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USEG > SEC Filings for USEG > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for US ENERGY CORP


8-Aug-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is Management's Discussion and Analysis of significant factors that have affected liquidity, capital resources and results of operations during the three and six months ended June 30, 2013 and 2012. The following also updates information as to our financial condition provided in our 2012 Annual Report on Form 10-K. Statements in the following discussion may be forward-looking and involve risk and uncertainty (see "Forward Looking Statements"). The following discussion should also be read in conjunction with our condensed financial statements and the notes thereto.

General Overview

We are an independent energy company focused on the acquisition and development of oil and gas producing properties in the continental United States. Our business is currently focused in the Rocky Mountain region (specifically the Williston Basin of North Dakota and Montana), Texas and Louisiana, however, we do not intend to limit our focus to these geographic areas. We continue to focus on increasing production, reserves, revenues and cash flow from operations while managing our level of debt.

We currently explore for and produce oil and gas through a non-operator business model; however, we may operate oil and gas properties for our own account and may expand our operations to other areas. As a non-operator, we rely on our operating partners to propose, permit and manage wells. Before a well is drilled, the operator is required to provide all oil and gas interest owners in the designated well the opportunity to participate in the drilling costs and revenues of the well on a pro-rata basis. After the well is completed, our operating partners also transport, market and account for all production.

We are also involved in the exploration for and development of minerals (molybdenum) through our ownership of the Mt. Emmons molybdenum project in Colorado. Our carrying capitalized dollar amounts in each of these areas at June 30, 2013 and December 31, 2012 were as follows:

                                                     (In thousands)
                                              June 30,       December 31,
                                                2013             2012
            Unproved oil and gas properties   $   9,194     $        9,169
            Proved oil and gas properties        71,397             76,465
            Undeveloped mining properties        20,739             20,739
                                              $ 101,330     $      106,373

Oil and Gas Activities

We have active agreements with several oil and gas exploration and production companies. Our working interest varies by project (and may vary over time depending on the terms of the relevant agreement), but typically ranges from approximately 1% to 62%. These projects may result in numerous wells being drilled over the next three to five years. We are also actively pursuing the potential acquisition of additional exploration, development or production stage oil and gas properties or companies. The following table details our interests in producing wells as of June 30, 2013 and 2012.

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                                                           June 30,
                                                  2013                  2012
                                            Gross     Net (1)     Gross     Net (1)
Williston Basin:
Productive wells                              74.00      11.02      32.00       9.82
Wells being drilled or awaiting completion    10.00       0.18       3.00       0.25

Gulf Coast/South Texas:
Productive wells                               3.00       0.56       3.00       0.56
Wells being drilled or awaiting completion     1.00       0.20       1.00       0.20

Eagle Ford/Buda:
Productive wells                               4.00       1.20       2.00       0.60
Wells being drilled or awaiting completion       --         --       1.00       0.30

Austin Chalk:
Productive wells                              11.00       2.98      11.00       2.98
Wells being drilled or awaiting completion       --         --         --         --

Total:
Productive wells                              92.00      15.76      48.00      13.96
Wells being drilled or awaiting completion    11.00       0.38       5.00       0.75

(1) Net working interests may vary over time under the terms of the applicable contracts.

Williston Basin, North Dakota

Rough Rider Prospect. We participate in fifteen 1,280 acre drilling units in the Rough Rider prospect with Brigham Oil & Gas, L.P. ("Brigham"), a subsidiary of Statoil. From August 24, 2009 to June 30, 2013, we have drilled and completed 20 gross Bakken formation wells (7.31 net) and one gross Three Forks formation well (0.18 net) under the Drilling Participation Agreement with Brigham.

At June 30, 2013, two additional gross wells (0.09 net) had been drilled and were awaiting completion. Our net investment in the Rough Rider prospect wells was $1.6 million for the six months ended June 30, 2013. Two additional gross wells (0.05 net) are expected to be drilled during the balance of 2013. Brigham operates all of the wells.

Yellowstone and SEHR Prospects. We participate in twenty-seven gross 1,280 acre spacing units in the Yellowstone and SEHR prospects with Zavanna, LLC ("Zavanna"). Through June 30, 2013, we have drilled and completed 21 gross Bakken formation wells (2.87 net) and two gross Three Forks formation well (0.18 net) in these prospects. The wells are operated by Zavanna (17 gross, 2.86 net) Emerald Oil, Inc. (3 gross, 0.05 net), Murex Petroleum (2 gross, 0.13 net) and Slawson Exploration Company, Inc. (1 gross, 0.01 net). At June 30, 2013, six additional gross wells (0.08 net) had been spud and were in progress.

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During the first six months of 2013, we completed six gross wells (0.27 net) in the Yellowstone and SEHR prospects. Our net investment in the Yellowstone and SEHR prospect wells was $3.9 million during the six months ended June 30, 2013.

Bakken/Three Forks Asset Package. Under the Bakken/Three Forks asset package we acquired in 2012, we participate in 23 drilling units in McKenzie, Williams and Mountrail Counties of North Dakota. At June 30, 2013, there were 30 gross producing wells (0.48 net) in these drilling units. All acreage is currently held by production and produces approximately 47 BOE/day net to the Company.

During the first six months of 2013, we completed one gross well (0.43 net) on this acreage and two additional gross wells (0.01 net) were drilled and awaiting completion. Our net investment in wells under the drilling units in this program was $529,000 during the six months ended June 30, 2013.

U.S. Gulf Coast (Onshore) / South Texas

We participate with three different operators in the U.S. Gulf Coast (onshore). At June 30, 2013, we had three gross producing wells (0.56 net) in this region. Our net investment in Gulf Coast / South Texas wells and properties was $53,000 during the six months ended June 30, 2013.

Eagle Ford Shale and Buda Limestone

We participate in in the Leona River and Booth-Tortuga Eagle Ford/Buda prospects with Crimson Exploration Inc. ("Crimson"). During the six months ended June 30, 2013, we drilled and completed the Beeler 2H Buda limestone test well (0.30 net) in the Booth-Tortuga prospect. Our net investment in this well and lease acquisition costs in the prospects during the first six months of 2013 was $1.3 million.

2013 Production Results

The following table provides a regional summary of our production during the
first six months of 2013:

                          Williston Basin     Gulf Coast /    Eagle Ford /    Austin Chalk      Total
                                              South Texas         Buda
First Six Months of 2013
Production
Oil (Bbl)                        147,596             864           12,697            4,628       165,785
Gas (Mcf)                         66,452          98,757            8,710            2,475       176,394
NGLs (Bbl)                         3,883              88              182              363         4,516
Equivalent (BOE)                 162,554          17,412           14,331            5,403       199,700
Avg. Daily Equivalent                898              96               79               30         1,103
(BOE/d)
Relative percentage                  81%              9%               7%               3%          100%

Mount Emmons Molybdenum Project

On April 22, 2013, the Company received a letter from the U.S. Forest Service ("USFS") notifying the Company that the USFS has completed a review of the Mine Plan of Operations ("MPO" or the "Plan") for the Mount Emmons Molybdenum Project in Colorado (the "Project") and that it has determined that the MPO "does contain sufficient information and clarity to form the basis for a proposed action to initiate scoping and analysis under the National Environmental Policy Act ('NEPA')." The letter also states, "U.S. Energy has met the requirements of the Reality Check provision granting conditional water rights for the Mt. Emmons Molybdenum Project by filing the Plan for the Mt. Emmons

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Mine with the USFS. No other special use permits or rights-of-way for the water facilities are required because they are addressed in the Plan." The MPO provides an in-depth description of the proposed construction, mining, processing, and reclamation operations for the Project. The Company has initiated scoping analysis of the MPO with the USFS and anticipates that such work will continue through the balance of 2013.

Additional Comparative Data

The following table provides information regarding selected production and
financial information for the quarter ended June 30, 2013 and the immediately
preceding three quarters.

                                                              For the Three Months Ended
                                           June 30,       March 31,       December 31,       September 30,
                                             2013           2013              2012               2012
                                                      (in Thousands, except for production data)
Production (BOE)                             101,026          98,674            107,823             106,060
Oil, gas and NGL production revenue        $   7,915     $     7,879     $        8,039     $         7,639
Unrealized and realized derivative gain
(loss)                                     $     347     $      (602 )   $           (5 )   $          (466 )
Lease operating expense                    $   1,765     $     1,966     $        1,969     $         1,692
Production taxes                           $     800     $       833     $          853     $           822
DD&A                                       $   3,213     $     3,461     $        3,812     $         3,410
General and administrative                 $   1,319     $     1,307     $        1,497     $         1,659
Mineral holding costs                      $     297     $       227     $          205     $           400
Water treatment plant                      $     403     $       417     $          424     $           609
Income (loss) from continuing operations   $     367     $    (6,130 )   $       (5,932 )   $        (2,709 )

Results of Operations

Three Months Ended June 30, 2013 compared to Three Months Ended June 30, 2012

During the three months ended June 30, 2013, we recorded net income after taxes of $573,000, or $0.02 per share basic and diluted as compared to a net loss after taxes of $990,000, or $0.04 per share basic and diluted during the same period of 2012. Significant components of the change in operating revenues and results of operations for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 are as follows:

Oil and Gas Operations. Oil and gas operations produced operating income of $2.1 million during the quarter ended June 30, 2013 as compared to operating income, before impairment, of $1.9 million during the quarter ended June 30, 2012. The following table summarizes production volumes, average sales prices and operating revenues for the three months ended June 30, 2013 and 2012:

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                                                           Three Months Ended
                                                                June 30,               Increase
                                                           2013          2012         (Decrease)
Production volumes
Oil (Bbls)                                                  84,412        99,830          (15,418 )
Natural gas (Mcf)                                           88,296        95,299           (7,003 )
Natural gas liquids (Bbls)                                   1,898         3,070           (1,173 )
Equivalent (BOE)                                           101,026       118,783          (17,758 )
Avg. Daily Equivalent (BOE/d)                                1,110         1,305             (195 )
Average sales prices
Oil (per Bbl)                                            $   88.38     $   81.22             7.16
Natural gas (per Mcf)                                         4.28          2.92             1.36
Natural gas liquids (per Bbl)                                40.67         44.29            (3.62 )
Equivalent (BOE)                                             78.35         71.74             6.60
Operating revenues (in thousands)
Oil                                                      $   7,460     $   8,108     $       (648 )
Natural gas                                                    378           278              100
Natural gas liquids                                             77           136              (59 )
Total operating revenue                                      7,915         8,522             (607 )
Lease operating expense                                     (1,765 )      (1,630 )           (135 )
Production taxes                                              (800 )        (928 )            128
Impairment                                                       -          (523 )            523
Income before depreciation, depletion and amortization       5,350         5,441              (91 )
Depreciation, depletion and amortization                    (3,213 )      (4,030 )            817
Income                                                   $   2,137     $   1,411     $        726

During the three months ended June 30, 2013, we produced 101,026 barrels of oil equivalent (BOE), or an average of 1,110 BOE/day. Portions of our natural gas production are sent to gas processing plants to extract from the gas various natural gas liquids ("NGLs") that are sold separately from the remaining natural gas. We sell some of our gas before processing and some after processing but in both cases receive revenues based on a share of post-processing proceeds from plant sales of the extracted NGLs and the remaining natural gas. In the table above, our share of processing costs is classified as lease operating expenses.

We recognized $7.9 million in revenues during the three months ended June 30, 2013 as compared to $8.5 million during the same period of the prior year. This $607,000 decrease in revenue is primarily due to lower sales volumes in 2013 when compared to 2012 but was partially offset by higher average sales prices for oil and natural gas in 2013. Revenue from oil sales was lower in the three months ended June 30, 2013 when compared to the same period in 2012, primarily due to production declines from wells in the Williston Basin.

Our average net realized price (operating revenue per BOE) for the three months ended June 30, 2013 was $78.35 per BOE compared with $71.74 for the same period in 2012. The increase in our equivalent realized price for production corresponds with higher average oil and natural gas prices in 2013 when compared with 2012. Due to takeaway constraints, the discount, or differential, for oil prices in the Williston Basin has ranged from $3.00 to $12.00 per barrel during the first six months of 2013. Until additional takeaway capacity is available, we expect this differential to continue (with the amount of the differential varying over time) and that our oil sales revenue will be affected by lower realized prices.

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Lease operating expense of $1.8 million for the three months ended June 30, 2013 was comprised of $1.5 million in lease operating expense and $267,000 in workover expense. The $135,000 increase in total lease operating expense in 2013 as compared to 2012 is primarily a result of an increase in net producing wells.

During the three months ended June 30, 2012, the Company recorded a proved property impairment of $523,000 related to its oil and gas assets. The impairment was primarily due to a decline in the price of natural gas. There were no proved property impairments recorded during the three months ended June 30, 2013.

Our depletion, depreciation and amortization (DD&A) rate for the three months ended June 30, 2013 was $31.80 per BOE compared to $33.92 per BOE for the same period in 2012. Our DD&A rate can also fluctuate as a result of increases 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.

During the balance of 2013 we anticipate completing wells that were drilled during the first and second quarters of 2013 as well as drilling and completing new wells. We also anticipate that our production rates will remain relatively stable as a result of these activities. Various factors, including extensive workover costs on existing wells, lower commodity prices, commodity price differentials, cost overruns on projected drilling projects, unsuccessful wells or other development activities and/or faster than expected declines in production from existing wells, would have a negative effect on production, cash flows and earnings from the oil and gas segment and could cause actual results to differ materially from those we expect.

Mt. Emmons and Water Treatment Plant Operations. We recorded $403,000 in costs and expenses for the water treatment plant and $297,000 for holding costs for the Mt. Emmons molybdenum property during the three months ended June 30, 2013. During the three months ended June 30, 2012, we recorded $436,000 in operating costs related to the water treatment plant and $206,000 in holding costs.

General and Administrative. General and administrative expenses decreased by $441,000 during the three months ended June 30, 2013 as compared to general and administrative expenses for the three months ended June 30, 2012. Lower general and administrative costs in 2013 are primarily a result of reductions of $151,000 in compensation expense, $119,000 in contract services, $83,000 in depreciation expense, $53,000 in travel costs and $28,000 in bank charges.

Other income and expenses. We recognized an unrealized and realized derivative gain of $347,000 in the second quarter of 2013 compared to a gain of $1.8 million for the same period in 2012. The 2013 amount includes a gain on unrealized changes in the fair value of our commodity derivative contracts of $328,000 and realized cash settlement gains on derivatives of $19,000.

Gain on the sale of assets increased to $14,000 during the quarter ended June 30, 2013 from $0 during the quarter ended June 30, 2012. We recorded equity losses of $26,000 and $91,000 from the investment in Standard Steam Trust LLC ("SST") during the quarters ended June 30, 2013 and 2012, respectively. Equity losses from the investment in SST are expected to continue until such time as SST properties are sold, equity losses reduce our investment to zero or we sell the investment.

Gain on the sale of marketable securities (shares of Sutter Gold Mining) decreased to $0 during the quarter ended June 30, 2013 from $7,000 during the quarter ended June 30, 2012.

Interest income was $1,000 during the quarters ended June 30, 2013 and 2012.

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As a result of higher average debt balances, interest expense increased to $79,000 during the quarter ended June 30, 2013 from $36,000 during the quarter ended June 30, 2012.

Discontinued operations. We recorded income of $206,000, net of taxes from Remington Village during the quarter ended June 30, 2013 and income of $26,000, net of taxes for the quarter ended June 30, 2012. The increase in income when comparing the quarter ended June 30, 2013 to the quarter ended June 30, 2012 is primarily a result of lower contract services expenses in 2013. On March 5, 2013, we entered into a Purchase and Sale Agreement ("PSA") with an unrelated third party to sell the Remington Village apartment complex for $15.0 million. The transaction was initially scheduled to close in May 2013 and is currently scheduled to close in September 2013.

Six Months Ended June 30, 2013 compared to Six Months Ended June 30, 2012

During the six months ended June 30, 2013, we recorded a net loss after taxes of $5.3 million, or $0.19 per share basic and diluted as compared to a net loss after taxes of $1.4 million, or $0.05 per share basic and diluted during the same period of 2012. Significant components of the change in operating revenues and results of operations for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 are as follows:

Oil and Gas Operations. Before impairment, oil and gas operations produced operating income of $3.8 million during the six months ended June 30, 2013 as compared to operating income of $3.7 million during the six months ended June 30, 2012. The following table summarizes production volumes, average sales prices and operating revenues for the six months ended June 30, 2013 and 2012:

                                                            Six Months Ended
                                                                June 30,               Increase
                                                           2013          2012         (Decrease)
Production volumes
Oil (Bbls)                                                 165,785       192,412          (26,627 )
Natural gas (Mcf)                                          176,394       185,071           (8,677 )
Natural gas liquids (Bbls)                                   4,516         7,563           (3,047 )
Equivalent (BOE)                                           199,700       230,820          (31,120 )
Avg. Daily Equivalent (BOE/d)                                1,103         1,268             (165 )
Average sales prices
Oil (per Bbl)                                            $   89.28     $   82.77     $       6.52
Natural gas (per Mcf)                                         4.53          2.98             1.55
Natural gas liquids (per Bbl)                                42.78         50.38            (7.60 )
Equivalent (BOE)                                             79.09         73.03             6.06
Operating revenues (in thousands)
Oil                                                      $  14,802     $  15,925     $     (1,123 )
Natural gas                                                    799           551              248
Natural gas liquids                                            193           381             (188 )
Total operating revenue                                     15,794        16,857           (1,063 )
Lease operating expense                                     (3,731 )      (3,640 )            (91 )
Production taxes                                            (1,633 )      (1,811 )            178
Impairment                                                  (5,828 )        (523 )         (5,305 )
Income before depreciation, depletion and amortization       4,602        10,883           (6,281 )
Depreciation, depletion and amortization                    (6,674 )      (7,671 )            997
Income                                                   $  (2,072 )   $   3,212     $     (5,284 )

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During the six months ended June 30, 2013, we produced 199,700 barrels of oil equivalent (BOE), or an average of 1,103 BOE/day. Portions of our natural gas production are sent to gas processing plants to extract from the gas various natural gas liquids ("NGLs") that are sold separately from the remaining natural gas. We sell some of our gas before processing and some after processing but in both cases receive revenues based on a share of post-processing proceeds from plant sales of the extracted NGLs and the remaining natural gas. In the table above, our share of processing costs is classified as lease operating expenses.

We recognized $15.8 million in revenues during the six months ended June 30, 2013 as compared to $16.9 million during the same period of the prior year. This $1.1 million decrease in revenue is primarily due to lower sales volumes in 2013 when compared to 2012 but was partially offset by higher average sales prices for oil and natural gas in 2013. Revenue from oil sales was lower in the six months ended June 30, 2013 when compared to the same period in 2012, primarily due to production declines from wells in the Williston Basin.

Our average net realized price (operating revenue per BOE) for the six months ended June 30, 2013 was $79.09 per BOE compared with $73.03 for the same period in 2012. The increase in our equivalent realized price for production corresponds with higher average oil and natural gas prices in 2013 when compared with 2012. Due to takeaway constraints, the discount, or differential, for oil prices in the Williston Basin has ranged from $3.00 to $12.00 per barrel during the first six months of 2013. Until additional takeaway capacity is available, we expect this differential to continue (with the amount of the differential varying over time) and that our oil sales revenue will be affected by lower realized prices.

Lease operating expense of $3.7 million for the six months ended June 30, 2013 was comprised of $3.1 million in lease operating expense and $577,000 in workover expense. The $91,000 increase in total lease operating expense in 2013 as compared to 2012 is primarily a result of an increase in net producing wells.

During the six months ended June 30, 2013, the Company recorded a proved property impairment of $5.8 million related to its oil and gas assets. The impairment was primarily due to a decline in the price of oil, additional capitalized costs and changes in production. During the six months ended June 30, 2012, the Company recorded a proved property impairment of $523,000, primarily due to a decline in natural gas prices.

Our depletion, depreciation and amortization (DD&A) rate for the six months ended June 30, 2013 was $33.42 per BOE compared to $33.23 per BOE for the same period in 2012. We have been impacted by higher DD&A rates related to our Williston Basin wells due to increases in drilling and completion costs for wells in this region. Our DD&A rate can also fluctuate as a result of . . .

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