Business Overview and History
U.S. Energy Corp. (NASDAQ:USEG) is a growth-focused energy company undergoing a transformative shift, expanding its operations beyond traditional oil and gas exploration into the emerging industrial gas market, with a particular focus on helium extraction. With a strategic acquisition in Montana’s Kevin Dome and ongoing efforts to develop its non-hydrocarbon-based assets, USEG is positioning itself as a pioneer in the burgeoning helium sector, while optimizing its legacy oil and gas portfolio.
U.S. Energy Corp. was incorporated in Wyoming in 1966 and reincorporated in Delaware in 2022. The company has historically been focused on the acquisition and development of onshore oil and natural gas properties in the continental United States, primarily in the Rockies, Mid-Continent, and Gulf Coast regions. In 2020, the company made a strategic shift to acquire operated properties, moving away from its previous non-operator model.
In 2020, U.S. Energy faced significant challenges due to the COVID-19 pandemic, which led to a substantial decline in oil and gas prices. Despite these difficulties, the company successfully acquired operated properties in North Dakota, New Mexico, Wyoming, and the Texas Gulf Coast, diversifying its asset base.
A major milestone occurred in January 2022 when U.S. Energy closed acquisitions of oil and gas properties from three separate sellers. This transaction represented a diversified portfolio of primarily operated, producing, oil-weighted assets located across the Rockies, West Texas, South Texas, and Mid-Continent regions, allowing the company to transition to a more operator-focused model.
Throughout its history, U.S. Energy has faced challenges related to the full cost method of accounting used for its oil and gas activities. The company has recorded several ceiling test write-downs due to factors such as reductions in commodity prices, divestitures of properties, and revisions to reserve estimates. These write-downs have had a material adverse effect on the company’s financial condition.
Despite these challenges, U.S. Energy has maintained a focus on optimizing its oil and gas assets and maintaining a strong balance sheet. The company has divested non-core properties to generate cash flow, which has been used to pay down debt and fund capital expenditures.
In June 2024, USEG took a transformative step by closing a transaction with Wavetech Helium to acquire 82.5% of the rights to approximately 144,000 net acres across the Kevin Dome structure in Toole County, Montana, targeting the development of helium and other industrial gas resources. This acquisition marked a significant pivot for the company, as it sought to diversify its asset base and capitalize on the growing global demand for helium. To fund the acquisition, the company paid $2.0 million in cash and issued 2.6 million shares of restricted common stock valued at $2.7 million, while also incurring $0.4 million in transaction costs.
Complementing the Wavetech transaction, in June 2024, USEG also signed a non-binding letter of intent with Synergy Offshore to acquire an additional 24,000 net acres of highly contiguous helium-rich acreage in the same region. These two transactions solidified USEG’s position as a key player in the Montana helium play, with a combined net acreage position of approximately 164,000 acres.
USEG’s legacy oil and gas assets, while no longer the primary focus, continue to contribute to the company’s overall financial performance. As of the third quarter of 2024, the company’s oil and gas production was split 58% oil and 42% natural gas and liquids. Recent divestitures of non-core properties have streamlined USEG’s asset portfolio, allowing the company to focus its capital allocation on the development of its newly acquired helium assets.
Financial Overview
For the nine months ended September 30, 2024, USEG reported total revenue of $16.39 million, a 34% decrease compared to the same period in 2023, primarily due to a 33% decline in production volumes. The company’s oil production accounted for 62% of total production during the first nine months of 2024, with natural gas and liquids making up the remaining 38%.
Lease operating expenses for the nine-month period were $9.32 million, or $28.54 per barrel of oil equivalent (Boe), a 23% decrease from the prior-year period. This reduction was largely attributable to the company’s divestiture of non-operated properties and a decrease in well workover activities. Gathering, transportation, and treating costs decreased by 59% to $170,000, while production taxes declined by 39% to $1.01 million, in line with the lower revenue.
USEG reported a net loss of $13.76 million for the first nine months of 2024, which included a $6.84 million impairment charge related to the reduction in the value of its oil and gas reserves. The company’s adjusted EBITDA for the period was $0.95 million.
During the nine months ended September 30, 2024, the company recorded a ceiling test write-down of its oil and gas properties of $6.80 million due to a reduction in the value of proved oil and natural gas reserves, primarily as a result of decreases in crude oil and natural gas prices, as well as divestitures of oil and natural gas properties and reserves revisions related to wells shut-in during the first quarter of 2024 and updates to the decline curves for certain wells.
For the most recent fiscal year (2023), USEG reported revenue of $32.32 million, a net loss of $32.36 million, operating cash flow of $5.47 million, and free cash flow of $1.60 million. In the most recent quarter (Q3 2024), the company reported revenue of $4.96 million, a net loss of $2.25 million, operating cash flow of $2.57 million, and free cash flow of $0.33 million. The year-over-year revenue decline of 43% in Q3 2024 was primarily due to a 30% reduction in production volumes, partially offset by an 18% increase in realized prices. The lower production was attributed to divestitures and temporary weather-related impacts.
Financials
As of September 30, 2024, USEG had no outstanding debt on its $20 million credit facility, a testament to the company’s financial discipline and focus on balance sheet strength. The company’s cash position stood at $1.16 million at the end of the third quarter. USEG’s debt-to-equity ratio was 0.005, with a current ratio of 0.31 and a quick ratio of 0.37.
Liquidity
USEG’s strong financial position, with no outstanding debt and access to a $20 million credit facility, provides the company with significant liquidity to execute its growth strategy and fund the development of its helium assets. The company fully repaid its $5 million credit facility balance during Q3 2024, maintaining a strong balance sheet with no debt outstanding.
Helium Exploration and Development
The cornerstone of USEG’s strategic transformation is its focus on the exploration and development of helium resources in Montana’s Kevin Dome. In October 2024, the company successfully completed drilling operations on its initial well, with independent laboratory analysis confirming high-quality, non-hydrocarbon-based helium concentrations of up to 1.5%.
These promising results validate the economic potential of USEG’s helium assets and set the stage for the company’s next phase of development. The company plans to drill an additional 3-5 wells in 2025, with the goal of defining the full extent of the resource and progressing towards the construction of a processing facility to bring the helium to market. USEG expects to commence drilling a second well in early 2025 with additional developments throughout the year, aimed at zones where they anticipate similar helium concentrations of up to 1.5% as the initial well.
According to a third-party resource report, USEG’s helium assets in the Kevin Dome have mid-point contingent and prospective resource estimates of 23.7 billion cubic feet (Bcf) and 13.3 Bcf, respectively. The company’s legacy oil and gas reserves, as of mid-2024, were 3.5 million barrels of oil equivalent (MMboe), with a PV-10 value of $50.9 million.
USEG estimates the initial well’s drilling costs came in below their projected costs, and they expect costs to decrease further as they move forward with the 2025 drilling program. The company is targeting full-cycle production and sales to start in the early fourth quarter of 2025, with a chance that the timeline could be moved up. For the initial helium processing plant, USEG estimates it will have an annual EBITDA run-rate of around $5-$6 million, though they have not provided formal guidance on this yet as they are still finalizing plant sizing details.
On helium pricing, USEG models $400-$450 per Mcf, with potential upside to $450-$600 per Mcf if they are able to contract directly with end-users rather than going through a broker.
Operational and Financial Discipline
Throughout its transition, USEG has maintained a disciplined approach to its capital allocation and balance sheet management. The company has successfully divested non-core oil and gas assets, using the proceeds to fund the development of its helium projects and repay outstanding debt.
During the nine months ended September 30, 2024, the company closed several divestment transactions of its oil and gas properties for net proceeds totaling $5.9 million. These divestitures included a total of 245 wells located in Karnes County and Archer County, Texas, and Lea County, New Mexico. In October 2024, the company closed on the divestment of additional oil and gas properties in Pratt County and Sumner County, Kansas, and Kay County, Oklahoma, for net proceeds of $1.2 million.
In the third quarter of 2024, USEG fully repaid the outstanding balance on its $20 million credit facility, leaving the company debt-free. This strong financial position provides USEG with the flexibility to execute its growth strategy without the burden of significant leverage.
Additionally, USEG has an active share repurchase program in place, having repurchased approximately 886,000 shares, or 3% of its outstanding shares, as of the end of the third quarter of 2024. This demonstrates the company’s commitment to enhancing shareholder value and confidence in its long-term prospects.
Risks and Challenges
As USEG transitions its business model, the company faces several risks and challenges that investors should consider:
Commodity Price Volatility: Both the oil and gas and helium markets are subject to significant price fluctuations, which can impact the company’s financial performance and the economics of its development projects.
Regulatory and Environmental Compliance: USEG’s operations, particularly in the helium space, are subject to a complex web of federal, state, and local regulations, which could evolve over time and increase the company’s compliance costs.
Execution Risks: The successful execution of USEG’s transformation strategy, including the timely and cost-effective development of its helium assets, is critical to the company’s long-term success.
Outlook and Conclusion
USEG’s strategic pivot into the helium market represents a significant opportunity for the company to diversify its asset base and capitalize on the growing global demand for this essential industrial gas. The promising initial results from the company’s first helium well and the substantial resource potential of its Montana acreage position USEG as a potential leader in the emerging non-hydrocarbon-based helium space.
As USEG continues to execute its development plan, the company’s ability to efficiently bring its helium production online, secure favorable offtake agreements, and manage the associated risks and challenges will be key determinants of its long-term success. Investors will also closely monitor the company’s ongoing optimization of its legacy oil and gas portfolio and its ability to maintain a strong balance sheet and disciplined capital allocation.
The company’s third quarter 2024 production of 1,149 barrels of oil equivalent per day showed a sequential improvement over the first and second quarters of 2024, indicating potential stabilization in its legacy oil and gas operations. Looking ahead, USEG plans to focus its capital budget substantially on the completion of its recent helium discovery, with plans to drill 3-5 additional wells and related development activities over the next 12 months at an estimated cost of $4 million to $6.5 million, depending on the number of wells drilled.
Overall, USEG’s transformation into a diversified energy leader with a focus on helium extraction presents an intriguing investment opportunity for those seeking exposure to the growing industrial gas market, while also benefiting from the company’s prudent management of its legacy oil and gas assets. The company’s debt-free status, available credit facility, and strategic focus on high-potential helium assets position it well for potential growth in the coming years, though investors should remain mindful of the inherent risks associated with this transition and the broader energy sector.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.