By Thomas Kerr, CFA

NASDAQ:USEG

READ THE FULL USEG RESEARCH REPORT

On March 11, 2025, U.S. Energy (NASDAQ:USEG) reported 4^th quarter and full year 2024 financial and operating results. The year over year revenue comparisons were not relevant due to recent oil & gas divestitures that occurred in 2024. Total oil and gas revenue in 2024 was $20.6 million of which $18.2 million was oil and $2.5 million was natural gas and liquids.

In 2024, lease operating expense, inclusive of workover expense, was $11.2 million compared to $15.3 million in 2023. General and administrative expense totaled $6.9 million in 2024 which was a 25% decrease from 2023. This was primarily driven by a reduction in employee compensation and benefits. Stock compensation expense was $1.3 million which was a 45% decrease from 2023.

The company generated adjusted EBITDA of $3.6 million in 2024. The reported net loss was $25.8 million, or ($0.96) per diluted share, which was largely driven by a $11.9 million impairment of oil and natural gas properties and a $5.0 million loss on sale of assets related to divestiture of the East Texas properties. The impairment was related to a 38% decrease in reserve volumes resulting from decreases in commodity prices and other reserve revisions.

As of 12/31/24, the company had no outstanding debt, cash balances of $7.7 million, and $20.0 million of availability on its bank line of credit. In January 2025, the company raised approximately $10.5 million in net proceeds from an equity offering. In the 1^st quarter of 2025, the company spent $2.0 million to acquire additional acreage in Montana. After paying property taxes and spending on capex, we believe the current cash position is in the $12-$13 million range.

In the past 2 years, the company has repurchased more than 1.0 million shares of common stock at an average price of $1.28 per share. Outside of the repurchase program, the company repurchased 600,000 shares from a related party in connection with the January 2025 equity capital raise. On January 29, 2025, the company authorized and approved an extension of the ongoing share repurchase program for up to $5.0 million which expires on June 30, 2026. As of today, a total of up to $3.7 million remains available under the repurchase program.

Helium Program Updates

The company has an active industrial gas development program planned for the first half of 2025 in Montana. Initial efforts will focus on completion and workover of the two existing wells in April 2025.

These wells were approximately 90% nitrogen based with helium concentrations of roughly 1.5%.

In June 2025, two new industrial gas wells with a CO2 focus will be drilled with derived components of approximately 85% CO2 and helium concentration in the 0.50%-1.00% range. These wells are slightly more expensive than a nitrogen based well because of the large amount of CO2 that is involved, so the costs should come in around $1.5 million per well.

In Q2 2025, The company will draft and submit the Monitoring, Reporting, and Verification report (“MRV”) which is required before launching the carbon sequestration business which will occur in the two CO2 focused wells to be drilled in June 2025.

Also in the 2^nd quarter of 2025, the company will make the final investment decision around design capacity and execution of contract for the industrial gas processing plant. We expect the final plant to provide capacity of 10-20 Mmcf per day which could provide helium revenues between $15-$20 million on an annual basis.

Based on the new drilling and workover plans as well as a tougher than usual Montana winter, we expect industrial gas revenues to occur in the first quarter of 2026.

Oil & Gas Business

In 2024, the company produced 415,887 Boe, or an average of 1,136 Boe/d, compared to 624,420 Boe, or an average of 1,711 Boe/d during 2023.

The year-end 2024 SEC proved reserves, which is prepared by an independent third-party reserve engineer, were 2.0 MBoe. The SEC twelve-month first day of month average used for year end 2024 was $75.48 per Bbl for oil and $2.13 per Mcf of natural gas. This was a reduction of 4% for oil and 19% for natural gas when compared to 2023. The year end 2024 SEC proved reserves were comprised of 81% oil and 19% natural gas. The 2024 year end proved reserves were all classified as proved developed producing ("PDP"). The present value of the company's reported SEC proved reserves, discounted at 10% ("PV-10"), at year-end 2024 was $29.1 million.

Valuation & Estimates

We maintain our price target of $3.00 per share.

We utilize multiple valuation methodologies to arrive at our target price 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 early 2026. For calendar year 2026, we believe that helium revenues could total approximately $9.5 million and EBITDA generation would be in the range of $5.0 to $6.0 million. We assume the oil and gas properties produce steady state revenues in the $13.0-$14.0 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.

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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