U.S. Energy Corp. Reports Financial and Operating Results for Third Quarter 2022

MANAGEMENT COMMENTARY

“During the third quarter, U.S. Energy continued to build a strong platform for growth across a diverse portfolio of mature, stable-return producing properties,” stated Ryan Smith, Chief Executive Officer of U.S. Energy. “During the last two years, we have invested approximately $85 million to acquire nearly $175 million proved oil and gas reserves, resulting in more than $6 per share of combined PV-10 per share value. Looking ahead, we remain disciplined acquirors of proven, long-lived reserves within some of the most prolific U.S. basins, while continuing to drive strong free cash flow conversion in support of our stated return of capital priorities.”

“As expected, third quarter production levels and lease operating expense were impacted by planned, one-time maintenance costs associated with our recently acquired assets in West Texas,” continued Smith. “These non-recurring maintenance costs amounted to a one-time impact of approximately $1.3 million, or $0.05 per diluted share in the third quarter. Looking ahead to the fourth quarter, we anticipate sequential growth in production volumes, Adjusted EBITDA and free cash flow generation, with no planned maintenance in the period.”

“Entering 2023, our approach to capital allocation continues to prioritize further investments in new, producing properties, continue our quarterly cash dividend, together with a focus on maintaining a conservative net leverage profile,” noted Smith. Our team continues to demonstrate a proven ability to source, acquire, integrate, and operate a valuable portfolio of high-return assets, while providing shareholders an exciting opportunity to participate in value creation,” concluded Smith. “We are look forward to building on the momentum evident across our business as we enter this next chapter of growth.”

STRATEGIC UPDATE

U.S. Energy operates a portfolio of mature, producing assets that provide high margin free cash flow. That cash is allocated to maintaining a stable quarterly cash dividend and paying down the outstanding balance on the revolving credit facility.

The Company aims to achieve greater scale through the acquisition of high-quality, low-decline assets providing a platform for sustained profitability. As cash flows increase with new asset additions, the Company recognizes potential to develop an even more robust return of capital program.

PRODUCTION UPDATE

For the three months ended September 30, 2022, the Company produced 161,205 Boe, or an average of 1,752 Boe/d, as compared to 162,230 Boe, or an average of 1,783 Boe/d, during the prior quarter. 3Q 2022 2Q 2022Sales Volume (Total) Oil (Bbls) 95,429 107,845Gas and liquids (Mcfe) 394,660 326,308Sales volumes (Boe) 161,205 162,230
Average Daily Production (Boe/d) 1,752 1,783
Average Sales Prices Oil (Bbl) $94.81 $105.74Gas and liquids (Mcfe) $7.10 $6.55Barrel of Oil Equivalent $73.36 $83.09     

The Company benefits from a diversified production base and has focused its acquisition and operating efforts on the following asset districts. Net production from the third quarter 2022 is as follows:

Rockies / North Dakota – 512 Boe/d (79% oil)

Mid-Continent / East Texas – 695 Boe/d (28% oil)

West Texas / Gulf Coast – 545 Boe/d (80% oil)

THIRD QUARTER 2022 FINANCIAL RESULTS

U.S. Energy reported total oil and gas sales of approximately $11.8 million for the third quarter 2022, compared to $13.5 million in the second quarter 2022. The sequential decline in revenue was primarily due to planned maintenance on newly acquired wells in the West Texas district, which have been brought back online during the fourth quarter 2022. Sales from oil production represented 76% of total revenue during the quarter.

The Company recorded lease operating expense (“LOE”) of approximately $5.4 million for the third quarter 2022, compared to $4.6 million in the second quarter. LOE increased due to one-time charges incurred to maximize the operating performance of recently acquired wells in West Texas.

Severance and Ad Valorem taxes in the third quarter were approximately $0.8 million, as compared to approximately $0.9 million in the second quarter. On a percentage basis, U.S. Energy paid approximately 6.9% of total oil and natural gas sales revenue in taxes during the quarter.

Cash general and administrative expenses were approximately $2.2 million as compared to approximately $2.0 million during the prior period. The increase is primarily due to professional fees related to the registration of shares around the Company’s January 2022 acquisition.

Based on a realized price of $73.36 per Boe, the Company achieved an operating margin of $19.44 per Boe, or 27% for the quarter, down from $32.98 per Boe, or 40%, from the prior quarter, due in large part to non-recurring workover expense in recently acquired assets that resulted in delayed production and higher operating costs.

The Company reported net income of $4.1 million, or $0.16 per diluted share, which includes a $5.6 million net unrealized gain on the value of derivative contracts.

Adjusted EBITDA, excluding the impact of hedges, was $3.1 million.

HEDGING PROGRAM UPDATE

The following table reflects the hedged volumes under U.S. Energy’s commodity derivative contracts and the average fixed, floor and ceiling prices at which production is hedged for November 2022 through 2023, as of November 10, 2022: CollarsPeriod Commodity Volume
(Bbls) Floor
($ / Bbl) Ceiling
($ / Bbl)Q4 2022 Crude Oil 71,800 $59.86 $80.34Q1 2023 Crude Oil 66,200 $57.73 $76.00Q2 2023 Crude Oil 53,500 $60.00 $81.04Q3 2023 Crude Oil 52,600 $60.00 $81.04Q4 2023 Crude Oil 51,200 $60.00 $81.04 SwapsPeriod Commodity Volume
(Bbls | MMBtu) Avg Price
($/Bbl | $/MMBtu)Q4 2022 Crude Oil 9,000 $49.99Q4 2022 Natural Gas 60,000 $2.955Q1 2023 Crude Oil 3,000 $54.57Q1 2023 Natural Gas 60,000 $2.955Q2 2023 Crude Oil 3,000 $54.57       

EAST TEXAS ACQUISITION

On July 28, 2022, U.S. Energy closed on its acquisition of operated oil and gas producing properties located in Anderson and Henderson Counties, Texas, in an all-cash transaction valued at $11.8 million funded with cash on hand and borrowings under the Company’s senior secured revolving credit facility.

The bolt-on acquisition consists of low-decline wells with proved reserves of approximately 1.3 million Boe and PDP PV-10 of $22.7 million.

The acquisition is complementary to the Company’s existing East Texas assets and fits well within the corporate strategy of adding operating scale and cash flow in existing operating areas at compelling valuations.

BALANCE SHEET UPDATE

As of September 30, 2022, the Company had debt outstanding of $12.5 million on its revolving credit facility with availability of $7.5 million and a cash balance of approximately $3.1 million. The credit facility matures in 2026 and had a weighted average interest rate of 6.25% for the third quarter 2022.

RETURN OF CAPITAL PROGRAM

Consistent with the Company’s long-term return of capital strategy, the Company’s board of directors has declared a $0.0225 per share dividend for shareholders of record as of November 8, 2022. The dividend will be paid by U.S. Energy on November 22, 2022.

CONFERENCE CALL AND WEBCAST

U.S. Energy will host an investor conference call tomorrow at 8:30 a.m. Eastern Time to discuss these operating and financial results. Interested parties may join the call by dialing 1-877-407-3982 (U.S.), or 1-201-493-6780 (international), at least 15 minutes before the call begins and providing the Conference ID: 13733436. A telephonic replay will be available for fourteen days following the call by dialing 1-844-512-2921 (U.S.) or 1-412-317-6671 (international)and providing the replay PIN number: 13733436.

A webcast of the conference call will be available in the Investor Relations section of the Company’s website at www.usnrg.com. The listen to the live broadcast, go to the site at least 15 minutes prior to the scheduled start time in order to register, download and install any necessary audio software.

ABOUT U.S. ENERGY

We are a growth company focused on consolidating high-quality producing assets in the United States with the potential to optimize production and generate free cash flow through low-risk development while maintaining an attractive shareholder returns program. We are committed to ESG stewardship and being a leader in reducing our carbon footprint in the areas in which we operate. More information about U.S. Energy Corp. can be found at www.usnrg.com.

FORWARD-LOOKING STATEMENTS

Certain of the matters discussed in this communication which are not statements of historical fact constitute forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. Words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “would,” “will,” “estimates,” “intends,” “projects,” “goals,” “targets” and other words of similar meaning are intended to identify forward-looking statements but are not the exclusive means of identifying these statements.

Important factors that may cause actual results and outcomes to differ materially from those contained in such forward-looking statements include, without limitation, risks associated with the integration of the recently acquired assets; the Company’s ability to recognize the expected benefits of the acquisitions and the risk that the expected benefits and synergies of the acquisition may not be fully achieved in a timely manner, or at all; the amount of the costs, fees, expenses and charges related to the acquisitions; the Company’s ability to comply with the terms of its senior credit facilities; the ability of the Company to retain and hire key personnel; the business, economic and political conditions in the markets in which the Company operates; fluctuations in oil and natural gas prices, uncertainties inherent in estimating quantities of oil and natural gas reserves and projecting future rates of production and timing of development activities; competition; operating risks; acquisition risks; liquidity and capital requirements; the effects of governmental regulation; adverse changes in the market for the Company’s oil and natural gas production; dependence upon third-party vendors; risks associated with COVID-19, the global efforts to stop the spread of COVID-19, potential downturns in the U.S. and global economies due to COVID-19 and the efforts to stop the spread of the virus, and COVID-19 in general; economic uncertainty relating to increased inflation and global conflicts; the lack of capital available on acceptable terms to finance the Company’s continued growth; and other risk factors included from time to time in documents U.S. Energy files with the Securities and Exchange Commission, including, but not limited to, its Form 10-Ks, Form 10-Qs and Form 8-Ks. Other important factors that may cause actual results and outcomes to differ materially from those contained in the forward-looking statements included in this communication are described in the Company’s publicly filed reports, including, but not limited to, the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. These reports and filings are available at www.sec.gov.

The Company cautions that the foregoing list of important factors is not complete. All subsequent written and oral forward-looking statements attributable to the Company or any person acting on behalf of any Sale Agreement Parties are expressly qualified in their entirety by the cautionary statements referenced above. Other unknown or unpredictable factors also could have material adverse effects on U.S. Energy’s future results. The forward-looking statements included in this press release are made only as of the date hereof. U.S. Energy cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, U.S. Energy undertakes no obligation to update these statements after the date of this release, except as required by law, and takes no obligation to update or correct information prepared by third parties that are not paid for by U.S. Energy. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

FINANCIAL STATEMENT PRESENTATION AND RECONCILIATION

U.S. ENERGY CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

September 30, 2022 December 31, 2021 ASSETS Current assets: Cash and equivalents $3,093 $4,422 Oil and natural gas sales receivable 4,520 933 Marketable equity securities 106 191 Prepaid and other current assets 378 179 Real estate assets held for sale, net of selling costs 175 250 Total current assets 8,272 5,975 Oil and natural gas properties under full cost method: Unevaluated properties 1,584 1,588 Evaluated properties 201,572 95,088 Less accumulated depreciation, depletion, amortization and impairment (94,376) (88,195) Net oil and natural gas properties 108,780 8,481 Pending acquisition - 2,767 Property and equipment, net 634 188 Right-of-use asset 933 120 Other assets 375 132 Total assets $118,994 $17,663 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $8,196 $1,447 Accrued compensation and benefits 683 1,162 Commodity derivative liability-current 1,991 - Asset retirement obligations-current 1,965 - Premium finance note 216 - Warrant liability - 19 Current lease obligation 182 114 Total current liabilities 13,233 2,742 Credit facility 12,500 - Commodity derivative liability-noncurrent 6 - Asset retirement obligations-noncurrent 12,091 1,461 Lease obligation-noncurrent 837 19 Other noncurrent liabilities 6 6 Total liabilities 38,673 4,228 Commitments and contingencies (Note 8) Shareholders’ equity: Common stock, $0.01 par value; unlimited shares authorized; 25,023,812 and 4,676,301 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively 250 47 Additional paid-in capital 216,267 149,276 Accumulated deficit (136,196) (135,888) Total shareholders’ equity 80,321 13,435 Total liabilities and shareholders’ equity $118,994 $17,663 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(In thousands, except share and per share amounts)

Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Revenue: Oil $8,979 $1,593 $28,146 $4,232 Natural gas and liquids 2,820 191 6,005 419 Gathering fee 27 - 27 - Total revenue 11,826 1,784 34,178 4,651 Operating expenses: Lease operating expenses 5,350 586 12,732 1,631 Production taxes 817 133 2,302 343 Depreciation, depletion, accretion and amortization 2,528 151 6,985 415 General and administrative expenses 2,708 686 8,296 2,233 Total operating expenses 11,403 1,556 30,315 4,622 Operating income 423 228 3,863 29 Other non-operating income (expense): Commodity derivative gain (loss) 4,025 (25) (4,944) (235)Marketable equity securities (loss) gain (45) (6) (85) 67 Impairment on real estate held for sale (75) (141) (75) (141)Other (expense) income, net (2) 24 (8) 49 Interest, net (187) 1 (295) (57)Total other non-operating income (expense) 3,716 (147) (5,407) (317) Net income (loss) before income taxes $4,139 $81 $(1,544) $(288)Income tax (expense) benefit (29) 2,392 Net income (loss) $4,110 $81 $848 $(288)Basic weighted shares outstanding 24,390,193 4,676,301 24,548,385 4,429,870 Diluted weighted shares outstanding 24,682,476 4,721,301 24,891,148 4,429,870 Basic earnings (loss) per share $0.16 $0.02 $0.03 $(0.07)Diluted earnings (loss) per share $0.16 $0.02 $0.03 $(0.07) U.S. ENERGY CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(in thousands)

2022 2021 Cash flows from operating activities: Net income (loss) $848 $(288)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation, depletion, accretion, and amortization 6,985 415 Deferred income taxes (2,460) - Unrealized (gain) loss on commodity derivatives (1,155) 116 Loss (gain) on marketable equity securities 85 (67)Impairment and loss on real estate held for sale 75 141 Amortization of debt issuance costs 32 - Loss on warrant revaluation - (2)Loss on related party debt conversion and settlement of legal costs - 76 Stock-based compensation 2,594 310 Right of use asset amortization 140 66 Changes in operating assets and liabilities: Oil and natural gas sales receivable (3,587) (570)Other assets 320 130 Accounts payable and accrued liabilities 5,456 (215)Accrued compensation and benefits (479) (43)Payments on operating lease liability (68) (66)Payments for asset retirement obligations (289) (22)Net cash provided by (used in) operating activities 8,497 (19) Cash flows from investing activities: Acquisition of proved properties (12,610) - Oil and natural gas capital expenditures (5,369) (1,399)Property and equipment expenditures (379) (93)Proceeds from sale of oil and gas properties 1,250 30 Proceeds from sale of real estate - 440 Payment received on note receivable - 20 Net cash used in investing activities (17,108) (1,002) Cash flows from financing activities: Proceeds from sale of common stock, net of issuance costs - 5,283 Borrowings on credit facility 15,200 Repayment of debt (6,047) Payment of fees for credit facility (207) Repayments of insurance premium finance note payable (396) (122)Exercise of warrant 195 Shares withheld to settle tax withholding obligations for restricted stock awards (307) (39)Dividend paid (1,156) Net cash provided by financing activities 7,282 5,122 Net (decrease) increase in cash and equivalents (1,329) 4,101 Cash and equivalents, beginning of period 4,422 2,854 Cash and equivalents, end of period $3,093 $6,955          

ADJUSTED EBITDA RECONCILIATION

In addition to our results calculated under generally accepted accounting principles in the United States (“GAAP”), in this earnings release we also present Adjusted EBITDA. Adjusted EBITDA is a “non-GAAP financial measure” presented as supplemental measures of the Company’s performance. It is not presented in accordance with accounting principles generally accepted in the United States, or GAAP. The Company defines Adjusted EBITDA as net income (loss), plus net interest expense, net unrealized loss (gain) on change in fair value of derivatives, income tax (benefit) expense, deferred income taxes, depreciation, depletion, accretion and amortization, one-time costs associated with completed transactions and the associated assumed derivative contracts, non-cash share-based compensation, transaction related expenses, transaction related acquired realized derivative loss (gain), and loss (gain) on marketable securities. Company management believes this presentation is relevant and useful because it helps investors understand U.S. Energy’s operating performance and makes it easier to compare its results with those of other companies that have different financing, capital and tax structures. Adjusted EBITDA is presented because we believe it provides additional useful information to investors due to the various noncash items during the period. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations are: Adjusted EBITDA does not reflect cash expenditures, or future requirements for capital expenditures, or contractual commitments; Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt or cash income tax payments; although depreciation and amortization are noncash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and other companies in this industry may calculate Adjusted EBITDA differently than the Company does, limiting its usefulness as a comparative measure.

The Company’s presentation of this measure should not be construed as an inference that future results will be unaffected by unusual or nonrecurring items. We compensate for these limitations by providing a reconciliation of this non-GAAP measure to the most comparable GAAP measure, below. We encourage investors and others to review our business, results of operations, and financial information in their entirety, not to rely on any single financial measure, and to view this non-GAAP measure in conjunction with the most directly comparable GAAP financial measure. Three months
ended
September 30,
2022 (in thousands)Net Income (loss)$4,110Depreciation, depletion, accretion and amortization 2,528Unrealized loss (gain) on commodity derivatives (5,636)Interest expense, net 187Deferred income taxes 29Non-cash stock based compensation 485Transaction related expenses -Transaction related acquired realized derivative loss 1,371Loss (gain) on marketable securities 45Adjusted EBITDA$3,119   

INVESTOR RELATIONS CONTACT

U.S. Energy Corp.
IR@usnrg.com
(303) 993-3200
www.usnrg.com