US Energy Corp (USEG) -- Still Selling @ Discount to PV10...

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ajootian
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Joined: Thu Jun 17, 2010 7:16 am

US Energy Corp (USEG) -- Still Selling @ Discount to PV10...

Post by ajootian »

....despite recent gains in share price.

This nanocap has seen its stock price appreciate recently, on high volume, yet it still sells at a 12% discount to the PV10 value of just its proved developed reserves as of last quarter end, at SEC pricing ($75 oil price held constant). The PV10 value at current strip prices would obviously be a lot higher, making the trading discount a lot greater.

They attended their first investor conference last week, the Louisiana Energy Conference, and the stock went up about 16% during that time so it seems that their story is resonating, and they stand to benefit from further efforts to get their story out to more people.

About a month ago they made a small bolt-on acquisition which has me very intrigued. They bought a small amount of oil production and a local gas pipeline along with associated gathering lines, in Liberty County, TX. This is down in the Gulf Coast, just a few counties west of the Louisiana state line. It is not considered a hotbed of oil and gas but that gets me to the main point here -- when your market cap is only $115M you don't need to try to play in the same sandbox as the big boys. You can find these backwaters where no one is spending any money, even with the high commodity prices we are enjoying, and make serious amounts of coin.

The best illustration of this is what USEG has been able to do with its first acquisition in Liberty County, back in 4Q 2020. They issued $250K of stock to buy a bunch of mostly shut-in wells, spent $400K to get them back online, and voila, today the project is producing 80-100 bopd (see slide 7 of latest presentation). I estimate that at current oil prices this project is paying out its investment every 2-3 months.

Liberty County has a lot of salt domes that were drilled out decades ago but which have a lot of stripper wells still going, which produce small amounts of both oil and gas. Reading between the lines of USEG's PR announcement on their latest Liberty County acquisition, I believe they plan to extend the pipeline they bought to both their own plus other companies' wells, so that the associated gas that is being produced will be able to be sold into their pipeline vs. flared as is the case currently. There is probably not huge amounts of gas being flared over there but at $9 gas there doesn't have to be very much to make a lot of money.

Dan, if you're looking for more companies to present on EPG, you may want to try contacting these guys. They are based right in Houston.
dan_s
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Re: US Energy Corp (USEG) -- Still Selling @ Discount to PV1

Post by dan_s »

Thanks. I will check it out.
Dan Steffens
Energy Prospectus Group
ajootian
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Joined: Thu Jun 17, 2010 7:16 am

Re: US Energy Corp (USEG) -- Still Selling @ Discount to PV1

Post by ajootian »

Great to hear of your interest Dan.

USEG announced last week that the PV10 value of their PDP reserves @ 6/30, proforma for their acquisition that closed a month later, was $167M using SEC pricing, which was $86 for oil and $5 for gas on that date. The EV of the company, taking into account the debt incurred for the acquisition, is around $107M, or just about 65% of the PV10 value. The stock deserves a discount for the lack of trading liquidity but this seems to be a bit much, IMO.

Out in the field, the company made tremendous improvement in 2Q over what was a somewhat disappointing 1Q, increasing their production by about a third, sequentially.

The 2Q 10Q did not disclose any new hedges, which is a bit surprising, given that their acquisition looks to increase their production by about 23% vs. what they did last quarter.

You might consider adding USEG to your watch list. Also, I believe they may be very interested in presenting for EPG in say Oct/Nov, since they look to have a great quarter to announce for 3Q. I would think they would be very motivated to start getting their story out around that time.
dan_s
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Re: US Energy Corp (USEG) -- Still Selling @ Discount to PV1

Post by dan_s »

Good find and thanks for the reminder. Over the 20+ years of EPG's existence, we made some big gains on micro-caps like USEG by discovering them shortly before or after they have made a "transformational" deal that provides the Company with the "running room" to justify being public.

Just keeping up with all of our three model portfolio companies is full-time task the middle month of each quarter. I have added USEG to the list of Watch List companies that I want to build a forecast model for in September.

I just noticed that Randall Keys and James Denny are directors. I know them both.
Dan Steffens
Energy Prospectus Group
Fraser921
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Re: US Energy Corp (USEG) -- Still Selling @ Discount to PV1

Post by Fraser921 »

Nice tip! Why did it run up to 13 in March?

Going to take a starter stake despite the crap hedges

https://seekingalpha.com/article/451637 ... nergy-corp
ajootian
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Joined: Thu Jun 17, 2010 7:16 am

Re: US Energy Corp (USEG) -- Still Selling @ Discount to PV1

Post by ajootian »

Thanks Dan, and great to hear that you know some of the directors there.

They just updated their presentation, which has some helpful color on their latest acquisition and some other good stuff. Web site is usnrg.com.
dan_s
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Re: US Energy Corp (USEG) -- Still Selling @ Discount to PV1

Post by dan_s »

Just remember that small-caps like this have significant commodity price risk. As an investor you want them to have a hedging program. They must first survive to grow fast enough to survive in the future.
Dan Steffens
Energy Prospectus Group
ajootian
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Joined: Thu Jun 17, 2010 7:16 am

Re: US Energy Corp (USEG) -- Still Selling @ Discount to PV1

Post by ajootian »

USEG has a decent amount of its oil hedged. They don't have very much gas hedged but gas represents only a small portion of their revenues.

They don't have much debt -- their ratio of debt/EBITDA (projected) is only something like 0.5X. So I'm not too worried about whether they will survive this downturn or not.

They are growing production at a healthy rate -- about 30% higher in Q2 vs. Q1, and they are guiding to production increasing another 12% in Q3 vs. Q2.

I believe these guys would be very interested in presenting to EPG in the November/December timeframe, after putting out what should be a very solid set of numbers for the third quarter. Some of the shareholders who got stock when USEG made its big acquisitions in early January have been blowing out some of their position I believe, but most of that selling will probably have run its course by November or so.
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