NASDAQ:USEG
READ THE FULL USEG RESEARCH REPORT
On January 10, 2025, U.S. Energy (NASDAQ:USEG) announced it had closed on the acquisition of additional helium acreage in the Kevin Dome structure where it currently operates. The deal includes an 80% interest in 24,000 acres owned by Synergy Offshore (“SOG”). This deal was originally contemplated in July 2024 but fell through because of related party issues and conflicts of interest.
This acreage includes multiple prospective industrial gas pay zones, primarily composed of carbon dioxide (CO2) and nitrogen heavy formations enriched with significant helium concentrations. The SOG asset is located at the center of the Kevin Dome structure. The primary target for helium production within the asset will be at the Duperow formation, which is known for its carbon dioxide-dominated gas systems. Also, recent data indicated economically viable helium concentrations. The acquisition also includes an active well within the region with recent gas analysis confirming significant helium production.
This acquisition significantly enhances the company’s carbon sequestration business opportunity.
Base consideration terms include $2.0 million in cash and 1.4 million shares in USEG restricted stock. In addition:
- There is a $0 million carried working interest for which USEG will pay Synergy’s exploration, drilling, and completion costs attributable to Synergy’s 20.0% retained working interest for a period of 78 months.
- There will be An Area of Mutual Interest (“SOG AMI”) under which Synergy will have the right to participate for its proportionate interest of 20.0% in any new leases with any leasing amounts being deducted from the carried working interest.
- SOG will receive 18.0% of future amounts realized by USEG in connection with tax credits obtained from carbon sequestration on the SOG AMI.
- SOG will receive 18.0% of any future gain, after deducting USEG’s unrecovered capital costs, in connection with USEG’s initial CO2 processing plant located on the SOG AMI.
Additional details can be found here.
Sale of East Texas Oil & Gas Properties
On December 31, 2024, the company announced it had closed on its previously announced sale of its East Texas oil & gas properties.
Cash proceeds were $6,825,000 and the proceeds will likely be used to continued development of its industrial gas projects in the Kevin Dome structure in northern Montana. Divested assets averaged approximately 1.0 million cubic feet per day of natural gas and 149 barrels of oil per day for the three-month period ending September 30, 2024.
This transaction appears to represent about 25-30% of its former total oil and gas production. We expect the company’s new SEC PV-10 value may now be in the mid-$30.0 million range.
Valuation & Estimates
We maintain our price target of $3.00 per share and our current revenue and EPS estimates as we await the company’s 10-K filing and additional drilling results from its helium focused acreage.
We utilize multiple valuation methodologies to arrive at our price target 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 late 2025. For calendar year 2026, we believe that helium revenues could total approximately $12.0 million and EBITDA generation would be in the range of $7.0 to $8.0 million. We assume the oil and gas properties produce steady state revenues in the $17.0-$18.0 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.
The company reported $6.9 million in helium related unproven resources as of 9/30/24 which is essentially the acquisition costs and other incurred costs to date for the helium operations. We believe an independent third party will be able to provide an estimate of proven helium reserves at some point in the 1st quarter of 2025.
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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