On November 12, 2024, U.S. Energy (NASDAQ:USEG) reported 3rd quarter 2024 financial and operating results. The year over year revenue comparisons were not relevant due to recent divestitures incurred in 2024. Total oil and gas revenue decreased 43.3% to approximately $5.0 million, compared to $8.7 million in the prior year period. The company divested its South Texas properties in July 2024. Sales from oil production represented 88% of total revenue during the quarter, a decrease from 91% in the 2nd quarter of 2024. Natural gas sales were 12% of revenues in the 3rd quarter of 2024.
Lease operating expense in the 3rd quarter of 2024 was approximately $3.1 million, or $28.95 per Boe, as compared to $4.0 million, or $23.61, in the 3rd quarter of 2023. The decrease in the total amount of LOE was primarily due to a reduction in producing assets as a result of asset divestitures.
Cash general and administrative expenses were approximately $1.6 million during the 3rd quarter of 2024, a reduction from the $2.2 million reported in the prior year period. This reduction reflects recent cost cutting efforts at the corporate level and was offset by one-time costs associated with business development efforts in Montana.
Adjusted EBITDA was $1.8 million in the 3rd quarter of 2024, compared to adjusted EBITDA of $1.7 million in the 3rd quarter of 2023. The company reported a net loss of ($2.2) million, or a loss of ($0.08) per diluted share. Absent the impairment charge, adjusted EPS was a loss of ($0.04) per share.
As of 9/30/24, the company had no outstanding debt and cash balances of $1.15 million and $20.0 million of availability on its bank line of credit which provides total liquidity of $21.15 million. Subsequent to the end of the 3rd quarter, the company divested its Kansas oil & gas properties which provided an additional $1.2 million in liquidity
During the 3rd quarter of 2024, the company produced 105,699 Boe, or an average of 1,149 Boe/d. The South Texas divestiture represented approximately 100 Boe/d in production. When adjusting for the South Texas transaction and other non-core divestitures made to date, the company realized sequential production increases over both the 1 st and 2 nd quarters of 2024.
In April 2023, the company authorized a share repurchase program of up to $5.0 million. Since then, approximately 900,000 shares have been repurchased at an average price of $1.17 per share, which represents about 3.0% of shares outstanding. During the 3 rd quarter of 2024, the company repurchased 19,000 shares at an average price of $1.05. Recently, CEO Ryan Smith has purchased 9,100 shares at an average price of $1.24.
The company's 2024 SEC proved reserves as of July 1, 2024, as prepared by an independent third-party reserve engineer, were 3.5 Mboe and comprised of 62% oil. The total derived PV-10 value was approximately $50.9 million . At the end of the 3rd quarter, the SEC PV-10 value was approximately $52.0 million . Taking into account the divestiture of the Kansas properties, the SEC PV-10 value of the oil & gas properties was $49.8 million as of October 31, 2024.
Helium Program Update
Recently, U.S. Energy has had significant advances in developing the industrial gas assets in northern Montana. From September through October of 2024, the company successfully completed drilling operations on its first well which uncovered multiple productive helium zones within non-hydrocarbon-based gas streams.
The highest helium concentrations were identified within a nitrogen-based formation, with additional helium reserves discovered in a CO2-based formation. These results position the company to capitalize on these assets for future industrial gas development and planned carbon sequestration initiatives (see below for more drilling details).
The company expects to begin development of its helium processing plant in the first quarter of 2025. Due to the simplified modular component structure of the proposed plant, the company believes that the plant could become operational by September or October of 2025.
The structure of the helium operations provides for revenue generation from both the wellhead and from the processing plant. U.S. Energy owns an 82.5% working interest in the wells and owns 100% of the processing plants. There are multiple variables that could affect revenues and EBITDA generation in the helium operations including realized pricing, % of helium concentrations, and plant marketing fees. We believe under a wide range of scenarios; full cycle EBITDA generation could be in the $5.0-$10.0 million range.
Valuation & Estimates
We utilize multiple valuation methodologies to arrive at our price target of $3.00 for USEG stock. These include Discounted Cash Flow (DCF) calculations, peer multiples, price to book value, price to asset value and others.
Our DCF calculation assumes monetization of helium extraction begins in late 2025. For calendar year 2026, we believe that helium revenues could total approximately $12.0 million and EBITDA generation would be in the range of $7.0 to $8.0 million. We assume the oil and gas properties produce steady state revenues in the $17.0-$18.0 million range with EBITDA generation of approximately $2.0 million. Under this scenario, our DCF calculation is approximately $3.00 per share. This may prove to be conservative as we utilize a high discount rate of 12.5%. In addition, we do not incorporate any other industrial gas revenues or carbon sequestration related revenues into our model at this time.
We believe that USEG is also undervalued on an oil & gas standalone basis. The company's 2024 SEC PV-10 proved reserves as of October 31, 2024 were $49.8 million . With a current market cap of $44 million USEG is trading at 88% of proved reserves. If the company were to sell at the value of its proved oil & gas reserves, that would create a stock price of $1.78 . In addition, we believe recent M&A transaction values based on proven reserves have been at multiples of the SEC PV-10 value.
The company reported $6.9 million in helium related unproven resources as of 9/30/24 which is essentially the acquisition costs and other incurred costs to date for the helium operations. We believe an independent third party will be able to provide an estimate of proven helium reserves at some point in the 1 st quarter of 2025.
On a forward looking basis assuming the helium extraction efforts are successful and create $8.0-$10.0 of annual industrial gas EBITDA, we can look at industrial gas peer valuations. Using a peer group including APD, LIN and AIQUY, the average peer EV/EBITDA multiple is approximately 16x. Applying that multiple to the range of estimates for USEG’s industrial gas business would create a stock price in the $4.50- $5.70 range. We don’t incorporate that range into our target price at this time, but we are demonstrating the potential upside for USEG if the helium business is successful over time.
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