Keith Larsen, the CEO of U.S. Energy Corp. (USEG), was nice enough to spend 40 minutes on the phone with me Friday answering my questions about his company, and sharing his insights about the natural resources industry. Here are a few notes from our conversation.
- Alternative Energy: T. Boone Pickens's plan came up in our conversation, and Keith Larsen mentioned that he had just seen Pickens speak at an event in Denver. Larsen noted that USEG is considering investments in alternative energy, including wind.
- The Gillette, WY project: Currently, it's half built, and the half that is built is 100% occupied and generating $120k in monthly revenue. The other half will be completed by October 1st, and Larsen expects this half to be fully occupied as well, so the completed project should be generating about $240k in monthly revenue for USEG. Gillette has a population of about 50,000, but is growing at about 7% per year and has been benefiting from the secular bull market in commodities -- 40% of America's coal comes from this area (and of course about half of America's electricity is generated by coal-fired power plants).
- Real estate in general: USEG's board has decided not to pursue additional developments, despite the success of the Gillette project, and plans to sell off piecemeal another property it owns -- 25 acres of undeveloped land adjacent to its headquarters. Mr. Larsen expects they will be able to do so at a profit.
- Oil & Gas exploration: The first of three wells being drilled in partnership with Petroquest Energy (NYSE: PQ) is about to be spudded, and the next two are scheduled to be completed this fall. Although Petroquest's website touts an 89% success rate on its wells, Larsen says that figure includes its shale projects, and the more relevant success rate for Petroquest with these sorts of exploratory wells is 70%. If these wells are successful, Larsen estimates they could generate $150k-$250k in monthly revenue per well for USEG. Combined with the revenue from the Gillette, WY development, this could total $1 million in revenue per month, which would be enough to give USEG consistent, positive earnings.
- The Lucky Jack Molybdenum project: Keith Larsen is confident that this project will eventually get completed. He noted that, although our current high energy prices are bad for America unfortunately, they are at least finally increasing public support for natural resource projects such as Lucky Jack (and, of course, oil & gas drilling). Larsen says that despite a small, vocal, minority of environmentalists (who remain unsatisfied by USEG's plans to develop the mine in an environmentally responsible way), the feedback USEG is getting from most locals in the Crested Butte area is that they want the project to go forward, and they are looking forward to the jobs it will create. Larsen also clarified his earlier $10 per pound cost estimate, saying they are working on getting a current engineering cost estimate, and that his $10 figure was a ballpark estimate derived by more than doubling a previous engineering cost estimate. Ten years ago, when molybdenum was trading for about $5 per pound, a previous engineering study estimated that this molybdenum deposit could be mined profitably, at a cost of about $4.50 per pound. Larsen used $10 per pound as a ballpark estimate to take into account the increased cost of mining equipment and labor today.
- Uranium: Larsen explained that the end of our reprocessing treaty with the Russians should put pressure on uranium prices over the next few years. Although Uranium One is not required to give USEG updates on its plans, he estimates that USEG will receive at least $20 million of its $40 million in contingent deferred compensation from Uranium One by 2011. Larsen also noted that USEG also has a 4% interest in any net profits from the Green Mountain uranium deposit, which is estimated to contain 50 million pounds of uranium (uranium currently trades for about $60 per pound). That deposit is currently owned by Rio Tinto which is shopping it around to other mining companies.
- Insider sales: I mentioned the three ~300,000 insider sales listed on Nasdaq in January, and Larsen explained that those were actually shares of a subsidiary that were canceled, and that they are reported as insider sales although they actually aren't. He said that no insider in USEG has sold shares in 10 years.
- Three accounting firms used in the last few years: Larsen said that one of USEG's accounting firms was bought by another, and that also Sarbox required them to change accountants periodically. He noted also that, since they were now actively involved in oil & gas exploration, they might need to switch accountants to a firm more experienced in this area.
U.S. Energy Corp. also recently announced that it has applied for a listing on the Toronto Stock Exchange (TSX), and it expects that application to be approved and that U.S. Energy will start trading on the TSX by the end of October. Since many natural resources companies are listed on the TSX, a listing there should expose U.S. Energy Corp. to a new audience of natural resources investors.
At the current quote ($2.81 per share), USEG trades at less than 60% of its book value. I may add more at these levels.