Big Sky Industrial Inc. (BSIN) Earnings Call Transcript

Good morning, and welcome to Big Sky Industrial, Inc.'s Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Today's call is being recorded, and a replay will be available on the Investor Relations section of the company's website at bigskyindustrialinc.com. Before we begin, I'd like to remind everyone that today's discussion will include forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the company's most recent SEC filings, including the Form 10-Q filed today with the Form 10-K for a discussion of these risks. Statements made on this call only as of today, and the company undertakes no obligation to update them. Joining us today are Ryan Smith, President and Chief Executive Officer; and Mark Zajac, Chief Financial Officer. I will now turn the call over to Ryan Smith.

Thanks, Mason, and good morning, everyone. Welcome to our second quarter call. The first one we get to do is Big Sky Industrial. Investor engagement over the last 90 days has been the strongest I've seen in my time here with more meetings, sharper questions and a lot more of them from institutions that have never looked with us before. The story is starting to resonate, and that's a credit to the work this team has put in over the last several quarters. Let me start with the name since it's the most visible change since we last spoke. On June 8, U.S. Energy Corp. became Big Sky Industrial and our stock began trading on NASDAQ under BSIN. Structurally, nothing moved and nothing was required of shareholders. It wasn't a change in strategy, but it was the name catching up for the business. We spent the last few years turning the legacy oil and gas producer into an integrated industrial gas and carbon management platform. And in the second quarter, we made that official. The quarter was about finishing the foundation and then going to work on top of it. In April, we completed the Phase 1 capital stack by amending our credit facility and doubling the borrowing base. And later that month, we signed a 5-year 100% take-or-pay helium offtake with an investment-grade global industrial gas counterparty. In June, we completed the rebrand and all quarter long, capital went into the ground in Montana. Every structural piece of Phase 1 is now in place, engineering, permitting, EPC, funding and offtake. What's left between here and first revenue is execution. Here's how I'll walk through the call this morning, what's happening in the field, then our commercial position and the market we're walking into. Mark will take you through the quarter and the balance sheet, and I'll come back at the end with what's ahead. Let's start in the field because like every development project, execution is critical. We made our final investment decision on the Phase 1 processing facility in March, and we took it the way it should be taken. Engineering complete, permitting complete, a fixed scope EPC contract with CANUSA and a funded capital stack behind it. Five weeks later, we added a long-term contracted helium buyer on top of that. Since then, it's been a construction project and not a development project. Capital went into the plant through the first half and long lead equipment items are moving through fabrication. The plant is sized for up to 8 million cubic feet a day of inlet capacity, which gets us to more than 14 million cubic feet of contained helium and about 125,000 metric tons of captured CO2 per year. On the field side, the producing wells are in the ground, along with 2 operational Class II injection wells. Gathering system installation is underway this summer, plant commissioning is targeted for later this year and first gas and with the commercial operations for March 2027. That's the same schedule we gave the market when we first sanctioned the project and the modular plant design is a big reason why we haven't moved that. There's far less that can go sideways on site, and that's what keeps us comfortable on schedule and budget. On the regulatory side, both of our monitoring, reporting and verification plans on Big Rose and Cut Bank are in active review with the EPA. Those interactions have been positive and nothing has come up that gives us concern. We expect approvals well ahead of commercial operations, so that timing belongs to the agency and not to us. Those approvals are the gate to the Section 45Q credit stream, roughly $130 million of credit value over the first 12 years of Phase 1 alone. I want to highlight that number because I don't think it's understood yet. That $130 million of federal carbon capture tax credits from a single Phase 1 facility at a company whose entire market cap today is much less than that. It's policy-backed and commodity independent sitting underneath everything that we're building. The credit is $85 a ton with annual CPI-linked escalators. It has bipartisan support and it runs for 12 years. Our base case uses today's rate and anything better is pure upside. And that number is more than just a line on schedule. Under current law, 45Q credits are transferable. That means they can be sold to a third party for cash. We've begun the work to monetize the Phase 1 credit stream and pull that value forward rather than collect it in 12 annual installments. That converts a policy-backed credit stream into nondilutive cash upfront at a scale that is highly significant relative to where the company is valued today. We expect it to be the primary funding source for Phase 2, and we've already started that planning. You'll hear more from us on both of these throughout the balance of this year. None of it sits in our base case, but it's the largest source of nondilutive capital available to us, and we're actively working on it. Now to the commercial side of the platform. The helium offtake we signed in April anchors our initial revenue. A reminder on the terms, 5 years with an investment-grade global industrial gas company, one of the leading helium distributors in the world, 100% take-or-pay, 1.2 million cubic feet per month at a fixed plant gate price of $285 per Mcf with CPI escalation beginning March 1, 2028, and a price redetermination in year 3 that preserves our upside. Volume risk is gone, demand risk is gone and the helium has contracted day 1 revenue. 90 days later, here's what I'd still emphasize. A counterparty like that doesn't sign a multiyear 100% take-or-pay contract with a development stage project on faith. They put our resource, our development plan and our ability to execute through significant diligence first. That was third-party validation of this asset and nothing has changed the picture other than we're 90 days closer to first gas production. On helium, global helium supply is structurally tight. Instability in the Middle East, along with real questions about long-term supply out of Russia and Qatar has only made it tighter. There's no substitute for helium in semiconductors, medical imaging, fiber optics, aerospace or the manufacturing chain behind the AI build-out. Demand doesn't flex on price and domestic supply is very thin. Our all-in contracted price of $285 is strong, especially with transportation and tolling costs sitting solely with our counterparty. And candidly, I think it will look conservative relative to where the market is heading, which is why we negotiated the 3-year reprice. We're an American producer of a strategically important industrial gas at a moment when that matters a great deal in Washington. On the CO2 and carbon management, 45Q tax credit has bipartisan support was extended under the IRA and the carbon management market is forecast to grow exponentially from here. Today, there are only about 20 operational CCUS projects in the entire country, which is a very short list, a list that we'll be on. What sets us apart is how the CO2 comes to us. It's created as part of our own industrial process and we capture all of it and either sequester it permanently or put it into work and enhance oil recovery. There's no combustion, no fermentation, no energy-intensive capture equipment on the front of the plant. Most carbon projects spend real capital and real energy just to get CO2 into a pipe. We don't, and that's a structural cost advantage and one that a competitor cannot go and just buy. On the oil front, Cut Bank keeps doing its job, low decline established production that supports the platform while we build out. The bigger point is the retained optionality that it gives us. There is significant recovery potential through phased CO2 enhanced oil recovery and the CO2 comes from us. No third-party supply, no negotiation, no counterparty risk. We already hold more than 170 permitted Class II injection wells, so the path to a multi-decade production tail is a low capital path. Cut Bank is the captive CO2 outlet. It closes the loop on the platform. With that, let me hand it to Mark to walk through the second quarter results and the capital structure.

Thanks, Ryan, and good morning, everyone. I'll keep my remarks focused on the capital structure because that is where the most consequential financial work happened this quarter. There are 2 pieces I'll cover, our Phase 1 capital position and the path forward. I will briefly touch upon the quarter's results and additional details can be found in the morning's press release and the 10-Q. Starting with the quarter, revenue was $2.1 million, essentially flat from a year ago as stronger realized oil prices offset lower volumes following our completed divestiture program. Cash, general and administrative expense was $1.8 million, down from $2.6 million in the first quarter as the transaction-related professional fees behind FID, the EPC contract, the offtake and the credit facility amendment rolled off. Adjusted EBITDA was a negative $0.9 million compared to a negative $1.3 million a year ago, and we invested $9.6 million of industrial gas capital in the first half against $2.5 million in the prior year period. That number is the one I would like to point to. It is the clearest financial evidence that Big Sky has moved from development into construction this year. As for our capital position, the equity offering we completed in March brought in capital to fund development and strengthen the balance sheet. In April, we amended our senior secured credit agreement, doubling the borrowing base of $20 million, fixing the interest margin at 200 basis points and suspending quarterly financial covenant testing to the first quarter ending March 31, 2027. The facility runs to a May 2029 maturity with no prepayment penalties. Those are the right terms for a project in construction, low cost, low covenant noise and flexibility on timing. Together with cash on hand, these sources are expected to fund the Phase 1 program, and we will remain flexible in how we finance the balance of the build as construction advances. Second, the path forward. As we move from building into operations and begin positioning for Phase 2, the multistream nature of the platform opens capital avenues that were not available to us as a legacy E&P. Project level debt becomes more accessible as MRD approvals and the contracted offtake derisk the asset. The 45Q stream Ryan walked through is a financeable asset in its own right, a potential nondilutive source of capital that sits outside our base case. And over time, while the existing facilities are appropriately sized for today, we would expect to transition to a larger, longer-dated facility as revenue comes online and the credit profile matures. From a near-term liquidity standpoint, we ended the quarter with $21.5 million of total liquidity. And as of August 4, we had $16.4 million following a $4 million draw to fund construction. We believe we are well positioned to deliver Phase 1 into commercial operations in the first quarter of 2027. We're retaining multiple financing levers as the project advances. From here, my focus on the capital side is optimization, cost of capital, flexibility, prepositioning for Phase 2. And with that, back to Ryan.

Thanks, Mark. Let me close with the path forward because the gap between intrinsic value and where the stock trades is, in our view, the central fact of the investment case at Big Sky. Over the coming quarters, we have a sequence of independent derisking events, MRV approvals in the near term, gathering system completion through the fall, facility commissioning later this year with first gas and first revenue in March of 2027. Phase 2 is the first step in that scaling, and it is entirely excluded from our base case model. It's a second larger plant on the same footprint using the same infrastructure, approvals, field operations and many of the same commercial relationships. Our acreage, our permitted wells and our geology already support 2x to 3x Phase 1 capacity with no new land and no new approvals needed. Because the heavy lifting is done, the incremental capital per unit is meaningfully lower. And as the asset derisks, we would expect our cost of capital to improve as well. Compound those across a larger second unit and our internal modeling supports project NPV that is multiples of where Phase 1 stands today. As I mentioned, $130 million gross 45Q value earlier, that monetization work is underway now, either through a transferability transaction or a structured credit sale. This is a nondilutive capital acceleration that isn't in our base case, and we'll share more with the market as it advances. Let me close with a candid observation on valuation because it gets at why we made this pivot. Small-cap E&P companies trade at roughly 3x EBITDA today. Small and mid-cap midstream and gas processing trade roughly 8x. Blue-chip industrial gas companies trade at roughly 17x or higher. Those are our forecast, they're public market multiples that anyone can verify. Once Phase 1 is operating, Big Sky Industrial is no longer a small-cap E&P. We're an industrial gas producer with a contracted offtake, a carbon management business with policy-backed revenue and the low-decline oil business integrated as a captive CO2 outlet. We don't need every part of that re-rating for the equity to perform very well from here. Today, we trade at a meaningful discount to our internally calculated Phase 1 NAV against an EBITDA multiple well below where any of those categories trade. Our job between now and commissioning is to keep executing the milestones to let the market award it. To put a fine point on the quarter, we completed the Phase 1 capital stack. We signed a 5-year 100% take-or-pay helium offtake, and we became Big Sky Industrial. Through all of it, construction advanced on schedule with the countdown to commercial operations now measured in months and not years. The backdrop for helium, carbon management and American production of critical industrial gases has never been more favorable. I'm more confident in our plan today than at any point since we set it out. I want to thank our team in Houston, and Montana and across our partner network for outstanding execution this quarter. And thank you to our shareholders for the continued support as we move from the build phase into the cash flow phase. Operator, with that, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Charles Meade with Johnson Rice.

I want to start with a simple question, maybe an obvious one. But MRV is one of the things on -- I think it's on your critical path to startup. And here's the question. In the case that MRV, let's say, it took another 6 months or 8 months, would you still be able to start up your facility in 1Q '27 and monetize the helium part of that stream even if you don't have the MRV through yet?

Yes. Good question. I'll caveat my answer with saying internally, and I'll give my own opinion on that. I think that 6- to 8-month time line is a wildly unlikely time line to happen. But with that being said, the answer is unequivocally yes. We would be able to. We have the assets on the injection, sequestration and disposal side to where just hypothetically speaking, if we were commercial today, we could still sequester and utilize the CO2 that is captured from the plant, the exact same process and results that we would be doing in the first quarter of next year. We just wouldn't be receiving the 45Q credits.

Right. So the Class II wells are there. It's just whether you have the whole -- so you can inject in them. It's just whether you get the MRV credit is -- it would be the question.

Correct.

So as a follow-up -- and I'm sorry, I cut you off there, Ryan. But so the MRV is not really on the critical path to start up. Can you -- you talked about some of this in your prepared remarks, you talked about the gathering system and the facility construction. Can you share what are the items on the critical path and what you're -- when you show up in the office on a Monday morning, if you didn't look at your phone on the weekend, what are the things you're most interested and seeing the progress on?

Yes. I mean from a high level, right, it's execution, execution and more execution. With a plant like ours, the timing concerns are really like extremely front-loaded with ordering long lead time items to get them into the EPC field and start plant construction, stuff like power generators, which we're competing with data centers for power generation. We've bought and paid and taken ownership of those compression, membranes and these other things that range from on the short side, 3 on the long side, 9 months of lead time. So from the very beginning, that was always the biggest concern is making sure that, one, we got access to be able to purchase these items and then made those purchases and would have those well before plant construction, fabrication, et cetera. So we've done the vast majority of that. I would say, by far, the biggest bucket of long lead time items, which is really Caterpillar 2-megawatt power generators that run off nat gas, which we've recently acquired and put into our field is by far the biggest concern or I'll say, what was the biggest concern, and we've made really good progress on that. So over the next couple of months, it's those items that haven't already shown up, showing up and then starting turning the proverbial wrench on everything early fourth quarter of this year.

Got it. That is great detail. And if I could just sneak one more in, Ryan. And I know this is kind of -- you've got a lot of stuff -- you've got a lot of turning the branches in front of you. But peering into the future, you made some comments about Phase 2 and about the potential there. As you look at what that could be, what are the key variables or what are the kind of key design parameters you're thinking about when you size that plant? From your prepared comments, it seems -- I got the impression that maybe it's only capital, but are there other things like gross deliverability into the plant inlet or maybe the capacity of your gathering system? I mean what are the variables that you're going to be looking at in, let's say, 9 months from now after you've got your first facility up? What are the variables you're going to be looking at when you decide with your Board what size that Phase 2 is going to be?

Yes. I think you kind of almost answered it with your question, right? I'll start with the smallest ones first. We always want to make sure we have the production, of course, to support further expansion. That being said, we have an extremely large resource here that really can -- within natural limitations can produce into the future into perpetuity. Example being our first plant has a capacity of 8 million cubic feet a day. Our 3 producing wells are flowing or test flowed at combined 17 million a day, and they're being choked back to feed this plant. Some of that production would go to a second plant. So I would say, again, just using rough numbers here, 0.5-ish of the needed production to go to the second plant is already there, and we will just open those wells up a little bit more. On the sequestration side, and kind of related to your first question as well, we've already tested our sequestration wells. We tested with nitrogen just because it's cheaper and easier than CO2. But from an engineering standpoint, it's the same thing. Those -- the main sequestration well held on an annualized basis, what would be 400,000 metric tons per year. We're going to be storing 1/4 of that on this first phase. So a lot of the infrastructure to expand Phase 2 is already in place. We will probably need to expand the gathering system a little bit on a second phase. But that being said, just because of the geographic proximity of all these assets, even though we own a very large position up there, a lot of the activity we're doing is within 0.5 mile to 1.5 miles of distance, expanding that gathering system, but that's a very low capital cost. That's probably $1 million. So going back to what would be the driving force, it really would be capital. And again, not to jump ahead here, but we think we have a pretty unique capital pathway here on nondilutive pull-forward cash through our 45Q credit stream. And the sizes we talked about, the sizes we put in our investor presentation, which I think our investor presentation shows a Phase 2 that's 2x the size of Phase 1. I think right now, internally, we're kind of penciling between 2x and 3x just as we move through the rest of this year. A big driver on that will be both execution, monetization and ultimate value to Big Sky on the 45Q pull forward as well as a modest amount of leverage that makes sense and just having that toggle to fill that Phase 2 cap stack.