Forward Looking Statements
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements
other than statements of historical facts included in and incorporated by
reference into this Form 10-Q are forward-looking statements. When used in this
Form 10-Q, the words "will", "expect", "anticipate", "intend", "plan",
"believe", "seek", "estimate" and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. Forward-looking statements in this Form 10-Q include
statements regarding our expected future revenue, income, production, liquidity,
cash flows, reclamation and other liabilities, expenses and capital projects,
future capital expenditures and future transactions. Forward-looking statements
are based on information available at the time the statements are made and
involve known and unknown risks, uncertainties and other factors that may cause
our results, levels of activity, performance or achievements to be materially
different from the information expressed or implied by the forward-looking
statements in this Report. These factors include those associated with our
ability to find oil and natural gas reserves that are economically recoverable,
the volatility of oil, natural gas liquids and natural gas prices, declines in
the values of our properties that have resulted in and may in the future result
in additional ceiling test write downs, our ability to replace reserves and
sustain production, our estimate of the sufficiency of our existing capital
sources, our ability to raise additional capital to fund cash requirements for
our participation in oil and gas properties and for future acquisitions, the
uncertainties involved in estimating quantities of proved oil and natural gas
reserves, in prospect development and property acquisitions or dispositions and
in projecting future rates of production or future reserves, the timing of
development expenditures and drilling of wells, hurricanes and other natural
disasters and the operating hazards attendant to the oil and gas and minerals
businesses, and the effects of COVID-19, including decreases in the price of oil
and gas associated therewith and potential rescissions caused thereby and the
governmental actions implemented to stop the spread of such virus.
You should read the matters described and incorporated by reference in " Risk
Factors " and the other cautionary statements made in this Report, and
incorporated by reference herein, as being applicable to all related
forward-looking statements wherever they appear in this Report. We cannot assure
you that the forward-looking statements in this Report will prove to be accurate
and therefore prospective investors are encouraged not to place undue reliance
on forward-looking statements. Other than as required by law, we undertake no
obligation to update or revise these forward-looking statements, even though our
situation may change in the future.
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 ended
December 31, 2019, filed with the Securities and Exchange Commission on March
30, 2020 (the "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.
25
Unless the context requires otherwise, references to the "Company," "we," "us,"
"our," "U.S. Energy", and "U.S. Energy Corp." refer specifically to U.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 of six 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 the United States Securities and Exchange
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 the SEC. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC like us at http://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 the SEC 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.
General Overview
U.S. Energy Corp. - is a Wyoming 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 continental United States. Our business
activities are currently focused in South Texas, the Williston Basin in North
Dakota, Lea County in New Mexico and Converse County in Wyoming.
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 of New Horizon Resources and
certain FieldPoint Petroleum wells we now operate a small portion of our
production.
26
Recent Developments
On September 25, 2020, we acquired certain operated and non-operated producing
properties primarily located in Lea County, New Mexico and Converse County,
Wyoming. The acquired properties consist of select upstream assets of FieldPoint
Petroleum Corporation ("FieldPoint") and were acquired pursuant to FieldPoint's
Chapter 7 bankruptcy process (the "FieldPoint Properties"). The purchase price
for the FieldPoint Properties was $500,000, which was paid in cash. We entered
into a $375 thousand secured promissory note with APEG Energy II LP, which
entity Patrick E. Duke, a director of the Company, has shared voting power and
shared investment power over ("APEG II") (the "Note"). The Note accrues interest
at 10% per annum and matures on September 24, 2021. The Note is secured by the
Company's wholly owned subsidiary, Energy One's oil and natural gas producing
properties. In the event that the Note is repaid prior to the maturity date
there is a prepayment penalty of 10% of the principal amount of the Note less
accrued interest. At September 30, 2020, APEG II held approximately 40% of the
Company's outstanding common stock.
On October 2, 2020, we closed a registered direct offering of 315,810 shares of
our common stock, at $5.25 per share, for aggregate gross proceeds of
approximately $1,658,000, before deducting the placement agent fees and related
offering expenses. The net proceeds from the offering were approximately
$1,523,500. The Offering was the result of a Securities Purchase Agreement (the
"Purchase Agreement") the Company had entered into on September 30, 2020 with
certain institutional investors (the "Purchasers") The Purchase Agreement
contains customary representations and warranties and agreements of the Company
and the Purchasers, and customary indemnification rights and obligations of the
parties. Until the twelve month anniversary of the closing of the Offering, the
Company is required to offer each of the Purchasers the right to participate in
an amount up to 50% of any subsequent financing transaction undertaken by the
Company at the offering price of the subsequent financing transaction.
Additionally, each of the officers and directors of the Company pursuant to
lock-up agreements agreed not to sell or transfer any of the Company securities
which they hold, subject to certain exceptions, during the 180-day period
following the closing of the Offering.
On November 9, 2020, U.S. Energy Corp., through its wholly-owned subsidiary New
Horizon entered into a Purchase and Sale Agreement ("PSA") to acquire certain
assets from Newbridge Resources LLC ("Newbridge"). The transaction, which is
subject to customary closing conditions, is expected to close during the fourth
quarter of 2020. The assets include acreage and operated producing properties in
Liberty County, Texas (the "Newbridge Properties"). The Newbridge Properties
also consist of approximately 680 net acres located primarily in Liberty County,
Texas which are 100% held by production, and which average a 100% working
interest and 86% net revenue interest. The consideration payable by the Company
for the Newbridge Properties will consist of $250,000 in shares of U.S. Energy
restricted common stock (the "Acquisition" and the "Purchase Price"). The number
of shares issuable will equal the Purchase Price divided by the lesser (i.e.,
the calculation which results in the greatest number of shares) of (a) the
closing sales price of U.S. Energy's common stock as traded on The NASDAQ
Capital Market on the day prior to the closing; and (b) the volume weighted
average price of U.S. Energy's common stock, as traded on The NASDAQ Capital
Market, for the 15 trading days immediately prior to the closing date of the PSA
(as applicable, the "Newbridge Shares"). The effective date of the Acquisition
was November 1, 2020.
On November 16, 2020, we closed an underwritten offering of an aggregate of
1,150,000 shares of our common stock at a public offering price of $3.00 per
share. The net proceeds to the Company from the offering, after deducting the
underwriting discount, the underwriters' fees and expenses and our estimated
offering expenses, are expected to be approximately $3.0 million. We intend to
use the net proceeds from this offering for general corporate purposes, capital
expenditures, working capital, and potential acquisitions of oil and gas
properties.
Impacts of COVID-19 Pandemic and Effect on Economic Environment
In early March 2020, there was a global outbreak of COVID-19 that has 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 and remain depressed.
Operators in North 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. Operators 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.
27
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 beginning in the first quarter of 2020, which
negatively affected our results of operations and cash flows. These conditions
have persisted throughout the second and third quarters and continue to
negatively affect our results of operations and cash flows. While demand and
commodity prices have shown signs of recovery, they are not back to pre-pandemic
levels, and 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; 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.
At September 30, 2020, we performed an impairment review resulting in the
Company recording an additional ceiling test write down of $1.1 million due to
the effect lower crude oil prices had on the value of its proved reserves. In
the calculation of the ceiling test as of September 30, 2020, the Company used
$43.40 per barrel for oil and $1.97 per mcf for natural gas (as further adjusted
for differentials related to property, specific gravity, quality, local markets
and distance from markets) to compute the future cash flows of the Company's
producing properties. The discount factor used was 10%. These prices represent
the average of first day of the month prices for oil and natural gas for each
month in the twelve-month period ended September 30, 2020. If depressed prices
for crude oil continue, it is likely that the Company will experience additional
ceiling test write-downs in 2020 and 2021 as higher prices from earlier quarters
in 2019 and the first quarter of 2020 used in the calculation of the average
price are replaced with the more recent lower priced quarters.
Legal Proceedings
In July 2020, we received a request for arbitration from our former Chief
Executive Officer claiming that we breached his employment agreement. We intend
to vigorously contest this matter and believe these claims are without merit.
The employment agreement requires that any disputes be submitted to binding
arbitration. We have insurance for these types of claims and have reported the
request for arbitration to our insurance carrier. We believe it is probable that
we will incur future defense costs in this matter and have accrued $100 thousand
at September 30, 2020, representing the amount of the Company's responsibility
for costs under the insurance policy.
APEG II, which entity Patrick E. Duke, a director of the Company has shared
voting power and shared investment power over, is our largest shareholder
holding approximately 40% of our outstanding common stock, and its general
partner, APEG Energy II, GP (together with APEG II, "APEG"), were involved in
litigation with us and our former Chief Executive Officer, David Veltri. On July
29, 2020 APEG filed a Notice of Voluntary Dismissal in their lawsuit against us
and Mr. Veltri and on July 30, 2020, we filed a Notice of Voluntary Dismissal in
our Lawsuit against Mr. Veltri. The litigation was formally dismissed in August
2020. For more detail regarding such litigation, please see the sections
Litigation-APEG II Litigation and -Litigation with Former Chief Executive
Officer in Note 9-Commitments, Contingencies and Related-Party Transactions in
the Notes to the Unaudited Condensed Consolidated Financial Statements included
in Part I-Financial Information- Item 1. Financial Statements of this report.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements in conformity
with generally accepted accounting principles in the 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 2019 Annual Report on Form 10-K filed with the SEC
on March 30, 2020.
Recently Issued Accounting Standards
Please refer to the section entitled Recently Adopted Accounting Pronouncements
under Note 1 - Organization, Operations and Significant Accounting Policies in
the Notes to the Unaudited Condensed Consolidated Financial Statements included
in Part I, Item 1 of this report for additional information on recently adopted
accounting standards.
28
Results of Operations
Comparison of our Statements of Operations for the Three Months Ended September
30, 2020 and 2019
For the three months ended September 30, 2020, we recorded a net loss of $1,713
thousand as compared to a net loss of $281 thousand for the three months ended
September 30, 2019. In the following sections we discuss our revenue, operating
expenses and non-operating income for the three months ended September 30, 2020
compared to the three months ended September 30, 2019.
Revenue. Presented below is a comparison of our oil and gas sales, production
quantities and average sales prices for the three months ended September 30,
2020 and 2019 (dollars in thousands, except average sales prices):
Three months ended
September 30, Change
2020 2019 Amount Percent
Revenue:
Oil $ 362 $ 1,571 $ (1,209 ) -77 %
Gas 39 62 (23 ) -37 %
Total $ 401 $ 1,633 $ (1,232 ) -75 %
Production quantities:
Oil (Bbls) 10,354 28,266 (17,912 ) -63 %
Gas (Mcf) 18,591 37,978 (19,387 ) -51 %
BOE 13,453 34,596 (21,143 ) -61 %
Average sales prices:
Oil (Bbls) $ 34.96 $ 55.58 $ (20.62 ) -37 %
Gas (Mcf) 2.10 1.63 0.47 29 %
BOE $ 29.81 $ 47.20 $ (17.39 ) -37 %
The decrease in our oil and gas revenue of $1,232 thousand for the three months
ended September 30, 2020 as compared to the three months ended September 30,
2019 was due to a decrease in oil production of 63% and decrease in the realized
price received for our oil production of 37%. The decline in oil prices is
primarily due to reduced demand on a global basis beginning in mid-March 2020 as
a result of the COVID-19 pandemic. In addition, our oil price differential
widened, particularly for our North Dakota properties where the differential
from WTI increased to $6.40 per barrel as compared to $4.37 per barrel in the
comparable period in 2019. The decrease in oil production volumes is primarily
the result of operators shutting in production on our North Dakota properties as
a response to low oil prices and the production declines from our South Texas
wells drilled in late 2018 and early 2019.
For the three months ended September 30, 2020, we produced 13,453 BOE, or an
average of 146 BOE per day, as compared to 34,596 BOE or 376 BOE per day during
the comparable period in 2019. This decrease was mainly attributable to North
Dakota operators shutting in production as the result of low prices and the
production declines from the previously mentioned South Texas wells.
29
Oil and Gas Production Costs. Presented below is a comparison of our oil and gas
production costs for the three months ended September 30, 2020 and 2019 (dollars
in thousands):
Three months ended
September 30, Change
2020 2019 Amount Percent
Production taxes $ 30 $ 107 $ (77 ) -72 %
Lease operating expense 290 410 (120 ) -29 %
Total $ 320 $ 517 $ (197 ) -38 %
For the three months ended September 30, 2020, production taxes decreased by $77
thousand, or 72%, compared to the comparable period in 2019. This decrease was
primarily attributable to the decrease in oil revenues. For the three months
ended September 30, 2020, lease operating expenses decreased by $120 thousand
when compared to the three months ended September 30, 2019 due to cost cutting
measures enacted due to low commodity prices and reduced field activity.
Depreciation, Depletion and Amortization. Our depreciation, depletion and
amortization ("DD&A") rate for the three months ended September 30, 2020 was
$5.32 per BOE compared to $5.04 per BOE for the three months ended September 30,
2019. For the most recently completed quarter, our depletion rate was impacted
by the reduction in reserve quantities, primarily due to pricing revisions. 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.
Impairment of Oil and Natural Gas Properties. For the three months ended
September 30, 2020 we recorded impairment of $1.1 million due to the net
capitalized cost of our oil and natural gas properties exceeding the full cost
ceiling limitation. For the three months ended September 30, 2019 there was no
such full cost ceiling limitation.
General and Administrative Expenses. Presented below is a comparison of our
general and administrative expenses for the three months ended September 30,
2020 and 2019 (dollars in thousands):
Three months ended
September 30, Change
2020 2019 Amount Percent
Compensation and benefits,
including directors $ 365 $ 177 $ 188 106 %
Professional fees, insurance and
other 242 812 (570 ) -70 %
Total $ 607 $ 989 $ (382 ) -39 %
General and administrative expenses decreased by $382 thousand during the
three-month period ended September 30, 2020 as compared to the prior year period
primarily due to a reduction in professional fees. The decrease was primarily
attributable to a reduction in legal fees of $239 thousand. In the prior year
period, we incurred legal costs of $104 thousand primarily as a result of the
APEG II litigation. See Litigation-APEG II Litigation and -Litigation with
Former Chief Executive Officerin Note 9-Commitments, Contingencies and
Related-Party Transactions in the Notes to the Financial Statements included in
Part I, Item 1 of this report. Accounting fees also decreased $324 thousand for
the three months ended September 30, 2020 when compared to the prior year period
due to fees related to the forensic accounting investigation in the prior year
period. These decreases in professional fees were partially offset by an
increase in compensation and benefits of $188 thousand due to the amortization
of stock-based compensation awards granted to our Chief Executive Officer and
members of our Board in January 2020 and an incentive-based compensation accrual
of $150 thousand.
30
Non-Operating Income (Expense). Presented below is a comparison of our
non-operating income (expense) for the three months ended September 30, 2020 and
2019 (dollars in thousands):
Three months ended
September 30, Change
2020 2019 Amount Percent
Loss on marketable equity securities $ (32 ) $ (240 ) 208 87 %
Warrant revaluation gain (loss) 55 (23 ) 78 339 %
Rental property loss, net (5 ) (16 ) 11 69 %
Other income 26 50 (24 ) -48 %
Interest, net (1 ) 1 (2 ) -200 %
Total other income (expense) $ 43 $ (228 ) $ 271 119 %
For the three months ended September 30, 2020 we recognized an unrealized loss
on marketable equity securities of $32 thousand as compared to a loss of $240
thousand for the comparable period of 2019. The unrealized losses represent the
decline in value of our investment in Anfield. In July 2020, we sold 1,210,455
shares of Anfield, representing one-third of our total investment, for proceeds
of $45 thousand. We expect to sell the remaining shares in the fourth quarter of
2020 and the first quarter of 2021.
For the three months ended September 30, 2020, we recognized a warrant
revaluation gain of $55 thousand as compared to a loss of $23 thousand during
the three months ending September 30, 2019. The gain for the three months ended
September 30, 2020 was attributable to a decrease in the warrant liability
primarily due to an exercise of 50,000 of the 100,000 outstanding warrants
during the period, which was partially offset by an increase in the liability
due to an increase in the value of our common stock at September 30, 2020.
For the three months ending September 30, 2020 we recognized a loss on rental
property. The loss represents rental expenses in excess of rental income related
to our Riverton, Wyoming office building. We have entered into an agreement with
a large national commercial broker to sell the office building.
In 2018, due to uncertainty of collection, we wrote off a receivable of $374
thousand related to a refundable deposit for a transaction that was not
completed. For the three months ended September 30, 2020, we recovered $25
thousand of the receivable. For the three months ended September 30, 2019 we
recovered $50 thousand related to the recovery of the same receivable. The total
amounts of the receivable collected through September 30, 2020 is $250 thousand.
See Note 7-Write-Off of Deposit in the notes to the condensed consolidated
financial statements included in Part I, Item 1 of this report.
Interest, net represents the interest related to our insurance premium finance
note net of interest earned on cash balances on deposit at our bank.
31
Comparison of our Statements of Operations for the Nine Months Ended September
30, 2020 and 2019
For the nine months ended September 30, 2020, we recorded a net loss of $5,670
thousand as compared to a net loss of $246 thousand for the nine months ended
September 30, 2019. In the following sections we discuss our revenue, operating
expenses and non-operating income for the nine months ended September 30, 2020
compared to the nine months ended September 30, 2019.
Revenue. Presented below is a comparison of our oil and gas sales, production
quantities and average sales prices for the nine months ended September 30, 2020
and 2019 (dollars in thousands, except average sales prices):
Nine months ended
September 30, Change
2020 2019 Amount Percent
Revenue:
Oil $ 1,418 $ 4,746 $ (3,328 ) -70 %
Gas 95 320 (225 ) -70 %
Total $ 1,513 $ 5,066 $ (3,553 ) -70 %
Production quantities:
Oil (Bbls) 42,369 83,006 (40,637 ) -49 %
Gas (Mcf) 72,025 151,381 (79,356 ) -52 %
BOE 54,373 108,236 (53,863 ) -50 %
Average sales prices:
Oil (Bbls) $ 33.47 $ 57.18 $ (23.71 ) -42 %
Gas (Mcf) 1.31 2.11 (0.80 ) -38 %
BOE $ 27.82 $ 46.81 $ (18.99 ) -41 %
The decrease in our oil and gas revenue of $3,553 thousand for the nine months
ended September 30, 2020 as compared to the nine months ended September 30, 2019
was due primarily to a decrease in oil production of 49% and decrease in the
realized price received for our oil production of 42%. The decline in oil prices
is primarily due to reduced demand on a global basis beginning in mid-March 2020
as a result of the COVID-19 pandemic. In addition, our oil price differential
widened significantly, particularly for our North Dakota properties where the
differential from WTI increased to $7.08 per barrel as compared to $4.37 per
barrel in the comparable period in 2019. The decrease in oil production
quantities is the result of operators shutting in production in our North Dakota
properties beginning in April 2020 as a response to low oil prices, and the
production declines from our South Texas wells, which were drilled in late 2018
and early 2019.
For the nine months ended September 30, 2020, we produced 54,373 BOE, or an
average of 198 BOE per day, as compared to 108,236 BOE or 396 BOE per day during
the comparable period in 2019. This decrease was mainly attributable to North
Dakota operators shutting in production as the result of low prices and the
production declines from the previously mentioned South Texas wells.
32
Oil and Gas Production Costs. Presented below is a comparison of our oil and gas
production costs for the nine months ended September 30, 2020 and 2019 (dollars
in thousands):
Nine months ended
September 30, Change
2020 2019 Amount Percent
Production taxes $ 110 $ 323 $ (213 ) -66 %
Lease operating expense 1,032 1,348 (316 ) -23 %
Total $ 1,142 $ 1,671 $ (529 ) -32 %
For the nine months ended September 30, 2020, production taxes decreased by $213
thousand, or 66%, as compared to the comparable period in 2019. This decrease
was primarily attributable to the decrease in oil revenues, which decreased by
70% compared to 2019. For the nine months ended September 30, 2020, lease
operating expenses decreased by $316 thousand when compared to the nine months
ended September 30, 2019 as the result of operators shutting in production, cost
cutting measures enacted due to low commodity prices and reduced field activity.
Depreciation, Depletion and Amortization. Our DD&A rate for the nine months
ended September 30, 2020 was $5.05 per BOE, compared to $4.90 per BOE for the
nine months ended September 30, 2019. For the nine months ended September 30,
2020, our depletion rate was impacted by a reclassification of $2.1 million of
our unevaluated properties and the reduction in reserve quantities at September
30, 2020, primarily due to pricing revisions. Our DD&A rate can fluctuate as a
result 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.
Impairment of Oil and Natural Gas Properties. For the nine months ended
September 30, 2020 we recorded an impairment of $2.9 million due to the net
capitalized cost of our oil and natural gas properties exceeding the full cost
ceiling limitation. For the nine months ended September 30, 2019, there was no
such full cost ceiling limitation.
General and Administrative Expenses. Presented below is a comparison of our
general and administrative expenses for the nine months ended September 30, 2020
and 2019 (dollars in thousands):
Nine months ended
September 30, Change
2020 2019 Amount Percent
Compensation and benefits,
including directors $ 884 $ 655 $ 229 35 %
Professional fees, insurance and
other 662 2,434 (1,772 ) -73 %
Bad debt expense - 28 (28 ) 100 %
Total $ 1,546 $ 3,117 $ (1,571 ) -50 %
General and administrative expenses decreased by $1,571 thousand for the
nine-month period ended September 30, 2020 as compared to the nine-month period
ended September 30, 2019 due to a reduction in professional fees. The decrease
was primarily attributable to a reduction in legal fees of $1,421 thousand,
including the removal of $250 thousand for litigation settlement accruals. The
APEG litigation was dismissed in August 2020, without us incurring certain
estimated legal costs. Also included in legal fees during the period is an
accrual of $100 thousand for a claim from a former employee that will go to
arbitration. In the prior year's period, we incurred legal costs of $1,281
thousand, primarily as the result of the APEG II litigation. See Litigation-APEG
II Litigation and -Litigation with Former Chief Executive Officer in Note
9-Commitments, Contingencies and Related-Party Transactions in the Notes to the
Financial Statements included in Part I, Item 1 of this report. Compensation and
benefits increased $229 thousand due to amortization of stock-based compensation
awards granted to our Chief Executive Officer and directors in January 2020 of
$170 thousand and an accrual for 2020 bonuses of $225 thousand. These increases
were partially offset by a reduction in salary expense due to lower headcount.
33
Non-Operating Income (Expense). Presented below is a comparison of our
non-operating income (expense) for the nine months ended September 30, 2020 and
2019 (dollars in thousands):
Nine months ended
September 30, Change
2020 2019 Amount Percent
Loss on real estate held for sale (651 ) - (651 ) - %
Impairment of real estate (403 ) - (403 ) - %
Unrealized loss on marketable
equity securities (153 ) (235 ) 82 35 %
Warrant revaluation (loss) gain (65 ) 219 (284 ) -130 %
Rental property loss (40 ) (39 ) (1 ) -3 %
Other income 54 100 (46 ) -46 %
Interest, net (3 ) (19 ) 16 84 %
Total other income (expense) $ (1,261 ) $ 26 $ (1,287 ) -4950, %
During the nine months ended September 30, 2020 we reclassified our Riverton,
Wyoming office building and the related parcel of land to real estate held for
sale. Concurrent with the reclassification we recognized a $651 thousand loss to
adjust the carrying amount of the land and building to its estimated fair value
of $725 thousand. See Note 3-Real Estate Held for Sale in the notes to the
condensed consolidated financial statements included in Part I, Item 1 of this
report.
During the nine months ended September 30, 2020 we recorded impairment of $403
thousand related to three land parcels totalling 13.85 acres that we own in
Riverton, Wyoming, which are not currently offered for sale.
During the nine months ended September 30, 2020 we recognized an unrealized loss
on marketable equity securities of $153 thousand as compared to an unrealized
loss of $235 thousand for the comparable period of 2019. The unrealized loss
represents the decline in value of our investment in Anfield Energy Inc. In July
2020, we sold 1,210,455 shares, representing one-third of our total investment
for proceeds of $45 thousand. We expect to sell the remaining shares in the
fourth quarter of 2020.
During the nine months ended September 30, 2020, we recognized a warrant
revaluation loss of $65 thousand as compared to a gain of $219 thousand during
the nine months ended September 30, 2019. The loss during the nine months ended
September 30, 2020 was attributable to an increase in the warrant liability,
primarily as a result of the increase in the value of our common stock, which
was partially offset an exercise of 50,000 of the 100,000 outstanding warrants
during the period.
In 2018, due to uncertainty of collection, we wrote off a receivable of $374
thousand related to a refundable deposit for a transaction that was not
completed. During the nine months ended September 30, 2020, we recovered $50
thousand of the receivable. During the nine months ended September 30, 2019 we
recovered $100 thousand related to the recovery of the same receivable. The
total amounts of the receivable collected through September 30, 2020 is $250
thousand. See Note 7-Write-Off of Deposit in the notes to the condensed
consolidated financial statements included in Part I, Item 1 of this report.
Interest, net decreased by $16 thousand during the nine months ended September
30, 2020 compared to the comparable period in 2019. The decrease was
attributable to the reduction in the principal balance of our credit facility,
which was repaid in full on March 1, 2019.
34
Non-GAAP Financial Measures- Adjusted EBITDAX
Adjusted EBITDAX represents income (loss) from continuing operations as further
modified to eliminate depreciation, depletion accretion and amortization,
impairment, stock-based compensation expense, unrealized gains and loss on
marketable equity securities, gains and losses on warrant revaluation,
unrealized losses on the reclassification of real estate to held for sale,
interest expense net of interest income, and other items set forth in the table
below. Adjusted EBITDAX excludes certain items that we believe affect the
comparability of operating results and items that are generally one-time in
nature or whose timing and/or amount cannot be reasonably estimated.
Adjusted EBITDAX is a non-GAAP measure that is presented because we believe it
provides useful additional information to investors and analysts as a
performance measure. In addition, adjusted EBITDAX is widely used by
professional research analysts and others in the valuation, comparison, and
investment recommendations of companies in the oil and natural gas exploration
and production industry, and many investors use the published research of
industry research analysts in making investment decisions. Adjusted EBITDAX
should not be considered in isolation or as a substitute for net income (loss),
income (loss) from operations, net cash provided by operating activities, or
profitability or liquidity measures prepared under GAAP. Because adjusted
EBITDAX excludes some, but not all items that affect net income (loss) and may
vary among companies, the adjusted EBITDAX amounts presented may not be
comparable to similar metrics of other companies.
The following table provides reconciliations of income (loss) from continuing
operations to adjusted EBITDAX for the nine months ended September 30, 2020 and
2019:
Nine months ended
September 30,
2020 2019
(in thousands)
Loss from continuing operations (GAAP) $ (5,670 ) $ (246 )
Depreciation, depletion, accretion and amortization 291 550
Impairment of oil and gas properties 2,943 -
Loss on real estate held for sale 651 -
Impairment of real estate 403 -
Loss on marketable equity securities 153 235
Loss (gain) on warrant revaluation 65 (219 )
Stock-based compensation expense 170 35
Interest, net 3 19
Adjusted EBITDAX (Non-GAAP) $ (991 ) $ 374
Liquidity and Capital Resources
The following table sets forth certain measures of our liquidity as of September
30, 2020 and December 31, 2019:
December 31,
September 30, 2020 2019 Change
(in thousands)
Cash and equivalents $ 1,039 $ 1,532 $ (493 )
Working capital (1) 802 1,470 (668 )
Total assets 9,606 13,467 (3,195 )
Total shareholders' equity 4,598 9,210 (3,793 )
Select Ratios:
Current ratio (2) 1.5 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.
35
As of September 30, 2020, we had working capital of $802 thousand compared to
working capital of $1,470 thousand as of December 31, 2019, a decrease of $668
thousand. This decrease was primarily attributable to cash used in operating
activities of $549 thousand and cash payments of $183 thousand for the
acquisition of New Horizon, including repayment of its credit facility and the
cash payment of $529 thousand for the acquisition of certain assets from
FieldPoint which were partially offset by the reclassification of real estate
held for sale of $725 thousand.
As of September 30, 2020, we had cash and cash equivalents of $1,039 thousand
and accounts payable and accrued liabilities of $1,145 thousand. As of November
5, 2020, we had cash and cash equivalents of approximately $2,415 thousand and
accounts payable and accrued liabilities of approximately $690 thousand.
In early March 2020, the New York Mercantile Exchange (NYMEX) WTI crude oil
price decreased significantly and although it has increased to $38.49 per barrel
as of November 5, 2020, it remained historically low for much of the three-month
period ended September 30, 2020. Currently, we do not have any commodity
derivative contracts in place to mitigate the effect of lower commodity prices
on our revenues. 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.
Lower crude prices could also affect the realizability of our oil and gas
properties. For the three and nine months ended September 30, 2020 we recorded
ceiling test write-downs of $1.1 million and 2.9 million, respectively. In the
calculation of the ceiling test as of September 30, 2020, we used $43.40 per
barrel for oil and $1.97 per mcf for natural gas (as further adjusted for
differentials related to property, specific gravity, quality, local markets and
distance from markets) to compute the future cash flows of our producing
properties. The discount factor used was 10%. These prices represent the average
of first day of the month prices for oil and natural gas for each month in the
twelve-month period ended September 30, 2020. If depressed prices for crude oil
continue, it is likely that the Company will experience additional ceiling test
write-downs in 2020 and 2021 as higher prices from earlier quarters in 2019 and
the first quarter of 2020, used in the calculation of the average price, are
replaced with the more recent lower priced quarters.
The Company owns a 14-acre tract in Riverton, Wyoming with a two-story, 30,400
square foot office building. The building served as the Company's corporate
headquarters until 2015 and is currently being leased to government agencies and
other non-affiliated companies. In 2020, the Company made the decision to sell
the land and building and began a process to determine the price at which it
would list the property for sale. The Company determined that the realizable
value of the building was in the range of $700 thousand to $900 thousand. A
special committee of the Board was formed to evaluate the sales process and
ultimately recommend any action to the Board regarding any potential action.
During the three months ended September 30, 2020 we entered into an agreement
with a large national commercial broker to sell the building.
In July 2020, we sold 1,210,455 shares of our investment in Anfield Energy Inc.
and received proceeds of approximately $45 thousand. The sale represented
one-third of our total investment in Anfield. We intend to dispose of the
remaining shares during the fourth fiscal quarter of 2020.
On October 2, 2020 the Company closed on a registered direct offering (the
"Offering") of 315,810 shares (the "Shares") of the Company's common stock, par
value $0.01 per share (the "Common Stock"), at $5.25 per share, for aggregate
gross proceeds of approximately $1,658,000, before deducting the placement agent
fees and related offering expenses. The net proceeds from the offering were
approximately $1,523,500. The Offering was the result of a Securities Purchase
Agreement (the "Purchase Agreement") the Company had entered into on September
30, 2020 with certain institutional investors (the "Purchasers") The Purchase
Agreement contains customary representations and warranties and agreements of
the Company and the Purchasers, and customary indemnification rights and
obligations of the parties. Until the twelve month anniversary of the closing of
the Offering, the Company is required to offer each of the Purchasers the right
to participate in an amount up to 50% of any subsequent financing transaction
undertaken by the Company at the offering price of the subsequent financing
transaction. Additionally, each of the officers and directors of the Company
pursuant to lock-up agreements agreed not to sell or transfer any of the Company
securities which they hold, subject to certain exceptions, during the 180-day
period following the closing of the Offering.
36
On November 16, 2020, we closed an underwritten offering of an aggregate of
1,150,000 shares of our common stock at a public offering price of $3.00 per
share. The net proceeds to the Company from the offering, after deducting the
underwriting discount, the underwriters' fees and expenses and our estimated
offering expenses, are expected to be approximately $3.0 million. We intend to
use the net proceeds from this offering for general corporate purposes, capital
expenditures, working capital, and potential acquisitions of oil and gas
properties
If we have needs for financing in 2020, alternatives that we will consider would
potentially include entering into a reserve-based credit facility, selling all
or a partial interest in our oil and natural gas assets, issuing shares of our
common stock for cash or as consideration for acquisitions, and other
alternatives, as we determine how to best meet our financial objectives.
Cash Flows
The following table summarizes our cash flows for the nine months ended
September 30, 2020 and 2019:
Nine months ended
September 30,
2020 2019 Change
(in thousands)
Net cash provided by (used in):
Operating activities $ (549 ) $ 297 $ (846 )
Investing activities (665 ) (122 ) (543 )
Financing activities 721 (1,130 ) 1,851
Operating Activities. Cash used in operating activities for the nine months
ended September 30, 2020 was $549 thousand as compared to cash provided by
operating activities $297 thousand for the comparable period in 2019. The
increase in cash used in operating activities is mainly attributable to the
decrease in revenues of $3,553 thousand, which was partially offset by a
decrease in lease operating expenses, production taxes and general and
administrative costs of $2,100 thousand.
Investing Activities. Cash used in investing activities for the nine months
ended September 30, 2019 was $665 thousand as compared to $122 thousand for the
comparable period in 2019. The primary use of cash in our investing activities
for the nine months ended September 30, 2020 was the acquisition of New Horizon
for net cash of $122 thousand and the acquisition of certain assets from
FieldPoint for $529 thousand.
Financing Activities. Cash provided by financing activities for the nine months
ended September 30, 2020 was $721 thousand as compared to cash used in financing
activities of $1,130 thousand for the comparable period in 2019. The cash
provided by financing activities during the nine months ended September 30, 2020
was primarily attributable to cash received in connection with the exercise of
warrants of $565 thousand and proceeds from the secured note payable of $375
thousand. These were partially offset by the repayment of $157 thousand on a
note payable to finance insurance premiums and repayment of the New Horizon
credit facility of $61 thousand. For the nine months ended September 30, 2019
cash used in financing activities included repayment of $937 thousand
outstanding under our credit facility and $193 thousand for the repayment of our
note payable to finance insurance premiums.
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.
37
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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U.S. ENERGY CORP. 
