Greetings. Welcome to the U.S. Energy Corporation Fourth Quarter and Full Year 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Mason McGuire, Director of Corporate Development. Thank you. You may begin.

Thank you, operator, good morning, everyone. Welcome to U.S. Energy Corp.'s fourth quarter and year end 2023 results conference call. Ryan Smith, our Chief Executive Officer, will provide an overview of our operating results and discuss the company's strategic outlook; and our Chief Financial Officer, Mark Zajac will give a more detailed review of our financial results. After the market closed yesterday, U.S. Energy issued a press release summarizing operating and financial results for the year ended December 31, 2023. This press release, together with accompanying presentation materials are available in the Investor Relations section of our website at www.usnrg.com. 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. Further, please note that non-GAAP financial measures may be disclosed during this call. A full reconciliation of GAAP to non-GAAP measurements are available in our latest quarterly earnings release and conference call presentation. With that, I would 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 share with you some of the strong highlights from this year and quarter as well as provide an update on our strategic outlook. Our year-end results reflect the dedication and consistency of our entire team. We achieved annual net daily production of greater than 1,700 barrels of oil equivalent per day which takes into effect our fourth quarter asset divestitures, which I will discuss later, marking an increase from the comparable period of 2022. Oil production accounted for 63% of our total production, with the remainder consisting of approximately even split of natural gas and NGLs. I'm particularly proud to highlight our substantial achievements in cost management. Our lease operating expense came in at $3.1 million, or $22.38 per BOE, representing a significant reduction compared to both the prior quarter as well as the fourth quarter of 2022. This impressive reduction underscores our commitment to operational efficiency and has achieved the continued backdrop of high interest rates, which flows through to everything including elevated service costs. That being said, I should mention that while some costs have remained elevated compared to historical levels, we have begun to see cost reductions in certain materials that we often use across our operations. Of significant note, during the fourth quarter, the company closed on approximately $7.3 million of asset divestitures. The assets represented the majority of our non-operated properties and represented roughly 11% of company production. All proceeds from the divestitures went to debt reduction, putting us at our current attractive leverage profile. As borrowing rates continue to increase throughout the year, and in my belief, a USEG equity valuation that is trading at less than what will be realized through certain asset divestitures, the USEG…

Thank you, Ryan. Hello, everyone. Let's delve into the financial details for the fourth quarter and year end of 2023. Total oil and gas sales for the quarter amounted to $7.3 million approximately, reflecting a decrease from $10.4 million in the same period last year. This decline was attributed to a 21% reduction in volumes and a 10% reduction in realized prices. It is important to note that this quarter's production was significantly impacted by the nonoperated divestments made during the quarter. Sales from oil production contributed 88% of our total revenue for the quarter, demonstrating our continued focus on optimizing our oil assets. Our lease operating expense for the fourth quarter was approximately $3.1 million, equivalent to $22.38 a Boe, indicating an impressive 28% reduction in total lease operating expense compared to the fourth quarter of 2022. This reduction can be attributed to fewer one-time workovers and the divestment of higher cost non-operated assets during the recent quarter. Severance and ad valorem taxes for the fourth quarter of 2023 totaled approximately $0.5 million, reflecting a decline from $0.7 million in the same period last year. As a percentage of total oil and natural gas sales revenue, these taxes accounted for approximately 6% during the quarter. Cash general and administrative expenses reached approximately $2.2 million for the fourth quarter of 2023, compared to roughly $2.4 million in a similar period of 2022. This decrease of aggregate expenses was primarily attributed to higher professional fees incurred in 2022 prior to high grading several accounting and finance positions. Turning to our net financial performance. The company reported a net loss of $19.8 million in the fourth quarter of 2023. The fourth quarter loss is largely attributed to an oil and gas impairment expense of $20.2 million, driven by impact of lower SEC pricing on the company's reserve report. Our adjusted EBITDA, excluding the impact of hedges, stood at $1.4 million in the fourth quarter of 2023, compared to $2.7 million in the same period last year, influenced most notably by the decline in commodity prices and production from the prior period. Let's briefly touch upon our balance sheet. As of December 31, 2023, the company held outstanding debt of $5 million on a $20 million revolving credit facility. Our cash position stood at $3.4 million. We plan to continue allocating a portion of free cash flow to debt reduction and maintain the flexibility to react to market conditions on that front. In conclusion, we are pleased with our operating performance and the financial results that enable us to support the company's initiatives in a way that maintains full balance sheet integrity. I'm leading the charge to ensure the company's reporting processes maintain a high standard of excellence, and we feel confident in our ability to support any growth initiatives we may entertain going forward. Thank you for your participation this morning. We are now ready to take your questions.

Thank you. [Operator Instructions] Our first question is from Charles Meade with Johnson Rice. Please proceed.

Good morning, Ryan to you and the whole USEG team.

Good morning, Charles. Thanks for calling.

Ryan, in your prepared comments, I want to go back and make sure I heard you correctly, and I'm interpreting it the right way. I think I heard you say or I seem to recall you saying that you feel like you have investment opportunities or growth opportunities or growth initiatives inside your portfolio that are a higher returns than any outside M&A opportunities. Was that -- did I hear and interpret that correctly? And I wonder if you can elaborate to the extent that you're able to right now, what those growth initiatives kind of organic growth initiatives are?

Yes, of course. Good question. And there's kind of a lot of layers to that question. So I'll pick out a few of them, and if I don't answer all of them, just please let me know. So from a -- and this also could go into type of a catalyst type of answer as well. It's no secret, borrowing costs are high, equity valuations aren't great. And on a smaller scale M&A like relative to US Energy, that makes some of the acquisitions, asset-level acquisition, risk/reward base is tough. And as we look at running the company both on a day-to-day basis and then a long-term value creation basis, I think on a day-to-day basis, where it comes down to greatly simplify it, but take your existing assets, keep production flat, maybe a little bit up and to the right and fund that out of cash flow at a small enough portion of that cash flow that you can still keep your repurchase program going and you still keep debt reduction going. And so when it comes to I'll call it, bringing on production or bringing on barrels from a cost of capital perspective, from a risk reward perspective, from a likelihood of getting it done perspective, I think we have those opportunities in our existing portfolio that, again, in this macro oil and gas environment are a much higher rate of return. And then obviously, since we own it in areas that we feel much more comfortable about that even acquiring an asset and doing extremely thorough diligence on it. We've had these assets now for a little over two years. And -- we spent a long time. We have assets from almost the Canadian border to the southern border and everywhere in between, really getting our arms…

Got it. Well, look, $80-plus oil, a lot of stuff will work. And Ryan I wondered just -- you've made a lot of comments about the A&D market. I just wonder can we go at that directly. From my seat, the big deals, equity-to-equity are still happening, but kind of the cash deals in the A&D seemed to have slowed down mostly because there's -- it looks like there's no -- the sellers -- buyers have moved down what they're willing to pay and sellers haven't. I'm curious, is that the way it seems to you? Or maybe just elaborate a little bit more on the character of the -- of the kind of the smaller scale A&D opportunity set right now?

Yes, you're exactly right, and I'll elaborate, but you hit it spot on, right? Like the bigger deals out there, which I know you're not saying they are, but those really aren't applicable to the mid and small-cap and lower universe. So, guys that are still -- the bigger guys who still have healthy equity valuations, you see stock-for-stock deals, you see proposed hostile stock-for-stock deals, and those are for all the same reasons that people have always done those, right, to scale up, cut costs, and get bigger. On the smaller side, I think it's totally related to the things you said, in addition to the public equity valuations are depressed at these size of companies in this industry and whenever a public-to-private, which used to be a larger multiple transacts, now you're forcing the private to take on the public discount right out of the gate. And in every single situation that I've seen bar none, the private company, no big surprise, is marking their book at a significantly higher number than what the smaller microcap public guys get marked at every single day. Borrowing costs, it's a lot tougher to underwrite these things that 9 -- or significantly greater than 9% as it was 3% for the last several years. And then on the seller appetite, we absolutely see it. And even though oil properties or oil properties, they still have a lot of gas in them and where gas has gone really drives that kind of incremental value for some of these sellers and it just doesn't make sense from a risk/reward basis for a company our size to underwrite optimistic commodity price projections going forward. And I'll even add a fourth one on, again, no secret, the regulatory environment. While I would say, from like a media perspective, it's gotten a little bit better, it's still very serious. It's still very tough. States are still coming down and monitoring company's activities and companies very small producing wells and P&A obligations, way more than they ever have and the U.S. energy stays on top of that very much. But a lot of these smaller deals historically have always had a significant P&A component, shut-in component that came along with them. And there was always some tricks that people and companies would do to, kind of, kick that cane down the road, I think you still see people doing that now. But that game is ending. It's not if, it's when. So it's really become as much of a part of the transaction calculus as the other three items, that I mentioned.

Thank you for all that added detail, Ryan.

Our next question is from Tim Moore with EF Hutton. Please proceed.

Thanks. We really appreciate that asset growth initiatives color as you wrap up the optimization effort there and geographically, it makes sense why that would take so long. But any other comments maybe you can give us for sneak peak on a strategic alternatives over your commentary, Ryan, and we assume they're going to be mostly oil-weighted assets?

Yeah. So good question. I think, as you know, as the Board and management look at strategic alternatives, like it always carries tenacity word historically, especially in the oil and gas business. But where we're sitting and where we’re sitting, when we announced it, I believe it was in November, is a delevered balance sheet and what I call significant balance sheet value that is not flowing through to equity valuations. I know we're not the only small micro-cap oil and gas company that represents that. But I do think we're one of the larger examples out there. So I think how we look at it is my job and when I focus on day-to-day, we have a very good team here that handles our day-to-day operations in the field and accounting, et cetera. But it's really finding the right, I'll say, project or transaction or initiative that transfers, what I think is extremely significant balance sheet value at this company and have it flow through to something that helps expand our equity valuation. I know that's a very obvious comment, but it's a tricky thing to do, especially in the oil and gas space for the last few years. So I think it can take several forms. As I think you mentioned on your oil projects, we're always going to probably trend towards oil, and looking at M&A transactions. I thought we understand it more, and it doesn't seem to be as volatile as gas. I know it's easy to say sitting here now. But I do think that, Tim, we're at a size now and we're in a valuation now to where all options are on the table for us. We have a very concentrated shareholder base, lot of those shareholders sit on our board. And the goal of the company is to make the stock price go up as simplistic as that sounds. So I think in terms of the strategic alts, everything is on the table. Of course, we're going to transact and venture into areas that we already know well and we're an oil and gas company. So I'll let you put those two together. But it's still just as active as it was. And when there is something that comes out of that process, we will announce it at that time. But no, it's still an ongoing process. We look at it the same way as we did when we announced it back in November.

Good. That's helpful. Now we're looking forward to more on that front. Yes, for lease operating expenses, that decreased nicely, as you mentioned, to $22 BOE averaged something like 25 in the first nine months of a year. How much lower do you think you can squeeze that out? Is there more potential there?

I mean I think on an absolute basis, there's a little bit of potential like some costs have come down. They're still historically high, but -- and again, I'm talking recent times in the graph here, but like steel and the associated pipe, et cetera, that we use very often, prices have started to trend down. Labor costs and availability have started to trend down a little bit. It's starting -- it feels like it's starting to sway in the employer's favor for the first time in quite a while, at least down in Houston, Texas, it feels like that. So I do think that incrementally as inflation tapers off, and the industry becomes more healthy. There's probably some continued reduction to those costs. That being said, the flip side to having a high single-digit-ish corporate decline rate on our assets on a conventional asset base, a little bit higher LOE. So I'm happy where we were. I think there is some room to still reduce some of what you saw in the fourth quarter. But I think the really big jump that we made from when we initially bought the assets to our fourth quarter, a lot of that is going to be onetime stuff that's removed. So we still do have some improvement, but a lot of that improvement has been realized.

Thanks for being candid on that. Yeah, you made some great progress. And Ryan and Mark, I know you don't give guidance, but in PE, if crude oil prices stayed above $70 for the rest of the year, what type of production growth do you think you could achieve maybe on an organic basis, let's exclude that divestiture of the 11% to 12% production decline. I mean, should you be up high single-digits, just looking at this year for production volumes?

Yeah. I mean I think that could be a fair assumption, Tim. And not to be coy, but like some of the what I call day-to-day smaller scale organic projects. Those are real, and we're still kind of getting our arms around that and starting to begin those. I think we'll have more color on the next call or incrementally in between now and then on some of those projects and kind of what we expect it to do from a CapEx perspective and a production profile perspective. But I do think just, again, from a high level, and our model, I think, historically, we've always shown this, that we can keep production flat or close to flat with a very low single million CapEx number on our current assets.

Great. That's really good color. And one last question for Mark maybe. I know you did the $20 million impairment in the fourth quarter and $6.5 million in the third quarter. If the prices stay fairly flattish or not down too much. I mean would you expect you could be done with impairments for the rest of this year?

In our filing we made last night, I think we're projecting one in the first quarter 2024. The issue ultimately is the SEC rolling prices. And so if prices decrease on a comparative basis as the quarters roll in, there's a potential for impairment, and that's what we're dealing with. We're dealing with retrospective prices relative to current prices.

Yeah. No, I figured that. I just think maybe we got past March could be not as much of an issue. But thanks a lot. I appreciate all the color and the answers.

Great. Thanks, Tim.

With no further questions in the queue, we will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.