U.S. Energy Corp. (NASDAQ: USEG)  is a natural resource exploration and development company with a primary focus on the exploration and development of its oil and gas assets in the Williston Basin in North Dakota and Montana, Eagle Ford Shale play in South Texas, as well as its most recent entrance into the Woodbine play in Texas.

OAG 360 notes that the company delivered a trailing twelve months (TTM) cash margin per barrel of approximately $31.32. This metric establishes USEG as a market leader given that its TTM cash margin is approximately $2.22 per barrel higher than the average of all companies in EnerCom’s database of 89 E&P companies.

USEG’s average Q1’12 production was approximately 1,231 BOEPD, a slight increase from the company’s total 2011 production average of 1,212 BOEPD.

Over the last three years, the company may not have grown production as fast as it would have anticipated; however, USEG has replaced approximately 393% of its production, and maintained a debt to market capitalization of approximately 1% as of June 1, 2012. A few key operational catalysts to keep an eye on that OAG360 will discuss in greater detail below:

  • First well results from its seven well program targeting the Woodbine Sub-Clarksville formations in Cherokee and Anderson Counties.
  • Continued successful well results and infill well programs in the Williston Basin with its operating partners Zavanna and Brigham/Statoil.
  • Additional Eagle Ford shale well results with operating partner Crimson Exploration (NASDAQ: CXPO).
  • Mount Emmons Molybdenum project update on possible land exchange proposal.
Woodbine Sub-Clarksville 7 Project / Anderson and Cherokee Counties, Texas:

OAG360 is pleased to report the first prospect, the Richard #1 test well, spud on June 8, 2012. The drilling program includes the partnership drilling the remaining six wells back to back subsequent to the drilling of the Richard #1 test well.U.S. Energy will earn 26.5% WI (19.6% NRI) in approximately 6,766 gross (1,274 net) acres for $1.7 million, or $1,334 per acre. USEG and its partner, privately held Mueller Exploration, plan to target seven oil prospects in Anderson and Cherokee counties, six of which will target the Woodbine, and one will target the Sub-Clarksville. All seven wells will be drilled with the same rig utilizing a pad drilling program.OAG360 notes that if initial well results are successful, there is the potential for multiple infill drilling locations, which could provide additional production growth for USEG in the second half of 2012.INDUSTRY COMPARISON: On June 5, 2012, Halcón Resources (NYSE: HK), led by former Petrohawk CEO Floyd Wilson, acquired an operated interest in 16,365 net acres of oil and gas leasehold in East Texas that the Company believes is prospective in the Woodbine formation. Net daily production from the acreage is approximately 2,000 BOPD. The initial purchase price consists of approximately $222.0 million in cash and the issuance of approximately 16.5 million shares of HK’s common stock.

Williston Basin Update:

U.S. Energy Corp. has been strategically re-aligning its assets in the Williston Basin primarily to provide value to shareholders and strengthen its balance sheet for 2012. Since the end of 2011, USEG has announced three undeveloped acreage sales, the most recent being the Daniels County, Montana sale that closed on June 8, 2012.A quick breakdown of the assets sales:

  • Daniels County, Montana Sale: USEG closed on the sale of an undivided 87.5% of its undeveloped acreage in Daniels County, Montana for $3.68 million. At year-end 2011, USEG held approximately 18,690 net acres in Daniels County valuing the deal at approximately $225 per acre. USEG retained a 12.5% WI and reserved overriding royalty interests in excess of 81%. .
  • The Zavanna Sale to GeoResources and Yuma Exploration and Production Company, Inc. (private company): This sale included 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.
  • The Brigham Exploration Sale: USEG announced the sale of 75% of its undeveloped acres at Rough Rider to Brigham Exploration (Statoil ASA, NYSE: STO) for $13.7 million.  USEG retained the remaining 25% of the undeveloped acreage and its original working interest in its 20 developed wells. Statoil/Brigham has agreed to drill three gross wells at Rough Rider in 2012 and three gross wells in 2013.
Big Well Results from the Williston:

Although USEG has been selling assets, the company is also reporting continued success on wells that are being drilled on the remaining acreage through its partnerships with Zavanna, Statoil/Brigham , and Slawson.For the well watchers out there (and you know who you are), during Q1’12, USEG reported 24-hour initial rates that included, the company’s Skorpil 11-2 #1H well (23% WI, 18% NRI) which flowed at 1,533 BOEPD, the Kalil 25-36 #2H infill well (27% WI, 21% NRI) which flowed at 1,869 BOEPD, the Lloyd 34-3 #2H infill well (14% WI, 11% NRI) which flowed at 4,300 BOEPD, the Wang 10-3 #1H well (18% WI, 14% NRI) which flowed at 2,208 BOEPD, and the  Crescent Farms 7-6 #1H well (27% WI, 21% NRI)  which flowed at 2,437 BOEPD.

More recently, the company announced 24-hour flow back rates of 1,449 BOEPD (32% WI, 25% NRI), 1,215 BOEPD (28% WI, 21% NRI), and 1,091 BOEPD (1% WI, 0.8% NRI). In the company’s Yellowstone and SE HR program, USEG and its operator plan to drill one well per month until all unites are HBP which is anticipated by mid 2013. In Rough Rider, the company has one well that is anticipated to produce in the coming weeks, with an additional two wells planned to be drilled by Q4’12.

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We believe USEG has more than ample running room in the Williston Basin to continue to drill and prove up its position with proven operators. Cash flow from these operations can then be reinvested into its Williston Basin projects to target down spacing opportunities, as well as drilling and testing additional zones in the Three Forks formations.

Closing Thoughts on USEG:

USEG’s three acreage sales in the Bakken enhance the company’s ability to allocate funds to its Eagle Ford program, Woodbine Sub-Clarksville prospect, and other exploration projects in the U.S. 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 Bakken still provides USEG growth opportunities; however, the Woodbine Sub-Clarksville prospect and Eagle Ford provides additional near-term catalysts for the company in 2012 and into 2013. We believe the company will continue to target oil and liquids rich regions, maintain its strong balance sheet, generate strong cash margins, and partner in some of the country’s leading oil and gas plays.


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