Big Sky Industrial Targets Helium, Carbon Revenue in Phase I Launch

Key Points

• Phase I is targeted to launch in the first quarter of next year, producing helium while capturing about 125,000 metric tons of carbon dioxide annually. Revenue is expected from helium sales, additional oil production through CO₂ injection, and federal 45Q carbon credits.
• Big Sky has secured an eight-figure, five-year helium offtake agreement with 100% take-or-pay terms at a base price of $285 per thousand cubic feet, while financing Phase I with approximately $17 million in equity and a $20 million debt facility.
• Expansion depends on completing the processing plant and obtaining approval for the company’s carbon-monitoring plan. Big Sky estimates Phase I could generate roughly $15 million in annual EBITDA and is exploring monetization of its expected 45Q credits for up to $80 million in upfront capital.

Big Sky Industrial Inc. Common Stock NASDAQ: BSIN is positioning itself as an industrial gas and carbon-management company while continuing to operate a legacy Montana oil business, Chief Executive Officer Ryan Smith said during Sidoti’s August conference.

Smith said the company has shifted in recent years from a traditional oil-and-gas model toward helium production, carbon capture and sequestration, and enhanced oil recovery. The company still produces approximately 200 to 250 barrels of oil per day, almost entirely in Montana, with a stated PV-10 value of roughly $20 million, he said.

The company’s principal industrial gas assets are located near its Cut Bank oil field in Montana. Smith said Big Sky controls a helium resource estimated at 1.3 billion cubic feet and a carbon dioxide resource approaching 0.5 trillion cubic feet at what it calls the Big Sky Carbon Hub. Ryder Scott, the company’s third-party reserve engineer, was involved in the helium resource estimate, according to Smith.

Phase I development targets helium, carbon revenue

Big Sky plans to bring its initial helium and carbon-management operations online in the first quarter of next year, Smith said. The first phase is expected to capture and sequester approximately 125,000 metric tons of carbon dioxide annually.

Under the planned operating model, gas from Big Sky’s wells will move through a gathering system to a processing facility that separates and purifies helium. The helium will be loaded into high-pressure transport tubes for collection by the company’s offtake partner, Smith said.

Smith said the company will capture all carbon dioxide produced during helium processing. A portion will be permanently sequestered underground, while remaining volumes will be transported about 10 miles to the Cut Bank oil field for injection intended to increase reservoir pressure and oil production.

The company expects to generate revenue from three areas:

• Helium sales;
• Incremental oil production associated with carbon dioxide injection; and
• Carbon-management incentives tied to captured, sequestered or utilized carbon dioxide.

Smith said Big Sky expects to receive $85 per metric ton through the federal Section 45Q carbon capture tax credit program, with the credit escalating by roughly 3% annually over 12 years. Based on Phase I volumes, he estimated the project could generate about $130 million in 45Q credits over that period.

Offtake agreement and project financing

The company signed a long-term helium offtake agreement in late March or early April, Smith said. While he did not identify the customer by name, he described it as the world’s largest industrial gas company and said the agreement was an eight-figure contract.

The agreement carries a base helium price of $285 per thousand cubic feet, escalating with the Consumer Price Index over a five-year contracted period, according to Smith. He said the pricing is net to Big Sky because the counterparty is responsible for transportation and access to liquefaction capacity. The agreement is also structured as 100% take-or-pay for Phase I production, he said.

Earlier this year, Big Sky raised approximately $17 million through common equity and entered a $20 million project-finance debt facility to support Phase I, Smith said. He said the company expects net leverage of about one times when operations begin, compared with what he described as typical infrastructure and midstream leverage levels of five to eight times.

Smith said the company has no warrants, convertible securities or other complex capital structures on its balance sheet.

Expansion plans depend on tax-credit monetization

Big Sky is already working on a Phase II processing design that could be two to three times the size of Phase I, Smith said. He estimated that Phase I on a standalone basis could produce approximately $15 million of annual EBITDA, split roughly evenly between the oil business and industrial gas activities.

According to Smith, the company’s key constraint is not gas supply but processing capacity. He said more than 80% of project capital expenditures are directed toward processing facilities and related infrastructure.

The company is pursuing monetization of its anticipated 45Q credits as a potential source of non-dilutive expansion capital. Smith said a typical transaction could value credits at $0.90 to $0.95 on the dollar, using a discount rate of roughly 6% to 7%. Based on Big Sky’s estimated Phase I credit stream, he said this could translate into approximately $70 million to $80 million of upfront cash.

Remaining execution items

Smith said Big Sky has drilled its wells, installed its gathering system and completed roughly two-thirds of the processing plant build-out. He added that long-lead equipment has been ordered and paid for.

The remaining major regulatory item is approval of the company’s monitoring, reporting and verification plan, or MRV, which is needed to support its carbon-management activities. Smith said the company expects approval by year-end and believes it could arrive sooner.

He said the approval would unlock the company’s carbon-management timeline and potential access to significant capital over the following six to 24 months. Smith also said he expects continued project execution, initial commercial operations and expansion planning to help investors view Big Sky as an industrial gas and carbon-management business rather than solely as a small oil producer.

About Big Sky Industrial Inc. Common Stock (NASDAQ:BSIN)

U.S. Energy Corp. NASDAQ: USEG is an independent oil and natural gas exploration and production company that acquires, develops and operates hydrocarbon properties across onshore regions in the United States. The company's activities encompass geological evaluation, drilling, completion and working-interest management, with an emphasis on cost-efficient development of discovered reserves and maximizing production from existing assets.

Over time, U.S. Energy has pursued growth through disciplined lease acquisitions, joint-venture partnerships and targeted drilling programs.

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