Big Sky Industrial Inc 10-Q for FY2024 Q1
Big Sky Industrial Inc. (BSIN)
About this 10-Q
Big Sky Industrial Inc filed this 10-Q on May 9, 2024, covering the quarter ended March 31, 2024 (FY2024 Q1).
Headline figures
Quarter ended March 31, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $5.39M
- down 34.8% from $8.27M a year earlier
- Net loss
- $9.54M
- compared with a net loss of $1.25M a year earlier
- Diluted EPS
- -$0.38
- compared with -$0.05 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the Quarterly Period Ended | |
| or | |
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from _____________ to _____________________ | |
Commission File Number
(Exact Name of Registrant as Specified in its Charter)
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| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
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| (Address of principal executive offices) | (Zip Code) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The registrant had
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| Part I. |
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| Item 1. |
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| Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) |
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| Notes to Unaudited Condensed Consolidated Financial Statements |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 4. |
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| Part II. |
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| Item 1. |
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| Item 1A. |
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| Item 2. |
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| Item 3. |
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| Item 4. |
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| Item 5. |
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| Item 6. |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report” or “Form 10-Q”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are forward-looking statements.
Examples of forward-looking statements in this Report include:
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planned capital expenditures for oil and natural gas exploration and environmental compliance; |
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potential drilling locations and available spacing units, and possible changes in spacing rules; |
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cash expected to be available for capital expenditures and to satisfy other obligations; |
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recovered volumes and values of oil and natural gas approximating third-party estimates; |
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anticipated changes in oil and natural gas production; |
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drilling and completion activities and opportunities; |
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timing of drilling additional wells and performing other exploration and development projects; |
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expected spacing and the number of wells to be drilled with our oil and natural gas industry partners; |
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when payout-based milestones or similar thresholds will be reached for the purposes of our agreements with our partners; |
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expected working and net revenue interests, and costs of wells, relating to the drilling programs with our partners; |
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actual decline rates for producing wells; |
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future cash flows, expenses and borrowings; |
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pursuit of potential acquisition opportunities; |
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economic downturns, wars and increased inflation and interest rates, and possible recessions caused thereby; |
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the effects of global pandemics on our operations, properties, the market for oil and gas, and the demand for oil and gas; |
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our expected financial position; |
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our expected future overhead reductions; |
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our ability to become an operator of oil and natural gas properties; |
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our ability to raise additional financing and acquire attractive oil and natural gas properties; and |
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other plans and objectives for future operations. |
These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “will,” “continue,” “potential,” “should,” “could,” “up to,” and similar terms and phrases. Though we believe that the expectations reflected in these statements are reasonable, they involve certain assumptions, risks and uncertainties. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, under and incorporated by reference in, “Risk Factors”, below, the risks discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, and those discussed in other documents we file with the Securities and Exchange Commission (the “SEC” or the “Commission”). Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above.
All forward-looking statements speak only at the date of the filing of this Report. We do not undertake any obligation to update or revise publicly any forward-looking statements except as required by law, including the securities laws of the United States and the rules and regulations of the SEC.
U.S. ENERGY CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
March 31, 2024 | December 31, 2023 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and equivalents | $ | $ | ||||||
Oil and natural gas sales receivables | ||||||||
Marketable equity securities | ||||||||
Commodity derivative asset -current | ||||||||
Other current assets | ||||||||
Real estate assets held for sale, net of selling costs | ||||||||
Total current assets | ||||||||
Oil and natural gas properties under full cost method: | ||||||||
Unevaluated properties | ||||||||
Evaluated properties | ||||||||
Less accumulated depreciation, depletion and amortization | ( | ) | ( | ) | ||||
Net oil and natural gas properties | ||||||||
Other Assets: | ||||||||
Property and equipment, net | ||||||||
Right-of-use asset | ||||||||
Other assets | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | $ | ||||||
Accrued compensation and benefits | ||||||||
Revenue and royalties payable | ||||||||
Asset retirement obligations - current | ||||||||
Current lease obligation | ||||||||
Total current liabilities | ||||||||
Noncurrent liabilities: | ||||||||
Credit facility | ||||||||
Asset retirement obligations - noncurrent | ||||||||
Long-term lease obligation, net of current portion | ||||||||
Deferred tax liability | ||||||||
Total liabilities | ||||||||
Commitments and contingencies (Note 8) | ||||||||
Shareholders’ equity: | ||||||||
Common stock, $par value; shares authorized; and shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively | ||||||||
Additional paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Total shareholders’ equity | ||||||||
Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
U.S. ENERGY CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE three months ended March 31, 2024 and 2023
(In thousands, except share and per share amounts)
Three Months Ended March 31, |
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2024 |
2023 |
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Revenue: |
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Oil |
$ | $ | ||||||
Natural gas and liquids |
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Total revenue |
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Operating expenses: |
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Lease operating expenses |
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Gathering, transportation and treating |
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Production taxes |
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Depreciation, depletion, accretion and amortization |
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Impairment of oil and natural gas properties |
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General and administrative expenses |
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Total operating expenses |
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Operating income (loss) |
( |
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Other income (expense): |
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Commodity derivative gain (loss), net |
( |
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Interest (expense), net |
( |
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Other income (expense), net |
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Total other income (expense) |
( |
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Net income (loss) before income taxes |
$ | ( |
) | $ | ( |
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Income tax (expense) benefit |
( |
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Net income (loss) |
$ | ( |
) | $ | ( |
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Basic and diluted weighted average shares outstanding |
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Basic and diluted income (loss) per share |
$ | ( |
) | $ | ( |
) | ||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
U.S. ENERGY CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY
FOR THE three months ended March 31, 2024 and 2023
(in thousands, except share amounts)
Additional |
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Common Stock |
Paid-in |
Accumulated |
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Shares |
Amount |
Capital |
Deficit |
Total |
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Balances, December 31, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
Stock-based compensation |
- | |||||||||||||||||||
Shares issued upon vesting of restricted stock awards |
( |
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Shares withheld to settle tax withholding obligations for restricted stock awards |
( |
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Cash dividends |
- | ( |
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Net loss |
- | ( |
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Balances, March 31, 2023 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
Balances, December 31, 2023 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
Stock-based compensation |
- | |||||||||||||||||||
Shares issued upon vesting of restricted stock awards |
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Shares withheld to settle tax withholding obligations for restricted stock awards |
( |
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Share repurchases |
( |
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) | ( |
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Net loss |
- | ( |
) | ( |
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Balances, March 31, 2024 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
U.S. ENERGY CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE three months ended March 31, 2024 and 2023
(in thousands)
2024 |
2023 |
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Cash flows from operating activities: |
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Net income (loss) |
$ | ( |
) | $ | ( |
) | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Depreciation, depletion, accretion, and amortization |
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Impairment of oil and natural gas properties |
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Deferred income taxes |
( |
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Total commodity derivatives (gains) losses, net |
( |
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Commodity derivative settlements received (paid) |
( |
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(Gains) losses on marketable equity securities |
( |
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Impairment and loss on real estate held for sale |
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Amortization of debt issuance costs |
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Stock-based compensation |
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Right of use asset amortization |
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Changes in operating assets and liabilities: |
- | - | ||||||
Oil and natural gas sales receivable |
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Other assets |
( |
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Accounts payable and accrued liabilities |
( |
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Accrued compensation and benefits |
( |
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Revenue and royalties payable |
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Payments on operating lease liability |
( |
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Payments of asset retirement obligations |
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Net cash provided by (used in) operating activities |
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Cash flows from investing activities: |
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Oil and natural gas capital expenditures |
( |
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Property and equipment expenditures |
( |
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Proceeds from sale of oil and natural gas properties, net |
( |
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Net cash provided by (used in) investing activities |
( |
) | ( |
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Cash flows from financing activities: |
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Payments on insurance premium finance note |
( |
) | ( |
) | ||||
Shares withheld to settle tax withholding obligations for restricted stock awards |
( |
) | ( |
) | ||||
Dividends paid |
( |
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Repurchases of common stock |
( |
) | ||||||
Net cash provided by (used in) financing activities |
( |
) | ( |
) | ||||
Net (decrease) increase in cash and equivalents |
( |
) | ( |
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Cash and equivalents, beginning of period |
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Cash and equivalents, end of period |
$ | $ | ||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements. Please see Note-15- Supplemental Disclosures of Cash Flow Information.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
U.S. Energy Corp. (collectively with its wholly-owned subsidiaries, Energy One LLC (“Energy One”) and New Horizon Resources LLC (“New Horizon Resources”), referred to as the “Company” in these notes to unaudited Condensed Consolidated Financial Statements) is incorporated in the State of Delaware. The Company’s principal business activities are focused on the acquisition, exploration, and development of onshore oil and natural gas properties in the United States, which the Company considers a single operating segment. Our principal properties and operations are in the Rockies region (Montana, Wyoming and North Dakota), the Mid-Continent (Oklahoma, Kansas and North and East Texas) region, and the West Texas, South Texas, and Gulf Coast region.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”) and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included.
For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 26, 2024. Our financial condition as of March 31, 2024, and operating results for the three months ended March 31, 2024, are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the year ending December 31, 2024.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of oil and gas properties acquired, oil and natural gas reserves that are used in the calculation of depreciation, depletion, amortization, and impairment of the carrying value of evaluated oil and natural gas properties; production and commodity price estimates used to record accrued oil and natural gas sales receivables; future prices of commodities used in the valuation of commodity derivative contracts; and the cost and timing of future asset retirement obligations. The Company evaluates its estimates on an on-going basis and bases its estimates on historical experience and on various other assumptions the Company believes to be reasonable. Due to inherent uncertainties, including the future prices of oil and natural gas, these estimates could change in the near term and such changes could be material.
Principles of Consolidation
The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with GAAP and include the accounts of U.S. Energy Corp. and its wholly-owned subsidiaries Energy One and New Horizon Resources. U.S. Energy Corp. accounts for its share of oil and gas exploration and production activities, in which it has a direct working interest, by reporting its proportionate share of assets, liabilities, revenues, costs, and cash flows within the relevant lines on the balance sheets, statements of operations, and statements of cash flows. All inter-company balances and transactions have been eliminated in consolidation.
Reclassifications
Certain prior year amounts are reclassified to conform to the current year presentation.
Historically, the Company included gathering, transportation, and treating costs within lease operating expense on the Condensed Consolidated Statements of Operations. Effective July 1, 2023, the Company began classifying gathering, treating, and transportation costs in a separate line item, titled Gathering, transportation, and treating, on the Condensed Consolidated Statements of Operations and recast prior period results for this reclassification. This reclassification had no impact on the Company's net income, earnings per share, cash flows, or financial position. The Company revised historical periods to reflect this change in presentation.
The Company has historically included revenue and royalties payable within accounts payables and accrued liabilities on the Condensed Consolidated Balance Sheets. Effective December 31, 2023, the Company began classifying revenue and royalties payable as a separate line item on the Condensed Consolidated Balance Sheet. The Condensed Consolidated Statements of Cash Flows has been updated to separate changes in operating assets and liabilities from revenue and royalties payable and accounts payable and accrued liabilities. This reclassification had no impact on the Company's net income (loss), income (loss) per share, cash flows, or financial position. The Company revised historical periods to reflect this change in presentation.
2. ACQUISITIONS AND DIVESTITURES
Divestitures
During the year ended December 31, 2023, the Company closed on a series of individual divestitures for a total of $
3. REVENUE RECOGNITION
The Company disaggregates revenues from its share of revenue from the sale of oil and natural gas and liquids by region. The Company’s revenues in the Rockies region, West Texas, South Texas, and Gulf Coast region, and Mid-Continent region for the three months ended March 31, 2024 and 2023, are presented in the following table:
Three Months Ended March 31, | ||||||||
2024 | 2023 | |||||||
(in thousands) | ||||||||
Revenue: | ||||||||
Rockies | ||||||||
Oil | $ | $ | ||||||
Natural gas and liquids | ||||||||
Total | $ | $ | ||||||
West Texas, South Texas, and Gulf Coast | ||||||||
Oil | $ | $ | ||||||
Natural gas and liquids | ||||||||
Total | $ | $ | ||||||
Mid-Continent | ||||||||
Oil | $ | $ | ||||||
Natural gas and liquids | ||||||||
Total | $ | $ | ||||||
Combined Total | $ | $ | ||||||
Significant concentrations of credit risk
The Company has exposure to credit risk in the event of non-payment of oil and natural gas receivables by purchasers of its operated oil and natural gas properties. The following table presents the purchasers that accounted for 10% or more of the Company’s total oil and natural gas revenue for at least one of the periods presented:
Three Months Ended | ||||||||
March 31, | ||||||||
2024 | 2023 | |||||||
Purchaser A | % | % | ||||||
Purchaser B | % | % | ||||||
Purchaser C | % | % | ||||||
Purchaser D | % | % | ||||||
Purchaser E | % | % | ||||||
4. LEASES
The Company’s operating lease right-of-use asset and lease liability are recognized at their discounted present value under the following captions in the Condensed Consolidated Balance Sheets on March 31, 2024 and December 31, 2023:
March 31, 2024 | December 31, 2023 | |||||||
(in thousands) | ||||||||
Right-of-use asset | $ | $ | ||||||
Lease liability | ||||||||
Current lease obligation | $ | $ | ||||||
Long-term lease obligation | ||||||||
| $ | $ | |||||||
The Company recognizes lease expense on a straight-line basis excluding short-term and variable lease payments, which are recognized as incurred. Short-term lease cost represents payments for oilfield equipment with original lease terms less than one year. Following are the amounts recognized as components of lease cost for the three months ended March 31, 2024 and 2023:
Three Months Ended March 31, | ||||||||
2024 | 2023 | |||||||
(in thousands) | ||||||||
Operating lease cost | $ | $ | ||||||
Short-term lease cost | ||||||||
Total lease costs | $ | $ | ||||||
The Company’s Houston office operating lease does not contain implicit interest rates that can be readily determined; therefore, the Company used the incremental borrowing rates in effect at the time the Company entered into the leases.
As of March 31, | ||||||||
2024 | 2023 | |||||||
(in thousands) | ||||||||
Weighted average lease term (years) | ||||||||
Weighted average discount rate | % | % | ||||||
Maturity of operating lease liabilities with terms of one year or more as of March 31, 2024 are presented in the following table:
March 31, 2024 | ||||
(in thousands) | ||||
2024 | $ | |||
2025 | ||||
2026 | ||||
2027 | ||||
Total lease payments | $ | |||
Less: imputed interest | ( | ) | ||
Total lease liability | $ | |||
5. OIL AND NATURAL GAS PRODUCING ACTIVITIES
Full Cost Method Ceiling Test and Impairment
The reserves used in the ceiling test incorporate assumptions regarding pricing and discount rates over which management has no influence in the determination of present value. In the calculation of the ceiling test as of March 31, 2024, the Company used $
The Company recorded a $
6. DEBT
On January 5, 2022, the Company entered into a four-year credit agreement (“Credit Agreement”) with FirstBank Southwest (“FirstBank”) as administrative agent for one or more lenders (the “Lenders”), which provided for a revolving line of credit with an initial borrowing base of $
Under the Credit Agreement, revolving loans may be borrowed, repaid and re-borrowed until January 5, 2026, when all outstanding amounts must be repaid. Interest on the outstanding amounts under the Credit Agreement will accrue at an interest rate equal to the greater of (i) the prime rate in effect on such day, and (ii) the rate in effect on such day (as determined in the Credit Agreement) plus
Three Months Ended March 31, | ||||||||
2024 | 2023 | |||||||
(in thousands) | ||||||||
Interest expense | $ | $ | ||||||
Weighted average interest rate | % | % | ||||||
The Credit Agreement contains various restrictive covenants and compliance requirements, which include: (i) maintenance of certain financial ratios, as defined in the Credit Agreement tested quarterly, that limit the Company’s ratio of total debt to EBITDAX (as defined in the Credit Agreement) to and require its ratio of consolidated current assets to consolidated current liabilities (as each is described in the Credit Agreement) to remain at or higher; (ii) restrictions on making restricted payments as defined in the Credit Agreement, including the payment of cash dividends and repurchases of equity interests (subject to certain limited rights to make restricted payments as long as no event of default has occurred, or would result from the restricted payment, certain financial ratios are met and the borrowing availability after giving pro forma effect to any borrowing to be made on the date of the restricted payment is greater than, or equal to,
The amount outstanding on the Credit Agreement as of March 31, 2024 and December 31, 2023, was $
7. COMMODITY DERIVATIVES
The Company’s results of operations and cash flows are affected by changes in market prices for crude oil and natural gas. To manage a portion of its exposure to price volatility from producing crude oil and natural gas, the Company may enter into commodity derivative contracts to protect against price declines in future periods. The Company does not enter into derivative contracts for speculative purposes. The Company does not apply hedge accounting. Accordingly, changes in the fair value of the derivative contracts are recorded in the Condensed Consolidated Statements of Operations and are included as a non-cash adjustment to net income in the operating activities section in the Condensed Consolidated Statements of Cash Flows.
As of March 31, 2024, the Company had commodity derivative contracts outstanding as summarized in the tables below:
| Fixed Price Swaps | ||||||||
| Quantity | Weighted | |||||||
| Crude oil | Average | |||||||
| Commodity/ Index/ Maturity Period | (Bbls)(1) | Price | ||||||
| NYMEX WTI | ||||||||
| Crude Oil 2024 Contracts: | ||||||||
| Second quarter 2024 | $ | |||||||
| Third quarter 2024 | $ | |||||||
| Fourth quarter 2024 | $ | |||||||
| Total 2024 | $ | |||||||
| (1) | “Bbl” refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons. |
The following table details the fair value of commodity derivative contracts recorded in the accompanying Condensed Consolidated Balance Sheets by category:
March 31, 2024 | December 31, 2023 | |||||||
(in thousands) | ||||||||
Derivative assets: | ||||||||
Current assets | $ | $ | ||||||
Total derivative assets | $ | $ | ||||||
As of March 31, 2024, all commodity derivative contracts held by the Company were subject to a master netting arrangement with its counterparty. The terms of the Company’s derivative agreements provide for offsetting of amounts payable or receivable between it and the counterparty for contracts that settle on the same date. The Company’s agreements also provide that in the event of an early termination, the counterparty has the right to offset amounts owed or owing under that and any other agreement. The Company’s accounting policy is to offset positions when we have a right of offset or master netting arrangement. See Note 13-Fair Value Measurements for disclosure of the fair value of derivative assets and liabilities on a gross and net basis.
The following table summarizes the components of the commodity derivative settlement gain (loss) as well as the components of the net commodity derivative (gain) loss line-item presentation in the accompanying Condensed Consolidated Statements of Operations:
Three Months Ended March 31, | ||||||||
2024 | 2023 | |||||||
(in thousands) | ||||||||
Commodity derivative settlement gain (loss): | ||||||||
Oil contracts | $ | $ | ( | ) | ||||
Gas contracts | ( | ) | ||||||
Total commodity derivative settlement gain (loss) | $ | $ | ( | ) | ||||
Total net commodity derivative gain (loss): | ||||||||
Oil contracts | $ | ( | ) | $ | ||||
Gas contracts | ||||||||
Total net commodity derivative gain (loss) | $ | ( | ) | $ | ||||
8. COMMITMENTS AND CONTINGENCIES
Contingencies
The Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the anticipated results of any pending litigation and claims are not expected to have a material effect on the results of operations, the financial position, or the cash flows of the Company.
9. SHAREHOLDERS’ EQUITY
At March 31, 2024, the Company had
Stock Option Plans
From time to time, the Company may grant stock options under its incentive plan covering shares of common stock to employees of the Company. Stock options, when exercised, are settled through the payment of the exercise price in exchange for new shares of stock underlying the option. These awards typically expire years from the grant date.
For the three months ended March 31, 2024 and 2023, there was
March 31, 2024 | December 31, 2023 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Number of | Exercise | Number of | Exercise | |||||||||||||
Shares | Price | Shares | Price | |||||||||||||
Stock options outstanding and exercisable | $ | $ | ||||||||||||||
The following table summarizes information for stock options outstanding and for stock options exercisable at March 31, 2024 by the remaining contractual term:
| Options Outstanding | Options Exercisable | ||||||||||||||||||||||||
| Exercise | Weighted | Remaining | Weighted | ||||||||||||||||||||||
| Price | Average | Contractual | Average | ||||||||||||||||||||||
| Number of | Range | Exercise | Term | Number of | Exercise | ||||||||||||||||||||
| Shares | Low | High | Price | (years) | Shares | Price | |||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||
Restricted Stock
The Company grants restricted stock under its incentive plan covering shares of common stock to employees and directors of the Company. Significantly all of the restricted stock awards are time-based awards and are amortized ratably over a requisite service period. Time-based awards vest ratably following the grant date, provided the grantee is employed on the vesting date. The Company has one restricted stock award that vests if the Company's share price is equal to or greater than $
The following table presents the changes in non-vested restricted stock awards to all employees and directors for the three months ended March 31, 2024:
Weighted-Avg. | ||||||||
Grant Date | ||||||||
Fair Value | ||||||||
Shares | Per Share | |||||||
Non-vested restricted stock as of December 31, 2023 | $ | |||||||
Granted | $ | |||||||
Vested | ( | ) | $ | |||||
Forfeited | ( | ) | $ | |||||
Non-vested restricted stock as of March 31, 2024 | $ | |||||||
For the three months ended March 31, 2024 and 2023, the Company recognized $
Dividends
On February 23, 2023, the Company paid a quarterly cash dividend of $
Share Repurchase Program
On April 26, 2023, the Board of Directors of the Company authorized and approved a share repurchase program for up to $
Under the stock repurchase program, shares are repurchased from time to time in the open market or through negotiated transactions at prevailing market prices, or by other means in accordance with federal securities laws. Repurchases are made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase program is funded using the Company’s working capital. The repurchased shares are cancelled and therefore will not be held in treasury or reissued.
During the three months ended March 31, 2024, the Company repurchased
10. ASSET RETIREMENT OBLIGATIONS
The Company has asset retirement obligations (“ARO”) associated with the future plugging and abandonment of proved properties. Initially, the fair value of a liability for an ARO is recorded in the period in which the ARO is incurred with a corresponding increase in the carrying amount of the related asset. The liability is accreted to its present value each period and the capitalized cost is depleted over the life of the related asset. If the liability is settled for an amount other than the recorded amount, an adjustment to the full cost pool is recognized. The Company had no assets that are restricted for the purpose of settling ARO.
In the fair value calculation for the ARO there are numerous assumptions and judgments, including the ultimate retirement cost, inflation factors, credit-adjusted risk-free discount rates, timing of retirement and changes in legal, regulatory, environmental, and political environments. To the extent future revisions to assumptions and judgments impact the present value of the existing ARO, a corresponding adjustment is made to the oil and natural gas property balance.
The following is a reconciliation of the changes in the Company’s liabilities for asset retirement obligations as of March 31, 2024 and December 31, 2023:
March 31, 2024 | December 31, 2023 | |||||||
(in thousands) | ||||||||
Balance, beginning of year | $ | $ | ||||||
Acquired or incurred | ||||||||
Cost and life revisions | ( | ) | ||||||
Plugged | ( | ) | ( | ) | ||||
Sold | ( | ) | ||||||
Accretion | ||||||||
Balance, end of period | $ | $ | ||||||
Asset retirement obligations - current | $ | $ | ||||||
Asset retirement obligations - noncurrent | ||||||||
Balance, end of period | $ | $ | ||||||
11. INCOME TAXES
The Company’s tax provision or benefit from income taxes for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any. Each quarter the Company updates its estimate of the annual effective tax rate and makes a year-to-date adjustment to the provision. The Company’s effective tax rate was approximately
Deferred taxes are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets, liabilities, net operating losses and tax credit carry-forwards. We review our deferred tax assets (“DTAs”) and valuation allowance on a quarterly basis. As part of our review, we consider positive and negative evidence, including cumulative results in recent years. The Company has limitations on net operating losses (“NOLs”) generated prior to 2022 and other tax attributes as a result of an Internal Revenue Code ("IRC") Section 382 ownership change from a January 5, 2022 acquisition. As such, the Company is projecting that as of March 31, 2024, it will not have sufficient DTAs available to fully offset the expected future taxable income that will be generated by the realization of the Company’s deferred tax liabilities and thus has recorded a net deferred tax liability.
The Company recognizes, measures, and discloses uncertain tax positions whereby tax positions must meet a “more-likely-than-not” threshold to be recognized. During the three months ended March 31, 2024 and 2023, no adjustments were recognized for uncertain tax positions.
12. INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding for the respective period. Diluted net income per common share is calculated by dividing adjusted net income by the diluted weighted average number of common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for this calculation consist of stock options and unvested shares of restricted common stock, which are measured using the treasury stock method. When the Company recognizes a net loss, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of dilutive net loss per common share. Unvested shares of restricted stock participate in dividend distributions; however, they do not participate in losses. Therefore, dividends attributable to participating securities are not included as a reduction in the calculation of loss attributable to common shareholders.
The following table sets forth the calculation of basic and diluted net income (loss) per share for the three months ended March 31, 2024 and 2023:
Three Months Ended March 31, | ||||||||
2024 | 2023 | |||||||
(in thousands except per share data) | ||||||||
Net income (loss) attributable to common shareholders | $ | ( | ) | $ | ( | ) | ||
Basic weighted average common shares outstanding | ||||||||
Dilutive effect of potentially dilutive securities | ||||||||
Diluted weighted average common shares outstanding | ||||||||
Basic net income (loss) per share | $ | ( | ) | $ | ( | ) | ||
Diluted net income (loss) per share | $ | ( | ) | $ | ( | ) | ||
For the three months ended March 31, 2024 and 2023, potentially dilutive securities excluded from the calculation of weighted average shares because they were anti-dilutive were as follows:
Three Months Ended March 31, | ||||||||
2024 | 2023 | |||||||
(in thousands) | ||||||||
Stock options | ||||||||
Unvested shares of restricted stock | ||||||||
Total | ||||||||
13. FAIR VALUE MEASUREMENTS
The Company’s fair value measurements are estimated pursuant to a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability, and may affect the valuation of the assets and liabilities and their placement within the hierarchy level. The three levels of inputs that may be used to measure fair value are defined as:
Level 1 - Quoted prices for identical assets and liabilities traded in active markets.
Level 2 - Observable inputs other than Level 1 that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in active markets, or other observable inputs that can be corroborated by observable market data.
Level 3 - Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The following is a description of the valuation methodologies used for complex financial instruments measured at fair value:
Recurring Fair Value Measurements
Commodity Derivative Instruments
The Company measures the fair value of commodity derivative contracts using an income valuation technique based on the contract price of the underlying positions, crude oil and natural gas forward curves, discount rates, and Company or counterparty non-performance risk. The fixed-price swaps and collar derivative contracts are included in Level 2. The fair value of commodity derivative contracts and their presentation in our unaudited Condensed Consolidated Balance Sheet as of March 31, 2024 and December 31, 2023 are presented below:
As of March 31, 2024 | ||||||||||||||||||||||||
Net Fair Value | ||||||||||||||||||||||||
Quoted Prices | Presented in the | |||||||||||||||||||||||
in Active Markets | Significant Other | Significant | Unaudited | |||||||||||||||||||||
for Identical | Observable | Unobservable | Condensed | |||||||||||||||||||||
Assets | Inputs | Inputs | Total Gross | Effect of | Consolidated | |||||||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Fair Value | Netting | Balance Sheet | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current: | ||||||||||||||||||||||||
Commodity derivatives | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Current: | ||||||||||||||||||||||||
Commodity derivatives | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ||||||||||||||
Net commodity derivative instruments | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||
As of December 31, 2023 | ||||||||||||||||||||||||
Net Fair Value | ||||||||||||||||||||||||
Quoted Prices | Presented in the | |||||||||||||||||||||||
in Active Markets | Significant Other | Significant | Unaudited | |||||||||||||||||||||
for Identical | Observable | Unobservable | Condensed | |||||||||||||||||||||
Assets | Inputs | Inputs | Total Gross | Effect of | Consolidated | |||||||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Fair Value | Netting | Balance Sheet | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current: | ||||||||||||||||||||||||
Commodity derivatives | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Net commodity derivative instruments | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||
Marketable Equity Securities
We measure the fair value of marketable equity securities based on quoted market prices obtained from independent pricing services. The Company has an investment in the marketable equity securities of Anfield Energy (“Anfield”), which it acquired as consideration for sales of certain mining operations. Anfield is traded in an active market under the trading symbol AEC:TSXV and has been classified as Level 1.
March 31, 2024 | December 31, 2023 | |||||||
Current assets: | ||||||||
Marketable equity securities | ||||||||
Number of shares owned | ||||||||
Quoted market price | $ | $ | ||||||
Fair value of marketable equity securities | $ | $ | ||||||
Credit Facility
The Company’s credit facility approximates fair value because the interest rate is variable and reflective of market rates.
Other Financial Instruments
The carrying value of financial instruments included in current assets and current liabilities approximate fair value due to the short-term nature of those instruments.
Nonrecurring Fair Value Measurements
Asset Retirement Obligations
The Company measures the fair value of asset retirement obligations as of the date a well is acquired, the date a well begins drilling, or the date the Company revises its ARO assumptions. The Company’s estimated asset retirement obligations are based on historical experience in plugging and abandoning wells, estimated economic lives, estimated plugging and abandonment costs and federal and state regulatory requirements, all unobservable inputs, and therefore, are designated as Level 3 within the valuation hierarchy. The liability is discounted using the credit-adjusted risk-free rate estimated at the time the liability is incurred or revised upwards. The credit adjusted risk-free rate used to discount the Company’s plugging and abandonment liabilities range from
Other Assets and Liabilities
The Company evaluates the fair value on a non-recurring basis of its Riverton, Wyoming real estate assets when circumstances indicate that the value has been impaired. As of March 31, 2024, the Company estimated the fair value of its real estate assets based on a market approach, using the value from a binding offer on the real estate assets accepted on February 27, 2024. The sale closed on April 5, 2024.
14. OTHER CURRENT ASSETS AND ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Other Current Assets
The following table presents the components of other current assets as of the dates indicated:
March 31, 2024 | December 31, 2023 | |||||||
(in thousands) | ||||||||
Prepaid expenses | $ | $ | ||||||
Joint interest billings receivable | ||||||||
Income tax receivable | ||||||||
Other | ||||||||
Total other current assets | $ | $ | ||||||
Accounts Payable and Accrued Liabilities.
The following table presents the components of accounts payable and accrued liabilities as of the dates indicated:
March 31, 2024 | December 31, 2023 | |||||||
(in thousands) | ||||||||
Accounts payable | $ | $ | ||||||
Operating expense and oil and gas property accruals | ||||||||
Interest Payable | ||||||||
Production taxes payable | ||||||||
Insurance premium financing | ||||||||
Other | ||||||||
Total accounts payable and accrued expenses | $ | $ | ||||||
15. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Three Months Ended March 31, | ||||||||
2024 | 2023 | |||||||
(in thousands) | ||||||||
Cash paid for interest | $ | $ | ||||||
Cash received for income taxes | ( | ) | ||||||
Investing activities: | ||||||||
Change in capital expenditure accruals | ||||||||
Asset retirement obligations | ( | ) | ||||||
Financing activities: | ||||||||
Accrual for repurchase of common stock | ( | ) | ||||||
Financing of insurance premiums with note payable | ||||||||
16. SUBSEQUENT EVENTS
Derivative Activities
On April 2, 2024, the Company entered into crude oil swap agreements, agreeing to pay monthly the average NYMEX WTI price for the month of settlement and receive a fixed price. The contracts are for a total of
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on March 26, 2024 (the “Annual Report”).
Certain abbreviations and oil and gas industry terms used throughout this Report are described and defined in greater detail under “Glossary of Oil and Natural Gas Terms” on page 4 of our Annual Report.
Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our unaudited Condensed Consolidated Financial Statements included above under “Part I - Financial Information” – “Item 1. Financial Statements”.
In this Quarterly Report on Form 10-Q, we may rely on and refer to information regarding the industries in which we operate in general from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, we have not independently verified any of it, and we have not commissioned any such information.
See also “Cautionary Statement About “Forward-Looking Statements” above.
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “U.S. Energy”, and “U.S. Energy Corp.” refer specifically to U.S. Energy Corp. and its consolidated subsidiaries.
In addition, unless the context otherwise requires and for the purposes of this report only:
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“Bbl” refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons; |
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“BOE” refers to barrels of oil equivalent, determined using the ratio of one Bbl of crude oil, condensate or natural gas liquids, to six Mcf of natural gas; |
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“Bopd” refers to barrels of oil per day; |
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“Mcf” refers to a thousand cubic feet of natural gas; |
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“Mcfe” means 1,000 cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids; |
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“NGL” refers to natural gas liquids; |
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“Exchange Act” refers to the Securities Exchange Act of 1934, as amended; |
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“SEC” or the “Commission” refers to the United States Securities and Exchange Commission; |
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“Securities Act” refers to the Securities Act of 1933, as amended; and |
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“WTI” means West Texas Intermediate. |
Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC like us at https://www.sec.gov (our filings can be found at https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000101594) and on the “Investors – SEC Filings” page of our website at https://usnrg.com. Copies of documents filed by us with the SEC are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report.
Summary of The Information Contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying unaudited Condensed Consolidated Financial Statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
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General Overview. A general overview of the Company and our operations. |
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Recent Developments. Discussion of recent developments affecting the Company and our operations. |
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Plan of Operations and Strategy. Discussion of our strategy moving forward and how we plan to seek to increase stockholder value. |
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Critical Accounting Policies and Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. |
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Results of Operations. An analysis of our financial results comparing the three months ended March 31, 2024 and 2023. |
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Liquidity and Capital Resources. A discussion of our financial condition, including descriptions of balance sheet information and cash flows. |
General Overview
U.S. Energy Corp. was incorporated in the State of Wyoming on January 26, 1966, and reincorporated to Delaware effective on August 3, 2022. We are an independent energy company focused on the acquisition and development of oil and natural gas producing properties in the continental United States. Our 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.
We have historically explored for and produced oil and natural gas through a non-operator business model, however, during 2020 we acquired operated properties in North Dakota, New Mexico, Wyoming, and the Texas Gulf Coast, and on January 5, 2022, we closed the acquisitions of certain oil and gas properties from three separate sellers, representing a diversified portfolio of primarily operated, producing, oil-weighted assets located across the Rockies, West Texas, South Texas, and Mid-Continent regions. During the fourth quarter of 2023, we sold virtually all of our non-operated properties and as of December 31, 2023, operated 99% of our reserves.
Our business strategy going forward is to enhance the value of our acquired operated assets through evaluation of selected properties with the goal of increasing production and reserves. We plan to deploy our capital in a conservative and strategic manner and pursue value-enhancing transactions. We also continue to evaluate strategic alternative opportunities that we believe will enhance stockholder value.
Material Developments
Divestment of Properties
In the fourth quarter of 2023, the Company closed on a series of individual divestitures for a total of $7.0 million in net proceeds before transaction costs of $0.4 million. The divestitures included the Company’s non-operated interests in 152 wells across North Dakota, New Mexico, and Texas, and overriding royalty interests in seven wells in Karnes County, Texas. These divestitures did not have a significant impact to reserves volumes or the full cost pool depletion rate. As such, the Company recorded the proceeds, net of transaction costs and purchase price adjustments, to the full cost pool with no gain or loss recognized. Relief of associated asset retirement obligations of $0.5 million were also recorded to the full cost pool. The net proceeds from these divestitures were used to repay a portion of the outstanding balance on our credit facility, bringing the balance as of December 31, 2023 to $5.0 million.
Derivative Activities
On September 12, 2023, the Company entered into crude oil swap agreements, agreeing to pay the monthly average NYMEX WTI price the month of settlement and receive a fixed price. The contracts were for a total of 187,620 barrels of oil, extending from October 2023 through December 2024 with weighted average prices of $86.64 for the 2023 swaps and $81.16 for the 2024 swaps. In addition, on April 2, 2024, the Company entered into crude oil swap agreements, agreeing to pay monthly the average NYMEX WTI price for the month of settlement and receive a fixed price. The contracts are for a total of 164,125 barrels of oil, extending from January 2025 to December 2025 with a weighted average fixed price of $73.71.
Dividends
On February 23, 2023 and May 30, 2023, the Company paid a quarterly cash dividend of $0.0225 per share of common stock outstanding to stockholders of record at the close of business on February 10, 2023 and May 19, 2023. Total dividends paid during 2023 were $1.2 million. The Board of Directors suspended the Company’s dividend payment policy on August 9, 2023.
Stock Repurchase Program
On March 19, 2024, the Board of Directors authorized and approved an extension of the ongoing share repurchase program for up to $5.0 million of the currently outstanding shares of the Company’s common stock originally approved by the Board of Directors on April 26, 2023, and set to expire on June 30, 2024. Subject to any future extension in the discretion of the Board of Directors of the Company, the repurchase program is now scheduled to expire on June 30, 2025, or when a maximum of $5.0 million of the Company’s common stock has been repurchased, or when such program is discontinued by the Board of Directors.
Under the stock repurchase program, shares may be repurchased from time to time in the open market or through negotiated transactions at prevailing market prices, or by other means in accordance with federal securities laws. Repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase program will be funded using the Company’s working capital.
During the three months ended March 31, 2024, the Company repurchased 318,200 shares for $337 thousand, at a weighted average price of $1.06 per share. There were no share repurchases during the three months ended March 31, 2023. As of March 31, 2024, a total of $4.2 million remained available under the repurchase program for future repurchases.
Full Cost Method Ceiling Test
The reserves used in the ceiling test incorporate assumptions regarding pricing and discount rates over which management has no influence in the determination of present value. In the calculation of the ceiling test as of March 31, 2024, the Company used $77.48 per barrel for oil and $2.45 per one million British Thermal Units (MMbtu) for natural gas (as further adjusted for property, specific gravity, quality, local markets and distance from markets) to compute the future cash flows of the Company’s producing properties. The discount factor used was 10%.
The Company recorded a $5.4 million ceiling test write-down of its oil and gas properties during the three months ended March 31, 2024, due to a reduction in the value of proved oil and natural gas reserves primarily as a result of a decrease in crude oil and natural gas prices, as well as reserves revisions related to wells shut-in during the first quarter of 2024 and updates to the decline curves for certain wells.
Depending on actual commodity prices, estimated price differentials, lease operating costs, revisions to reserve estimates, and the amount and timing of capital expenditures, additional write-downs could be incurred in the future.
Plan of Operations and Strategy
Continuing through the end of 2024 and beyond, we intend to seek additional opportunities in the oil and natural gas sector, including but not limited to workover and stimulating inactive wells, participation with current and new industry partners in their exploration and development projects, acquisition of existing companies, and the purchase of oil and natural gas producing assets. In addition, from time to time, we evaluate growth opportunities on operated idle wells and plan to perform workovers that we believe are economic in order to return the wells to production.
Key elements of our business strategy include:
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Deploy our Capital in a Conservative and Strategic Manner and Review Opportunities to Bolster our Liquidity. In the current industry environment, maintaining liquidity is critical. Therefore, we plan to be highly selective in the projects we evaluate and plan to review opportunities to bolster our liquidity and financial position through various means. |
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Evaluate and Pursue Value-Enhancing Transactions. We plan to continue to evaluate strategic alternative opportunities with the goal of enhancing shareholder value. |
Critical Accounting Policies and Estimates
The preparation of our unaudited Condensed Consolidated Financial Statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies is detailed in Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2023 Annual Report on Form 10-K filed with the SEC on March 26, 2024.
Results of Operations
Comparison of our Statements of Operations for the Three Months Ended March 31, 2024 and 2023
For the three months ended March 31, 2024, we recorded a net loss of $9.5 million, which was primarily due to oil and natural gas property impairment expense of $5.4 million from reduced commodity prices used in the full cost pool ceiling test and lower production resulting in reduced revenue for the period. In the following sections we discuss our revenue, operating expenses, and other income (expense) for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.
Revenue. Presented below is a comparison of our oil and gas sales, production quantities and average sales prices for the three months ended March 31, 2024 and 2023:
Three months ended March 31, |
Change |
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2024 |
2023 |
Amount |
Percent |
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(in thousands except average prices and production quantities) |
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Revenue: |
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Oil |
$ | 4,727 | $ | 7,095 | $ | (2,368 | ) | (33 | )% | |||||||
Natural gas and liquids |
664 | 1,177 | (513 | ) | (44 | )% | ||||||||||
Total revenue |
$ | 5,391 | $ | 8,272 | $ | (2,881 | ) | (35 | )% | |||||||
Production quantities: |
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Oil (Bbls) |
68,599 | 91,311 | (22,712 | ) | (25 | )% | ||||||||||
Natural gas and liquids (Mcfe) |
247,209 | 384,031 | (136,822 | ) | (36 | )% | ||||||||||
BOE |
109,800 | 155,316 | (45,516 | ) | (29 | )% | ||||||||||
BOE/Day |
1,207 | 1,726 | (519 | ) | (30 | )% | ||||||||||
Average sales prices: |
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Oil (Bbls) |
$ | 68.91 | $ | 77.70 | $ | (8.79 | ) | (11 | )% | |||||||
Natural gas and liquids (Mcfe) |
$ | 2.69 | $ | 3.06 | $ | (0.38 | ) | (12 | )% | |||||||
BOE |
$ | 49.10 | $ | 53.26 | $ | (4.16 | ) | (8 | )% | |||||||
The decrease in our oil and gas revenue of $2.9 million for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, was primarily due to a decrease of 29% in production quantities, as well as a decrease in realized commodity pricing of 8% on a per BOE basis. For the three months ended March 31, 2024, we produced 109,800 BOE, or an average of 1,207 BOE per day, as compared to 155,316 BOE or an average of 1,726 BOE per day during the comparable period in 2023. The decrease in our production quantities relates to the divestiture of substantially all of our 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. During the three months ended March 31, 2024, our production was 62% oil and 38% natural gas and liquids compared to 59% oil and 41% natural gas and liquids produced during the three months ended March 31, 2023.
Oil and Gas Production Costs. Presented below is a comparison of our oil and gas production costs for the three months ended March 31, 2024 and 2023:
Three months ended March 31, |
Change |
|||||||||||||||
2024 |
2023 |
Amount |
Percent |
|||||||||||||
(in thousands) |
||||||||||||||||
Lease operating expenses |
$ | 3,186 | $ | 4,409 | $ | (1,223 | ) | (28 | )% | |||||||
Gathering, transportation and treating |
64 | 114 | $ | (50 | ) | (44 | )% | |||||||||
Production taxes |
343 | 520 | $ | (177 | ) | (34 | )% | |||||||||
Total |
$ | 3,593 | $ | 5,043 | $ | (1,450 | ) | (29 | )% | |||||||
Lease operating expense per BOE |
$ | 29.02 | $ | 28.39 | $ | 0.63 | 2 | % | ||||||||
Gathering, transportation and treating per BOE |
$ | 0.58 | $ | 0.73 | $ | (0.15 | ) | (21 | )% | |||||||
For the three months ended March 31, 2024, lease operating expenses were $3.2 million or $29.02 per BOE, a decrease of $1.2 million when compared to the $4.4 million or $28.39 per BOE for the three months ended March 31, 2023. The decrease in lease operating expense was due almost entirely to a reduction in well workover activity in 2024 when compared to 2023. The increase on a per BOE basis is the result of lower production volumes being compared to relatively fixed recurring lease operated expenses.
For the three months ended March 31, 2024, gathering, transportation, and treating costs were $64 thousand, a decrease of $50 thousand, or 44%, compared to the comparable period of 2023. This decrease was attributable to the divestiture of substantially all of our non-operated activities in the fourth quarter of 2023.
For the three months ended March 31, 2024, production taxes were $343 thousand, a decrease of $177 thousand, or 34%, compared to the comparable period of 2023. This decrease was attributable to the decrease in revenue of 35% discussed above as production taxes remained flat at 6% of revenue.
Depreciation, Depletion and Amortization. Our depreciation, depletion and amortization (“DD&A”) was $2.2 million and $2.4 million for the three months ended March 31, 2024 and 2023, respectively. Depletion expense on our oil and gas properties is the primary driver of DD&A expense. Our depletion rate was $15.90 per BOE and $13.52 per BOE for the three months ended March 31, 2024 and 2023, respectively. Our depletion rate can fluctuate because of acquisitions, changes in drilling and completion costs, impairments, revisions in asset retirement obligation cost estimates or timing, divestitures, changes in the mix of our production, the underlying proved reserve volumes and estimated future development costs.
Impairment of oil and natural gas properties. Impairment of $5.4 million was driven by a reduction in value of oil and gas reserves. The reduction was primarily due to lower commodity prices used in the full cost pool ceiling test, as well as reserves revisions related to wells shut-in during the first quarter of 2024 and updates to the decline curves for certain wells.
General and Administrative Expenses. Presented below is a comparison of our general and administrative expenses for the three months ended March 31, 2024 and 2023:
Three months ended March 31, |
Change |
|||||||||||||||
2024 |
2023 |
Amount |
Percent |
|||||||||||||
(in thousands) |
||||||||||||||||
Compensation and benefits |
$ | 1,172 | $ | 1,187 | $ | (15 | ) | (1 | )% | |||||||
Stock-based compensation |
200 | 727 | (527 | ) | (72 | )% | ||||||||||
Professional fees, insurance and other |
834 | 858 | (24 | ) | (3 | )% | ||||||||||
Total general and administrative expenses |
$ | 2,206 | $ | 2,772 | $ | (566 | ) | (20 | )% | |||||||
General and administrative expenses decreased by $566 thousand for the three-month period ended March 31, 2024, as compared to the prior year period. The decrease was primarily attributable to a decrease stock-based compensation expense. The value of the restricted stock awards being amortized for the three months ended March 31, 2024 was lower than those being amortized during the three months ended March 31, 2023.
Other Income (Expense). Presented below is a comparison of our other income (expense) for the three months ended March 31, 2024 and 2023:
Three months ended March 31, |
Change |
|||||||||||||||
2024 |
2023 |
Amount |
Percent |
|||||||||||||
(in thousands) |
||||||||||||||||
Commodity derivative gain (loss), net |
$ | (1,381 | ) | $ | 919 | $ | (2,300 | ) | (250 | )% | ||||||
Interest (expense), net |
(120 | ) | (268 | ) | 148 | (55 | )% | |||||||||
Other income (expense), net |
4 | - | 4 | 0 | % | |||||||||||
Total other income (expense) |
$ | (1,497 | ) | $ | 651 | $ | (2,148 | ) | (330 | )% | ||||||
Commodity derivative gain (loss), net, is the result of changes in derivative fair values associated with fluctuations in forward price curves for the commodities underlying our outstanding derivative contracts and the monthly cash settlements of our derivative positions during the period. For the three months ended March 31, 2024, we recognized losses on commodity derivative contracts of $1.4 million, primarily as the result of a decrease in the fair value of our outstanding commodity derivative contracts from settlements of open positions and higher WTI prices as compared to December 31, 2023. See Note 7 Commodity Derivatives in the notes to the unaudited Condensed Consolidated Financial Statements.
Interest expense primarily represents the interest on our credit facility with FirstBank Southwest. The decrease in interest expense is primarily driven by the decrease in the balance outstanding period over period. As of March 31, 2024, we had borrowed $5.0 million on the credit facility as compared to $12.0 million borrowed as of March 31, 2023. The average interest rate increased to 9.1% per annum for the three months ended March 31, 2024, as compared to 8.5% per annum for the three months ended March 31, 2023. See Note 6 Debt in the notes to the unaudited Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
Based on the current commodity price environment, we believe we have sufficient liquidity and capital resources to execute our business plan while continuing to meet our current financial obligations. We continue to manage our commitments in order to maintain flexibility with regard to our activity level and capital expenditures.
We have a 2024 capital budget of $2.4 million. Our capital budget is typically comprised of return to production workovers, repairs and maintenance, plugging and abandonment costs, and similar activities to support our asset base. We view some of these investments as discretionary for which we can control both the timing and amount of these expenditures. Other activities, such as some repairs and maintenance and plugging activities, may be required from time to time by regulatory bodies. We also expect to incur approximately $0.2 million on lease commitments and approximately $0.5 million on interest expense assuming no material changes to interest rates over the next 12 months and the outstanding balance of our credit facility remains at $5.0 million. We anticipate our expenditures will be funded primarily by operating cash flows. In the event that our operating cash flows are not sufficient to fund these expenditures, we have access to our credit facility and equity markets if such a need arises.
Sources of Cash
For the three months ended March 31, 2024, we funded our capital expenditures with cash on hand and cash flows from operating activities. In future quarters, if cash flows are not sufficient to fund our capital expenditures and operations, we may also use borrowings under our credit facility or raise funds through new equity offerings or from other sources of financing and re-evaluate our capital spend program as economic conditions warrant. Additionally, we may enter into carrying cost and sharing arrangements with third parties for certain development programs. All of our sources of liquidity can be affected by the changes in economic conditions, rising interest rate, changes in debt and equity markets, force majeure events, fluctuations in commodity prices, operating costs, tax law changes, and volumes produced, all of which would affect us and our industry.
We have no control over the market prices for oil and gas, although we may be able to influence the amount of our realized revenues from oil and gas through the use of commodity derivative contracts as part of our commodity price risk management program. Commodity derivative contracts may limit the prices we receive from our oil and gas sales if oil and gas prices rise substantially over the price established by the commodity derivative contract. See Note 7- Commodity Derivatives in Part I, Item 1 of this report for additional information about our oil and gas commodity derivative contracts currently in place and the timing of the settlement of those contracts.
Credit Agreement
On January 5, 2022, we entered into a four-year credit agreement with FirstBank Southwest as administrative agent, which provides for a revolving line of credit with a borrowing base of $20 million, and a maximum credit amount of $100 million (the “Credit Agreement”). Under the Credit Agreement, revolving loans may be borrowed, repaid and re-borrowed until January 5, 2026, when all outstanding amounts must be repaid. The Credit Agreement contains customary indemnification requirements, representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries. In addition, the Credit Agreement contains financial covenants, tested quarterly, that limit our ratio of total debt to EBITDAX (as defined in the Credit Agreement) to 3:1 and require our ratio of consolidated current assets to consolidated current liabilities (as each is described in the Credit Agreement) to remain at 1:1 or higher. We were in compliance with all financial covenants as of March 31, 2024. Please refer to Note 6 - Debt in Part I, Item 1 of this report for additional discussion.
The borrowing base is subject to being redetermined semi-annually, commencing on or about April 1 and October 1 of each year during the four-year term of the Credit agreement. Our borrowing base can be adjusted as a result of changes in commodity prices, acquisitions or divestitures of proved properties, or financing activities, all as provided for in the Credit Agreement.
Cash flows provided by our operating activities, proceeds received from divestitures of properties, capital markets activities, and our capital expenditures, including acquisitions, all impact the amount we borrow under our revolving Credit Agreement. The amount outstanding on the Credit Agreement as of March 31, 2024, was $5.0 million.
Uses of Cash
We use cash for the acquisition and development of oil and gas properties, workovers and capital expenditures, operating and general and administrative costs, settlements of commodity derivative contracts, debt obligations including interest, and share repurchases. During the three months ended March 31, 2024, we spent approximately $0.1 million on capital expenditures.
The amount and allocation of our future capital expenditures will depend upon a number of factors, including our cash flows from operating, investing, and financing activities, our ability to execute our development program, and the number and size of acquisitions that we complete. In addition, the impact of oil and gas prices on investment opportunities, the availability of capital, tax law changes, and the timing and results of our development activities may lead to changes in funding requirements for future development. We periodically review our capital expenditure budget to assess if changes are necessary based on current and projected cash flows, acquisition and divestiture activities, and other factors. We will continue to monitor the economic environment through the remainder of the year and adjust our activity level as warranted.
Cash Flows
The following table summarizes our cash flows for the three months ended March 31, 2024 and 2023:
Three months ended March 31, |
||||||||||||
2024 |
2023 |
Change |
||||||||||
(in thousands) |
||||||||||||
Net cash provided by (used in): |
||||||||||||
Operating activities |
$ | (603 | ) | $ | 236 | $ | (839 | ) | ||||
Investing activities |
(179 | ) | (1,367 | ) | 1,188 | |||||||
Financing activities |
(563 | ) | (859 | ) | 296 | |||||||
Operating Activities. Cash used in operating activities for the three months ended March 31, 2024 was $0.6 million as compared to cash provided by operating activities of $0.2 million for the comparable period in 2023. The decrease in cash provided by operating activities is mainly attributable to a reduction in cash receipts from revenues as a result of a decrease in production during the first quarter of 2024 and payment of expenses in the first quarter of 2024 that were accrued for in the fourth quarter of 2023.
Investing Activities. Cash used in investing activities for the three months ended March 31, 2024 was $0.2 million as compared to $1.4 million for the comparable period in 2023. The primary use of cash in our investing activities for the three months ended March 31, 2024 was capital expenditures. For the three months ended March 31, 2023, the primary use of cash in our investing activities was capital expenditures related to returning idle wells to productions and improvements to our gathering system in East Texas.
Financing Activities. Cash used in financing activities for the three months ended March 31, 2024 was $0.6 million as compared to $0.9 million for the comparable period in 2023. Cash used in financing activities during the three months ended March 31, 2024 was primarily attributable to share repurchases of $0.4 million. Cash used in financing activities during the three months ended March 31, 2023 primarily related to cash dividends paid of $0.6 million.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We are required to maintain disclosure controls and procedures (as defined by Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
As of March 31, 2024, our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on the results of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls were not effective as of March 31, 2024 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Such determination was made due to a material weakness in our internal control over financial reporting as of December 31, 2023, as discussed below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 26, 2024, in connection with our assessment of the effectiveness of our internal control over financial reporting at the end of our last fiscal year, management identified a material weakness in our internal control over financial reporting as of December 31, 2023. Specifically, our accounting system was not designed appropriately, and reliance could not be placed on some of the control elements of the accounting system. These control elements include a lack of certain functionality related to system-based account reconciliations, missing systematic controls in areas such as segregation of duties enforcement and data input validation, and an absence of independent evaluation of third-party information technology controls (" ITGCs"). The Company's manual review controls partially compensate for the system design limitations, but this material weakness cannot be remediated without the implementation of a system-based solution.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting
Except as disclosed below there were no changes in our internal control over financial reporting during the three months ended March 31, 2024, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
As of March 31, 2024, we are evaluating our options with respect to a new accounting system and have not concluded as to the system or the time of an implementation.
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in any legal proceedings that we believe could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.
There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 26, 2024, under the heading “Item 1A. Risk Factors”, except as discussed below, and investors should review the risks provided in the Annual Report, prior to making an investment in the Company. The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in the Annual Report, under “Item 1A. Risk Factors”, and below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.
Our stock repurchases are discretionary and even if effected, they may not achieve the desired objectives.
On March 19, 2024, the Board of Directors authorized and approved an extension of the ongoing share repurchase program for up to $5.0 million of the currently outstanding shares of the Company’s common stock originally approved by the Board of Directors on April 26, 2023, and set to expire on June 30, 2024. Subject to any future extension in the discretion of the Board of Directors of the Company, the repurchase program is now scheduled to expire on June 30, 2025, or when a maximum of $5.0 million of the Company’s common stock has been repurchased, or when such program is discontinued by the Board of Directors. Under the stock repurchase program, shares may be repurchased from time to time in the open market or through negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws. Repurchases are made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. During the three months ended March 31, 2024, the Company repurchased 318,200 shares for $337 thousand, at a weighted average price of $1.06 per share, in open market transactions. The program does not obligate the Company to acquire a minimum amount of shares.
There can be no assurance that any repurchases pursuant to our stock repurchase program will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchase such shares. The amounts and timing of the repurchases may also be influenced by general market conditions, regulatory developments (including recent legislative actions which, subject to certain conditions, may impose an excise tax of 1% on our stock repurchases) and the prevailing price and trading volumes of our common stock. If our financial condition deteriorates or we decide to use our cash for other purposes, we may suspend repurchase activity at any time.
We may enter into strategic transactions in the future which may result in a material change in our operations and/or a change of control.
In the future, we or our majority stockholders, may enter into transactions with, or undertake transactions with, parties seeking to merge and/or acquire us and/or our operations. While neither we, nor our majority stockholders have entered into any such agreements or understandings to date, in the event that we or our majority stockholders do enter into such a transaction or transactions in the future, it could result in a change in our business focus, the acquisition of significant amounts of our outstanding common stock, or a change in our majority stockholders. We and our majority stockholders have not entered into any agreements relating to any strategic transaction involving the Company as of the date of this filing and may never enter into such agreement(s) in the future. Any future strategic transaction involving the Company or its operations may have a material effect on our operations, cash flows, results of operations, prospects, plan of operations, the listing of our common stock on the Nasdaq Capital Market, our officers, directors and majority stockholders, and the value of our securities.
We have written down, and may in the future be forced to further write-down, material portions of our assets due to low oil and natural gas prices.
The full cost method of accounting is used for oil and gas acquisition, exploration, development and production activities. Under the full cost method, all costs associated with the acquisition, exploration, and development of oil and natural gas properties are capitalized and accumulated in a country-wide cost center. This includes any internal costs that are directly related to development and exploration activities, but does not include any costs related to production, general corporate overhead, or similar activities. Proceeds received from disposals are credited against accumulated cost, except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized. The sum of net capitalized costs and estimated future development and dismantlement costs for each cost center is depleted on the equivalent unit-of-production method, based on proved oil and natural gas reserves. Excluded from amounts subject to depreciation, depletion, and amortization are costs associated with unevaluated properties.
Under the full cost method, net capitalized costs are limited to the lower of (a) unamortized cost reduced by the related net deferred tax liability and asset retirement obligations, and (b) the cost center ceiling. The cost center ceiling is defined as the sum of (i) estimated future net revenue, discounted at 10% per annum, from proved reserves, based on unescalated costs, adjusted for contract provisions, any financial derivatives qualifying as accounting hedges and asset retirement obligations, and unescalated oil and natural gas prices during the period, (ii) the cost of properties not being amortized, and (iii) the lower of cost or market value of unproved properties included in the cost being amortized, less income tax effects related to tax assets directly attributable to the natural gas and crude oil properties. If the net book value reduced by the related net deferred income tax liability and asset retirement obligations exceeds the cost center ceiling limitation, a non-cash impairment charge is required in the period in which the impairment occurs.
We perform a quarterly ceiling test for our only oil and natural gas cost center, which is the United States. During 2023 we recorded ceiling test write-downs of $26.7 million. The ceiling test incorporates assumptions regarding pricing and discount rates over which we have no influence in the determination of present value. In arriving at the ceiling test for the year ended December 31, 2023, we used an average price applicable to our properties of $78.22 per barrel for oil and $2.64 per Mcfe for natural gas, based on average prices per barrel of oil and per Mcfe of natural gas at the first day of each month of the 12-month period prior to the end of the reporting period, to compute the future cash flows of each of the producing properties at that date.
In the calculation of the ceiling test as of March 31, 2024, the Company used $77.48 per barrel for oil and $2.45 per one million British Thermal Units (MMbtu) for natural gas (as further adjusted for property, specific gravity, quality, local markets and distance from markets) to compute the future cash flows of the Company’s producing properties. The discount factor used was 10%. The Company recorded a $5.4 million ceiling test write-down of its oil and gas properties during the three months ended March 31, 2024, due to a reduction in the value of proved oil and natural gas reserves primarily as a result of a decrease in crude oil and natural gas prices, as well as reserves revisions related to wells shut-in during the first quarter of 2024 and decline curve updates.
Depending on actual commodity prices, estimated price differentials, lease operating costs, revisions to reserve estimates, and the amount and timing of capital expenditures, additional write-downs could be incurred in the future.
Material write-downs or impairments of our oil and gas properties have in the past and may in the future have a material adverse effect on our assets and/or our financial condition, either of which may cause the value of our securities to decline in value.
The Company’s operations have in the past been, and could in the future be, disrupted by natural or human causes beyond its control.
The Company’s operations are subject to disruption from natural or human causes beyond its control, including risks from hurricanes, severe storms, floods, lightning strikes, heat waves, other forms of severe weather, wildfires, ambient temperature increases, sea level rise, war, accidents, civil unrest, political events, fires, earthquakes, system failures, cyber threats, terrorist acts and epidemic or pandemic diseases such as the COVID-19 pandemic, some of which may be impacted by climate change and any of which could result in suspension of operations or harm to people or the natural environment. For example, during the three months ended March 31, 2024, decreases in our production quantities compared to the three months ended March 31, 2023, related to temporary weather-related events such as flooding and winter weather. Any of the above events could have a future material adverse effect on the Company’s results of operations or financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Sales of Unregistered Securities
There have been no sales of unregistered securities during the quarter ended March 31, 2024, and from the period from April 1, 2024, to the filing date of this Report.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth share repurchase activity for the respective periods:
Total Number |
Approximate |
|||||||||||||||
of Shares |
Dollar Value of |
|||||||||||||||
Purchased as |
Shares that |
|||||||||||||||
Part of |
May Yet Be |
|||||||||||||||
Publicly |
Purchased |
|||||||||||||||
Total Number |
Average |
Announced |
Under the |
|||||||||||||
of Shares |
Price Paid Per |
Plans or |
Plans or |
|||||||||||||
Period |
Purchased |
Share |
Programs(1) |
Programs(1) |
||||||||||||
January 1- January 31, 2024 |
242,600 | $ | 1.07 | 242,600 | $ | 4,332,523 | ||||||||||
February 1 - February 29, 2024 |
75,600 | $ | 1.03 | 75,600 | $ | 4,229,203 | ||||||||||
March 1 - March 31, 2024 |
— | $ | — | — | $ | 4,229,203 | ||||||||||
Total |
318,200 | $ | 1.06 | 318,200 | $ | 4,229,203 | ||||||||||
(1) On March 19, 2024, the Board of Directors authorized and approved an extension of the ongoing share repurchase program for up to $5.0 million of the currently outstanding shares of the Company’s common stock originally approved by the Board of Directors on April 26, 2023, and set to expire on June 30, 2024. Subject to any future extension in the discretion of the Board of Directors of the Company, the repurchase program is now scheduled to expire on June 30, 2025, or when a maximum of $5.0 million of the Company’s common stock has been repurchased, or when such program is discontinued by the Board of Directors. Under the stock repurchase program, shares may be repurchased from time to time in the open market or through negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws. Repurchases are made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase program is funded using the Company’s working capital. The program does not obligate the Company to acquire a minimum amount of shares.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Rule 10b5-1(c) Trading Plans. Our directors and executive officers may from time to time enter into plans or other arrangements for the purchase or sale of our shares that are intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or may represent a non-Rule 10b5-1 trading arrangement under the Exchange Act. During the quarter ended March 31, 2024, of the Company’s directors or officers (as defined in Rule 16a-1(f)) adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
| Exhibit No. |
Description |
Form |
File No. |
Exhibit |
Filing Date |
Filed / |
||||||
| 10.1† |
U.S. Energy Corp. Form of Restricted Stock Grant Agreement – Ryan L. Smith (170,000 shares grant – March 19, 2024) (2022 Equity Incentive Plan) | 8-K |
000-06814 |
10.1 | 3/21/2024 |
|||||||
| 10.2† |
U.S. Energy Corp. Form of Restricted Stock Grant Agreement (2022 Equity Incentive Plan) |
S-8 |
333-267267 | 4.3 |
9/2/2023 | |||||||
| 31.1* |
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 |
X |
||||||||||
| 31.2* |
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 |
X |
||||||||||
| 32.1♦ |
Certification of Chief Executive Officer under Rule 13a-14(b) |
X |
||||||||||
| 32.2♦ |
Certification of Chief Financial Officer under Rule 13a-14(b) |
X |
||||||||||
| 101.INS |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
X |
||||||||||
| 101.SCH* |
Inline XBRL Schema Document |
X |
||||||||||
| 101.CAL* |
Inline XBRL Calculation Linkbase Document |
X |
||||||||||
| 101.DEF* |
Inline XBRL Definition Linkbase Document |
X |
||||||||||
| 101.LAB* |
Inline XBRL Label Linkbase Document |
X |
||||||||||
| 101.PRE* |
Inline XBRL Presentation Linkbase Document |
X |
||||||||||
| 104* |
Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set |
X |
| * |
Filed herewith. |
|
|
|
| † |
Exhibit constitutes a management contract or compensatory plan or agreement. |
|
|
|
| ♦ |
Furnished herewith. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| U.S. ENERGY CORP. |
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| Date: May 9, 2024 |
By: |
/s/ Ryan L. Smith |
| RYAN L. SMITH, Chief Executive Officer (Principal Executive Officer) |
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| Date: May 9, 2024 |
By: |
/s/ Mark L. Zajac |
| MARK L. ZAJAC, Chief Financial Officer (Principal Financial and Accounting Officer) |
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Exhibit 31.1
CERTIFICATION
I, Ryan L. Smith, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of U.S. Energy Corp.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report; |
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4. |
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: May 9, 2024
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By: |
/s/ Ryan L. Smith |
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Ryan L. Smith |
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Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Mark L. Zajac, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of U.S. Energy Corp.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report; |
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4. |
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: May 9, 2024 |
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By: |
/s/ Mark L. Zajac |
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Mark L. Zajac |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of U.S. Energy Corp. (the “Company”) for the period ended March 31, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Ryan L. Smith, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
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(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company, at the dates and for the periods indicated. |
Date: May 9, 2024
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By: |
/s/ Ryan L. Smith |
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Ryan L. Smith |
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Chief Executive Officer (Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of U.S. Energy Corp. (the “Company”) for the period ended March 31, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Mark L. Zajac, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
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(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company, at the dates and for the periods indicated. |
Date: May 9, 2024
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By: |
/s/ Mark L. Zajac |
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Mark L. Zajac |
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Chief Financial Officer (Principal Financial and Accounting Officer) |