General Overview

U.S. Energy Corp. was incorporated in Wyoming in 1966 and reincorporated to Delaware in 2022. It is an independent energy company focused on acquiring and developing oil and gas properties in the continental United States, primarily in the Rockies, Mid-Continent, West Texas, South Texas, and Gulf Coast regions.

The company has transitioned to an operated business model, acquiring operated properties in North Dakota, New Mexico, Wyoming, and Texas over the past few years. In 2023, U.S. Energy sold most of its non-operated properties and now operates 99% of its reserves.

The business strategy is to enhance the value of acquired assets to increase production and reserves. The company plans to deploy capital conservatively, pursue value-enhancing transactions, and evaluate strategic opportunities to enhance shareholder value.

Material Developments

Divestment of Properties

In Q4 2023, the company divested non-operated interests in 152 wells and overriding royalty interests in 7 wells for $7 million in net proceeds. The divestitures did not significantly impact reserves or the full cost pool depletion rate. Proceeds were recorded to the full cost pool and used to repay debt.

Derivative Activities

In September 2023 and April 2024, the company entered into crude oil swap agreements at weighted average prices ranging from $73.71/barrel to $86.64/barrel for 2023-2025 production.

Dividends

The company paid quarterly dividends of $0.0225 per share in Q1 and Q2 2023 totaling $1.2 million but suspended dividends in Q3 2023.

Stock Repurchase Program

In March 2024, the Board extended the $5 million share repurchase program through June 2025. In Q1 2024, the company repurchased 318,200 shares for $337 thousand, leaving $4.2 million remaining under the program.

Full Cost Pool Ceiling Test

In Q1 2024, the company recorded a $5.4 million ceiling test write-down due to lower crude oil and gas prices and reserves revisions for shut-in wells and production decline updates. Additional write-downs could occur depending on commodity prices, price differentials, operating costs, reserve revisions, and capital spending.

Plan of Operations and Strategy

The company plans to continue seeking opportunities in the oil and gas sector including working over and stimulating inactive wells, participating in exploration and development projects with partners, acquiring companies and assets, and performing economic workovers to return idle wells to production.

Key elements of the business strategy include:

• Deploy capital conservatively and review liquidity bolstering opportunities
• Evaluate and pursue value-enhancing transactions

Critical Accounting Policies and Estimates

Critical accounting estimates include assumptions and estimates used in the ceiling test calculations for oil and gas properties. These include commodity prices, discount rates, operating costs, reserve volumes, and estimated future development costs. Changes in these estimates can result in ceiling test impairments.

Results of Operations

Q1 2024 vs. Q1 2023

In Q1 2024, U.S. Energy recorded a $9.5 million net loss due to a $5.4 million ceiling test impairment and lower revenue from decreased production volumes and realized commodity prices.

Revenue

• Oil and gas revenue decreased 35% or $2.9 million due to a 29% decrease in production quantities and an 8% decrease in realized prices per BOE
• Q1 2024 production was 109,800 BOE (62% oil/38% gas) compared to 155,316 BOE (59% oil/41% gas) in Q1 2023

Expenses

• Total production costs decreased 29% or $1.5 million in line with the production decrease
• DD&A decreased $0.2 million or 8% due to lower production
• G&A expenses decreased 20% or $0.6 million primarily due to lower stock-based compensation

Other Income/Expenses

• Recognized $1.4 million in commodity derivative losses in Q1 2024 compared to $0.9 million in gains in Q1 2023 due to changes in fair values and contract settlements
• Lower interest expense due to decreased debt balance

Liquidity and Capital Resources

U.S. Energy believes it has sufficient liquidity to execute its business plan and meet current obligations. The company has a $2.4 million 2024 capital budget focused on workovers, repairs, regulatory requirements, etc. Other key cash needs include $0.2 million in lease commitments and $0.5 million in interest expense. Capital expenditures are expected to be funded by operating cash flows, with the credit facility and equity markets as additional sources if needed.

In Q1 2024, capital expenditures were funded via cash flows and cash on hand. Future sources could also include credit facility borrowings and new equity offerings if operating cash flows are insufficient.

Cash Flows

In Q1 2024, operating activities used $0.6 million cash compared to providing $0.2 million in Q1 2023. This was mainly due to lower cash receipts from reduced production and timing of payment for Q4 2023 accrued liabilities. Investing activities used $0.2 million in Q1 2024 compared to $1.4 million in Q1 2023, with the difference primarily related to lower capital expenditures year-over-year. Financing activities used $0.6 million in Q1 2024 largely for share repurchases compared to $0.9 million used in Q1 2023 mostly for dividend payments.