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On January 26, 2012, U.S. Energy Corp. (NASDAQ: USEG) announced that it completed the sale of an undivided 75% of its undeveloped leasehold in McKenzie County, North Dakota to GeoResources, Inc. (NASDAQ: GEOI) and Yuma Exploration and Production Company, Inc. (private company) for $16.7 million. The sale concerns two of USEG’s prospects in the Bakken shale, Yellowstone and SE HR (see map below), and were sold on January 20 and January24, respectively. USEG retained the remaining 25% interest in the undeveloped acreage, as well as its working interest and production in ten gross (2.3 net) wells drilled to date. Of these ten wells, five are producing, while the company expects the remaining five wells to be completed by mid-year 2012.

OAG360 Comments:

Valuation

The sale concerns leasehold that is part of USEG’s drilling partnership in the Bakken shale with Zavanna LLC (private company) which, prior to this sale, covered 34,560 gross acres (19.28% net to USEG) in two prospects, Yellowstone and SE HR. To date, the partnership has drilled ten wells gross in both prospects, which would cover approximately 12,800 gross acres assuming 1,280 acre spacing. Based on our spacing assumption, the partnership owned 21,760 gross undeveloped acres (4,195 net to USEG) prior to the sale, meaning USEG sold 75% of its 4,195 net undeveloped acres (3,146 acres) for $16.7 million or $5,308 per acre. OAG360 notes that the company originally purchased the acreage from Zavanna in December, 2010 for $11.0 million or $1,651 per acre.

Map of USEG’s Acreage with Zavanna in Yellowstone and SE HR

USEG Shifting Focus from Bakken to Eagle Ford, San Joaquin Basin

In 2011, more than 70% of USEG’s budget was spent developing its Bakken acreage, with the remainder split between its prospects in the Eagle Ford, San Joaquin Basin and Southeast Colorado. The sale of 75% of its undeveloped acreage with Zavanna, paired with the previously announced deal on December 20, 2011 where USEG sold 75% of its undeveloped acres in its Rough Rider prospect in the Bakken shale to Brigham Exploration (Statoil ASA, NYSE: STO) for $13.7 million will allow the company to allocate more capital to its Eagle Ford and San Joaquin Basin plays. With these two sales, the ccompany has realized $30.4 million in sale proceeds which will strengthen the company’s balance sheet and help fund part of the 2012 capital budget.

On December 20, 2011 the company announced that it will spend 38% or $18.4 million of its $48.1 million 2012 capital expenditures budget on its assets in the Bakken. At that time, USEG planned to spend the remaining 62% of its budget on its Eagle Ford shale prospects, Leona River and Booth-Tortuga prospects ($24.9 million), and on its assets in the San Joaquin Basin of California ($4.8 million). With today’s announcement we would expect the percentage of capital allocation in the 2012 budget to shift even more to the company’s Eagle Ford and San Joaquin assets.

An interesting note concerning the San Joaquin Basin where USEG owns 2,400 net acres: On January 19, 2012, Harold Hamm, the well-known wildcatter and CEO of Continental Resources, said in an interview with Businessweek where he thought the next big U.S. oil find would be, “The San Joaquin basin…huge, huge amount of oil there.”

 


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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.