U.S. Energy Corp. (NASDAQ:USEG) is an independent energy company focused on the acquisition and development of oil and natural gas producing properties in the continental United States. The company has a diversified portfolio of primarily operated, producing, oil-weighted assets located across the Rockies, West Texas, South Texas, and Mid-Continent regions.

In the fiscal year ended December 31, 2023, U.S. Energy Corp. reported annual revenue of $32,316,000 and a net loss of $32,356,000. The company generated annual operating cash flow of $5,472,000 and annual free cash flow of $1,605,000.

For the first quarter of 2024, the company reported total oil and gas sales of $5,391,000, a decrease from $8,272,000 in the same period of the prior year. This decline was primarily attributable to a 29% reduction in production volumes and an 8% decrease in realized commodity prices. Oil production accounted for 62% of the company's total production, with the remainder consisting of an approximately even split of natural gas and NGLs.

The company's operations were heavily impacted by severe flooding in East Texas and the Gulf Coast during the first quarter of 2024. Nearly all the affected production was brought back online in late March, but the company expects certain assets, primarily along the Gulf Coast, to be impacted by additional heavy rains in the second quarter. Despite these weather-related challenges, U.S. Energy Corp. was able to maintain strong cost control, with lease operating expenses decreasing by 28% compared to the first quarter of 2023.

Looking ahead, the company plans to continue deploying capital efficiently on supporting the production profile of its existing asset base, executing its share repurchase program, and maintaining balance sheet integrity. U.S. Energy Corp. believes it is well-positioned to navigate the evolving energy landscape, with a focus on operational efficiency, financial discipline, and responsible resource management.

Business Overview

U.S. Energy Corp. has a diversified portfolio of primarily operated, producing, oil-weighted assets located across the Rockies, West Texas, South Texas, and Mid-Continent regions. The company's principal properties and operations are in the Rockies region (Montana, Wyoming, and North Dakota), the Mid-Continent region (Oklahoma, Kansas, and North and East Texas), and the West Texas, South Texas, and Gulf Coast region.

Historically, the company has explored for and produced oil and natural gas through a non-operator business model. However, in 2020, U.S. Energy Corp. acquired operated properties in North Dakota, New Mexico, Wyoming, and the Texas Gulf Coast, and in January 2022, the company closed the acquisitions of certain oil and gas properties from three separate sellers, representing a diversified portfolio of primarily operated, producing, oil-weighted assets.

During the fourth quarter of 2023, the company sold virtually all of its non-operated properties, and as of December 31, 2023, U.S. Energy Corp. operated 99% of its reserves.

Financials

For the first quarter of 2024, U.S. Energy Corp. reported total oil and gas sales of $5,391,000, a decrease from $8,272,000 in the same period of the prior year. This decline was primarily attributable to a 29% reduction in production volumes and an 8% decrease in realized commodity prices.

Oil production accounted for 62% of the company's total production, with the remainder consisting of an approximately even split of natural gas and NGLs. The decrease in production was largely due to the divestiture of substantially all of the company's non-operated properties in the fourth quarter of 2023, as well as temporary weather-related events, such as flooding and winter weather, and natural production declines.

Lease operating expenses for the first quarter of 2024 were $3,186,000, or $29.02 per BOE, a decrease of 28% compared to the first quarter of 2023. This reduction was primarily due to fewer one-time workovers, as the company continues to focus on increasing operating efficiency.

General and administrative expenses for the first quarter of 2024 were $2,206,000, relatively flat compared to the same period in the prior year. The company reported a net loss of $9,537,000 for the first quarter of 2024, largely attributable to a $5,419,000 impairment of oil and natural gas properties due to the impact of lower commodity prices on the company's reserve report and the temporary shut-in of certain wells.

Liquidity

As of March 31, 2024, U.S. Energy Corp. had $2,006,000 in cash and cash equivalents and $5,000,000 in outstanding debt on its $20 million revolving credit facility. The company plans to continue allocating a portion of its free cash flow to debt reduction and maintaining the flexibility to react to market conditions.

For the full year 2024, the company has a capital budget of $2.4 million, which is primarily focused on return to production workovers, repairs and maintenance, plugging and abandonment costs, and similar activities to support its asset base. U.S. Energy Corp. expects to fund these expenditures primarily through operating cash flows, and it has access to its credit facility and equity markets if additional funding is required.

Risks and Challenges

U.S. Energy Corp. faces several risks and challenges, including:

1. Commodity price volatility: The company's results of operations and cash flows are affected by changes in market prices for crude oil and natural gas, which can be highly volatile.

2. Weather-related disruptions: The company's operations have been and may continue to be disrupted by severe weather events, such as the flooding experienced in the first quarter of 2024, which can impact production and lead to increased costs.

3. Regulatory and environmental risks: The company's operations are subject to various federal, state, and local laws and regulations governing the exploration, development, production, and transportation of oil and natural gas, as well as environmental protection.

4. Asset retirement obligations: The company has significant asset retirement obligations associated with the future plugging and abandonment of its proved properties, which could be subject to changes in cost estimates and timing.

5. Competition: The company operates in a highly competitive industry, which may impact its ability to acquire and develop attractive oil and gas properties.

Outlook

Moving forward, U.S. Energy Corp. plans to continue deploying its capital in a conservative and strategic manner, focusing on supporting the production profile of its existing asset base, executing its share repurchase program, and maintaining balance sheet integrity. The company also remains dedicated to capitalizing on current market conditions and leveraging its strengths to deliver continued growth and shareholder returns.

U.S. Energy Corp. believes it is well-positioned to navigate the evolving energy landscape, with a focus on operational efficiency, financial discipline, and responsible resource management. The company is evaluating a number of organic growth initiatives, including workovers and recompletions, which it believes offer more attractive returns than traditional upstream M&A opportunities in the current market environment.

Conclusion

U.S. Energy Corp. has demonstrated operational resilience and financial discipline in the face of challenging market conditions, including the severe weather events that impacted its operations in the first quarter of 2024. The company's diversified portfolio of primarily operated, producing, oil-weighted assets, coupled with its commitment to cost management and prudent capital allocation, position it well to continue generating steady, high-margin cash flow and creating value for shareholders.

As U.S. Energy Corp. navigates the evolving energy landscape, the company's focus on operational efficiency, balance sheet integrity, and responsible resource management will be key to its success. With a solid foundation in place and a strategic outlook aimed at unlocking greater equity value, the company appears well-equipped to capitalize on the opportunities that lie ahead.