On December 20, 2011 U.S. Energy Corp. (NASDAQ: USEG) announced a 2012 capital expenditure budget of $48.1 million and the sale of undeveloped Bakken acreage. The company will spend approximately $24.9 million (52%) of this budget drilling its Leona River and Booth-Tortuga prospects in the Eagle Ford shale of South Texas. Crimson Exploration (NASDAQ: CXPO) is the operator of both Eagle Ford prospects. The balance of USEG’s budget will be spent on its Rough Rider and Yellowstone / SE HR prospects in the Bakken shale ($18.4 million, or 38% million) and in the San Joaquin Basin of California ($4.8 million, or 10%).

USEG announced the sale of 75% of its undeveloped acres at Rough Rider to Brigham Exploration (Statoil ASA, NYSE: STO) for $13.7 million. To date, USEG and Brigham drilled 20 total wells through a drilling partnership agreement, 18 of which are currently producing at a rate of 781 BOEPD net. USEG will retain the remaining 25% of the undeveloped acreage and its original working interest in its 20 developed wells. Brigham has agreed to drill three gross wells at Rough Rider in 2012 and three gross wells in 2013.

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In a separate transaction, USEG entered into an option agreement to sell 75% of its undeveloped Yellowstone and SE HR prospects under its Zavanna drilling partnership. The Zavanna program is located in McKenzie County, North Dakota, and to date, the partnership drilled 10 gross wells. If the option is exercised, USEG will retain working interests in its wells which range from 6% to 31%. Of the 10 wells, five wells are currently producing, four have drilled to TD, and one is currently drilling.
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OAG360 Comments:

USEG Shifting Focus from Bakken to Eagle Ford

USEG’s two acreage sales in the Bakken will increase the company’s ability to allocate funds to its Eagle Ford program 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. In 2012, the company will spend $24.9 million participating in 12 gross (3.6 net) wells in the Eagle Ford, an increase from only one gross (0.3 net) in 2011. By contrast, USEG’s Bakken drilling program will decline from six gross (1.31 net) in 2011 to 14 gross (1.1 net) in 2012.

OAG360 notes some investors will question USEG’s decision to sell the majority of its Bakken interests. To date, the company participated in the drilling and completion of 18 gross wells with an average initial gross production rate of 2,411 BOEPD in its Rough Rider prospect with Brigham. OAG360’s observation is that through 2011 the expectations for U.S. Energy’s participation in new Bakken wells may not have fully materialized, particularly given Brigham’s drilling priorities on non-U.S. Energy acreage. Under the presumption that the bulk of Brigham’s operations team will continue to execute that company’s overall Bakken drilling strategy for Statoil, it appears U.S. Energy management believes growth opportunities for the company are better by aligning their capital expenditure program with Crimson Exploration in the Eagle Ford.

The early results on its wells with Zavanna have been strong. The Cheryl 14-23 #1H (39% WI) IP’d at 1,503 BOEPD gross and the Olson 8-5 #1H well (30% WI) IP’d at 1,840 BOEPD gross. It’s possible in both cases that USEG is getting good value for its Bakken acreage based on the strong initial results of the Bakken wells, and has chosen to capitalize on these successes by monetizing a portion of the acreage to help develop its Eagle Ford prospects. While OAG360 doesn’t have enough data to directly value USEG’s acreage sale to Brigham based on information provided to the public, Statoil paid $11,325 per acre when it purchased Brigham and this acreage included the Rough Rider program Brigham participated in with USEG. If USEG sold its Bakken acreage to Brigham at this valuation, it would be $475 per acre less than the $11,800 per acre Kodiak (NYSE: KOG) paid for Bakken acreage in its transaction with North Plains Energy, LLC and Mercuria Bakken, LLC in October.

Note: Statoil paid $4.7 billion (enterprise value) to purchase Brigham. The acquisition included 415,000 net acres, 375,000 of which were Bakken, 40,000 of which were outside of the Bakken.

USEG Bakken Asset Map: 

Source: USEG Corporate Presentation

Operations Update:

Rough Rider Program: Over the near-term, the development of USEG’s Rough Rider acreage will remain on schedule. The company’s next two Bakken wells to be completed are the Kalil 25-36 #2H (infill) (27% WI) well which is currently being frac’d and the Lloyd 34-3 #2H (infill) (8% WI) well which will be completed following the aforementioned Kalil well. Production averaged 781 BOEPD net during the month of November under this program and shouldn’t change markedly over the near-term as USEG retained all of its production in the Brigham sale.

Yellowstone and SE HR Programs:

The Olson 8-5 #1H well (30% WI) was completed with 35 fracture stimulation stages and had an early 24-hour flow back rate of 1,840 BOEPD gross (87% oil) on a restricted choke during drill-out of the plugs. Under the Precision Drilling rig program, Zavanna is currently drilling the Larsen 32-29 #1H (27% WI) in the horizontal leg of the wellbore and expects to continue to drill one well per month through June 2012. Zavanna anticipates fracing 10 gross wells through August of next year. The Company averaged 271 BOEPD net during the month of November under this program.

Eagle Ford Shale, South Texas – Leona River / Booth-Tortuga Programs:

The initial well on the Booth Tortuga prospect, the Beeler #1H well (30% WI), is currently drilling in the horizontal leg of the wellbore. The well is planned to be completed with approximately 18 fracture stimulation stages. Upon completing the drilling of the Beeler well, the drilling rig is scheduled to move to the Leona River acreage block to drill the KM Ranch #2H well. The Company averaged 50 BOEPD net during the month of November from its Austin Chalk and Eagle Ford production under this program.


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