Tuesday, July 15, 2008
USEG Update: Spudding of First Well with Petroquest Energy
In our conversation Friday, USEG's CEO mentioned that the first well USEG was participating in with Petroquest Energy was about to be spudded. Today USEG released this press release: "U.S. Energy Corp. Announces the Spudding of Its First Well With PetroQuest Energy".
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Dave: After reading your posts on USEG, it seems like it's good to go, but one thing bothers me, and that is that the stock has basically gone nowhere in 10 years. In fact, if you had bought longer than 10 years ago, you'd still be underwater. I realize that it doesn't matter where a stock has traded before, but something about that gives me pause. What has management been doing all this time?
Dennis,
This post goes into more detail, but ten years ago, USEG was focussed mainly on uranium. When uranium started plummeting in price (bottoming out at around $6.40 per pound in 2001), USEG started investing in coal bed methane. Over the next few years, it turned a $15 million investment in this area into $27.7 million. Then, last year, when uranium hit a cyclical peak of over $130 per lb, USEG sold most of its uranium interests for about $90 million up front, with a potential of $40 million in contingent deferred comp.
USEG did spike up over $6 per share last year, as uranium prices hit a cyclical peak, but I think one thing that has kept shares of USEG from appreciating consistently has been the company's lack of consistent earnings. As USEG's CEO indicated in his conversation with me Friday, the company has been working to develop consistent earnings. It would take about a million dollars in recurring monthly revenue, according to the CEO, for USEG to be consistently profitable (this seems consistent with the company's last 10Q, which showed SG&A at under $3 million). By October 1st, the company should have about $240k in monthly revenue from the Gillette, WY development. If the three wells with PQ are successful, each could generate between $150k and $250k in monthly revenue.
So, between those wells, the Gillette development, and interest on USEG's cash, it could generate enough revenue to be profitable early next year, by my estimation. That is without taking into account additional oil & gas investments, or any other potential developments (e.g., selling a stake in the molybdenum project, any additional revenues from uranium interests, etc.).
Thanks, Dave. I'll be watching this one.
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