Big Sky Industrial Inc. (BSIN) Earnings Call Transcript & Summary

Welcome to the U.S. Energy Corporation Investor Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Mason McGuire, Director of Corporate Development. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Welcome to U.S. Energy Corp.'s conference call to discuss the company's recent transactions. Ryan Smith, our Chief Executive Officer, will provide an overview and discuss the company's strategic outlook. Today's discussion may contain forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. With that, I'd like to now turn the call over to Ryan Smith.

Thank you, Mason, and good morning, everyone, and thank you for joining us today. I'm pleased to be with you this morning to discuss the company's recent transaction announcements, specifically those targeting helium production and other industrial gases in Montana and share with you a view on our strategic outlook going forward. During this morning's discussions, I plan to highlight the relevancy of 3 key items related to this transaction: number one, what is the asset and the background behind it; number two, what is U.S. Energy going to do with it; and number three, what does U.S. Energy look like going forward? And how are we differentiated from the existing market? First, what is the Kevin Dome structure in Montana? From a composition standpoint, the dome is a greater than 100 square-mile anticlinal structure, meaning that it rises in the center and dips towards the edges. The formations that make up the dome are highly porous and permeable making them ideal reservoirs for natural resources, both hydrocarbon and non-hydrocarbon. The formations also provide excellent storage capacity, which we believe makes it an ideal candidate for carbon sequestration. The major standout feature of the Kevin Dome with its long proven role as a significant domestic source of CO2 and other industrial gases. Over the years, extensive geological surveys and research have confirmed the presence of vast CO2 reserves within the dome's rock formations. These formations due to their high porosity and permeability service excellent reservoirs, allowing for the accumulation of multiple industrial gases, including the CO2 and nitrogen-dominated formations bearing helium. Stepping back briefly, I'd like to touch on the historical time line of development and ownership of these assets. As most on this call know, U.S. Energy owns and operates a large oil field in Montana. That field was originally developed by Unocal, who is now Chevron, who held ownership for many, many years. The Kevin Dome is approximately 30 miles of distance from the oil field and that became understood that the domed held vast CO2 deposits. The owner gained control of both assets with the ultimate intent to eventually initiate a large-scale CO2-enhanced recovery of the oil field. Eventually, the assets were sold to a fairly large public company called Quicksilver Resources who subsequently sold the assets to a Blackstone-backed private company called Synergy, which ultimately was bought out by its management and contains 2 members who's still on the current U.S. Energy Board of Directors. In 2022, that U.S. Energy acquired the oil field, splitting the Kevin Dome and the oil assets up and the Kevin Dome assets under LOI right now at Synergy represent that trail of assets. When the existing wells on the Kevin Dome were first tested for helium concentrations in 2023, the results were highly encouraging. After watching the evolution of the helium and CO2 markets over the last several years, already having significant operations on the ground in what can be a fairly remote area. And after multiple months of as thorough of a diligence process that I've been a part of, U.S. Energy decided to move forward and pursue the opportunity. In doing so, we also began to target surrounding areas that we believe further expanded the resource opportunity, and that resulted in both transactions that we released the other day, and the subsequent dominant land position across the dome. To end the first point and a very critical aspect on the background summary of the Kevin Dome, and I'll come back to this in a few minutes. But the vast majority of helium production in the United States is hydrocarbon-based being driven by byproducts of natural gas production. The helium sources across the dome are non-hydrocarbon-based and they are part of other industrial gas streams, making this project as low of an environmental footprint as any of its type in the United States. Now on to the second point. What is U.S. Energy going to do with the asset? The first thing we must now realize is that U.S. Energy controls a vast land position and resource across the dome. Thankfully, we have long-standing operations and staff in the area, giving us existing boots on the ground and a high degree of familiarity with the necessary materials and services to operate a development program in this part of the country. Initially -- and I'll define, initially as the next 12 months or so, we are currently at various stages of planning everything from the drilling of multiple wells over the summer and fall, to designing the necessary infrastructure and processing capabilities, to securing long-term offtake agreements that have highly supportive economics of all development. And then ultimately realizing meaningful helium cells at the end of that initial period, which we expect to be in the summer of 2025. As we think about the near-term drilling activity, of which we have 2 initial wells planned to drill in August and September, with likely 2 more later in the fall, we have many data points on productive zones from shallow conventional oil and gas wells drilled many years ago. That being said, we believe the helium dominant pay zones largely virgin reservoir pressure, resulting in what we expect to be highly productive wells with minimal declines and modest capital cost of $1.2 million to $1.4 million each, primarily driven by the relatively shallow and conventional nature. The expected size and minimal decline rates of the newly drilled wells are expected to support highly economic development of the asset base, both at the field and associated infrastructure levels, without the need to drill hundreds or even several dozens of producing wells. This is advantageous for numerous reasons, and the effects will ultimately show up in our realized economics. Additionally, our wells in the initial period will target our areas of high confidence while also bringing additional clarity to the productive parameters of the dome. It's very important to note that while we are focusing operations on the highest return on our near-term helium operations, we believe that there are other equally, if not more so, revenue streams associated with the project. While nitrogen is inert gas can be flared, I think everybody is aware that CO2 can't be, but the market for sequestering and ultimately monetizing certain types of CO2 sources through various methods have exploded over the last several years and been supported by highly bipartisan legislation. Additionally, whether it be the food and beverage market or high-growth tech and automotive processes, the commercialization of reliable domestic and non-hydrocarbon-based CO2 sources has grown tremendously, and we plan on pursuing all monetization avenues. Finally, to my third and final point, why U.S. Energy, and what does the company look like from here going forward. U.S. Energy is always targeted being a growth platform that aggregated oil and gas assets. while oil prices have been more supportive over the last couple of years than they were previously experienced. The challenges facing public small and mid-cap E&Ps are real. Specifically when managing current cost of capital and executing on meaningful transactions that truly makes sense to existing shareholders. We've grown the platform here at the company when applicable, and we've also targeted asset sales when we felt the market was tilted in the seller's favor, as shown by our last 2 announced deals. It left us with an ideal balance sheet, extremely low levels of simple bank debt and a very clean cap structure. I've said multiple times in the past, a big part of my job here at U.S. Energy is not to complain about small-cap E&P valuations but to formulate and execute ways that unlock the value of our balance sheet that I believe exists. I think you have seen modestly outsized value realized for our assets in the A&D market through our last 2 asset sales, which does include our recent announcement. And that has been significantly greater than our market cap value on a percentage of company production and reserves sold. While any development project will, of course, need some form of development capital, U.S. Energy sits in a highly enviable position relative to any perceived peer of having significant resources of internally generated nondilutive capital, whether it's cash flow from existing operations or more meaningfully opportunistic asset sales, having that lever to pull for significant cash value is a huge advantage, particularly with a highly desirable and immediate use of proceeds. In conclusion, U.S. Energy sits at the beginning of what I believe is a true first-mover advantage in this space, which I define as a growth-focused non-hydrocarbon industrial gas-focused company in the United States. The existing micro scale companies in the space are hindered by burdensome and convoluted equity structures, ugly balance sheets and listed on exchanges that are avoided by most institutional investors. U.S. Energy faces none of these hurdles, and we believe further corporate opportunities will present themselves as this becomes more apparent in the marketplace. While successful catalysts and sustainable growth will always drive long-term equity valuations, simply put, U.S. Energy's focus is creating a domestically focused non-hydrocarbon industrial gas platform that achieves these goals. At our scalable Kevin Dome position, we believe that we control a resource that gives us the ability to be the leading small-cap industrial gas-focused company with the cleanest environmental footprint in the United States. Looking ahead, we have an incredible opportunity to leverage this to drive growth, enhance our platform and create lasting value for all of our stakeholders. Thank you for your participation this morning. We're now ready to take any questions.

[Operator Instructions]. Our first questions come from the line of John White with ROTH Capital Partners.

Thank you for that overview of the recent transactions on your carbon sequestration plans and the CO2 at the dome, is -- some of the CO2 going to be transported to the oil field you mentioned and used in a tertiary recovery process?

John, thanks for joining the call. So as I kind of hit on during the summary, the long-time historical plan in many, many decades was to use the CO2 to flood the oil field. I think from a plausibility standpoint, like U.S. Energy now controls these 2 assets. Is it something that we're going to thoroughly evaluate in diligence and research, just like we would an internal project we were positive about? Absolutely, we're going to do those things. I think where the market is going right now both, I'll say, just capital markets wise, which is ultimately what we follow as a public company. I think there's probably more valuable avenues to monetize that CO2 stream and kind of keep it on a -- what I'll call, a closed loop system on the dome instead of piping it to the oil field. That being said, I think further down the road, whether it's on the platform we're building out now or some type of other structure where the oil assets may leave the platform but stay owned by the company. I think it's a huge upside opportunity down the road past these initial phases.

Okay. And what kind of reserve estimate for the helium on both acreage blocks do you have in place?

Great question. I'm going to put that just because we have not signed definitive documents with one of the parties yet, and I don't want to piece mail those numbers because it's much more simple, putting them all out at one time. I will say in terms of PSA signing with the other deal is from a high level, there's no reason for me to change my opinion that we had in the earnings call that we're expecting this deal to close at the end of September. And it's a public deal, so you can kind of back into definitive doc date expectations then. And once we do that, we'll have our reserve estimates plus whatever third-party work we've had done at that time. So probably sometime this month, early August.

Okay. I can understand that. And the first two drilling locations this summer are going to be on the Wavetech acreage, correct?

Correct. And the first -- sorry, go ahead.

I have your map on your press release in front of me. Can you generally describe where those locations are?

Yes. No, for sure. I think -- and I'm glad you generally, even though we do have permits. So these are known and out there. The first well we're drilling, again, we're drilling this back to back. So the first and the second aren't really that much of a difference. But the first well i,s, it's pretty close to the lease line of both the Wavetech and the Synergy acreage. If you look at it at that map, it's probably where the lower right part and the upper left of the Synergy acreage in the upper left part of the Wavetech acreage kind of meet is where the first well is being drilled. So we're excited about not only the prospects of that, but the mutually beneficial nature of drilling a well and proving up acreage, that really just shows the benefit of these two positions being together. And the second well is further south than that. On the Wavetech acreage, both for economic purposes and boundary testing, that second well is being drilled, and we're expecting both of those to kick off late August.

Okay. So both wells are generally southeast of the Synergy acreage.

Correct.