US Energy Corp (USEG) 2011 Q2 法說會逐字稿

Good morning, my name is Allie and I will be your conference operator today. At this time I would like to welcome everyone to the US Energy Corp. second-quarter 2011 operational and financial results conference call.

All lines have been placed on mute to prevent any background noise. I would now like to turn the conference over to Mr. Reggie Larsen, Director of Investor Relations for US Energy Corp. Sir, you may begin your conference.

Thank you, Allie, and good morning, ladies and gentlemen. Keith and Mark are not available to join us on the call today due to a previously scheduled trip and an unexpected illness.

After our prepared remarks today, there will not be a question-and-answer session. If you have follow-up questions, please feel free to contact me after the call or Keith can be reached upon his return to the office next week.

Joining me this morning is Bryon Mowry, our newly elected Principal Accounting Officer and he will be reviewing the financial section of today's call. In terms of an agenda for today's call, we will provide you with an update on our various operating initiatives for the first six months of 2011, review our operational and financial results for the first three and six months ended June 30, 2011 and conduct a brief financial review.

Before getting started, I would like to note that we may make forward-looking statements which may be identified by the words will, anticipate, expect, and similar words that are based on the beliefs and assumption of US Energy's management team. 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.

Forward-looking statements are subject to numerous risks and uncertainties including those described in Form 10-Q for the quarter ended June 30, 2011 which we filed on Monday, August 8, 2011; our Form 10-K for the year ended December 31, 2010 and our other filings with the SEC all of which are incorporated herein by reference. I will now begin the call this morning with an overview of our second-quarter 2011 operational highlights.

At the end of the second quarter, the Company had 25 gross producing wells, up by six from the first quarter of 2011 and had an average daily production during the quarter of 1125 barrels of oil equivalent per day. During the first six months of 2011 in the Williston Basin, we completed four gross wells, 1.37 net, with Brigham Exploration.

The Brad Olson 9-16 well, the second infill well in the Brad Olson unit was completed and began flowing to sales in May with a national production rate of 2357 BOE per day. Additionally, the Kalil Farms and the MacMaster were simultaneously fracked, also began flowing to sales in late May with initial production rates of 1603 and 1129 barrels of oil equivalent per day respectively.

Also, the Hovde 33 well which began flowing to sales in June and had an initial production rate of 2349 barrels of oil per day. This brings our total well count to 18 gross producing wells under the Brigham operated program. We expect to drill two additional gross infill wells 0.35 net with Brigham during the balance of 2011.

Additionally, drilling continued under the Zavanna Bakken program during the quarter. To date we've drilled four gross, one net well with completion activities for these wells commencing this week. We anticipate the completion of three of the four wells during the upcoming quarter in 2011.

For the balance of 2011 under the Zavanna program, the contracted precision drilling rig will continue to drill approximately one well per 30 to 40 days through early summer of 2012. This drilling program will provide an inventory of wells to be completed throughout the remainder of the year and into next.

The average interest in the first 15 wells currently planned in the Zavanna drilling program is approximately 22.5% working interest and 17.3% net revenue interest. During the quarter, we also participated in the drilling of one Bakken well with Murex Petroleum Corporation and the Yellowstone AMI.

The Amy Michelle 16-23 well was completed with 15 fracture simulation stages using a sliding sleeve and had an initial production rate of approximately 750 BOE per day over the first five days of production. The Company has an approximate 8.9% working interest and 6.9% net revenue interest in the well.

Additionally, we have funded the drilling cost for a second well, the David Rogers 18-19 well which spud this week and completion initiatives are anticipated for the fourth quarter of 2011. Based on four Bakken and four Three Forks wells per unit, we believe we have the potential to participate in 368 gross drilling locations in our two above mentioned programs. Our total acreage position in the Williston Basin now totals approximately 31,225 net acres including our Montana acreage.

In addition to our success in the Williston Basin, the Company announced earlier this year that it has entered into a participation agreement with Crimson Exploration to acquire a 30% working interest in an oil prospect in Zavala County Texas targeting the oil window of the Eagle Ford Shale play.

At the end of the second quarter, the Company announced another acreage acquisition with Crimson in both Zavala and Dimmit Counties, Texas. Under the new acreage acquisition, the Company will acquire a 30% working interest in the new prospect. The two prospects bring the Company's participation in the region to 11,861 gross, 3,550 net acres with the potential to participate in 70 gross, 21 net wells under both programs.

The first well, the KM Ranch #1 has been drilled to depth and completed with 20 fracture stimulation stages. The well is currently being monitored for a period of time in order to evaluate well performance.

The initial well on the second prospect is anticipated to spud in October of 2011. If successful, this program represents the second resource play in which the Company is involved in an area with proven operators and with significant development potential.

Moving on to the San Joaquin Basin of California, the first well in the Moose Prospect with Cirque Resources is now expected to spud in October. The well is permitted to drill, however, the delay is due to excess storage of water in the Kern River water bank which has hindered the operator's ability to access the drilling locations.

The prospect is a Miocene target with an expected total drilling depth of approximately 13,000 feet. The commitment well is targeting up to 300 feet of layered Stevens Sands in a stratigraphic trap on the flank of a prolific oil-producing field in the basin. Based on results of the commitment well, additional seismic analysis may be applied to further delineate the overall prospect and prospective drilling program. Geologic evaluation and current spacing suggests potential for up to 40 additional drilling locations.

Moving on to our Apache Prospect located in Southeastern Colorado, the Thompson 9-14 well spud on June 18, 2011 and reached its target depth of approximately 6000 feet the first week in July. The objective target was the Mississippian Formation which was encountered during drilling but did not contain hydrocarbons.

Upon evaluation of the drilling results, the Company determined that the well was nonproductive and has plugged and abandoned the well. No further drilling is anticipated in the acreage block at this time.

In the Gulf Coast during the first six months of 2011, we drilled three gross, 0.52 net wells. One well drilled with PetroQuest Energy, the L.L. Bean well, encountered 33 feet of pay during drilling. The well was completed during the quarter and sales commenced in May.

The well is currently producing approximately 4000 gross MCF per day or approximately 667 barrels of oil equivalent per day. The Company has an approximate 17% working interest and an approximate 13% net revenue interest in the well. The other two wells were determined to be non-productive.

Looking ahead, we plan to drill three wells in the Gulf Coast during the third quarter of 2011. The Bayou Bend well operated by Mueller Exploration is expected to spud in August.

We have a 16.6% before casing point and a 13.5% after casing point working interest in the well. The prospect is a 12,000 foot Eocene target with multiple pay opportunities.

Additionally, Yuma Exploration expects to spud two wells and in our Livingston Parish, Louisiana drilling program during the third quarter. The first well, the Weyerhaeuser 19-1 and the Bandolier Prospect is a lower Tuscaloosa oil target with a planned drill depth of approximately 15,000 feet.

Following this well, we expect to drill an offset to the producing Weyerhaeuser 57#2 in the Olympic Prospect. We have a 4.8% working interest and 3.6% net revenue interest in these wells.

During the quarter, we recognized revenues from oil and natural gas production of $7 million. We produced 102,413 barrels of oil equivalent or 1125 barrels of oil equivalent per day which is nearly identical to production from the first quarter of 2011.

Oil volumes were lower than anticipated during the quarter primarily due to weather-related production issues in the Williston Basin. Looking ahead, we expect that oil volumes will increase as we drill and complete additional oil wells over the balance of the year.

We realized an average oil price in the second quarter of $99.77 per barrel excluding the impact of our hedges or $27.79 per barrel higher than the second quarter of 2010. Our average natural gas price realized during the quarter was $4.46 per MCF, $0.70 per MCF lower than the second quarter of 2010.

As we discussed on the last call an April 25, 2011 Thompson Creek Metals Company terminated its option agreement to develop the Mount Emmons molybdenum deposit to focus on their more immediate development priorities.

We continue to work on baseline data collection studies as well as other related permitting and plan to file a plan of operations for the project in 2012 or early 2013. We remain committed to advancing the project and look forward to providing an update on these initiatives in the coming months.

Before passing the call on to Bryon, I would also like to touch base briefly on the Remington Village apartment complex located in Gillette, Wyoming. In May, the Company listed the complex for sale with a commercial realtor and obtained a $10 million long-term loan from a regional commercial bank on this asset. We look to monetize the asset in order to maintain our focus on oil and gas and deploy the remaining capital into those programs. I would now like to turn the call over to Bryon Mowry, the Company's Principal Accounting Officer, to review the financial portion of the call.

Thank you, Reggie. Our second-quarter operating revenues increased by $1.9 million to $8.1 million during the quarter ended June 30, 2011 as compared to revenues of $6.2 million during the quarter ended June 30, 2010. This operating revenue increase is primarily due to higher commodity prices and a $1.1 million gain from our hedging activities.

We did not have any hedges in place during the quarter ended June 30, 2010. The three hedges we have in place at June 30, 2011 resulted in a realized loss of $1 million and an unrealized income of $2.1 million for the net revenue from our risk management activities of $1.1 million.

The hedge income is as a result of decreased prices in excess of our hedges during the quarter ended June 30, 2011. Our oil and gas operations produced direct operating income of $3.1 million during the quarter ended June 30, 2011 as compared to operating income of $2.3 million from oil and gas operations during the quarter ended June 30, 2010.

The increase in earnings from oil and gas operations is primarily due to an $807,000 increase in revenues due to higher commodity prices during 2011 as compared to 2010 and the $1 million in realized loss and $2.1 million unrealized gain on risk management activities in 2011. The increases in revenue are partially offset by $457,000 higher lease operating expenses and $724,000 higher depletion expenses in 2011.

Oil production decreased due to the normal declines in production and weather-related production issues in the Williston Basin. The decreases in production were offset by increased oil prices.

Gas production increased from new Gulf Coast production. The increases in production were partially offset by decreases in gas prices. As Reggie mentioned, during the first quarter of 2011, we elected to sell our real estate complex in Gillette, Wyoming. The property has been listed for sale with a commercial realtor and therefore was moved to discontinued operations on the income statement and the statement of cash flows.

On the balance sheets, the property has been re-classed to assets and liabilities held for sale. At June 30, 2011 we had a debt of $13.1 million.

During the quarter ended June 30, 2011 we borrowed $10 million from a commercial bank. Our multifamily property in Gillette, Wyoming was used to secure this debt.

The proceeds of the loan are being used to fund our oil and gas programs and other operating expenses. We borrowed $3 million from our senior credit facility with BNP Paribas in February of 2011.

The $3 million borrowed under the BNP senior credit facility was used to purchase our interest in the Eagle Ford oil properties. During the quarter ended June 30, 2011 we recorded a net loss after taxes of $75,000 or less than one penny per share as compared to a net loss after taxes of $131,000 or less than $0.01 per share for the quarter ended June 30, 2010.

Our balance sheet remains strong at June 30, 2011 with working capital of $13.3 million. We had cash and cash equivalents of $7.8 million plus marketable securities of $2 million at June 30, 2011. I would now like to turn the call back over to Reggie.

Thank you, Bryon. To finish the prepared remarks for today, I'd like to mention that while we experienced weather-related issues again this quarter that worked against our bottom line, the wells which came online during the quarter allowed us to maintain our production without seeing a sequential decrease relative to the first quarter.

We continue to believe that our projects will deliver strong results as they are developed. We look forward to reporting the results of our first completed wells under the Zavanna drilling program in the coming months.

As we announced on Monday, we continue to add to our acreage position in the Wolverine Prospect in Northeastern Montana. We plan to drill a Red River test well during the fourth quarter of this year and we will also core and analyze both the Bakken and Three Forks formation for potential development.

We also look forward to reporting the results under our first Eagle Ford well with Crimson once the production data has been fully evaluated. We have multiple drills coming in the third quarter in the Gulf Coast and we look forward to kicking off our program with Cirque in California later this year.

That concludes our prepared remarks for today. As I mentioned at the beginning of the call, please feel free to contact me directly or Keith upon his return to the office next week with follow-up questions.

I would like to thank everyone for joining us today and we look forward to updating you on our next call. Good bye.

This concludes today's conference call. You may now disconnect.