U.S. Energy's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Transcripts

U.S. Energy Corp. (NASDAQ:USEG) Q2 2013 Earnings Conference Call August 9, 2013 12:00 PM ET

Executives

Reggie Larsen – Director of Investor Relations
Keith G. Larsen – Chairman and Chief Executive Officer
Steven D. Richmond – Chief Financial Officer
Mark J. Larsen – President and Chief Operating Officer

Analysts

Jeffrey R. Connolly – Brean Capital, LLC
Noel A. Parks – Ladenburg Thalmann Securities
Curtis R. Trimble – Global Hunter Securities LLC

Operator

Good day ladies and gentlemen and welcome to the U.S. Energy Corp. Second Quarter 2013 highlights and financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference, Reg Larsen, Director of Investor Relations. Please begin.

Reggie Larsen

Thank you. Good morning, ladies and gentlemen, and thank you for joining us today. With me this morning is Keith Larsen, Chief Executive Officer of the company, and Steve Richmond, the company’s Chief Financial Officer.

In terms of the agenda, Keith will provide you with an overview of the highlights and operating initiatives for the three and six months ended June 30, 2013. Steve will then conduct the financial review portion of the call, and we will finish up 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 maybe identified by the words will, anticipate, expect, 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 and 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 June 30, 2013, which we filed yesterday and our other filings with the SEC, all of which are incorporated herein by reference.

I’d now like to turn the call over to Keith Larsen.

Keith G. Larsen

Thanks Reg, good morning everybody. To begin today’s call, I would like to first thank the audience for attending our conference call and for following the company’s progress at midyear point of 2013.

I am pleased to report that the company recorded a net income after taxes of $573,000 or $0.02 per share during the quarter-end at June 30. During the quarter, the company produced 101,026 barrels of oil equivalents, which is an average of 1,110 barrels of oil equivalent per day nets of the company. This production comes from 92 gross, 15.76 net producing wells, primarily located in the Williston Basin of North Dakota. The company recognized revenues from oil and gas production of $15.8 million during the first six months of 2013 and had working capital of $12.8 million at quarter’s end.

Moving on to our oil and gas initiatives, as many of you may know, we have recently moved the focus of our South Texas drilling program with Crimson Exploration from developing the Eagle Ford shale, to testing and developing the Buda Limestone formation.

The company currently participates in approximately 10,140 gross acres in the Booth Tortuga acreage block in Dimmit County, which are perspective for the Buda Limestone formation. In addition, the company also participates in 3,443 gross acres in the Leona River acreage block in Zavala County. Both areas are also perspective for the Eagle Ford shale, Austin Chalk and, Pearsall and Georgetown formations. The company has an approximate 30% working interest and a 22.8% net revenue interest in each acreage position.

Early in 2013, favorable production results were obtained from operators adjacent to the Booth-Tortuga acreage block. These results prompted the operator to propose and drill our first Buda Limestone test well, the Beeler #2H well, which is a spud in April 2013 and begin producing in May 2013.

Well was drilled to a total measured depth of 11,013 feet, including an 3,700 foot lateral. Well was completed open hole without fracture stimulation and has an initial production rate of 859 gross barrels of oil equivalent per day. The well has since produced approximately 57,500 gross BOE during the first 83 days of production which is the last reported data, or an average of 693 gross BOE per day.

During July, the well averaged approximately 597 gross BOE per day. The well has clearly demonstrated a superior economic return today based on a $3.75 million AFE. Based upon the results from Beeler #2H well, the operators now contract as a drilling rig and has notified the company that they anticipate utilizing rig to drill the Buda Limestone wells throughout 2013. In this regard, the Beeler #2H well was start on August 3, and is currently being drilled at a depth of 3,300 feet.

The well is anticipated to be completed nearly September, on completion the rig will mobilize for the next well site and begin drilling the Beeler #4H well. We are very pleased with this development, but caution the listeners that future drilling results are hard to predict.

At this point mean time we’ll remain cautiously optimistic about this drilling program in Texas and look forward to providing further updates as more wells are drilled. We expect to report our drilling results from the 3H well in the mid to late September.

Now I’ll move on to the Williston Basin, in North Dakota, we participate in 65 1280 acre drilling units in the Basin under three active programs.

At June 30, 2013, we have 74 gross, a 11.02 net producing wells and 10 gross 0.18 net wells being drilled or waiting completion. At the quarter’s end, we are producing approximately 932 net BOE per day from the second of our business, which is the majority of our production profile and is primarily oil.

We continue to participate in the drilling and completion of new wells in the basin on a smaller lower risk basis in order to maintain our stabilized base production from this region.

I will now turn to Mount Emmons Molybdenum Project located in Gunnison County, Colorado. During this quarter, on April 22, 2013, the Company received a letter from the U.S. Forest Service notifying the Company that it had completed a review of the Mine Plan of Operations for the Mount Emmons Molybdenum Project in Colorado and that it has determined that the Mine Plan of Operations does contain sufficient information and clarity to form the basis for a proposed action to initiate scoping and analysis under the National Environmental Policy Act, NEPA.

The letter also states, U.S. Energy has met the requirements of the Reality Check provision granting conditional water rights for the Mount Emmons Molybdenum Project by filing the plan for the Mount Emmons mine with the Forest Service. No other special use permits or rights-of-way for the water facilities are required because they are addressed in the plan. The MPO provides an in-depth description of the proposed construction, mining, processing, and reclamation operations for the project.

The Company recently initiated a scoping analysis of the MPO with the U.S. Forest Service and anticipates that such work will continue through the balance of 2013 while we continue to work towards our goal of monetizing the project outright such that we can focus solely on oil and gas development.

I’d like to now turn the call over to Steve Richmond, the company’s Chief Financial Officer to review the financial portion of the call.

Steven D. Richmond

Thank you, Keith. During the quarter ended June 30, 2013, we recorded net income of $573,000 after taxes, or $0.02 per share as compared to a loss after taxes of $990,000, or $0.04 per share for the quarter ended June 30, 2012.

Operating revenues for the quarter decreased by $607,000 to $7.9 million as compared to revenues of $8.5 million during the quarter ended June 30, 2012. The decrease in operating revenue was primarily due to lower oil and gas sales volumes in 2013 as compared to 2012.

Our average realized price for the quarter ended June 30, 2013 improved to $78.35 per BOE from $71.74 per BOE during the second quarter of 2012. Lease operating expense per BOE including work over cost was $17.47 per BOE for the quarter ended June 30, 2013. This rate compares to $13.72 per BOE for the same period in 2012.

Our DD&A rate was approximately $31.80 per BOE for the quarter ended June 30, 2013 compared to $33.92 per BOE in 2012.

Looking at the six months ended June 30, 2013, we’ve reported a net loss of $5.9 million after taxes or $0.19 per share as compared to a net loss after taxes of $1.4 million or $0.05 per share for the six months ended June 30, 2012. Our 2013 earnings were negatively impacted by a $5.8 million non-cash ceiling test write down on our oil and gas assets that we took in the first quarter of 2013.

During the six months ended June 30, 2013, operating revenues decreased by $1.1 million to $15.8 million as compared to revenues of $16.9 million during the six months ended June 30, 2012. The decrease in operating revenue was primarily due to lower oil and natural gas sales volumes in 2013 as compared to 2012.

Our average realized price for the six months ended June 30, 2013 improved to $79.09 per BOE from $73.03 per BOE during the same period in 2012. Lease operating expense per BOE including work over cost was $18.68 per BOE for the six months ended June 30, 2013. This rate compares to $15.77 per BOE for the same period of 2012. Our DD&A rate was approximately $33.42 per BOE for the six months ended June 30, 2013 compared to $33.23 per BOE in the first six months of 2012.

We continue to focus on cutting our costs and as a result general and administrative costs were $441,000 lower during the three months ended June 30, 2013 as compared to the same period in 2012. G&A costs were $1 million lower in the six months ended June 30, 2013 as compared to the first six months of 2012.

In the financial and operational release that went out yesterday we presented a modified EBIDTAX 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. We use this non-GAAP measure internally to manage our business and believe it is a valuable tool in measuring operating performance.

Earnings before modified EBITDAX was $8 million for the six months ended June 30, 2013, which is a 33% increase over the modified EBITDAX of $7.1 million for the same period in 2012.

Through our hedging program, we have hedged 600 barrels of oil per day through June 30, 2014 using costless collars. Our weighted average core price for July 1, 2013 through June 30, 2014 is $90.42 per barrel and a weighted average ceiling price is $98.40 per barrel.

On March 5, 2013, the Company entered into a purchase and sale agreement with an undisclosed buyer to sell its Remington Village apartment complex located in Gillette, Wyoming for $15 million. The transaction is now anticipated to close on or before September 20, 2013 subject to due diligence and the purchaser’s ability to obtain an acceptable loan commitment for the proposed acquisition of the property.

Finally, at June 30, 2013, we remain in good position to fund our forward drilling programs with $4.1 million in cash and cash equivalents, working capital of $12.8 million and $15 million in borrowing capacity remaining under our $25 million line of credit with Wells Fargo.

I’d now like to turn the call back over to Keith Larsen for the Q&A session.

Keith G. Larsen

That concludes our prepared remarks for today. Operator, would you begin the Q&A please?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jeffrey Connolly of Brean Capital. Your line is now open.

Jeffrey R. Connolly – Brean Capital, LLC

Hey, good afternoon guys.

Keith G. Larsen

Hey Jeff.

Steven D. Richmond

Hi Jeff.

Jeffrey R. Connolly – Brean Capital, LLC

First question is, does the success of the Buda change your view on Bakken acquisitions when it comes to CapEx this year?

Keith G. Larsen

Jeff, we are still looking at some acquisitions, some small acquisitions and we are looking at spending somewhere in the neighborhood of 35,000 to 50,000 flowing barrels and if we can see those type of opportunities in the Williston Basin and we will go after those, but other than that, the economics down on the Buda look much, much better than the Bakken or quite frankly anything that we have participated in so far.

Jeffrey R. Connolly – Brean Capital, LLC

Okay, great. And can you just give us or just tell us how the spud to spud and spud to first production times work down in the Buda?

Keith G. Larsen

Yes, we’d like to get at least 15, maybe 30 days of production just so we have a good handle, but spud to spud, it looks like it’s going to be about three weeks to four weeks. So we start the well on the 3 and I would expect we will be operating the well by the first of September and onto the next one.

Jeffrey R. Connolly – Brean Capital, LLC

So we are looking at about four or five wells down the Buda for the remainder of the year?

Keith G. Larsen

That’s what it looks like right now, barring any mechanical or unseen problem, but we are expecting at least four or maybe five.

Jeffrey R. Connolly – Brean Capital, LLC

All right. That’s it from me. Thanks guys.

Keith G. Larsen

Thanks Jeff.

Operator

Thank you. Our next question comes from Noel Parks of Ladenburg Thalmann. Your line is now open.