RIVERTON Jul 20, 2015 (Thomson StreetEvents) -- Edited Transcript of US Energy Corp earnings conference call or presentation Tuesday, May 12, 2015 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Reg Larsen U.S. Energy Corporation - Director, IR * Keith Larsen U.S. Energy Corporation - Chairman and CEO * David Veltri U.S. Energy Corporation - President and COO ================================================================================ Conference Call Participants ================================================================================ * Mike Walka [Lamco] - Analyst * Patrick Rigamer Global Hunter Securities, LLC - Analyst * George Jasper - Private Investor * John White ROTH Capital Partners - Analyst * Mike Jacobson - Private Investor * William Marcellus - Private Investor ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning. My name is Nicholas, and I will be your conference operator today. At this time I would like to welcome everyone to the U.S. Energy Corp. first-quarter 2015 selected highlights, financial results and operations update conference call. (Operator Instructions). I would now like to turn the conference over to Mr. Reg Larsen, Director of Investor Relations of U.S. Energy Corp. Sir, you may begin your conference. -------------------------------------------------------------------------------- Reg Larsen, U.S. Energy Corporation - Director, IR [2] -------------------------------------------------------------------------------- Thank you, Nicholas. Good morning, ladies and gentlemen, and thank you for joining us today. With me this morning is Keith Larsen, Chief Executive Officer; David Veltri, President and Chief Operating Officer; and Steve Richmond, the Chief Financial Officer of the Company. In terms of an agenda for today's call, Keith will provide you with an overview of our highlights, financial results and operating initiatives for the first quarter of 2015 and will finish the call with a question-and-answer session. As a preliminary matter, I would like to note that during this call we may make forward-looking statements which may be identified by the words will, anticipate, expects, and similar words that are based on the beliefs and assumptions of U.S. Energy's management. These and all statements other than statements of historical fact are forward-looking statements within the meaning of Section 21E of the Securities & Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The forward-looking statements are subject to numerous risks and uncertainties, including those described in the Form 10-Q for the quarter ended March 31, 2015, which we filed pre-market yesterday and our other filings with the SEC, all of which are incorporated herein by reference. Relevant non-GAAP reconciliations are available on the Company's website, which is located at www.usnrg.com. I would now like to turn the call over to Keith Larsen. -------------------------------------------------------------------------------- Keith Larsen, U.S. Energy Corporation - Chairman and CEO [3] -------------------------------------------------------------------------------- Thanks, Reg, and good morning, ladies and gentlemen. Again, I would like to thank the audience for attending today's call and for following the Company's progress as we enter the midway point of 2015. At the end of the first quarter, the Company had participation interest in 140 gross, 20.41 net producing wells primarily located in South Texas and in the Williston Basin of North Dakota. During the first quarter of 2015, the Company produced 86,227 net BOE. Average net daily production during the quarter was 958 BOE per day, which is an approximate 18% decrease when compared to the same period of 2014. The decrease in production comes from the curtailment of drilling in both South Texas and North Dakota due to the dramatic downturn in the price of oil beginning in the fourth quarter of 2014. The pricing situation affected all aspects of our business, including lower sales volumes and lower realized oil prices, which are reflected in our published first-quarter 2015 results. During the three months ended March 31, 2015, the Company recognized $2.7 million in revenue, and cash provided by operations was $1.8 million. At March 31, 2015, we had $4 million in cash and cash equivalents, and effective April 15 we had an additional $1.5 million in borrowing capacity under our $7.5 million line of credit with Wells Fargo. Redetermination of the line of credit was based on reserves and production forecast as of December 31, 2014, taking into account current oil and natural gas price forecasts. During the three months ended March 31, we received an average of $893,000 per month from our producing wells with an average operating cost of $531,000 per month, including workover costs and production taxes of $86,000 for average net cash up close of $276,000 per month oil and gas production before non-cash depletion expense. In the financial and operational release that was published yesterday, which is available on our website, we presented an EBITDAX table showing earnings before interest, income taxes, depreciation, depletion and amortization, accretion of discount on asset retirement obligations, non-cash impairments, unrealized derivative gains and losses, and non-cash stock compensation expense which we refer to as modified EBITDAX. Modified EBITDAX was a loss of $1.2 million for the three months ended March 31, 2015. The production and financial metrics that I have just stated have resulted in a net loss after tax of $23.7 million or $0.85 per share basic and diluted for the quarter. This loss is inclusive of the recorded property impairment of $19.2 million related to our oil and gas assets, which represent $0.69 of the $0.85 per share loss during the quarter. The impairment was primarily due to the decline in the price of the gas or the decline in the price of oil. Now moving on to our oil and gas operations, in South Texas the Company currently participates in approximately 28,696 gross, 6,781 net acres in Zavala and Dimmit County. Production averaged 270 net BOE per day from 35 gross, 9.53 net producing wells during the first quarter of 2015. On March 16, 2015, CML Exploration, LLC spudded the Richard #1 well in the Booth-Tortuga Prospect targeting the Buda Formation. The well was drilled and completed open hole without fracture stimulation. Production commenced in early May, and the wellhead had a peak early 24-hour flow back rate of approximately 820 gross BOE per day. The Company has a 12.9% working interest and a 9.87% net revenue interest in the well. In the South McKnight Prospect, the South McKnight 1305 B well targeting the Eagle Ford formation was spud on March 5, 2015. The well is a vertical test well and was drilled to a major depth of approximately 6,700 feet and was fracture stimulated with 15 stages. The well is currently flowing back, and we're monitoring the performance of the well in order to determine further developmental potential. Now I'll move on to the Williston Basin of North Dakota. The Company participates in approximately 84,810 gross, 3511 net acres in Williams, McKenzie and Montrail Counties, North Dakota, with numerous operators. Production averaged 609 net BOE per day from 102 gross, 10.32 net producing wells during the first quarter of 2015. We continue to actively participate in the drilling and completion of our inventory of wells in the basin in order to maintain our base production from this region. At the conclusion of our prepared remarks today, I would like to note that we remain positioned to weather the current storm of reduced commodity pricing. I would point out that our low level of debt is manageable at $6 million. We have substantial oil and gas assets and over 900 net BOE per day of stabilized oil and gas production. While we anticipate only a handful of additional wells will be drilled during the balance of 2015, we are continuing to seek funding sources to provide liquidity for the acquisition of a treaty of operated projects. We believe that we will be successful in these efforts and that this acquisition approach will be value-added complement to the expected reduced development of our portfolio through the drill bit this year. That concludes the oil and gas operations portion of the call. Operator, will you begin the Q&A session now, please? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). [Mike Walka], [Lamco]. -------------------------------------------------------------------------------- Mike Walka, [Lamco] - Analyst [2] -------------------------------------------------------------------------------- Thank you. My question is for Mr. Veltri. Mr. Veltri, I am sure you are probably aware that in the course of the last several years if you are a shareholder and disagree with actions of management, that you are then excluded from being able to get any information that is in the terms of a conversation. Do you agree with that policy, and if you do and I know the Board members are aware of it, why have an investor relations department? -------------------------------------------------------------------------------- David Veltri, U.S. Energy Corporation - President and COO [3] -------------------------------------------------------------------------------- Well, Mike, I am not aware of any formal policy that we have adopted to exclude information. We make all of our information available to the public at the same time to everybody, and we're happy to share our information with you. -------------------------------------------------------------------------------- Operator [4] -------------------------------------------------------------------------------- Patrick Rigamer, [Global Hunter Securities]. -------------------------------------------------------------------------------- Patrick Rigamer, Global Hunter Securities, LLC - Analyst [5] -------------------------------------------------------------------------------- Appreciate you taking my call. I was just curious if maybe you can comment a little bit more on the M&A landscape and what you're seeing there, maybe what are you seeing more deals or fewer deals than you were a month or two ago with valuations? Are those moving around? Just any comments you can provide on that landscape? -------------------------------------------------------------------------------- David Veltri, U.S. Energy Corporation - President and COO [6] -------------------------------------------------------------------------------- Sure. As we have evaluated about a dozen potential candidates for acquisition, we have made three offers on property that we feel like that we could transact on, and then we are in the price range where we are looking at using current strip pricing. Those properties did close, and as additional ones that we are evaluating, we're using the same approach and valuating method. So, we do see some activity, and we are participating in trying to work in today's parameters and make sure that anything we acquire is accretive and actually making money in today's environment. -------------------------------------------------------------------------------- Patrick Rigamer, Global Hunter Securities, LLC - Analyst [7] -------------------------------------------------------------------------------- Can you provide any framing around potential size of acquisitions that you're looking for from a monetary or production standpoint or anything like that? -------------------------------------------------------------------------------- Patrick Rigamer, Global Hunter Securities, LLC - Analyst [8] -------------------------------------------------------------------------------- Well, we're looking for acquisitions all over the board really. It depends on the company that they are offering those (inaudible). We're just trying to make sure that they are accretive to our balance sheet, and they are positive for the Company and they [seem] comfortable in [operating]. -------------------------------------------------------------------------------- Patrick Rigamer, Global Hunter Securities, LLC - Analyst [9] -------------------------------------------------------------------------------- Okay. And then in the South Texas Buda program, it looks like you're still getting some solid results with these open hole completions. Curious, with the open hole completion, is there an opportunity later in the life of the well to go back in and frac it once the production dies down, and is there any production response, or is that something -- I am not a geologist, so I --? -------------------------------------------------------------------------------- Keith Larsen, U.S. Energy Corporation - Chairman and CEO [10] -------------------------------------------------------------------------------- So, I think that the engineers will have to look at that and evaluate that further on down the line, but our operators so far have not indicated that they plan on going in and fracking any of the wells. -------------------------------------------------------------------------------- Patrick Rigamer, Global Hunter Securities, LLC - Analyst [11] -------------------------------------------------------------------------------- Okay. And then I guess just moving on to the Bakken quickly, we have heard a lot of operators talk over this earnings season about decreasing well costs, increasing EURs, and you guys are in sort of an interesting position. You actually get the AFEs and see the numbers. I would be curious if you have any comments on where you see the economics in the play at this point, and are they improving or any trends there? -------------------------------------------------------------------------------- Keith Larsen, U.S. Energy Corporation - Chairman and CEO [12] -------------------------------------------------------------------------------- Well, I can speak specifically about some of our operators in the Bakken. Of course, we haven't drilled that many wells in Texas this year, but where we were seeing AFEs around [$]10 million, and we have seen them now closer to [$]7 million. I think that's reflective of the service costs. Of course, there is only 80 rigs working up there, and so when you see the downturn, you can expect the cost to come down. In fact, I would expect the cost to at least be 20% lower than they were a year ago and probably approaching 30% or 35% lower, and I think that's going to be true in South Texas as well. -------------------------------------------------------------------------------- Patrick Rigamer, Global Hunter Securities, LLC - Analyst [13] -------------------------------------------------------------------------------- Okay. That's it for me. Thank you. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- [George Jasper], Private Investor. -------------------------------------------------------------------------------- George Jasper, - Private Investor [15] -------------------------------------------------------------------------------- Keith, a little commentary or someone there on back to the question or just taken before. On the Buda wells, the decline curves, can you just give some thought as to what you're seeing in these current production rates on, let's say, the last three or four of them that you have drilled coming off their high rates, but I mean what kind of a recovery are you getting apparently? -------------------------------------------------------------------------------- Keith Larsen, U.S. Energy Corporation - Chairman and CEO [16] -------------------------------------------------------------------------------- Well, George, it is still being evaluated. We have proved out that the plumbing underground is interconnected. We have seen communication between the wells. Really it's more of a question, Dave, that you may answer. Are you looking for EURs or decline rates during the first year, George? -------------------------------------------------------------------------------- George Jasper, - Private Investor [17] -------------------------------------------------------------------------------- Decline, yes, decline rates. -------------------------------------------------------------------------------- Keith Larsen, U.S. Energy Corporation - Chairman and CEO [18] -------------------------------------------------------------------------------- Dave, do you have an answer to that? -------------------------------------------------------------------------------- David Veltri, U.S. Energy Corporation - President and COO [19] -------------------------------------------------------------------------------- Well, the decline rates are -- there has been a little, I guess, excess decline in a few of the wells because of the communication as wells are coming back online. We are hoping to recover those reserves again back to the original rate, but these wells are still seeing about 55% decline (inaudible). -------------------------------------------------------------------------------- George Jasper, - Private Investor [20] -------------------------------------------------------------------------------- 55%, okay. All right. And then ongoing on the previous questioner off, on reworking Buda wells that you have currently, is there any thought, and I know that I think the Beeler 24 maybe was drilled into the Eagle Ford, but is there a chance that these Buda wells that they peter down to where it's not appropriate to produce but tried for drilling downward to the Eagle Ford? Is there a possibility of doing that, or would that require a total new well system? -------------------------------------------------------------------------------- David Veltri, U.S. Energy Corporation - President and COO [21] -------------------------------------------------------------------------------- Yes, there is certainly a possibility to sidetrack and go to other levels in the system -- Eagle Ford to Chalk. We're testing different levels in the areas. I think at some point in time we will take a look at that underneath our current wells. But it is absolutely just impossible to drill as a hole inside the current well. Now (inaudible) the current well. -------------------------------------------------------------------------------- George Jasper, - Private Investor [22] -------------------------------------------------------------------------------- I got you. And am I correct that the Beeler 24, which was targeted the Eagle Ford, is there anything you can tell us on the results of that situation? -------------------------------------------------------------------------------- Keith Larsen, U.S. Energy Corporation - Chairman and CEO [23] -------------------------------------------------------------------------------- The only thing, George, I think we have said this before, we do plan on -- Contango is considering drilling another Eagle Ford well in our Leona River formatio,n and the purpose was to do some science on those cores, but we haven't released the results, but it's encouraging enough that I believe that if it's not this year, we will drill another Eagle Ford, and that could kick off the play. The big thing here is the completion technique, and the completion technique we used on the first three Eagle Ford wells that we drilled with Contango were different than what is being used for companies such as EXCO that has had some great results, very close to our acreage position. I think they are still evaluating that, and with the lower commodity prices, the oil is still in the ground. It is not going anywhere, but that is the potential for the future for anything. -------------------------------------------------------------------------------- George Jasper, - Private Investor [24] -------------------------------------------------------------------------------- I see, okay. And then as far as getting involved in your other partnerships, is there any altering of your relationships on the other partnerships that were drilling in the area? In that particular area? -------------------------------------------------------------------------------- Keith Larsen, U.S. Energy Corporation - Chairman and CEO [25] -------------------------------------------------------------------------------- No, I think that our partnerships are solid with these folks, and we have had our successes and some that have been a little bit disappointing, but again there is multiple zones there for testing, there is people trying different techniques on a lot of the zones, and we're keeping abreast of that, and we still think we have a lot of potential in that area. -------------------------------------------------------------------------------- George Jasper, - Private Investor [26] -------------------------------------------------------------------------------- I see. Okay. Well, that's good. And then one question, please, on the Mount Emmons. Where do you sit on that situation? Is there anything being done at all out there in terms of maintaining your water treatment operations or trying to get further along on permitting? -------------------------------------------------------------------------------- Keith Larsen, U.S. Energy Corporation - Chairman and CEO [27] -------------------------------------------------------------------------------- There is. What we have done is we have asked the forest service to do a scoping study and do some geotechnical work, but we have cut costs wherever we can down there. We look to cut costs again wherever we can, but we do take the treatment of the water very seriously. We have had an excellent record down there in the treatment of the water. But in low commodity prices, again, we are trying to cut costs wherever we can. Not to say that we haven't in the past, but we also are seeking alternative ways to handle Mount Emmons, bringing in a partner, working with anybody that has any interest, and we are actively pursuing that. -------------------------------------------------------------------------------- George Jasper, - Private Investor [28] -------------------------------------------------------------------------------- Okay. All right. Thank you. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- John White, ROTH Capital Partners. -------------------------------------------------------------------------------- John White, ROTH Capital Partners - Analyst [30] -------------------------------------------------------------------------------- Good morning and thank you for your time. Proceeding with further questions on the Buda, it is receiving a lot of attention because you have got a fairly high net revenue interest and also the completion technique. Two questions really good for the Richard #1 and the S. McKnight, are those vertical wellbores? And question number two, since no frac job applied, are these -- would you describe the Buda in this area as a conventional reservoir, and can you talk a little bit about the porosity and the permeability in the wells? -------------------------------------------------------------------------------- David Veltri, U.S. Energy Corporation - President and COO [31] -------------------------------------------------------------------------------- Well, John -- I will take the Richard and the Buda. These are naturally fractured formations, which we are looking for as a natural permeability to deliver rate from the well. So, these are kept open hole. In the Richard itself, it actually has three legs in that well, and the first porosity permeability are, I guess, pretty high in the fractures and pretty low in the rock itself. We have got one leg going out due East and then one Southeast at probably around a little less than 180 degrees in the wellbore. The South McKnight has targeted the upper Eagle Ford, lower Chalk, so it was more of a vertical test, and it is still flowing back right now. It is just starting to cut a little oil, so we are just assessing how that is going to work. But that's the second well to try that (inaudible). -------------------------------------------------------------------------------- John White, ROTH Capital Partners - Analyst [32] -------------------------------------------------------------------------------- Okay. Well, thank you very much. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- [Mike Jacobson], Private Investor. -------------------------------------------------------------------------------- Mike Jacobson, - Private Investor [34] -------------------------------------------------------------------------------- Wonder if there is any update at all regarding the old uranium property and how is that progressing regarding permitting? -------------------------------------------------------------------------------- David Veltri, U.S. Energy Corporation - President and COO [35] -------------------------------------------------------------------------------- Well, I am assuming that you are referring to the Uranium One deal where we closed down the uranium mill and the properties. If that's the case, there is a small Canadian company that has signed an agreement with Uranium One to buy those assets, and they have informed us that they have got an expansion or seeking out financing so that they can close that deal, and they are optimistic that they're going to close it by June 30. -------------------------------------------------------------------------------- Mike Jacobson, - Private Investor [36] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- [William Marcellus], Private Investor. -------------------------------------------------------------------------------- William Marcellus, - Private Investor [38] -------------------------------------------------------------------------------- Just simple question, do you have any leases in the Niobrara? -------------------------------------------------------------------------------- David Veltri, U.S. Energy Corporation - President and COO [39] -------------------------------------------------------------------------------- Do not. -------------------------------------------------------------------------------- William Marcellus, - Private Investor [40] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- George Jasper, Private Investor. -------------------------------------------------------------------------------- George Jasper, - Private Investor [42] -------------------------------------------------------------------------------- Just a follow-up on the Bakken, you have several wells now that in your release were indicated as drill completion pending, which I assume obviously that they are not -- that completion has been put off because of the decline in the price of oil. Do you have any thought process, or can you share any idea information on what price you might -- the drillers involved in these projects would go back and initiate completion activity? -------------------------------------------------------------------------------- Keith Larsen, U.S. Energy Corporation - Chairman and CEO [43] -------------------------------------------------------------------------------- We don't. George, some of these operators are very large companies. I am not sure that they are pulling them in inventory, but rather pulling them for timing. We are seeing the pad drilling now. They're doing as many as eight to 10 wells per pad, and it is just a function of when they get time to come back in and frac those wells. And these bigger companies have the budgets and the capital to keep completing. So, I haven't seen a holdback of completions with our operators because of the price. -------------------------------------------------------------------------------- George Jasper, - Private Investor [44] -------------------------------------------------------------------------------- Okay. But if they are at the point where they have completed pretty much pad drilling activity and then they get into going through the completion process beyond where they are, can you give us a thought on how many days or weeks would be involved in moving an individual project forward from where it is now? -------------------------------------------------------------------------------- Keith Larsen, U.S. Energy Corporation - Chairman and CEO [45] -------------------------------------------------------------------------------- I would have a tough time, George. I can tell you that over the course of since we got involved in the Bakken over the past five years that we've seen changes in the fracking. The stages are up as high as I have seen as high as 52 stages in some of the wells that we are in. And the amount of sand or proper that they put in has changed, so I think there is still some science, and they are seeing the results as well as economics. Will they go back to 26 stages now that the prices have come down? It's probably a function of they will be looking at those wells and the performance of the EURs in those wells. But you have -- to give you an intimate knowledge, I really just don't have it. -------------------------------------------------------------------------------- George Jasper, - Private Investor [46] -------------------------------------------------------------------------------- Okay. Well, thanks for that. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- There are no further questions at this time. I will turn it back over to Mr. Keith Larsen for any final remarks. -------------------------------------------------------------------------------- Keith Larsen, U.S. Energy Corporation - Chairman and CEO [48] -------------------------------------------------------------------------------- Well, in closing, we remain committed to the major development of our portfolios. We, along with the industry, wait out a price rebound or improved project economics based on reductions in drilling and completion costs. We remain cautiously optimistic as the curtailment of drilling in the US is beginning to have an impact on the daily output of US producers. We, along with our peers, closely monitor the price per barrel and have seen the price improve by approximately $15 per barrel from a slow point thus far in 2015. During the year, we have funded our drilling and capital commitments without taking on additional debt during the downturn. We recently drilled and brought into production a strong development well in Buda, conducted [e-testing] in order to determine additional potential in South Texas, and have seen a meaningful reduction in drilling and completion costs over the last several months. We have strong banking relationships and are seeking additional leverage at this time in order to capture accretive acquisitions at the current commodity price environment. It is also our intent to consolidate our acreage position where appropriate and transition the Company into operations during the course of 2015. Operator, that completes our remarks. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for your participation in today's conference. This now concludes the program, and you may disconnect.
|