Under our $30.2 million capital expenditures budget for 2014, we have spent approximately $17.3 million to fund our 2014 oil and gas drilling programs through June 30, 2014.The remaining $12.9 million is currently budgeted to be spent on exploration, development and acquisition initiatives in South Texas and in the Williston Basin of North Dakota.*
On May 7, 2014, the Company entered into a Participation Agreement with a private South Texas based oil and gas company (“Seller”) to acquire 33% of the Seller’s interest in approximately 12,100 gross (3,384 net) acres in Dimmit County, Texas.The acreage consists of 4,020 gross (1,181 net) acres of primary leasehold acreage and 8,080 gross (2,203 net) acres of farm-in acreage, to be earned through a continuous drilling program. The farm-in acreage has an initial two well commitment and a 12.5% working interest carry for the leaseholder (the “Farmor”) in the first 10 wells. After 100% payout of all costs for the first 10 wells that are drilled under the farm-in program, the Farmor will back in for their 12.5% retained working interest in the prospect. The Seller also retained a 25% working interest back-in after 115% of project payout has been received by the Company. The Company paid $3.9 million to enter into the transaction, which included leasehold and farm-in acquisition costs as well as our proportionate share of drilling costs for the initial test well in the prospect.
On May 27, 2014, the Company entered into a Purchase and Sale Agreement to sell certain Williston Basin assets. Under the terms of the sale agreement, the Company sold its interest in approximately 285 net acres and 16 gross (0.62 net) producing wells in Williams and McKenzie Counties, North Dakota. The transaction closed in June 2014 with an effective date of January 1, 2014.The Company received $12.2 million at closing which included $681,000 in adjustments related to revenue receivable and accounts payable through the date of closing.The $11.5 million balance of the sale proceeds was recorded as a credit to our full cost pool.
The Company currently participates in drilling programs with three operators in Zavala and Dimmit Counties, Texas which are prospective for the Buda Limestone and other formations.We currently participate in approximately 35,221 gross (9,130 net) acres in the region.At June 30, 2014, we had 27 gross (7.48 net) producing wells in these prospects comprised of 13 gross (3.60 net) Buda Limestone wells, 3 gross (0.90 net) Eagle Ford Shale wells and 11 gross (2.98 net) Austin Chalk wells.During the quarter ended June 30, 2014, the Company produced approximately 538 net BOE/D from this region, which represents an approximate 32% increase compared to Q1 2014’s average net daily production from the region.
The Beeler # 17H, Beeler Unit F #19H and the Beeler Unit C #20H well costs have been approximately $2.6 million per well. Going forward we are currently scheduled to drill an additional four gross Buda wells with Contango during the balance of the year.The drilling rig utilized in our program with Contango is currently drilling a well at another site in which we do not participate.We anticipate that the rig will return to drill our next participated well in the Booth -Tortuga acreage block in early September 2014. All four wells are proposed to be drilled with lateral lengths of9,000 plus feet.
Under an Area of Mutual Interest Election, the Company acquired a 7.5% working interest in an additional 800 gross (~60 net) acres in the Booth-Tortuga prospect.This acreage is operated by a private Texas-based company which has proposed to drill two wells in this acreage.The acreage block lies between the Beeler Unit D #16H and the Beeler Unit A #9H well locations.
The Company participates in drilling programs with numerous operators in the Williston Basin of North Dakota.We participate in approximately 74,280 gross (2,939 net) acres in Williams, McKenzie and Mountrail Counties, North Dakota.At June 30, 2014, the Company participated in 87 gross (10.10 net) Bakken and Three Forks formation wells.During the quarter ended June 30, 2014, the Company produced approximately 660 net BOE/D from this region, which represents a slight decrease over Q1 2014’s average daily production of 679 net BOE/D, primarily due to the divestiture of assets in North Dakota mentioned earlier in this release.
The following table summarizes current activity under our Williston Basin drilling programs.
“At the mid-year point I am pleased to report a second successive profitable quarter of 2014 on behalf of the Company and its shareholders.We have made strategic acquisitions and divestitures during the first half of the year which have enabled the Company to maintain a low debt level while adding additional prospects and development opportunities in South Texas,” said Keith Larsen, the Company’s CEO.”We continue to delineate the potential of our prospects in South Texas, notably through drilling a dual lateral well, participating in the fracture stimulation of an existing wellbore and through extending the lateral length on the Beeler #20 well to over 9,000 feet.Additionally, we are fracture stimulating both of the initial test wells in our Q2 2014 South Texas acquisition acreage and will evaluate those results in the coming weeks.Looking forward, based on our recent completions in South Texas, we are confident that our third quarter results will reflect further production gains,” he added.
The following table sets forth selected financial information for the three and six months ended June 30, 2014 and 2013.This information is derived from the unaudited financial statements included in our Quarterly Report on Form 10-Q for the three months ended June 30, 2014, and should be read in conjunction with the Form 10-Q and the financial statements contained therein, including the notes to the financial statements.
In addition to reporting net income (loss) as defined under GAAP, in this release we also present net earnings before interest, income taxes, depreciation, depletion, and amortization, accretion of discount on asset retirement obligations, non-cash impairments, unrealized derivative gains and losses and non-cash compensation expense (“Modified EBITDAX”), which is a non-GAAP performance measure.Modified EBITDAX excludes certain items that the Company believes affect the comparability of operating results and can exclude items that are generally one-time or whose timing and/or amount cannot be reasonably estimated.Modified EBITDAX is a non-GAAP measure that is presented because the Company believes that it provides useful additional information to investors, as a performance measure.We believe that Modified EBITDAX is useful to investors because similar measures are frequently used by securities analysts, investors, and other interested parties in their evaluation of companies in the energy industry.Our management uses Modified EBITDAX to manage our business, including preparation of our annual operating budget and financial projections.Modified EBITDAX does not represent, and should not be considered an alternative to, GAAP measurements such as net income (loss) (its most directly comparable GAAP measure), or as a measure of liquidity, and our calculations thereof may not be comparable to similarly titled measures reported by other companies.Our management does not view Modified EBITDAX in isolation and also uses other measurements, such as net income (loss) and revenues, to measure operating performance.The following table provides a reconciliation of net income (loss) to Modified EBITDAX for the periods presented:
Adjusted Net Income (Loss) is another supplemental non-GAAP financial measure that is used by management and external users of the Company’s condensed consolidated financial statements.The Company defines Adjusted Net Income as net income after adjusting for the impact of certain non-recurring items, including the change in the fair value of derivative instruments, impairments of oil and gas properties, and certain non-recurring charges to the reported net income (loss) as defined under GAAP set forth in the table below.
The following table provides a reconciliation of net income (loss) (GAAP) to Adjusted Net Income (Loss) (non-GAAP):
U.S. Energy Corp. is a natural resource exploration and development company with oil and gas assets located primarily in North Dakota and Texas.The Company is headquartered in Riverton, Wyoming and trades on the NASDAQ Capital Market under the symbol “USEG”.
* Actual capital expenditures for each regional drilling program are contingent upon timing, well costs and success.If our drilling initiatives in any program are not initially successful, or do not progress as projected, funds allocated for those drilling programs may be allocated to other drilling and/or acquisitions in due course.The projected number of gross and net wells could vary in each of these cases.