow multiple, I believe, 1.7x. 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 it's 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, our plan on it is, on one hand if it's not broke, don't try and fix it and let it keep producing 400 to 450 BOE per day, 60% gas. And 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 recompletion opportunities. And a number, I'd say the majority of the wellbores that we acquired in the deal. At 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.

[Charles Meade:]

Got it. That's helpful, Ryan. And then on the oil side, I think you addressed this a bit or you maybe hinted at in your prepared remarks. The workover program you guys were doing on your -- those -- I believe they're conventional Permian assets in West Texas. Is -- are we -- what kind of production response do you expect to see or should we expect to see? Or was this workover more just kind of cleaning things up as opposed to improving rate?

[Ryan Smith:]

Unfortunately, I would say the latter. It's definitely a mix. But I think it's kind of a two-part answer. The first half of the year, the capital that we spent on our West Texas assets were, call it, return-to-production type of capital. We have fairly decent results there. We didn't have a chance to fulfil the whole program. I would say the most recent capital that we spent, especially the stuff that showed up in the third quarter, was -- the vast majority of that capital was maintenance capital that took some of that return to production off of line. 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. We're almost done now. But I expect that production to come back online, what hasn't already throughout the fourth quarter. So naturally, spending workover capital and maintenance hurts your field-level economics for the year. But we do believe here that once, kind of, it shakes out on an annual look-back basis, the capital that's being spent in West Texas 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.

[Charles Meade:]

So Ryan, so if I understand correctly, the volumes will go up because basically wells are coming back online. But it's not -- but it's not the case that wells are coming on back online at a higher rate. It's more just there'll be an uptick because of uptime as opposed to improved rate. Is that the right read?

[Ryan Smith:]

I think it's both. I mean, taking like slush production out of the equation, a lot of the return to production wells we were doing work that we're doing were wells that were shut in when we acquired them. So I think it's a mix of both.

[Charles Meade:]

Got it. Okay, got it. I have another question but if there's anyone else in the queue, you can go to them.

[Ryan Smith:]

You can go ahead, if you want to.

[Charles Meade:]

All right. So I wanted to ask about how the -- what the A&D opportunity set looks like for you right now? And I wonder if you could address it from 2 perspectives. Number one, what do you see? Like how has the opportunity set changed either for the better or for worse? Or what's new and different? And then on the other side of it, what are you seeing in the way of competition from other possible buyers on the opportunity set you're after?

[Ryan Smith:]

Yes. No, it's a great question. Complicated and very fluid, as you well know, in the M&A markets right now. I think -- at least what I see and what we see here is like a 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 I mean larger relative to U.S. Energy, not relative to Exxon. I think we have seen kind of a recalibration of seller and especially buyer and what they'll attribute value to. And I've seen when -- over the last several months, if you will, or maybe last several months beginning in maybe June or July, people talking about paying for upside or giving any credit to upside would get you thrown out of the room. I think we've seen -- I think we've seen a few transactions that if there's real near-term drilling, real being you have permits in hand, you have a rig in hand, you have crew in hand, you have a million things right now that are tough to get and you have your arms around and this's really development drilling and not kind of step out exploration drilling, you're seeing 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 PDP plus, with that plus representing 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 million or $30 million but again that number is very rangy, are still straight cash flow multiples, whether it's 24 or 27 type of month deals. And we haven't seen as much seller and buyer recalibration in that market. Because at these commodity prices, right, a private seller that doesn't have a lot of hedges is probably cash flow in their asset, pretty strong, definitely stronger than it's been in a long time. And a lot of those folks don't want to sell at 24, 27 months cash flow, right? They would just rather keep it. So, we've seen a slowdown in that market and kind of a head butting in that market. It hasn't really changed. But again, that's just a challenge that we overcome. So that's kind of where we see the deals shaking out and the values being attributed. In terms of competition, I mean, no doubt that there's 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 there's not that many smaller scale entities out there that are out bidding. And if they do, I'd say the -- some of the existing smaller-scale entities are probably focused on singular areas. And with the larger guys, right, they need to do stuff 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 -- I call them true privates, not private equity portfolio companies, true privates and family office type of funded capital, especially in that world, there's a lot of that money chasing 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 budged much over the last few months.

[Operator:]

Our next question comes from the line of Ignacio Bernaldez from EF Hutton.

[Ignacio Bernaldez:]

Congratulations on the quarter. I'm calling on behalf of Ben Piggot with 2 questions here. Just to start, I guess, just an update on recompletion opportunities in Montana and how that's going?

[Ryan Smith:]

Yes, for sure. So I'll expand it a little bit because I think it's kind of more of an asset-based question. On Montana specifically, we have not done a ton of recomplete work on the Montana asset that we acquired in January of '22 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 Cut Bank, Montana that is running it. So it's really been just like a cash flow generation machine for us right now. I think on the true recompletion side, we have participated in some on a non-op basis in North Dakota to, 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 recompletion opportunities, at least what we're spending a lot of time on, is on our newly acquired East Texas assets going back into the Rodessa 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 recomplete 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 like going through and formulating our 2023 budget but we do think that there is upside over a significant portion of our asset base on recomplete opportunities. And I think we start in Texas, both in the East Texas and kind of our South Texas acreage.

[Ignacio Bernaldez:]

That's really helpful. 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 you're seeing? Anything would be helpful there.

[Ryan Smith:]

Yes. I mean, I think I'll kind of reiterate what I already mentioned and maybe add a little more color to how we do it. We have a very strong business development team here and evaluation process. And we're very, I would say, in the market on all sides of the deals, small and large. So I do think that we have a good pulse on the market. I see a bigger gap, like I mentioned, between the larger scale of deals and the smaller scale of deals. And the way that they're valued, I know they're always valued a little bit different when the scale is that wide. But the way that they're being valued the way the companies and entities are looking at them, just seem to be very far apart from a PDP paying for some upside as well and then a cash flow deal. And I think that's why we've seen outside of the really, really big guys M&A slow down unless their respective transactions gave some upside to the sellers. I think you've seen 2 or 3 transactions over the last, call it, 6 weeks or so reflect that. So, I do think it's something that 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 and real near-term drilling that in this business, you can put as much certainty around results as you possibly can. I think you're going to see deals start going off more and more with value attributed to those locations.

[Ignacio Bernaldez:]

Congrats on the quarter.

[Operator:]

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And now I would like to turn the conference to Ryan Smith, CEO, for closing comments.

[Ryan Smith:]

Thank you, everybody. I appreciate your time this morning and for your continued interest in U.S. Energy. I look forward to speaking again next quarter. Thank you.

[Operator:]

Thank you. The conference of U.S. Energy Corp. has now concluded. Thank you for your participation. You may disconnect your lines.