U.S. ENERGY CORP. Introduction
This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSecurities and Exchange Commission onMarch 26, 2021 (the "Annual Report"). Certain abbreviations and oil and gas industry terms used throughout this Report are described and defined in greater detail under " Glossary of Oil and Natural Gas Terms " on page 4 of our Annual Report.
Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our consolidated financial statements included above under "Part I - Financial Information" - " Item 1. Financial Statements ''.
In this Quarterly Report on Form 10-Q, we may rely on and refer to information regarding the industries in which we operate in general from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, and we have not independently verified any of it.
See also " Cautionary Note About "Forward-Looking Statements " above.
Unless the context requires otherwise, references to the "Company," "we," "us," "our," "U.S. Energy", and "U.S. Energy Corp. " refer specifically toU.S. Energy Corp. and its consolidated subsidiaries
In addition, unless the context otherwise requires and for the purposes of this report only:
? "Bbl" refers to one stock tank barrel, or 42 U.S. gallons liquid volume,
used in this report in reference to crude oil or other liquid
hydrocarbons;
? "BOE" refers to barrels of oil equivalent, determined using the ratio of
one Bbl of crude oil, condensate or natural gas liquids, to six Mcf of
natural gas;
? "Bopd" refers to barrels of oil day;
? "Mcf" refers to a thousand cubic feet of natural gas;
? "Mcfe" means 1,000 cubic feet equivalent, determined using the ratio ofsix Mcf of natural gas to one Bbl of crude oil, condensate or natural gas
liquids
? "NGL" refers to natural gas liquids;
? "Exchange Act" refers to the Securities Exchange Act of 1934, as amended;
? "SEC" or the "Commission" refers to theUnited States Securities andExchange Commission ; ? "Securities Act" refers to the Securities Act of 1933, as amended; and ? "WTI" means West Texas Intermediate.
Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with theSEC . TheSEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with theSEC like us at https://www.sec.gov (our filings can be found at https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000101594) and on the "Investors - SEC Filings" page of our website at https://usnrg.com. Copies of documents filed by us with theSEC are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report. 21 Table of Contents General OverviewU.S. Energy Corp. - is aWyoming corporation organized in 1966. We are an independent energy company focused on the acquisition and development of oil and natural gas producing properties in the continentalUnited States . Our business activities are currently focused inSouth Texas , theWilliston Basin inNorth Dakota ,Lea County inNew Mexico andConverse County inWyoming . We have historically explored for and produced oil and natural gas through a non-operator business model. As a non-operator, we rely on our operating partners to propose, permit, drill, complete and produce oil and natural gas wells. Before a well is drilled, the operator provides all oil and natural gas interest owners in the designated well the opportunity to participate in the drilling and completion costs and revenues of the well on a pro-rata basis. Our operating partners also produce, transport, market and account for all oil and natural gas production. With recent acquisitions in 2020 ofNew Horizon Resources, certain FieldPoint Petroleum wells and certain wells inLiberty County, Texas we now operate a small portion of our production. Recent Developments
Impacts of COVID-19 Pandemic and Effect on Economic Environment
In earlyMarch 2020 , there was an outbreak of a novel strain of coronavirus, which causes the infectious disease known as COVID-19, which resulted in a drastic decline in global demand of certain mineral and energy products including crude oil. As a result of the lower demand caused by the COVID-19 pandemic and the oversupply of crude oil, spot and future prices of crude oil fell to historic lows during the second quarter of 2020, which remained depressed for the majority of 2020. Operators inNorth Dakota's Williston Basin responded by significantly decreasing drilling and completion activity and shutting in or curtailing production from a significant number of producing wells, all of which have since come back online. Operator's decisions on these matters are changing rapidly and it is difficult to predict the future effects on the Company's business. Lower oil and natural gas prices not only decrease our revenues, but an extended decline in oil or gas prices may materially and adversely affect our future business, financial position, cash flows, results of operations, liquidity, ability to finance planned capital expenditures and the oil and natural gas reserves that we can economically produce. Additionally, the outbreak of COVID-19 and decreases in commodity prices resulting from oversupply, government-imposed travel restrictions, and other constraints on economic activity have caused a significant decrease in the demand for oil and has created disruptions and volatility in the global marketplace for oil and gas which began in the first quarter of 2020, and continued through most of 2020, which negatively affected our results of operations and cash flows. While demand and commodity prices have recently recovered and are back to pre-pandemic levels, our financial results may continue to be depressed in future quarters. The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors we cannot reliably predict, including the duration and scope of the pandemic; governmental, business, and individuals' actions in response to the pandemic; the availability and efficacy of vaccines, and the willingness of individuals to obtain such vaccines; and the impact on economic activity including the possibility of recession or financial market instability. These factors may adversely impact the supply and demand for oil and gas and our ability to produce and transport oil and gas and perform operations at and on our properties. This uncertainty also affects management's accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions, including investments, receivables, and forward-looking guidance. Legal Proceedings InJuly 2020 , the Company received a request for arbitration from its former Chief Executive Officer,David Veltri claiming that the Company breached his employment agreement. The Company intends to vigorously contest this matter and believes these claims are without merit. The employment agreement requires that any disputes be submitted to binding arbitration. The Company has insurance for these types of claims and has reported the request for arbitration to its insurance carrier. ThroughMarch 31, 2021 , the Company has incurred defence costs in this matter of$90 thousand and has accrued$10 thousand for future defence costs, representing the Company's responsibility for costs under the insurance policy. 22 Table of Contents FromFebruary 2019 untilAugust 2020 , the Company was involved in litigation with its former Chief Executive Officer,David Veltri and at the time its largest shareholder,APEG Energy II, L.P. ("APEG II") and APEG II's general partner, APEG Energy II, GP (together with APEG II, "APEG"). In addition,Patrick E. Duke , a former director of the Company, had shared voting and shared investment power over APEG. The litigation arose as a result of a vote at theFebruary 25, 2019 board of directors meeting to terminateMr. Veltri for using Company funds outside of his authority and for other reasons (the "Texas Litigation"). In a separate lawsuit, APEG initiated a shareholder derivative action inColorado againstMr. Veltri due to his refusal to recognize the Board's decision to terminate him (the "Colorado Litigation"). The Company was named as a nominal defendant in the Colorado Litigation. TheColorado litigation was dismissed inMay 2020 and the Texas Litigation was dismissed inAugust 2020 . ThroughMarch 31, 2021 , the Company had incurred legal costs of approximately$1.7 million related to the litigation. OnMarch 4, 2021 , the Company issued 90,846 shares of unregistered common stock, which had a value on the date of issuance of$406 thousand , to APEG in reimbursement of APEG's legal costs in theColorado and Texas Litigation.
Critical Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles inthe United States ("GAAP") requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies is detailed in Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2020 Annual Report on Form 10-K filed with the
SEC onMarch 26, 2021 . The Company's results of operations and operating cash flows are affected by changes in market prices for crude oil and natural gas. To manage a portion of our exposure to price volatility from producing crude oil, we entered into a crude oil derivative swap contract during the three months endedMarch 31, 2021 , to protect against price declines in future periods. The Company does not designate commodity derivative contracts as a cash flow hedges and therefore the contract does not qualify for hedge accounting. Changes in fair value of the swap contract are recorded in the condensed consolidated statement of operations. The fair value of the swap contract is recorded as either an asset or a liability on the condensed consolidated balance sheet.
Recently Issued Accounting Standards
We do not believe that any recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on our Condensed Consolidated Financial Statements or related disclosures.
Results of Operations
Comparison of our Statements of Operations for the Three Months Ended
2021 and 2020
For the three months ended March 31, 2021 , we recorded a net loss of $162
thousand as compared to a net loss of $306 thousand for the three months ended
March 31, 2020 . In the following sections we discuss our revenue, operating
expenses and non-operating income for the three months ended March 31, 2021 ,
compared to the three months ended March 31, 2020 .
Revenue. Presented below is a comparison of our oil and gas sales, production
quantities and average sales prices for the three months ended March 31, 2021
and 2020:
Three months ended
March 31, Change
2021 2020 Amount Percent
(in thousands except average prices and production quantities)
Revenue:
Oil $ 1,132 $ 855 $ 277 32 %
Gas 79 68 11 16 %
Total $ 1,211 $ 923 $ 288 31 %
Production quantities:
Oil (Bbls) 21,872 20,305 1,567 8 %
Gas (Mcf) 24,195 40,313 (16,118 ) -40 %
BOE 25,905 27,204 (1,301 ) -5 %
Average sales prices:
Oil (Bbls) $ 51.74 $ 42.11 $ 9.63 23 %
Gas (Mcf) 3.27 1.69 1.58 94 %
BOE $ 46.74 $ 34.16 $ 12.58 37 %
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The increase in our oil and gas revenue of $288 thousand for the three months
ended March 31, 2021 , as compared to the three months ended March 31, 2020 , was
due to an increase in oil production of 8% and an increase in the realized price
received for our oil production of 23%. The increase in oil prices is primarily
due to stronger demand for crude oil on a global basis as the world recovers
from government mandated lockdowns which began in mid-March 2020 in order to
reduce the spread of the COVID-19 pandemic. The increase in oil production
volumes is primarily the result of the acquisitions of operated properties we
completed during 2020, and our efforts to return idle wells to production.
During the three months ended March 31, 2021 , we produced 7,056 Bbls from
operated properties acquired in 2020. These production increases were partially
offset by production declines from our South Texas wells drilled in late 2018
and early 2019.
For the three months ended March 31, 2021 , we produced 25,905 BOE, or an average
of 288 BOE per day, as compared to 27,204 BOE or 299 BOE per day during the
comparable period in 2020; however, the production mix shifted to become more
oil weighted in 2021, due to the acquisition in 2020 of operated oil properties.
During the three months ended March 31, 2021 , our BOE production mix was 84% oil
and 16% natural gas compared to 75% oil and 25% gas in the comparable period of
2020. The gas production declines are primarily coming from our South Texas
region where we have experienced steep production declines from initial
production rates for wells drilled in late 2018 and 2019 as the wells have
matured.
Oil and Gas Production Costs. Presented below is a comparison of our oil and gas
production costs for the three months ended
Three months ended
March 31, Change
2021 2020 Amount Percent
(in thousands)
Production taxes $ 79 $ 66 $ 13 20 %
Lease operating expense 568 408 160 39 %
Total $ 647 $ 474 $ 173 36 %
For the three months ended March 31, 2021 , production taxes increased by $13
thousand , or 20%, compared to the comparable period in 2020. This increase was
primarily attributable to the increase in oil revenues. For the three months
ended March 31, 2021 , lease operating expenses increased by $160 thousand when
compared to the three months ended March 31, 2020 , due increased activity as the
result of operated properties acquired in 2020.
Depreciation, Depletion and Amortization. Our depreciation, depletion and
amortization ("DD&A") rate for the three months ended March 31, 2021 was $3.82
per BOE compared to $3.89 per BOE for the three months ended March 31, 2020 . Our
DD&A rate can fluctuate because of changes in drilling and completion costs,
impairments, divestitures, changes in the mix of our production, the underlying
proved reserve volumes and estimated costs to drill and complete proved
undeveloped reserves.
General and Administrative Expenses. Presented below is a comparison of our
general and administrative expenses for the three months ended March 31, 2021
and 2020:
Three months ended
March 31, Change
2021 2020 Amount Percent
(in thousands)
Compensation and benefits,
including directors' fees $ 339 $ 223 $ 116 52 %
Professional fees, insurance
and other 396 349 47 13 %
Total $ 735 $ 572 $ 163 28 %
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General and administrative expenses increased by $163 thousand during the
three-month period ended March 31, 2021 , as compared to the prior year period.
The increase was primarily attributable to an increase in compensation and
benefits of $117 thousand , of which $37 thousand relates to an increase in the
amortization of stock-based compensation awards granted to employees and
directors during the period and $81 thousand related to an increase in incentive
compensation and director fees. Professional fees also increased $46 thousand
which was due to legal fees, increasing $35 thousand compared to the prior year
period related to final settlement of the litigation with APEG. See Note
9-Commitments, Contingencies and Related Party Transactions-APEG II Litigation
in the notes to the unaudited condensed consolidated financial statements.
Non-Operating Income (Expense). Presented below is a comparison of our
non-operating income (expense) for the three months ended March 2021 and 2020:
Three months ended
March 31, Change
2021 2020 Amount Percent
(in thousands)
Commodity derivative gain $ 107 $ - $ 107 100 %
Gain (loss) on marketable
equity securities 50 (76 ) 126 166 %
Warrant revaluation loss (20 ) (6 ) (14 ) 233 %
Rental property gain (loss),
net 17 (17 ) 34 200 %
Other income 25 28 (3 ) -11 %
Interest, net (52 ) - (52 ) -100 %
Total other income (expense) $ 127 $ (71 ) $ 198 279 %
For the three months endedMarch 31, 2021 , we recognized an unrealized gain on the fixed-price swap commodity derivative contract that we entered into during the period of$109 thousand . The gain is related to a change in the fair value of the fixed-price swap contract for the remaining periods. The unrealized gain was partially offset by a$2 thousand realized loss. See Note 8 Commodity Derivative in the notes to the condensed consolidated financial statements. For the three months endedMarch 31, 2021 , we recognized an unrealized gain on marketable equity securities of$50 thousand as compared to a loss of$76 thousand for the comparable period of 2020. The unrealized gain represents the increase in value of our investment in Anfield. For the three months endedMarch 31, 2021 , we recognized a warrant revaluation loss of$20 thousand as compared to a loss of$6 thousand during the three months endingMarch 31, 2020 . The loss for the three months endedMarch 31, 2021 was attributable to an increase in the value of our common stock during the period, which was partially offset by a decrease in the warrant liability due to the exercise of warrants to purchase 50,000 shares of common stock (leaving warrants to purchase 50,000 shares of common stock outstanding), which occurred in the third fiscal quarter of 2020.
For the three months ending
Interest, net, represents the interest related to our related party secured note payable with APEG II. During the three months endedMarch 31, 2021 , we entered into a Debt Conversion Agreement with APEG II. Pursuant to the agreement we repaid the note and accrued interest to the maturity date by issuing 97,962 shares. See Note 7-Debt in the notes to the condensed consolidated financial statements. 25 Table of Contents
Liquidity and Capital Resources
The following table sets forth certain measures of our liquidity as ofMarch 31, 2021 andDecember 31, 2020 : March 31, December 31, 2020 2020 Change (in thousands) Cash and equivalents$ 7,236 $ 2,854 $ 4,382 Working capital (1) 8,184 2,499 5,685 Total assets 17,650 12,363 5,237 Total shareholders' equity 14,573 8,567 6,006 Select Ratios: Current ratio (2) 7.0 to 1.0 2 .2 to 1.0
(1) Working capital is computed by subtracting total current liabilities from
total current assets.
(2) The current ratio is computed by dividing total current assets by total
current liabilities.
As of March 31, 2021 , we had working capital of $8.2 million compared to working
capital of $2.5 million as of December 31, 2020 , an increase of $5.7 million .
This increase was primarily attributable to proceeds of $5.3 million from the
sale of 1.1 million shares of common stock, net of issuance costs, sold pursuant
to an underwritten offering in February 2021 , as discussed below.
As of March 31, 2021 , we had cash and cash equivalents of $7.2 million and
accounts payable and accrued liabilities of $0.9 million . As of May 10, 2021 , we
had cash and cash equivalents of approximately $7.0 million and accounts payable
and accrued liabilities of approximately $0.6 million .
We own a 14-acre tract in Riverton, Wyoming with a two-story, 30,400 square foot
office building and an additional 13-acre parcel of land adjacent to the
building. The building served as our corporate headquarters until 2015 and is
currently being leased to government agencies and other non-affiliated
companies. During 2020, we made the decision to sell the land and building and
began a process to determine the price at which we would list the property for
sale. The process included obtaining an appraisal, analysing operating
statements for the building, reviewing capitalization rates and consulting a
large national commercial real estate company. We determined the realizable
value of the real estate assets was in the range of $950 thousand to $1.2
million . A special committee of the board of directors was formed to evaluate
the sales process and during 2020, we entered into an agreement with a large
national commercial broker and a local broker in Riverton, Wyoming to sell our
real estate assets. We plan to sell the property in 2021.
On
If we have needs for additional capital in 2021, alternatives that we will consider would potentially include entering into a reserve-based credit facility, selling all or a partial interest in certain of our non-operated oil and natural gas assets, selling our marketable equity securities, issuing additional shares of our common stock for cash or as consideration for acquisitions, and other alternatives, as we determine how to best fund our capital programs and meet our financial obligations.
Cash Flows The following table summarizes our cash flows for the three months endedMarch 31, 2021 and 2020: Three months ended March 31, 2021 2020 Change (in thousands) Net cash provided by (used in): Operating activities$ (536 ) $ (181 ) $ (355 ) Investing activities (326 ) (128 ) (198 ) Financing activities 5,244 (87 ) 5,331 Operating Activities. Cash used in operating activities for the three months endedMarch 31, 2021 was$536 thousand as compared to cash used in operating activities$181 thousand for the comparable period in 2020. The increase in cash used in operating activities is mainly attributable to the increases in payments for operating and general and administrative expenses, which were partially offset by an increase in cash receipts for revenues. 26 Table of Contents Investing Activities. Cash used in investing activities for the three months endedMarch 31, 2021 was$326 thousand as compared to$128 thousand for the comparable period in 2020. The primary use of cash in our investing activities for the three months endedMarch 31, 2021 was the capital expenditures of oil and gas properties related to returning idle wells to production in ourLiberty County, Texas field. The comparable number in 2020 represents the cash paid for the acquisition ofNew Horizon for net cash of$122 thousand . Financing Activities. Cash provided by financing activities for the three months endedMarch 31, 2021 was$5.2 million as compared to cash used in financing activities of$87 thousand for the comparable period in 2020. The cash provided by financing activities during the three months endedMarch 31, 2021 was primarily attributable to cash received from the sale of 1.1 million shares of common stock of$5.3 million . The comparable number in 2020 represents repayment of the credit facility and payments on the premium finance note payable.
Off-Balance Sheet Arrangements
As part of our ongoing business, we have not participated in transactions that
generate relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities ("SPEs"), which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
We evaluate our transactions to determine if any variable interest entities exist. If it is determined that we are the primary beneficiary of a variable interest entity, that entity will be consolidated in our consolidated financial statements. We have not been involved in any unconsolidated SPE transactions during the periods covered by this report.
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