US Energy Corp (USEG) 2013 Q4 法說會逐字稿

Good morning, my name is Kate and I will be your conference operator today. At this time I would like to welcome everyone to the U.S. Energy Corp. year-end 2013 selected highlights financial results and operations update 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 at U.S. Energy Corp. Sir, you may begin your conference.

Thank you, Kate. 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; Steve Richmond, the Company's Chief Financial Officer as well as members of the Company's management team. In terms of an agenda Keith will provide you with an overview of our highlights, financial results and operating initiatives for the year ended December 31, 2013 as well as the period subsequent to quarter end and we'll 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, 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.

Forward-looking statements are subject to numerous risks and uncertainties including those described in the Form 10K for the year ended December 31, 2013, which we filed on Wednesday, March 12, 2013 and our other filings with the SEC all of which are incorporated herein by reference. I would now like to turn the call over to Keith.

Thank you, Reg, and good morning, ladies and gentlemen. To begin today's call I would first like to thank the audience for attending our conference call and for following the Company's progress throughout 2013.

The year 2013 was a transformative year for the Company as we continued our drive to narrow our focus on the oil and gas sector. During the year we shed several non-core assets and realized very meaningful production and reserve gains as we exited the year.

2013 we realized record oil and gas revenues and record reserves and we look to improve upon those records in 2014. During the 12 months ended December 31, 2013, we had an average daily production rate of 1,164 net barrels of oil equivalent and the Company realized a total annual production of approximately 425,000 barrels of oil equivalent during the year.

This production comes from 113 gross, 16.2 net wells primarily located in the Williston Basin in North Dakota and South Texas. While we had relatively stable production of approximately 1,100 net barrels of oil equivalent per day during the first three quarters of 2013 we began to see an increase in our production from our two non-operated drilling programs in South Texas during the fourth quarter of 2013.

We had an average daily production rate during the fourth quarter of 2013 of approximately 1,340 net barrels of oil equivalent per day which represents an approximate 22% increase in net daily production as compared to the average for the first three quarters of 2013. As a result of our increased production the Company recognized another Company record, $9.3 million in revenue during the three months ended December 31, 2013, as compared to $8 million during the same period of the prior year and $8.6 million during the prior quarter.

The $1.2 million increase in year-over-year comparative period revenue is primarily due to higher realized oil and gas prices and higher oil and gas sales volumes in the fourth quarter of 2013 when compared to the same period of 2012. The increase in production is primarily from Buda formation wells in our Booth-Tortuga prospect in South Texas.

During the fourth quarter of 2013 we recorded a net loss of $1.2 million or $0.04 per share. However, excluding the $2.2 million non-cash impairment taken on our investment in Standard Steam Trust we recorded income of $940,000.

On an annualized basis the Company recognized the Company record $33.6 million in revenue during 2013 compared to revenues of $32.5 million during the prior year. The $1.1 million increase in revenue was primarily due to higher average realized prices for oil and natural gas in 2013 when compared to the prior year.

Looking forward we remain in a good position to fund our forward drilling programs. At December 31, 2013, we had $5.9 million in cash and cash equivalents and an additional $16 million in borrowing capacity under our $25 million line of credit with Wells Fargo.

Our working capital at year-end was $6 million. During the year we received an average of $2.8 million per month from our producing wells with an average operating cost of $594,000 per month including work over cost and production taxes of $278,000, our average net cash flows of $1.9 million per month from oil and gas production before non-cash depletion expense. In the financial and operational release that went out on Wednesday of this week 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 and a reconciliation of Modified EBITDAX to net income.

Modified EBITDAX was $16.1 million for the year ending December 31, 2013, which is a 21% increase over Modified EBITDAX of $13.3 million for 2012. Our net loss for the year ended December 31, 2013 was $7.4 million or $0.27 per share. However, excluding the $5.8 million non-cash impairment taken on our oil and gas properties during the first quarter of 2013, and a $2.2 million non-cash impairment taken on our investment in Standard Steam Trust during the fourth quarter of 2013, we recorded net income of $609,000 for the year.

Moving on to our oil and gas operations, our primary focus remains on our two active drilling programs in South Texas targeting the development of the Buda limestone formation in Zavalla and Dimmit County and our drilling programs with several operators in the Williston Basin. In South Texas the Company now participates with Contango and approximately 12,460 gross, 3,740 net acres in Booth-Tortuga acreage block in Zavalla and Dimmit Counties.

The increased figures come through in AMI election of another 1,257 gross, 380 net acres in the Booth-Tortuga prospect yesterday, which increased our total net acreage in Booth-Tortuga by 11%. The Company has an approximate 30% working interest and an approximate 22.5% net revenue interest in this acreage.

First Buda target well in the program, the Beeler number 2 well, was drilled in April 2013 and began producing on May 10, 2013. The well had a gross initial production rate of 859 gross barrels of oil equivalent per day and had a 30 day average gross daily production rate of 797 barrels of oil equivalent per day.

The initial success experienced in the Beeler number 2 well was seen as the first step in confirming the Buda formation potential in the Booth-Tortuga prospect. In August 2013 we began drilling wells in the Booth-Tortuga acreage block in succession. At year-end December 2013 4 gross, 1.2 net wells were producing from the Buda formation.

Today we have not participated in 8 gross, 2.4 net Buda formation wells with Contango. It should be noted that the Beeler number 5 well which was spud in October 2013 encountered mechanical problems while drilling the curve of the well and it has been temporarily abandoned.

The Beeler number 5 well is now plan to be respudded in late March, late this month. Contango is currently drilling the Dunlap well, a well that is located outside of our AMI in which we have no participation. On the completion of the drilling of that well the rig is scheduled to impact the Beeler number 5 well location.

Additionally, the Beeler number 9 well, which is located further to the west in the acreage block is also currently plan to be spud in mid-to late March. Contango has contracted a full-time drilling rig for the balance of 2014 and anticipates adding another rig to drill the Beeler number 9 and Beeler number 10 in succession to meet lease drilling clauses.

Under our 2014 CapEx budget we have allocated approximately $10.8 million towards the drilling of 9 gross, 2.7 net wells during the year with Contango. In the meantime the Beeler number 6, 7 and 8 are now producing with positive flow rates and we expect to release 30-day production rates in our next operational update.

Additionally, Contango has continued to optimize its Buda drilling and completion practices to reduce well costs. And those costs have come down from an average of $3.9 million per well on the first three wells drilled to an average of less than $3 million per well on the last three walls. While lateral lengths increased an average of 33%, average days for spud to initial production have also decreased from 34 days to 25 days comparing the same group of wells.

Now moving on to our Big Wells prospect, which is contiguous to the southwestern portion of the Booth-Tortuga acreage blocks. In August 2013 under an area of mutual interest collection the Company acquired a 15% working interest, 11.25% net revenue interest in an additional 4,243 gross, 637 net acres from U.S. Enercorp, a private oil and gas Company based in San Antonio, Texas.

The initial Buda formation test while on this acreage, the Willerson number 1H well was spud on August 26, 2013. The well began producing in October 2013 with an early initial flow rate of 1,039 barrels of oil equivalent per day on a 2,264 choke and had an initial 30-day average production rate of 605 gross barrels of oil equivalent per day.

Subsequent to year end the Willerson number 2H well was spud on February 3, 2014, and began producing last week. Initial flow rates are positive and we are currently monitoring flow back. We expect to report initial production data in our next operational update.

Under our 2014 CapEx budget for the Big Wells program we have allocated approximately $1.8 million toward the drilling of 3 gross, 0.45 net wells during the year. However, the operator has indicated that they may drill up to 3 additional gross wells which would be 0.45 wells net to us during calendar year 2014 if drilling results were an accelerated development in the acreage.

In summary, in South Texas we now participate in approximately 21,665 gross, 5,863 net acres in the Booth-Tortuga, Big Wells and Leona Rive prospects combined. While we have been encouraged by the initial performance of our Buda Wells at both prospects, we want to remind the listeners that development of the Booth-Tortuga and Big Wells acreage is still in its early stages and that while results may vary significantly depending upon the well location and further step out results, the Buda formation is a naturally fractured formation and the extent that those natural fractures is yet to be determined. Additionally, down spacing and fracture stimulation of the Buda formation and other formation development in each prospect is yet to be determined.

Now I will move on to the Williston Basin of North Dakota. We participate was 65 1,280 acre spacing units in the basin with numerous operators. At year-end 2013 we had 91 gross, 10.4 net producing wells and 10 gross, 0.3 net wells being drilled or waiting completion.

During the 12 months ended December 31, 2013, we averaged approximately 862 net BOE per day from this segment of our business which accounted for approximately 74% of our net daily production during the year. As it you can see from our release published in conjunction with our 10-K filing earlier this week we continue to actively participate in the drilling and completion of numerous new wells in the basin in order to maintain our stabilized base production from this region.

Under our 2014 CapEx budget for the Williston Basin, we have allocated approximately $9.6 million towards the drilling of 23 gross, 1.1 net wells during the year. At year-end 2013 the Company had record estimated proved reserves of 3.85 million BOE, and that is 90% oil and 10% natural gas compared to 2.9 million BOE at year-end 2012, which represents a 32.3% increase year over year.

The estimated proved reserves at December 31, 2013, reached a record standardized measure value of $104.9 million and a PV10 of $115.1 million, which represents a 48% increase and a 50% increase year over year respectively. The difference between the Company's PV10 of $115.1 million and it's standardized measure value of $104.9 million is as of December 31, 2013, is the effect of estimated income taxes.

The Company also deploys a risk management strategy through its hedging program as directed by our Board of Directors. In our current hedging program we have had 600 barrels of oil per day through 2014 using costless collars. Our weighted average floor price for 2014 is $90 per barrel and our weighted average ceiling price is $97.01.

I will now turn to the Mount Emmons molybdenum Project located in Gunnison County Colorado. During the third quarter the Company initiated scoping analysis of the Mine Plan of Operations with the U.S. Forest Service and anticipates that such work will continue through the balance of 2014.

At the same time we are also pursuing various alternatives in addition to a joint venture or outright sale that may lead to monetization of the project. These alternatives include a continued dialogue with the town of Crested Butte and other parties and various reclamation and cost reduction strategies in order to minimize our project holding costs.

Before moving on to question-and-answer portion of today's call I would also like to highlight a few additional points of progress which we made during 2013. In an ongoing effort by the management team to continue to reduce costs, work toward profitability for the Company shareholders, the Company sold its corporate aircraft and related facilities for $2.7 million in January.

Additionally, in September 2013 the Company sold its Remington Village apartment complex located in Gillette, Wyoming for $15 million. The $9.5 million commercial note balance on the property was paid in full at closing reducing our overall debt by approximately 50%.

After the payment of the note, commission and other closing costs, the net proceeds to the Company were approximately $5 million. General and administrative expenses were also decreased by $1.1 million during 2013 as compared to G&A expenses for 2012.

In summary, 2013 was a year of transition and refined focus for the Company. We have monetized several non-core assets and in the process have also reduced our G&A significantly. We have also established a clear path for growth in the oil and gas sector by reaching record-setting milestones within that sector.

As we head further into 2014 the Company has a strong balance sheet and is poised for further growth fueled by our active drilling programs and cash allocated for the acquisition of additional prospects. That concludes our prepared remarks for today. Operator, would you please begin the Q&A session?

(Operator Instructions). Evan Richert, Sidoti & Company.

First if you could just touch on the 5H well, how much did that one end up costing?

You know, the total amount that we got into right now is probably about $4 million. And they had some trouble right after they turned the corner on it and got stuck a couple of times and because of the other success that we had in the area we decided to move on and get some cash flow moving before we move back to it.

The real issue was there was some Austin Chalk Wells in the area and they were trying to directionally avoid some of those wellbores. And so they kind of corkscrewed the well, if you will.

My understanding now is we are going to come from the other direction. And we don't anticipate any more further trouble in that well.

Okay. So do you have an expectation on how much the additional cost would be or --?

I think it is going to come in under $3 million, like the other three recent wells that we have drilled.

Okay, great. And then if you could just touch on the Beeler 2H well, do you have a current daily rate on that?

Steve, do you got the -- probably better to give you --.

Just wondering what the decline rates have then. If you can kind of contrast that with the other. I know it is early but the other Beeler Wells.

The February groceries are about 5,300 barrels of oil and about 27,000 Mcf.

Okay. And do you expect Contango to continue drilling on the areas you have an AMI in for I guess through the rest of the year or do you not really have the clarity from them on that?

No, I think they are going to continue with at least one rig throughout the rest of the year. What happened is they, outside of our AMI they had a lease obligation and they moved the rig there. But I expect them to continue on our property throughout the rest of the year.

Okay. And then in the filing I guess you mentioned $8 million you have allocated for acquisition CapEx. Just wondering if you target I guess a high working interest kind of like what you have done in Booth-Tortuga and Big Wells or if that is not as important?

We are targeting the Buda formation in South Texas with high interest, working interest.

So just no change in strategy there, just allocating that for just additional land?

That is correct.

Okay. And then last question for me. Do you have any expectation on cost from Mount Emmons this year?

No, it has been running about $2 million to run the water treatment plant. But we are working on ways to reduce that cost and one of them is through a voluntary cleanup program down there in Colorado.

And we expect to get the acceptance of that for future. And if it does then we hope to cut those costs at least in half.

Okay, great. That is it for me. Thanks.

[Charles Neek], private investor.

Good morning. Assuming stable oil prices can you give us any revenue guidance for 2014?

You know, Charles, it is still a little early for that. We would like to see some more performance from these wells in the Buda, so we are going to withhold that at least until the next quarter.

Okay, thanks.

(Operator Instructions). [Robert Sherring], private investor.

Good morning, Keith. You guys are doing a bang up job.

I have a few questions hopefully you can answer. Will these wellbores be able to be used for the Eagle Ford after they are depleted in the Buda lime or partly depleted?

You know, I don't know the answer to that question. I know that they can go down and mill out the casing in some instances. But we have not had great success to date in the Eagle Ford in that area.

We have drilled three wells, two in the Leona River and one in the Booth-Tortuga, and the wells did not perform. What we are doing is we're waiting on different operators around us to kind of bring the play to us to develop new techniques in the fracking and completing and possibly develop those in the future.

And we have had some shows as we have logged through the Eagle Ford, they are encouraging. But to date we are not planning on any Eagle Ford development in the area.

All right. Well, I would imagine that given that most of the drilling cost or at least the vertical part of the well is sunk that you would have stronger economics when you get the Buda lime near to depletion and I anticipate you will do well but we'll see. Is there any hope for the Buda lime on -- or I guess it is the KM Ranch acreage?

There is. We do have the Buda formation there and I'm glad you mentioned that because I forgot to in our prepared remarks, Robert.

And that is we have got several formations and that is what we like about the South Texas acreage. We have got the Austin Chalk, we have got the Eagle Ford, we have got the Buda, we have got the Georgetown, we have got the Pearsall.

So there is multiple potentials in the area. And again I think that after we develop more fully down at the Buda down in the Booth-Tortuga that we will be looking at the Leona River KM Ranch area for possible exploration there as well.

All right. Then another question about the Buda, where you're at. Has there been any successful wells to our West?

Not that I know of, no horizontal wells to our West. Mainly it has been to the east and that was [Danuse] and Sage and to our South. So the 9 well will be to the west the most westerly horizontal well in the Buda that I am aware of.

All right. So we are doing -- it's step out and or exploration as we go west on the acreage block?

That is correct.

Okay then, you know when a look at your acreage map and I look at your little picture of South Texas in your presentation it looks to me like it might cross the Rio Grande River. The Mexican government is changing the rules in Mexico about participation in oil and gas down there.

And you guys may have started looking into it already or not. But I think that you should talk at least with Contango about looking for prospects better on the other side of the river.

Duly noted.

Because I do not believe the geo -- I was -- as I mentioned to you when I met you that one time, the state line between Colorado and Kansas didn't terminate production and neither will the Rio Grande River I don't think. And lastly, it looks to me like the wells to the south of us are getting gassier almost as if what you're looking at is a solution gas drive reservoir. Is that kind of your take at this stage or has anybody made an effort to understand whether or not this is just one large fractured reservoir behaving in certain ways?

We have seen a higher indication of gas production to the South, but I think it is too early to tell, Robert. We need to drill some more wells to really see what the performance is down there.

Okay. Well, I will grant that that is true. But just to put a bug in your ear I think you guys are in a real large solution gas drive reservoir and it is looking to me like the acreage to the north is in the oil leg, which is where Booth-Tortuga is, the other acreage not so much.

And then lastly, on your maps I can see a structure contour. And I am assuming what I am looking at is the nose of an anticline, is that correct?

Not sure, I am not a geologist. But we do see some turns of the contours like you see on the maps there, Robert. We appreciate your comments and your questions today, my friend.

All right. Well listen, you guys are doing a bang up job and you are on the right road. The last thing I would say to you is the Bakken we are not getting any real value for it now. The value of the Company, the stock price today is the value of the Bakken.

They are either giving you nothing for the Buda or nothing for the Bakken. And I look for that to rectify itself shortly. Good luck, gentlemen.

Thank you, Robert.

Charles Neek, private investor.

Can you comment further on the possibility there was a second rig in the Buda lease that was mentioned by Contango on their call?

Yes. Charles, our understanding is they are bringing a second rig so we are going to spud the five later this month and the nine later this month.

And my understanding from Contango is that rig will be with us for two drills, possibly more but they also have a need in another area for that rig. So we may only get two. And they get more than the two and again that is probably going to depend on results.

Okay, thanks.

And there are no further questions at this time. Do you have any closing remarks?

Yes, I do. I would like to thank our audience for joining us today. As demonstrated throughout 2013 we have continued to manage our balance sheet and drilling commitments, we have significantly reduced our overhead costs through the sale of our non-core assets, we are focused on our development opportunities through acquisitions in the drill bit.

And we continue to work to reduce our Mount Emmons holding costs while working diligently to monetize this legacy asset and further refine our focus on the oil and gas sector. And we will continue to maintain our financial and operational flexibility with the ultimate goal of driving growth and profitability for the Company shareholders. I want to thank everybody for joining us today.

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