UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

x
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarter ended March 31, 2013 or
   
o
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: 0-6814



U.S. ENERGY CORP.
(Exact name of registrant as specified in its charter)

Wyoming
 
83-0205516
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
877 North 8 th West, Riverton, WY
 
82501
(Address of principal executive offices)
 
(Zip Code)
     
Registrant's telephone number, including area code:
 
(307) 856-9271

Not Applicable
(Former name, address and fiscal year, if changed since last report)

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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES   x                       NO   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

YES   x                       NO   o
 
 
 
 
 
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     o
Accelerated filer     x
Non-accelerated filer    o   (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES   o                 NO   x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

At May 7, 2013 there were issued and outstanding 27,682,602 shares of the Company’s common stock, $0.01 par value.

 
 
 
-2-
 

 

U.S. ENERGY CORP. and SUBSIDIARIES

INDEX

   
Page No.
 
     
 
     
 
     
 
     
 
     
 
     
 
     
     
     
     
 
     
     
     
     
     
     
     
     
 
     
 
Certifications
See Exhibits
 
 
 
 
-3-
 
 
 

 
PART I.  FINANCIAL INFORMATION

ITEM 1.   Financial Statements

U.S. ENERGY CORP.
 
 
ASSETS
 
(Unaudited)
 
(In thousands, except shares)
 
             
   
March 31,
   
December 31,
 
   
2013
   
2012
 
Current assets:
           
Cash and cash equivalents
  $ 2,547     $ 2,825  
Available for sale securities
    144       183  
Accounts receivable trade
    5,884       5,182  
Commodity risk management asset
    --       472  
Assets held for sale
    15,369       17,051  
Other current assets
    338       302  
Total current assets
    24,282       26,015  
                 
Investment
    2,239       2,264  
                 
Properties and equipment
               
Oil & gas properties under full cost method,
               
net of $46,915 and $43,454 accumulated
               
depletion, depreciation and amortization
    82,201       85,634  
Undeveloped mining claims
    20,739       20,739  
Property, plant and equipment, net
    4,362       4,435  
Net properties and equipment
    107,302       110,808  
                 
Other assets
    1,742       1,740  
Total assets
  $ 135,565     $ 140,827  
                 


 
The accompanying notes are an integral part of these statements.
 
-4-
 
 
U.S. ENERGY CORP.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
(Unaudited)
 
(In thousands, except shares)
 
             
   
March 31,
   
December 31,
 
   
2013
   
2012
 
Current liabilities:
           
Accounts payable
  $ 3,196     $ 2,692  
Accrued compensation
    314       295  
Commodity risk management liability
    145       --  
Current portion of debt
    200       200  
Liabilities held for sale
    9,978       10,022  
Other current liabilities
    49       44  
Total current liabilities
    13,882       13,253  
                 
Long-term debt, net of current portion
    10,000       10,000  
                 
Asset retirement obligations
    706       686  
                 
Other accrued liabilities
    742       771  
                 
Commitment and contingencies
               
                 
Shareholders' equity
               
Common stock, $.01 par value; unlimited shares
               
authorized; 27,667,602 and 27,652,602
               
shares issued, respectively
    277       277  
Additional paid-in capital
    123,133       123,078  
Accumulated deficit
    (13,237 )     (7,339 )
Other comprehensive income
    62       101  
Total shareholders' equity
    110,235       116,117  
Total liabilities and shareholders' equity
  $ 135,565     $ 140,827  
                 
 
 
The accompanying notes are an integral part of these statements.
 
-5-
 
 
U.S. ENERGY CORP.
 
 
(Unaudited)
 
(In thousands except per share data)
 
             
   
Three months ended March 31,
 
   
2013
   
2012
 
Oil, gas, and NGL production revenues:
  $ 7,879     $ 8,335  
                 
Operating expenses:
               
Oil and gas
    2,799       2,893  
Oil and gas depreciation, depletion and amortization
    3,461       3,641  
Impairment of oil and gas properties
    5,828       --  
Water treatment plant
    417       509  
Mineral holding costs
    227       110  
General and administrative
    1,307       1,894  
      14,039       9,047  
Loss from operations
    (6,160 )     (712 )
Other income and expenses:
               
Realized gain (loss) on risk management activities
    14       (143 )
Unrealized (loss) on risk management activities
    (616 )     (59 )
Gain on the sale of assets
    696       10  
Equity (loss) in unconsolidated investment
    (25 )     (60 )
Gain on sale of marketable securities
    --       47  
Miscellaneous income
    39       118  
Interest income
    2       5  
Interest expense
    (80 )     (39 )
      30       (121 )
Loss before income taxes and discontinued operations
    (6,130 )     (833 )
 
 
 
The accompanying notes are an integral part of these statements.
 
-6-
 
 
U.S. ENERGY CORP.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
(In thousands except per share data)
 
             
   
Three months ended March 31,
 
   
2013
   
2012
 
Income taxes:
           
Current (provision for)
    --       (104 )
Deferred benefit from
    --       492  
      --       388  
                 
(Loss) from continuing operations
    (6,130 )     (445 )
                 
Discontinued operations:
               
Discontinued operations, net of taxes
    232       64  
      232       64  
Net (loss)
  $ (5,898 )   $ (381 )
                 
Net (loss) income per share basic and diluted
               
(Loss) from continuing operations
  $ (0.22 )   $ (0.01 )
Income from discontinued operations
    0.01       --  
Net (loss) per share
  $ (0.21 )   $ (0.01 )
                 
Weighted average shares outstanding
               
Basic and Diluted
    27,667,102       27,438,584  
                 
 
 
The accompanying notes are an integral part of these statements.
 
-7-
 
 
U.S. ENERGY CORP.
 
 
(Unaudited)
 
(In thousands)
 
             
   
Three months ended March 31,
 
   
2013
   
2012
 
Net (loss)
  $ (5,898 )   $ (381 )
Other comprehensive income (loss):
               
Marketable securities, net of tax
    (39 )     18  
                 
Total comprehensive (loss)
  $ (5,937 )   $ (363 )
                 
 
 
The accompanying notes are an integral part of these statements.
 
-8-
 
 
U.S. ENERGY CORP.
 
 
(Unaudited)
 
   
(In thousands)
 
   
For the thee months ended March 31,
 
   
2013
   
2012
 
Cash flows from operating activities:
           
Net loss
  $ (5,898 )   $ (381 )
(Gain) from discontinued operations
    (232 )     (64 )
(Loss) from continuing operations
    (6,130 )     (445 )
Adjustments to reconcile net loss to
               
net cash provided by operations
               
Depreciation, depletion & amortization
    3,532       3,798  
Change in fair value of commodity price
               
risk management activities, net
    616       59  
Impairment of oil and gas properties
    5,828       --  
(Gain) on sale of marketable securities
    --       (47 )
Equity loss from Standard Steam
    25       60  
Net change in deferred income taxes
    --       (455 )
(Gain) on sale of assets
    (696 )     (10 )
Noncash compensation
    98       50  
Noncash services
    16       23  
Net changes in assets and liabilities
    (24 )     (2,269 )
Net cash provided by operating activities
    3,265       764  
Cash flows from investing activities:
               
Acquisition & development of oil & gas properties
    (6,074 )     (12,047 )
Acquisition of property and equipment
    --       (3 )
Proceeds from sale of oil and gas properties
    --       18,119  
Proceeds from sale of marketable securities
    --       62  
Proceeds from sale of property and equipment
    2,563       22  
Net change in restricted investments
    (37 )     (84 )
Net cash (used in) provided by investing activities:
    (3,548 )     6,069  
                 
 
 
The accompanying notes are an integral part of these statements.
 
-9-
 
 
 
U.S. ENERGY CORP.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
   
(In thousands)
 
   
For the thee months ended March 31,
 
   
2013
   
2012
 
Cash flows from financing activities:
           
Issuance of common stock
    --       50  
Repayments of debt
    (79 )     (12,065 )
Net cash (used in) financing activities
    (79 )     (12,015 )
                 
Net cash (used in) provided by operating activities
               
of discontinued operations
    84       92  
                 
Net decrease in cash and cash equivalents
    (278 )     (5,090 )
                 
Cash and cash equivalents at beginning of period
    2,825       12,874  
                 
                 
Cash and cash equivalents at end of period
  $ 2,547     $ 7,784  
                 
Supplemental disclosures:
               
Interest paid
  $ 57     $ 64  
                 
Non-cash investing and financing activities:
               
                 
Unrealized gain from available for sale securities
  $ 62     $ 96  
                 
Acquisition and development of oil and gas
               
properties through accounts payable
  $ 230     $ 1,581  
                 
Acquisition and development of oil and gas
               
through asset retirement obligations
  $ 11     $ 45  
                 
 
 
The accompanying notes are an integral part of these statements.
 
-10-
U.S. ENERGY CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
1)       Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for the periods ended March 31, 2013 and March 31, 2012 have been prepared by U.S. Energy Corp. (“we,” “us,” “U.S. Energy” or the “Company”) in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).  The financial statements at March 31, 2013 include the Company’s wholly owned subsidiary Energy One LLC (“Energy One”), which owns the majority of the Company’s oil and gas assets.  The Condensed Consolidated Balance Sheet at December 31, 2012 was derived from audited financial statements.  In the opinion of the Company, the accompanying condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company for the reported periods.  Entities in which the Company holds at least 20% ownership or in which there are other indicators of significant influence are accounted for by the equity method, whereby the Company records its proportionate share of the entities’ results of operations.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.  The unaudited condensed consolidated financial statements should be read in conjunction with the Company's December 31, 2012 Annual Report on Form 10-K (the “2012 10-K”).  Subsequent events have been evaluated for financial reporting purposes through the date of the filing of this Form 10-Q.

2)       Summary of Significant Accounting Policies

We follow accounting standards set by the Financial Accounting Standards Board, commonly referred to as the “FASB.”  The FASB sets generally accepted accounting principles (U.S. GAAP) that we follow to ensure we consistently report our financial condition, results of operations, and cash flows.

For detailed descriptions of our significant accounting policies, please see the 2012 10-K (Note B pages 92 to 100).

Use of Estimates

The preparation of financial statements in conformity with U.S. 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 oil and gas reserves used for depletion and impairment considerations and the cost of future asset retirement obligations.  Due to inherent uncertainties, including the future prices of oil and gas, these estimates could change in the near term and such changes could be material.

Properties and Equipment

Land, buildings, improvements, machinery and equipment are carried at cost.  Depreciation of buildings, improvements, machinery and equipment is provided principally by the straight-line method over estimated useful lives ranging from 3 to 45 years.
 

 
 
-11-
U.S. ENERGY CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)

 
Components of Property and Equipment as of March 31, 2013 and December 31, 2012 are as follows:
 
   
(In thousands)
 
   
March 31,
   
December 31,
 
   
2013
 
2012
 
Oil & Gas properties
 
 Unproved
  $ 9,171     $ 9,169  
 Proved
    119,945       119,919  
      129,116       129,088  
Less accumulated depreciation
 
 depletion and amortization
    (46,915 )     (43,454 )
 Net book value
    82,201       85,634  
                 
 Mineral properties
    20,739       20,739  
                 
 Building, land and equipment
    8,410       8,469  
 Less accumulated depreciation
    (4,048 )     (4,034 )
 Net book value
    4,362       4,435  
 Totals
  $ 107,302     $ 110,808  
                 

Oil and Gas Properties

The Company follows the full cost method in accounting for its oil and gas properties.  Under the full cost method, all costs associated with the acquisition, exploration and development of oil and 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 property 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 gas reserves.  Excluded from amounts subject to depletion are costs associated with unproved properties.

Full Cost Pool - Full cost pool capitalized costs are amortized over the life of production of proven properties.  Capitalized costs at March 31, 2013 and December 31, 2012 which were not included in the amortized cost pool were $9.2 million and $9.2 million, respectively.  These costs consist of exploratory wells in progress, seismic costs that are being analyzed for potential drilling locations as well as land costs related to unevaluated properties.  No capitalized costs related to unevaluated properties are included in the amortization base at March 31, 2013 and December 31, 2012.  It is anticipated that these costs will be added to the full cost amortization pool in the next two years as properties are proved, drilled or abandoned.
 
 
 
-12-
U.S. ENERGY CORP
.Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)

 
Ceiling Test Analysis - Under the full cost method, net capitalized costs are limited to the lower of unamortized cost reduced by the related net deferred tax liability and asset retirement obligations or 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 average prices per barrel of oil and per MMbtu of natural gas at the first day of each month in the 12-month period prior to the end of the reporting period and costs, adjusted for contract provisions and financial derivatives that hedge our oil and gas revenue and asset retirement obligations, (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, reduced by (iv) the income tax effects related to differences between the book and tax basis of the crude oil and natural gas 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 each of our oil and gas cost centers.  There is only one such cost center in 2013.  The reserves used in the ceiling test and the ceiling test itself incorporate assumptions regarding pricing and discount rates over which management has no influence in the determination of present value.  In arriving at the ceiling test for the quarter ended March 31, 2013, we used $92.63 per barrel for oil and $2.950 per MMbtu for natural gas (and adjusted for property specific gravity, quality, local markets and distance from markets) to compute the future cash flows of our producing properties.  The discount factor used was 10%.

During the three months ended March 31, 2013, the Company recorded a proved property impairment of $5.8 million related to its oil and gas assets.  The impairment was primarily due to a decline in the price of oil, additional capitalized well costs and changes in production. There were no proved property impairments recorded during the first three months of 2012.  Management will continue to review our unproved properties based on market conditions and other changes and, if appropriate, unproved property amounts may be reclassified to the amortized base of properties within the full cost pool.

Wells in Progress - Wells in progress represent the costs associated with unproved wells that have not reached total depth or have not been completed as of period end.  They are classified as wells in progress and withheld from the depletion calculation.  The costs for these wells are then transferred to evaluated property when the wells reach total depth and are completed and the costs become subject to depletion and the ceiling test calculation in future periods.

Mineral Properties

We capitalize all costs incidental to the acquisition of mineral properties.  Mineral exploration costs are expensed as incurred.  When exploration work indicates that a mineral property can be economically developed as a result of establishing proved and probable reserves, costs for the development of the mineral property as well as capital purchases and capital construction are capitalized and amortized using units of production over the estimated recoverable proved and probable reserves. Costs and expenses related to general corporate overhead are expensed as incurred. All capitalized costs are charged to operations if we subsequently determine that the property is not economical due to permanent decreases in market prices of commodities, excessive production costs or depletion of the mineral resource. Mineral properties at March 31, 2013 and December 31, 2012 reflect capitalized costs associated with our Mt. Emmons molybdenum property near Crested Butte, Colorado.
 
 
 
-13-
U.S. ENERGY CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)

 
Our carrying balance in the Mt. Emmons property at March 31, 2013 and December 31, 2012 is as follows:
 
 
   
(In thousands)
 
   
March 31,
   
December 31,
 
   
2013
 
2012
 
Costs associated with Mount Emmons
 
 beginning of year
  $ 20,739     $ 20,739  
 Development costs
    --       --  
 Costs at the end of the period
  $ 20,739     $ 20,739  
                 

 
Derivative Instruments

The Company uses derivative instruments, typically fixed-rate swaps and costless collars, to manage price risk underlying its oil and gas production.  All derivative instruments are recorded in the consolidated balance sheets at fair value. The Company offsets fair value amounts recognized for derivative instruments executed with the same counterparty. Although the Company does not designate any of its derivative instruments as a cash flow hedge, such derivative instruments provide an economic hedge of our exposure to commodity price risk associated with forecasted future oil and gas production. These contracts are accounted for using the mark-to-market accounting method and accordingly, the Company recognizes all unrealized and realized gains and losses related to these contracts currently in earnings which are classified as gain (loss) on derivative instruments, net in our consolidated statements of operations. The Company may also use puts, calls and basis swaps in the future.

The Company’s Board of Directors sets all risk management policies and reviews the status and results of derivative activities, including volumes, types of instruments and counterparties on a quarterly basis. These policies require that derivative instruments be executed only by the Chief Executive Officer or President. The agreements with approved counterparties identify the Chief Executive Officer and President as the only Company representatives authorized to execute trades. See Note 5, Commodity Price Risk Management, for further discussion.

Revenue Recognition

The Company records oil and natural gas revenue under the sales method of accounting. Under the sales method, we recognize revenues based on the amount of oil or natural gas sold to purchasers, which may differ from the amounts to which we are entitled based on our interest in the properties. Natural gas balancing obligations as of March 31, 2013 were not significant.

Revenues from real estate operations are reported on a gross revenue basis and are recorded at the time the service is provided.
 
 
 
-14-
U.S. ENERGY CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)

 

Recent Accounting Pronouncements

In December 2011, the FASB issued Accounting Standard Update No. 2011-11, Balance Sheet:  Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”).  The objective of ASU 2011-11 is to require an entity to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position.  ASU 2011-11 is effective for interim and annual reporting periods beginning on or after January 1, 2013 and should be applied retrospectively.  The adoption of this standard did not have an impact on the Company’s consolidated financial statements.

The Company has reviewed other current outstanding statements from the FASB and does not believe that any of those statements will have a material adverse effect on the financial statements of the Company when adopted.

3)       Assets Held for Sale

In January 2011, we made the decision to sell our Remington Village multifamily project in Gillette, Wyoming and plan to use the proceeds to further the development of our oil and gas business, reduction of debt or for general corporate purposes.

As of March 31, 2013, the accompanying condensed consolidated balance sheets include approximately $15.4 million in book value of assets held for sale related to Remington Village, net of accumulated depreciation, and $10.0 million in liabilities held for sale.  Because Remington Village has been classified as an asset held for sale, scheduled depreciation of $220,000 for the first three months of 2013 and $224,000 for the first three months of 2012 was not recorded.  Remington is pledged as collateral on a $10.0 million note.  At such time as Remington is sold, the debt balance will be retired.

Operations related to Remington Village are shown in discontinued operations on the accompanying condensed consolidated statements of operations.

On March 5, 2013, the Company entered into a Purchase and Sale Agreement (“PSA”) with an undisclosed buyer to sell its Remington Village apartment complex located in Gillette, Wyoming for $15.0 million.  The transaction is anticipated to close in the second quarter of 2013 although there is no assurance that the transaction will close at this time.

In September 2012, we made the decision to sell our corporate aircraft and related facilities to cut overhead costs and plan to use the proceeds to further the development of our oil and gas business, reduction of debt or for general corporate purposes.  During the quarter ended March 31, 2013, the Company sold the corporate aircraft for $1.9 million and the related facilities for $767,000.
 

 
 
-15-
U.S. ENERGY CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
 

 
The following assets and liabilities have been segregated and included in the Assets Held for Sale and Liabilities Held for Sale, as appropriate, in the condensed consolidated balance sheets as of March 31, 2013 and December 31, 2012:
 
   
(In thousands)
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
 Cash and cash equivalents
  $ 358     $ 211  
 Accounts receivable
    37       19  
 Prepaid expenses
    78       42  
 Property, plant and equipment, net
    14,775       14,775  
 Restricted investment
    121       120  
 Assets of discontinued operations
    15,369       15,167  
                 
 Corporate aircraft and related facilities
    --       1,884  
 Assets held for sale
  $ 15,369     $ 17,051  
                 
 Accounts payable
  $ 125     $ 144  
 Accrued and other liabilities
    311       257  
 Long term debt
    9,542       9,621  
 Liabilities held for sale
  $ 9,978     $ 10,022  
                 
 
4)       Asset Retirement Obligations

We record the fair value of the reclamation liability for our inactive mining properties and our operating oil and gas properties as of the date that the liability is incurred.  We review the liability each quarter and determine if a change in estimate is required as well as accrete the discounted liability on a quarterly basis for the future liability.  Final determinations are made during the fourth quarter of each year.  We deduct any actual funds expended for reclamation during the quarter in which it occurs.

The following is a reconciliation of the total liability for asset retirement obligations:
 
   
(In thousands)
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
Beginning asset retirement obligation
  $ 686     $ 510  
Accretion of discount
    9       34  
Liabilities incurred
    11       142  
Ending asset retirement obligation
  $ 706     $ 686  
                 
Mining properties
  $ 165     $ 162  
Oil & Gas wells
    541       524  
Ending asset retirement obligation
  $ 706     $ 686  
                 
 
 
 
 
-16-
U.S. ENERGY CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
 
 
5)       Commodity Price Risk Management

Through our wholly-owned subsidiary Energy One, we have entered into commodity derivative contracts (“economic hedges”) with BNP Paribas (“BNP”) and Wells Fargo, as described below.  The derivative contracts are priced using West Texas Intermediate (“WTI”) quoted prices.  The Company is a guarantor of Energy One’s obligations under the economic hedges.  The objective of utilizing the economic hedges is to reduce the effect of price changes on a portion of our future oil production, achieve more predictable cash flows in an environment of volatile oil and gas prices and to manage our exposure to commodity price risk. The use of these derivative instruments limits the downside risk of adverse price movements.  However, there is a risk that such use may limit our ability to benefit from favorable price movements. Energy One may, from time to time, add incremental derivatives to hedge additional production, restructure existing derivative contracts or enter into new transactions to modify the terms of current contracts in order to realize the current value of its existing positions. The Company does not engage in speculative derivative activities or derivative trading activities, nor does it use derivatives with leveraged features.

Energy One's commodity derivative contracts as of March 31, 2013 are summarized below:

           
Quantity
         
Settlement Period
 
Counterparty
 
Basis
 
(Bbls/day)
 
Strike Price
 
                       
Crude Oil Costless Collar
                     
10/01/12 - 03/31/13
 
 Wells Fargo
 
 WTI
    200  
Put:
  $ 85.00  
                 
Call:
  $ 101.00  
Crude Oil Costless Collar
                         
01/01/13 - 06/30/13
 
 Wells Fargo
 
 WTI
    200  
Put:
  $ 90.00  
                 
Call:
  $ 105.75  
Crude Oil Costless Collar
                         
04/01/13 - 06/30/13
 
 Wells Fargo
 
 WTI
    200  
Put:
  $ 90.00  
                 
Call:
  $ 97.50  
Crude Oil Costless Collar
                         
10/01/12 - 09/30/13
 
 BNP Paribas
 
 WTI
    200  
Put:
  $ 95.00  
                 
Call:
  $ 116.60  
Crude Oil Costless Collar
                         
07/01/13 - 09/30/13
 
 Wells Fargo
 
 WTI
    400  
Put:
  $ 90.00  
                 
Call:
  $ 97.50  
Crude Oil Costless Collar
                         
10/01/13 - 12/31/13
 
 Wells Fargo
 
 WTI
    600  
Put:
  $ 90.00  
                 
Call:
  $ 97.50  
Crude Oil Costless Collar
                         
01/01/14 - 06/30/14
 
 Wells Fargo
 
 WTI
    300  
Put:
  $ 90.00  
                 
Call:
  $ 95.00  
 
 
 
-17-
U.S. ENERGY CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
 

The following table details the fair value of the derivatives recorded in the applicable condensed consolidated balance sheet, by category:
 
 
As of March 31, 2013
 
 
(in thousands)
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Balance Sheet
 
Fair
 
Balance Sheet
 
Fair
 
 
Classification
 
Value
 
Classification
 
Value
 
                 
Crude oil costless collars
Current Asset
  $ -  
Current Liability
  $ 145  
                     

Unrealized gains and losses resulting from derivatives are recorded at fair value on the condensed consolidated balance sheet and changes in fair value are recognized in the unrealized gain (loss) on risk management activities line on the condensed consolidated statement of operations. Realized gains and losses resulting from the contract settlement of derivatives are recorded in the commodity price risk management activities line on the condensed consolidated statement of income.

6)       Fair Value Measurements

We follow authoritative guidance regarding fair value measurements for all assets and liabilities measured at fair value.  That guidance establishes a fair value hierarchy that prioritizes the inputs the Company uses to measure fair value based on the significance level of the following inputs:

·  
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets.
·  
Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs or significant value drivers are observable.
·  
Level 3 - Significant inputs to the valuation model are unobservable.

Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the nonfinancial assets and liabilities and their placement in the fair value hierarchy levels.  As of March 31, 2013, we held $144,000 of investments in marketable securities.  We determine our estimate of the fair value of derivative instruments using a market approach based on several factors, including quoted prices in active markets, and quotes from third parties.

The following table summarizes, by major security type, the fair value and any unrealized gain of our available for sale securities.  The unrealized gain is recorded on the condensed consolidated balance sheets as other comprehensive income, a component of shareholders’ equity.
 
 
 
-18-
U.S. ENERGY CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
 
 
   
(In thousands)
 
         
Fair Value Measurements at March 31, 2013 Using
 
   
March 31,
   
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
Description
 
2013
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Available for sale securities
  $ 144     $ 144     $ --     $ --  
Assets held for sale
    15,369       --       --       15,369  
                                 
Total assets
  $ 15,513     $ 144     $ --     $ 15,369  
                                 
Commodity risk management liability
  $ 145     $ --     $ 145     $ --  
Other accrued liabilities
    742       --       --       742  
                                 
Total
  $ 887     $ --     $ 145     $ 742  
                                 

 
The revision in value related to Remington Village is a result of changes in cash held by Remington, prepaid expenses and accounts receivable.
 
   
Change in Level 3 Fair Value Measurements
       
   
(In thousands)
 
   
December 31,
   
Sale of
         
March 31,
 
Description
 
2012
   
Assets
   
Revision of Value
   
2013
 
                         
Assets held for sale
                       
Remington Village
  $ 15,167     $ --     $ 202     $ 15,369  
Corporate aircraft and facilities
    1,884       (1,884 )     --       --  
                                 
Total
  $ 17,051     $ (1,884 )   $ 202     $ 15,369  
                                 
 

Our other financial instruments include cash and cash equivalents, accounts receivable, accounts payable, other current liabilities and long-term debt.  The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximate fair value because of their immediate or short-term maturities.  The carrying value of our debt approximates its fair market value since interest rates have remained generally unchanged from the issuance of the debt.  The fair value and carrying value of our debt was $19.7 million as of March 31, 2013.

7)       Debt

At March 31, 2013, total debt in the amount of $19.7 million consists of $9.5 million in debt on our multifamily housing project, $10.0 million in debt from our reserve based senior credit facility and $200,000 in debt related to the purchase of land near our Mt. Emmons molybdenum property.
 
 
 
 
-19-
U.S. ENERGY CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)

 
On May 5, 2011 we borrowed $10.0 million from a commercial bank against Remington Village.  At March 31, 2013, the balance due on this note was $9.5 million.  The note is collateralized by the Company’s multi-family property in Gillette, Wyoming.  The note is amortized over 20 years with a balloon payment at the end of five years with an interest rate of 5.50% per annum.  Proceeds of the note were used to fund general business obligations.  When Remington is sold, the proceeds from the sale will first be applied to the retirement of the debt and the remainder applied to project development and general corporate overhead.  Therefore, the debt is included in current liabilities held for sale.

As of March 31, 2013, we have borrowed $10.0 million under our reserve based senior credit facility to fund our oil and gas programs.  Each borrowing under the senior credit facility has a term of six months, but can be continued at our election through July 2014 if we remain in compliance with the covenants under the facility.  Our intent is to extend this debt and therefore we have classified it as a long-term liability.  The current weighted average interest rate on this debt is 2.91%.  As of March 31, 2013, Energy One was in compliance with all the covenants under the senior credit facility.

The land debt of $200,000 bears an interest rate of 6.0% per annum and is due on January 2, 2014.

8)       Shareholders’ Equity

Common Stock

During the three months ended March 31, 2013, the Company issued 15,000 shares of common stock to officers of the Company pursuant to the 2001 Stock Compensation Plan.

The following table details the changes in common stock during the three months ended March 31, 2013:
 
(Amounts in thousands, except for share amounts)
 
               
Additional
 
   
Common Stock
   
Paid-In
 
   
Shares
   
Amount
   
Capital
 
                   
 Balance January 1, 2013
    27,652,602     $ 277     $ 123,078  
 2001 stock compensation plan
    15,000       --       23  
 Expense of employee options vesting
    --       --       16  
 Expense of outside director options vesting
    --       --       16  
 Balance March 31, 2013
    27,667,602     $ 277     $ 123,133  
                         
 
 
 
-20-
U.S. ENERGY CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)

 
Stock Option Plans

The following table represents the activity in employee stock options and non-employee director stock options for the three months ended March 31, 2013:

   
Employee Stock Options
   
Director Stock Options
 
         
Weighted
         
Weighted
 
         
Average
         
Average
 
         
Exercise
         
Exercise
 
   
Options
   
Price
   
Options
   
Price
 
                         
Outstanding balance at December 31, 2012
    2,259,282     $ 3.80       150,000     $ 3.05  
Granted
    --     $ --       --     $ --  
Forfeited
    --     $ --       --     $ --  
Expired
    --     $ --       --     $ --  
Exercised
    --     $ --       --     $ --  
Outstanding at March 31, 2013
    2,259,282     $ 3.80       150,000     $ 3.05  
Exercisable at March 31, 2013
    2,119,282     $ 3.90       83,335     $ 2.97  
                                 
Weighted Average Remaining Contractual Life - Years
      4.05               6.22  
                                 
Aggregate intrinsic value of options / warrants outstanding
    $ -             $ -  
                                 
 
Employee Stock Option Plans.   During the three months ended March 31, 2013 and 2012, we recorded $16,000 and $2,000, respectively, in compensation expense for employee stock options.  We will recognize an additional $149,000 in expense over the vesting period of the outstanding employee options.

Director Option Plans.   During the three months ended March 31, 2013 and 2012, we recorded $16,000 and $22,000, respectively, in expense for options issued to non-employee directors.  We will recognize an additional $96,000 in expense over the vesting period of the outstanding director options.

9)       Income Taxes

The Company uses the asset and liability method of accounting for deferred income taxes.  Deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities.  Deferred tax assets or liabilities at the end of each period are determined using the tax rate in effect at that time.

The deferred income tax assets or liabilities for an oil and gas exploration company are dependent on many variables such as estimates of the economic lives of depleting oil and gas reserves and commodity prices.  Accordingly, the asset or liability is subject to continual recalculation, revision of the numerous estimates required, and may change significantly in the event of such things as major acquisitions, divestitures, product price changes, changes in reserve estimates, changes in reserve lives, and changes in tax rates or tax laws.
 
 
 
-21-
U.S. ENERGY CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)

 

The Company does not expect to pay any federal or state income tax for 2013 as a result of net operating loss carry forwards from prior years.  Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred tax assets will not be realized. As of March 31, 2013, the Company maintains a full valuation allowance on its net deferred tax assets. Based on these requirements no provision or benefit for income taxes has been recorded for deferred taxes. There were no recorded unrecognized tax benefits at the end of the reporting period.

10)       Segment Information

As of March 31, 2013, we had two reportable segments: Oil and Gas and Maintenance of Mineral Properties.  A summary of results of operations for the three months ended March 31, 2013, and 2012, and total assets as of March 31, 2013 and December 31, 2012 by segment are as follows:
 
 
 
-22-
U.S. ENERGY CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)

 
   
(In thousands)
 
   
For the three months ended March 31,
 
   
2013
   
2012
 
Revenues:
           
Oil and gas
  $ 7,879     $ 8,335  
Total revenues:
    7,879       8,335  
                 
Operating expenses:
               
Oil and gas
    12,088       6,534  
Mineral properties
    644       619  
Total operating expenses:
    12,732       7,153  
                 
Interest expense
               
Oil and gas
    76       30  
Mineral properties
    24       6  
Total interest expense:
    100       36  
                 
Operating (loss) income
               
Oil and gas
  $ (4,285 )   $ 1,771  
Mineral properties
    (668 )     (625 )
Operating income (loss)
               
from identified segments
    (4,953 )     1,146  
                 
General and administrative expenses
    (1,307 )     (1,894 )
Add back interest expense
    100       36  
Other revenues and expenses:
    30       (121 )
                 
(Loss) before income taxes
               
and discontinued operations
  $ (6,130 )   $ (833 )
                 
Depreciation depletion and amortization expense:
         
Oil and gas
  $ 3,461     $ 3,641  
Mineral properties
    32       32  
Corporate
    39       125  
Total depreciation expense
  $ 3,532     $ 3,798  
                 
 
 
 
-23-
U.S. ENERGY CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
 
 
 
   
(In thousands)
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
Assets by segment
           
Oil and gas
  $ 88,812     $ 93,839  
Mineral
    20,746       20,747  
Corporate
    26,007       26,241  
Total assets
  $ 135,565     $ 140,827  
                 

11)       Equity Income in Unconsolidated Investment

We recorded an equity loss from our unconsolidated investment in Standard Steam, LLC (“SST”) during the three months ended March 31, 2013 and 2012 of $25,000 and $60,000, respectively.
 
 
 
-24-

 
ITEM 2 .   Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is Management's Discussion and Analysis of significant factors that have affected liquidity, capital resources and results of operations during the three months ended March 31, 2013 and 2012.  The following also updates information as to our financial condition provided in our 2012 Annual Report on Form 10-K.  Statements in the following discussion may be forward-looking and involve risk and uncertainty (see “Forward Looking Statements”).  The following discussion should also be read in conjunction with our condensed financial statements and the notes thereto.

General Overview

We are an independent energy company focused on the acquisition and development of oil and gas producing properties in the continental United States.  Our business is currently focused in the Rocky Mountain region (specifically the Williston Basin of North Dakota and Montana), Texas and Louisiana, however, we do not intend to limit our focus to these geographic areas.  We continue to focus on increasing production, reserves, revenues and cash flow from operations while managing our level of debt.

We currently explore for and produce oil and gas through a non-operator business model; however, we may operate oil and gas properties for our own account and may expand our operations to other areas.  As a non-operator, we rely on our operating partners to propose, permit and manage wells.  Before a well is drilled, the operator is required to provide all oil and gas interest owners in the designated well the opportunity to participate in the drilling costs and revenues of the well on a pro-rata basis.  After the well is completed, our operating partners also transport, market and account for all production.

We are also involved in the exploration for and development of minerals (molybdenum) through our ownership of the Mt. Emmons Molybdenum Project in Colorado.  Gross capitalized dollar amounts invested in each of these areas at March 31, 2013 and December 31, 2012 were as follows:

   
(In thousands)
 
   
March 31,
   
December 31,
 
   
2013
 
2012
 
 Unproved oil and gas properties
  $ 9,171     $ 9,169  
 Proved oil and gas properties
    119,945       119,919  
 Undeveloped mining properties
    20,739       20,739  
    $ 149,855     $ 149,827  
                 

 
Oil and Gas Activities

We have active agreements with several oil and gas exploration and production companies.  Our working interest varies by project (and may vary over time depending on the terms of the relevant agreement), but typically ranges from approximately 1% to 62%.  These projects may result in numerous wells being drilled over the next three to five years.  We are also actively pursuing the potential acquisition of additional exploration, development or production stage oil and gas properties or companies.  The following table details our interests in producing wells as of March 31, 2013 and 2012.
 
 
 
-25-
 
 

 
March 31,
 
2013
 
2012
 
Gross
 
Net
 
Gross
 
Net
Williston Basin:
             
Productive wells
     70.00
 
     10.86
 
     27.00
 
       8.95
Wells being drilled or awaiting completion
     10.00
 
       0.25
 
       7.00
 
       1.08
               
Gulf Coast/South Texas:
             
Productive wells
       3.00
 
       0.56
 
       5.00
 
       1.12
Wells being drilled or awaiting completion
         --
 
         --
 
       1.00
 
       0.13
               
Eagle Ford:
             
Productive wells
       3.00
 
       0.90
 
       2.00
 
       0.60
Wells being drilled or awaiting completion
         --
 
         --
 
       1.00
 
       0.30
               
Austin Chalk:
             
Productive wells
     11.00
 
       2.98
 
     11.00
 
       2.98
Wells being drilled or awaiting completion
         --
 
         --
 
         --
 
         --
               
Total:
             
Productive wells
     87.00
 
     15.30
 
     45.00
 
     13.65
Wells being drilled or awaiting completion
     10.00
 
       0.25
 
       9.00
 
       1.51

 
 
(1)   
Net working interests may vary over time under the terms of the applicable contracts.

Williston Basin, North Dakota

Rough Rider Prospect.   We participate in fifteen 1,280 acre drilling units in the Rough Rider prospect with Brigham Oil & Gas, L.P. (“Brigham”), and a subsidiary of Statoil.  From August 24, 2009 to March 31, 2013, we have drilled and completed 20 gross Bakken formation wells (7.31 net) and one gross Three Forks formation well (0.18 net) under the Drilling Participation Agreement with Brigham.

At March 31, 2013, two additional gross wells (0.07 net) had been drilled and were awaiting completion.  Our net investment in the Rough Rider prospect wells was $1.1 million for the three months ended March 31, 2013. Three additional gross wells (0.08 net) are expected to be drilled during the balance of 2013.  Brigham operates all of the wells.

Yellowstone and SEHR Prospects.   We participate in twenty-seven gross 1,280 acre spacing units in the Yellowstone and SEHR prospects with Zavanna, LLC (“Zavanna”).  Through March 31, 2013, we have drilled and completed 19 gross Bakken formation wells (2.89 net) in these prospects, including two gross wells (0.13 net) operated by Murex Petroleum and one gross well (0.01 net) operated by Slawson Exploration Company, Inc.  Zavanna operates the remaining wells.  At March 31, 2013, six additional gross wells (0.18 net) had been spud and were in progress.

During the first three months of 2013, we completed three gross wells (0.20 net) and drilled five gross wells (0.15 net) in the Yellowstone and SEHR prospects.  Our net investment in the Yellowstone and SEHR prospect wells was $3.2 million during the three months ended March 31, 2013.  Eight additional gross wells (0.39 net) are expected to be drilled during the balance of 2013.
 
 
 
-26-
 
 
Bakken/Three Forks Asset Package .  Under the Bakken/Three Forks asset package we acquired in 2012, we participate in 23 drilling units in McKenzie, Williams and Mountrail Counties of North Dakota.  At March 31, 2013, there were 30 gross producing wells (0.48 net) in these drilling units.  All acreage is currently held by production and produces approximately 47 BOE/day net to the Company.
 
During the first three months of 2013, we completed one gross well (0.43 net) on this acreage and two additional gross wells (0.01 net) were drilled and awaiting completion.  Our net investment in wells under the drilling units in this program was $490,000 during the three months ended March 31, 2013.
 
U.S. Gulf Coast (Onshore) / South Texas

We participate with several different operators in the U.S. Gulf Coast (onshore).  At March 31, 2013, we had three gross producing wells (0.56 net) in this region.  Our net investment in Gulf Coast / South Texas wells and properties was $72,000 during the three months ended March 31, 2013.

Eagle Ford Shale

We participate in up to 114 gross (34 net) drilling locations in the Leona River and Booth-Tortuga Eagle Ford/Buda prospects with Crimson Exploration Inc. ("Crimson").  During the three months ended March 31, 2013, we advance funded the Beeler 2H Buda formation test well (0.30 net) that was spud in April 2013.  Our net investment in this well during the first three months of 2013 was $1.1 million.

2013 Production Results

The following table provides a regional summary of our production during the first three months of 2013:

 
Williston Basin
 
Gulf Coast / South Texas
 
Eagle Ford
 
Austin Chalk
 
Total
First Three Months of 2013 Production
               
Oil (Bbl)
        75,719
 
             448
 
          2,584
 
          2,622
 
        81,373
Gas (Mcf)
        34,895
 
        47,435
 
          4,121
 
          1,647
 
        88,098
NGLs (Bbl)
          2,238
 
              44
 
              70
 
             266
 
          2,618
Equivalent (BOE)
        83,773
 
          8,398
 
          3,341
 
          3,162
 
        98,674
Avg. Daily Equivalent (BOE/d)
             931
 
              93
 
              37
 
              35
 
          1,096
Relative percentage
85%
 
9%
 
3%
 
3%
 
100%
 
Mount Emmons Molybdenum Project

On April 22, 2013, the Company received a letter from the U.S. Forest Service (“USFS”) notifying the Company that the USFS has completed a review of the Mine Plan of Operations (“MPO” or “Plan”) for the Mount Emmons Molybdenum Project in Colorado (the “Project”) and that it has determined that the MPO “does contain sufficient information and clarity to form the basis for a proposed action to initiate scoping and analysis under the National Environmental Policy Act (‘NEPA’).”  The letter also states, “U.S. Energy has met the requirements of the Reality Check provision granting conditional water rights for the Mt. Emmons Molybdenum Project by filing the Plan for the Mt. Emmons Mine with the Forest Service.  No other special use permits or rights-of-way for the water facilities are required because they are addressed in the Plan.”  The MPO provides an in-depth description of the proposed construction, mining, processing, and reclamation operations for the Project.
 
 
 
-27-

 
Additional Comparative Data

The following table provides information regarding selected production and financial information for the quarter ended March 31, 2013 and the immediately preceding three quarters.

   
For the Three Months Ended
 
   
March 31,
2013
   
December 31,
2012
   
September 30,
2012
   
June 30,
2012
 
   
(in Thousands, except for production data)
 
Production (BOE)
    98,674       107,823       106,060       118,783  
Oil, gas and NGL production revenue
  $ 7,879     $ 8,039     $ 7,639     $ 8,522  
Unrealized and realized derivative (loss) gain
  $ (602 )   $ (5 )   $ (466 )   $ 1,764  
Lease operating expense
  $ 1,966     $ 1,969     $ 1,692     $ 1,630  
Production taxes
  $ 833     $ 853     $ 822     $ 928  
DD&A
  $ 3,461     $ 3,812     $ 3,410     $ 4,030  
General and administrative
  $ 1,307     $ 1,497     $ 1,659     $ 1,760  
Mineral holding costs
  $ 227     $ 205     $ 400     $ 206  
Water treatment plant
  $ 417     $ 424     $ 609     $ 436  
Income (loss) from continuing operations
  $ (6,130 )   $ (5,932 )   $ (2,709 )   $ (991 )

 
Results of Operations

Three Months Ended March 31, 2013 compared to Three Months Ended March 31, 2012

During the three months ended March 31, 2013, we recorded a net loss after taxes of $5.9 million, or $0.21 per share basic and diluted as compared to a net loss after taxes of $381,000, or $0.01 per share basic and diluted during the same period of 2012.  Significant components of the change in operating revenues and results of operations for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 are as follows:

Oil and Gas Operations.    Oil and gas operations produced operating income of $1.7 million during the quarter ended March 31, 2013 as compared to operating income of $1.9 million during the quarter ended March 31, 2012. The following table summarizes production volumes, average sales prices and operating revenues for the three months ended March 31, 2013 and 2012:
 
 
 
-28-
 

   
Three Months Ended
       
   
March 31,
   
Increase
 
   
2013
   
2012
   
(Decrease)
 
Production volumes
                 
Oil (Bbls)
    81,373       92,582       (11,209 )
Natural gas (Mcf)
    88,098       89,772       (1,674 )
Natural gas liquids (Bbls)
    2,618       4,492       (1,874 )
Equivalent (BOE)
    98,674       112,036       (13,362 )
Avg. Daily Equivalent (BOE/d)
    1,096       1,231       (135 )
Average sales prices
                       
Oil (per Bbl)
  $ 90.23     $ 84.43     $ 5.80  
Natural gas (per Mcf)
    4.78       3.04       1.74  
Natural gas liquids (per Bbl)
    44.30       54.76       (10.46 )
Equivalent (BOE)
    79.85       74.40       5.45  
Operating revenues (in thousands)
                       
Oil
  $ 7,342     $ 7,817     $ (475 )
Natural gas
    421       273       148  
Natural gas liquids
    116       245       (129 )
Total operating revenue
    7,879       8,335       (456 )
Lease operating expense
    (1,966 )     (2,010 )     44  
Production taxes
    (833 )     (883 )     50  
Impairment
    (5,828 )     -       (5,828 )
Income before depreciation, depletion and amortization
    (748 )     5,442       (6,190 )
Depreciation, depletion and amortization
    (3,461 )     (3,641 )     180  
Income
  $ (4,209 )   $ 1,801     $ (6,010 )
                         

 
During the three months ended March 31, 2013, we produced 98,674 barrels of oil equivalent (BOE), or an average of 1,096 BOE/day.  Portions of our natural gas production are sent to gas processing plants to extract from the gas various natural gas liquids (“NGLs”) that are sold separately from the remaining natural gas. We sell some of our gas before processing and some after processing but in both cases receive revenues based on a share of post-processing proceeds from plant sales of the extracted NGLs and the remaining natural gas. In the table above, our share of processing costs is classified as lease operating expenses.

We recognized $7.9 million in revenues during the three months ended March 31, 2013 as compared to $8.3 million during the same period of the prior year.  This $456,000 decrease in revenue is primarily due to lower oil sales volumes in 2013 when compared to 2012.  Revenue from oil sales was lower in the three months ended March 31, 2013 when compared to the same period in 2012, primarily due to production declines from wells in the Williston Basin.

Our average net realized price (operating revenue per BOE) for the three months ended March 31, 2013 was $79.85 per BOE compared with $74.40 for the same period in 2012.  The increase in our equivalent realized price for production corresponds with higher average oil and natural gas prices in 2013 when compared with 2012.  Due to takeaway constraints, the discount, or differential, for oil prices in the Williston Basin has ranged from $5.00 to $9.00 per barrel during the first three months of 2013.  Until additional takeaway capacity is available, we expect this differential to continue (with the amount of the differential varying over time) and that our oil sales revenue will be affected by lower realized prices.
 
 
 
-29-

 
Lease operating expense of $2.0 million for the three months ended March 31, 2013 was comprised of $1.7 million in lease operating expense and $310,000 in workover expense.  The $44,000 decrease in total lease operating expense in 2013 as compared to 2012 is primarily a result of lower workover expense in the three months ended March 31, 2013 as compared to the same period of 2012.

During the three months ended March 31, 2013, the Company recorded a proved property impairment of $5.8 million related to its oil and gas assets.  The impairment was primarily due to a decline in the price of oil, additional capitalized costs and changes in production. There were no proved property impairments recorded during the first three months of 2012.

Our depletion, depreciation and amortization (DD&A) rate for the three months ended March 31, 2013 was $35.08 per BOE compared to $32.50 per BOE for the same period in 2012.  We have been impacted by higher DD&A rates related to our Williston Basin wells due to increases in drilling and completion costs for wells in this region.  Our DD&A rate can also fluctuate as a result of impairments, divestitures, changes in the mix of our production, the underlying proved reserve volumes and estimated costs to drill and complete proved undeveloped reserves.

During the balance of 2013 we anticipate completing wells that were drilled during the first quarter of 2013 as well as drilling and completing new wells.  We also anticipate that our production rates will remain relatively stable as a result of these activities.  Various factors, including extensive workover costs on existing wells, lower commodity prices, commodity price differentials, cost overruns on projected drilling projects, unsuccessful wells or other development activities and/or faster than expected declines in production from existing wells, would have a negative effect on production, cash flows and earnings from the oil and gas segment and could cause actual results to differ materially from those we expect.

Mt. Emmons and Water Treatment Plant Operations.   We recorded $417,000 in costs and expenses for the water treatment plant and $227,000 for holding costs for the Mt. Emmons molybdenum property during the three months ended March 31, 2013.  During the three months ended March 31, 2012, we recorded $509,000 in operating costs related to the water treatment plant and $110,000 in holding costs.

General and Administrative .  General and administrative expenses decreased by $587,000 during the three months ended March 31, 2013 as compared to general and administrative expenses for the three months ended March 31, 2012.  Lower general and administrative costs in 2013 are primarily a result of reductions of $247,000 in compensation expense, $96,000 in professional services, $93,000 in contract services, $82,000 in depreciation expense, $47,000 in travel costs and $30,000 in bank charges.

Other income and expenses.   We recognized an unrealized and realized derivative loss of $602,000 in the first quarter of 2013 compared to a loss of $202,000 for the same period in 2012.  The 2013 amount includes a loss on unrealized changes in the fair value of our commodity derivative contracts of $616,000 and realized cash settlement gains on derivatives of $14,000.

During the three months ended March 31, 2013, we sold our corporate aircraft and related facilities.  As a result, we recorded a gain on the sale of assets during the quarter in the amount of $696,000.  During the three months ended March 31, 2012, we recorded a gain on the sale of assets of $10,000. We recorded equity losses of $25,000 and $63,000 from the investment in Standard Steam Trust LLC (“SST”) during the quarters ended March 31, 2013 and 2012, respectively.   Equity losses from the investment in SST are expected to continue until such time as SST properties are sold, equity losses reduce our investment to zero or we sell the investment.

Gain on the sale of marketable securities from the sale of shares of Sutter Gold Mining decreased to $0 during the quarter ended March 31, 2013 from $47,000 during the quarter March 31, 2012.
 
 
 
-30-

 
Interest income decreased to $2,000 during the quarter ended March 31, 2013 from $5,000 during the quarter ended March 31, 2012. The decrease is a result of lower amounts of cash invested in interest bearing instruments during the quarter.

Interest expense increased to $80,000 during the quarter ended March 31, 2013 from $39,000 during the quarter ended March 31, 2012.

Discontinued operations.   We recorded income of $232,000, net of taxes from Remington Village during the quarter ended March 31, 2013 and income of $64,000, net of taxes for the quarter ended March 31, 2012.  The increase in income when comparing the quarter ended March 31, 2013 to the quarter ended March 31, 2012 is primarily a result of lower contract services expenses in 2013.  On March 5, 2013, we entered into a Purchase and Sale Agreement (“PSA”) with an unrelated third party to sell the Remington Village apartment complex for $15.0 million.  The transaction is expected to close in the second quarter of 2013.

Overview of Liquidity and Capital Resources

At March 31, 2013, we had $2.5 million in cash and cash equivalents.  Our working capital (current assets minus current liabilities) was $10.4 million.  As discussed below in Capital Resources and Capital Requirements, we project that our capital resources at March 31, 2013 will be sufficient to fund operations and capital projects through the balance of 2013.  Given the size of our potential commitments related to our existing inventory of drilling projects, however, our requirements for additional capital could increase significantly during the remainder of 2013 if we elect to participate in any currently unanticipated drilling of additional wells.  As a result, we may consider drawing down additional debt on our senior credit facility, selling or joint venturing an interest in some of our oil and gas assets, or accessing the capital markets or other alternatives, as we determine how to best fund our capital program.

The principal recurring uncertainty which affects the Company is variable prices for commodities producible from our oil, gas and mineral properties. Significant price swings can have adverse or positive effects on our business of exploring for, developing and producing oil and gas or minerals.  Availability of drilling and completion equipment and crews fluctuates with the market prices for oil and natural gas and thereby affects the cost of drilling and completing wells.  When prices are low there is typically less exploration activity and the cost of drilling and completing wells is generally reduced.  Conversely, when prices are high there is generally more exploration activity and the cost of drilling and completing wells generally increases.

Capital Resources

Potential primary sources of future liquidity include the following:

Oil and Gas Production.   At March 31, 2013, we had 87 gross producing wells (15.30 net).  During the three months ended March 31, 2013, we received an average of $2.6 million per month from these producing wells with an average operating cost of $655,000 per month (including workover costs) and production taxes of $278,000, for average cash flows of $1.7 million per month from oil and gas production before non-cash depletion expense.  We anticipate that cash flows from oil and gas operations will remain stable and may increase through the balance of 2013 as additional wells being drilled with Zavanna, Brigham, Crimson and others begin to produce.  However, decreases in the price of oil and natural gas, increased operating costs and workover expenses, declines in production rates, and other factors could reduce these average monthly cash flow amounts.
 
 
 
-31-

 
Normal production declines and the back-in after payout provisions granted to Brigham and Zavanna will eventually decrease the amount of cash flow we receive from these wells.  We anticipate drilling more Bakken and Three Forks wells with Brigham and Zavanna in the future and will continue to search for additional drilling opportunities to replace these oil reserves and cash flows.

Cash on Hand.   At March 31, 2013, we had $2.5 million in cash and cash equivalents.
 
Wells Fargo Senior Credit Facility.   On July 30, 2010, we established a senior credit facility through our wholly owned subsidiary, Energy One, LLC (“Energy One”) to borrow up to $75 million (since increased to $100 million as described below) from a syndicate of banks, financial institutions and other entities, including Wells Fargo Bank, National Association, which recently acquired the North American reserve-based and related diversified energy lending business of BNP Paribas.  The senior credit facility is being used to advance our short and mid-terms goals of increasing our investment in oil and gas.

From time to time until the expiration of the credit facility (July 30, 2014) if Energy One is in compliance with the facility documents, Energy One may borrow, pay, and re-borrow funds from the lenders, up to an amount equal to the borrowing base.  The borrowing base is redetermined semi-annually, taking into account updated reserve reports.  Any proposed increase in the borrowing base will require approval by all lenders in the syndicate, and any proposed borrowing base decrease will require approval by lenders holding not less than two-thirds of outstanding loans and loan commitments.  On April 10, 2012, the commitment amount increased to $100 million and the borrowing base increased to $30.0 million (from $28.0 million) as a result of a redetermination using our December 31, 2011 financial statements, production reports and reserve reports.  As of March 31, 2013, Energy One was in compliance with all the covenants under the senior credit facility.

As of March 31, 2013, we have borrowed $10.0 million under the senior credit facility to fund our drilling programs.

Asset Held for Sale – Remington Village.   Until Remington Village is sold, we will continue to receive rental receipts from the property.  The property had an average occupancy rate of 87% during 2012 and was 90% occupied as of March 31, 2013.  Occupancy is dependent on the regional economy, including local coal mining operations, which has been affected by the global recession.  The property generated average positive cash flow from operations of $80,000 per month during the first three months of 2013 and cash flow is projected to remain in that range during the balance of 2013.

On May 5, 2011, we borrowed $10.0 million from a commercial bank against Remington Village.  The note is amortized over 20 years with a balloon payment at the end of five years and has an interest rate of 5.50% per annum.  The proceeds of the note were used to fund our general business obligations.

Capital Requirements

Our direct capital requirements during the balance of 2013 relate to the funding of our drilling programs, additional oil and gas exploration and development projects, acquisition of prospective oil and gas properties and/or existing production, payment of debt obligations, operating and capital improvement costs of the water treatment plant at the Mt. Emmons project and ongoing permitting activities for the Mt. Emmons project, operations at Remington Village until it is sold and general and administrative costs.  We intend to finance our 2013 capital expenditure plan primarily from the sources described above under “Capital Resources”.  We may be required to reduce or defer part of our 2013 capital expenditures plan if we are unable to obtain sufficient financing from these sources.  We regularly review our capital expenditure budget to assess changes in current and projected cash flows, acquisition opportunities, debt requirements and other factors.
 
 
 
-32-

 
Oil and Gas Exploration and Development.   We continue to expect capital expenditures of approximately $27.1 million in our 2013 oil and gas drilling program (through March 31, 2013, we had spent approximately $5.9 million of this budgeted amount).  The remaining $21.2 million in capital expenditure is budgeted to be spent on exploration and acquisition initiatives in the Williston Basin of North Dakota and Texas. Amounts budgeted for each regional drilling program is contingent upon timing, well costs and success.  If any of our drilling initiatives are not initially successful or progress more slowly than anticipated, funds allocated for that program may be allocated to other initiatives and/or acquisitions in due course.  The actual number of gross and net wells could vary in each of these cases.

Mt. Emmons Molybdenum Project.   We are responsible for all costs associated with the Mt. Emmons project, which includes operation of a water treatment plant.  Operating costs for the water treatment plant during the remainder of 2013 are expected to be approximately $141,000 per month.  Additionally, we have a remaining budget of $263,000 for permitting and water treatment plant capital improvements that are expected to improve the plant’s efficiency and reduce costs.

In 2009, 160 acres of fee land in the vicinity of the mining claims was purchased by the Company and Thompson Creek Metals Company USA (“TCM”) for $4 million ($2 million in January 2009, $400,000 annually for five years thereafter).  On December 6, 2011, TCM notified the Company that it wishes to sell its interest in the property.  The Company has until June 6, 2013 to decide whether to purchase TCM’s interest in the property, at TCM’s cost, and close such purchase.  The Company has budgeted $2.0 million for this purchase.

Real Estate.   Cash operating expenses at Remington Village are projected to be approximately $85,000 per month until Remington Village is sold.

Insurance.   We have liability insurance coverage in amounts we deem sufficient and in line with industry standards for the location, stage, and type of operations in oil and gas, mineral property development (the Mt. Emmons molybdenum project), and the Remington Village housing complex.  Payment of substantial liabilities in excess of coverage could require diversion of internal capital away from regular business, which could result in diminished operations.  We have property loss insurance on all major assets equal to the approximate replacement value of the assets.

Reclamation Costs.   We have reclamation obligations with an estimated present value of $541,000 related to our oil and gas wells and $165,000 related to the Mt. Emmons molybdenum property.  No reclamation is expected to be performed during the year ended December 31, 2013 unless a well, or wells, are abandoned due to unexpected operational challenges.  As the Mt. Emmons project is developed, the reclamation liability is expected to increase.  It is not anticipated that this reclamation work will occur in the near term.  Our objective, upon closure of the proposed mine at the Mt. Emmons project, is to eliminate long-term liabilities associated with the property.
 

 
 
-33-
 

 
Cash flows during the three months ended March 31, 2013

The following table presents changes in cash flows between the three month periods ended March 31, 2013 and 2012.  The analysis following the table should be read in conjunction with our condensed consolidated statements of cash flows in Part I, Item 1 of this report.
 
   
(In thousands)
 
   
For the three months ended March 31,
 
   
2013
   
2012
   
Change
 
Net cash provided by operating activities
  $ 3,265     $ 764     $ 2,501  
Net cash (used in) provided by investing activities
    (3,548 )     6,069       (9,617 )
Net cash (used in) financing activities
    (79 )     (12,015 )     11,936  
 

Operating Activities .  Cash provided by operations for the three month period ended March 31, 2013 increased to $3.3 million as compared to cash provided by operations of $764,000 for the same period of the prior year.  This $2.5 million year over year increase in cash from operating activities is predominantly a result of net changes in assets and liabilities including a $1.5 million reduction in accounts payable in the first quarter of 2012 as compared to an increase in accounts payable of $504,000 during the first quarter of 2013 as compared to the first quarter of 2012.  The remainder of the change in cash provided by operations is part of the complete discussion of cash provided by operations in “Results of Operations” above.

Investing Activities .  Investing activities provided cash during the first three months of 2013 through $2.6 million in proceeds from the sale of property and equipment related to the Company’s aircraft and related facilities.

Investing activities consumed cash through the acquisition and development of oil and gas properties in the amount of $6.1 million during the first three months of 2013.  Other uses of cash for investing activities in the period included a $37,000 change in restricted investments.

The $9.6 million decrease in cash used in investing activities during the three months ended March 31, 2013 as compared to the same period of the prior is primarily a result of: (a) $18.1 million in sales of oil and gas properties during 2012 with no oil and gas property sales during the same period in 2013, (b) $2.6 million in proceeds from the sale of property and equipment in 2013 as compared to $22,000 during the three months ended March 31, 2013 and (c) $6.0 million less investment in oil and gas properties in 2013 as compared to 2012.

Financing Activities .  Financing activities consumed $79,000 during the three months ended March 31, 2013.  This cash outflow was entirely related to the repayment of debt.  During the three months ended March 31, 2012 financing activities consumed $12.0 million.  Components of cash flow from financing activities during the three months ended March 31, 2012 include the repayment of debt in the amount of $12.1 million and provision of $50,000 through the issuance of common stock.

Critical Accounting Policies

For detailed descriptions of our significant accounting policies, we refer you to the corresponding section of Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012 (please see pages 74 to 77).
 
 
 
-34-

 
Future Operations

Management intends to continue the development of our oil and gas portfolio as well as seek additional investment opportunities in the oil and natural gas sector.  Long term, we intend to fund the holding and permitting costs associated with the Mt. Emmons property.

Effects of Changes in Prices

Natural resource operations are significantly affected by changes in commodity prices.  As prices for a particular commodity increase, values for prospects for that commodity typically also increase, making acquisitions of such properties more costly and sales potentially more valuable.  Conversely, a price decline could enhance acquisitions of properties related to that commodity, but could also make sales of such properties more difficult.  Operational impacts of changes in commodity prices are common in the oil and gas and mining industries.

At March 31, 2013, we are receiving revenues from our oil and gas business.  Our revenues, cash flows, future rate of growth, results of operations, financial condition and ability to finance projected acquisitions of oil and gas producing assets are dependent upon prevailing prices of oil and gas.

Forward Looking Statements

This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  All statements other than statements of historical facts included in and incorporated by reference into this Form 10-Q are forward-looking statements.  When used in this Form 10-Q, the words “will”, “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements in this Form 10-Q include statements regarding our expected future revenue, income, production, liquidity, cash flows, reclamation and other liabilities, expenses and capital projects and capital expenditures.  Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements due to a variety of factors, including those associated with our ability to find oil and natural gas reserves that are economically recoverable, the volatility of oil, NGL and natural gas prices, declines in the values of our properties that have resulted in and may in the future result in additional ceiling test write downs, our ability to replace reserves and sustain production, our estimate of the sufficiency of our existing capital sources, our ability to raise additional capital to fund cash requirements for our participation in oil and gas properties and for future acquisitions, the uncertainties involved in estimating quantities of proved oil and natural gas reserves, in prospect development and property acquisitions or dispositions and in projecting future rates of production or future reserves, the timing of development expenditures and drilling of wells, hurricanes and other natural disasters and the operating hazards attendant to the oil and gas and minerals businesses.  In particular, careful consideration should be given to cautionary statements made in the Company’s Risk Factors included in our Annual Report on Form 10-K and other quarterly reports on Form 10-Q filed with the SEC, all of which are incorporated herein by reference.  The Company undertakes no duty to update or revise any forward-looking statements.

 
 
-35-
 
 
Forward-looking statements also include those relating to the permitting and approval process for the Mount Emmons Molybdenum Project (the “Project”).There can be no assurance that U.S. Energy will receive the permits and approvals necessary to pursue the Project.  In addition, such permits and approvals, if received, could be unreasonably or unexpectedly delayed or made subject to conditions that reduce the benefits of the Project or render it uneconomic.  The process under NEPA may be longer than the Company expects, may involve substantial costs, and may require substantial management attention.  The mine, if constructed, could be substantially different in nature, productivity and economic potential than the mine as contemplated by the MPO.  In addition, if constructed, the operation of the mine will be subject to a wide variety of operating, commodity-price related and financial risks.

Off-Balance Sheet Arrangements

None

Contractual Obligations

We had three principal categories of contractual obligations at March 31, 2013: Debt to third parties of $19.7 million, executive retirement obligations of $867,000 and asset retirement obligations of $706,000.

The debt consists of debt to a commercial bank secured by Remington Village, debt under the senior credit facility related to our oil and gas reserves and debt related to the purchase of land near our Mt. Emmons molybdenum property.  The debt to the commercial bank bears an interest rate of 5.5% per annum and the land debt bears an interest rate of 6.0% per annum.  The debt to the commercial bank is amortized over 20 years with a balloon payment due at the end of five years on May 5, 2015.  The balloon payment at maturity is $8.8 million.  Each borrowing under the senior credit facility has a term of six months but can be continued at our election through July 2014 if we remain in compliance with the covenants under the facility.  The $200,000 land debt is due on January 2, 2014.  The executive retirement liability will be paid out over varying periods starting after the actual retirement dates of the covered executives.  The asset retirement obligations are expected to be retired during the next 34 years.
 
ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk

Commodity Risk. Our major market risk exposure is the commodity pricing applicable to our oil and natural gas production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for oil and spot prices applicable to natural gas.  The market prices for oil and natural gas have been highly volatile and are likely to continue to be highly volatile in the future, and this volatility will impact our revenues.

To mitigate some of our commodity risk, we use derivative instruments, typically fixed-rate swaps and costless collars, to manage price risk underlying our oil and gas production.  We may also use puts, calls and basis swaps in the future.   We do not hold or issue derivative instruments for trading purposes.  The objective of utilizing the economic hedges is to reduce the effect of price changes on a portion of our future oil production, to achieve more predictable cash flows in an environment of volatile oil and gas prices and to manage our exposure to commodity price risk. The use of these derivative instruments limits the downside risk of adverse price movements.  However, there is a risk that such use may limit our ability to benefit from favorable price movements. Energy One may, from time to time, add incremental derivatives to hedge additional production, restructure existing derivative contracts or enter into new transactions to modify the terms of current contracts in order to realize the current value of its existing positions.
 
 
 
-36-

 
Through Energy One, we have entered into commodity derivative contracts (“economic hedges”) with Wells Fargo and BNP Paribas, as described below.  The derivative contracts are priced using West Texas Intermediate (“WTI”) quoted prices.  The Company is a guarantor of Energy One’s obligations under the economic hedges.


Energy One's commodity derivative contracts as of March 31, 2013 are summarized below:
 
           
Quantity
         
Settlement Period
 
Counterparty
 
Basis
 
(Bbls/day)
 
Strike Price
 
                       
Crude Oil Costless Collar
                     
10/01/12 - 03/31/13
 
 Wells Fargo
 
 WTI
    200  
Put:
  $ 85.00  
                 
Call:
  $ 101.00  
Crude Oil Costless Collar
                         
01/01/13 - 06/30/13
 
 Wells Fargo
 
 WTI
    200  
Put:
  $ 90.00  
                 
Call:
  $ 105.75  
Crude Oil Costless Collar
                         
04/01/13 - 06/30/13
 
 Wells Fargo
 
 WTI
    200  
Put:
  $ 90.00  
                 
Call:
  $ 97.50  
Crude Oil Costless Collar
                         
10/01/12 - 09/30/13
 
 BNP Paribas
 
 WTI
    200  
Put:
  $ 95.00  
                 
Call:
  $ 116.60  
Crude Oil Costless Collar
                         
07/01/13 - 09/30/13
 
 Wells Fargo
 
 WTI
    400  
Put:
  $ 90.00  
                 
Call:
  $ 97.50  
Crude Oil Costless Collar
                         
10/01/13 - 12/31/13
 
 Wells Fargo
 
 WTI
    600  
Put:
  $ 90.00  
                 
Call:
  $ 97.50  
Crude Oil Costless Collar
                         
01/01/14 - 06/30/14
 
 Wells Fargo
 
 WTI
    300  
Put:
  $ 90.00  
                 
Call:
  $ 95.00  
 

The following table details the fair value of the derivatives recorded in the applicable condensed consolidated balance sheet, by category:
 
 
 
As of March 31, 2013
 
 
(in thousands)
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Balance Sheet
 
Fair
 
Balance Sheet
 
Fair
 
 
Classification
 
Value
 
Classification
 
Value
 
                 
Crude oil costless collars
Current Asset
  $ -  
Current Liability
  $ 145  
                     

These contracts are accounted for using the mark-to-market accounting method and accordingly, we recognize all unrealized and realized gains and losses related to these contracts currently in earnings and such gains and losses are classified as gain (loss) on derivative instruments, net in our consolidated statements of operations.
 

 
 
-37-

ITEM 4 .   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31, 2013, the Company’s management, including its Chief Executive Officer and Chief Financial Officer, completed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act).  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded:

i.  
That the Company’s disclosure controls and procedures are designed to ensure (a) that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (b) that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure; and
ii.  
That the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 

 
 
-38-
 

 
PART II.  OTHER INFORMATION

ITEM 1.    Legal Proceedings

Water Rights Litigation – Mt. Emmons Project

On April 22, 2013, the Company received a letter from the U.S. Forest Service (“USFS”) notifying the Company that the USFS has completed a review of the Mine Plan of Operations (“MPO” or “Plan”) for the Mount Emmons Molybdenum Project in Colorado (the “Project”) and that it has determined that the MPO “does contain sufficient information and clarity to form the basis for a proposed action to initiate scoping and analysis under the National Environmental Policy Act (“NEPA”).”  The letter also states, “U.S. Energy has met the requirements of the Reality Check provision granting conditional water rights for the Mt. Emmons Molybdenum Project by filing the Plan for the Mt. Emmons Mine with the Forest Service.  No other special use permits or rights-of-way for the water facilities are required because they are addressed in the Plan.”  The MPO provides an in-depth description of the proposed construction, mining, processing, and reclamation operations for the Project.

There have been no other material changes from the legal proceedings as previously disclosed in our 2012 Form 10-K in response to Item 3 of Part I of such Form 10-K (pages 49-51).
 
 
ITEM 1A. Risk Factors

There have been no material changes to the risk factors discussed in Part I, “Item 1A - Risk Factors” (pages 16 to 31) in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, which are expected to materially affect the Company’s business, financial condition or future results.  Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its business, financial condition and/or operating results.

ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds

None

ITEM 3.    Defaults Upon Senior Securities

Not Applicable

ITEM 4 .   Mine Safety Disclosures

None

ITEM 5.    Other Information

Not Applicable
 
 
 
-39-

 

ITEM 6.    Exhibits
   
  10.1 Form of Executive Severance and Non-Compete Agreement
 
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
 
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
     
 
 
 
-40-

 

SIGNATURES

Pursuant to the requirements 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.
   
(Registrant)
     
     
     
Date: May 10, 2013
 
By:
/s/ Keith G. Larsen
     
KEITH G. LARSEN
     
Chairman and CEO
       
       
       
       
Date: May 10, 2013
 
By:
/s/ Steven D. Richmond
     
STEVEN D. RICHMOND
     
Chief Financial Officer
       


 
 
-41-
 
 
 
 
EXHIBIT 10.1
 
EXECUTIVE SEVERANCE AND NON-COMPETE AGREEMENT


Agreement made this   day of                 , 20___, between U.S. Energy Corp, a Wyoming corporation (the "Company") and ______________________, the ("Executive").

WHEREAS, the Executive is presently employed by the Company as ___________________________;

WHEREAS, the Board of Directors of the Company ("the Board") recognizes that the Executive's efforts have been among the most important factors to the growth and success of the Company, and the Board wishes to ensure continuing access to the Executive's services to the benefit of the Company's employees and shareholders;

WHEREAS, this Agreement will benefit the Company's shareholders by placing the Executive in a neutral position with respect to any proposed merger, consolidation, sale of substantially all assets, change in control or similar substantial corporate change of the Company, and accordingly enable the Executive to better represent the Company and its shareholders in evaluating and responding to any such transaction;

WHEREAS, this Agreement will serve to secure benefits for the Executive to which the Board believes the Executive is entitled, as a result of services rendered and services anticipated to be provided to the Company; and

WHEREAS, this Agreement will benefit the Company by ensuring that the efforts of the Executive will be applied to the Company's activities without the distractions which might arise if the Executive were subjected to ordinary concerns about his personal welfare in the face of proposed mergers, consolidations, sales of all assets, changes in control or similar substantial corporate changes.

NOW THEREFORE, in order to effect the foregoing, the Company and the Executive wish to enter into this Agreement on the terms and conditions set forth below, and in consideration of the promises and the respective covenants and agreements of the parties herein contained, it is agreed as follows:

1.            Definitions . As used in this Agreement:

(a)            Beneficial Owner shall mean any Person who directly or through any contract, arrangement, understanding, relationship, or otherwise has or shares voting power (which includes the power to vote or to direct the voting) and/or investment power (which includes the power to dispose or to direct the disposition) of a security issued by the Company.
 
 
 
 
1
 
 

 
(b)            Cause shall mean the negligent and continued failure by the Executive to substantially perform his duties with the Company (other than any such failure resulting from Disability) after a written demand for substantial performance is delivered to the Executive, identifying the manner in which the Executive has not substantially performed his duties, or describing his participation in misconduct which is materially injurious to the Company, monetarily or otherwise, unless done or omitted to be done, in good faith and with a reasonable belief that the action or omission was in the best interest of the Company.

(c)            Change in Control shall mean a change in the control of the Company of a nature which would be required to be reported in response to Item 6(e) of Schedule 14a to Regulation 14A, as promulgated under the Exchange Act (or any successors thereto); provided that, without limitation, a Change in Control shall be deemed to have occurred if:

(i) any Person is or becomes the Beneficial Owner directly or indirectly, of 25% or more of a class of equity securities of the Company, or of securities which in the aggregate provide such Beneficial Owner with 25% or more of the votes entitled to be cast with respect to the election of members of the Board of Directors;

(ii) during any period of two consecutive years, the individuals who   at the beginning of such period constituted the Board of Directors cease for any reason to constitute a majority thereof;

(iii) any Person acquires, directly or indirectly, more than 25% of the outstanding shares of voting securities of the Company, coupled with or followed by the election of directors of the Company of persons who were not directors at the time of such acquisition, if such directors comprise a majority of the Board; or

(iv) as a result of a tender offer, merger, consolidation, sale of assets, contested election or any combination of those or similar transactions, the directors of the Company immediately before such transaction(s) shall cease to constitute a majority of the Board or of any successor to the Company;

provided, however, that a transaction described in subparagraphs (i) or (ii) shall not be deemed to be a Change in Control if the transaction(s) causing such change shall have been approved by the affirmative vote of a majority of all members of the Board of Directors in office immediately prior to the Change in Control.

(d)            Disability shall mean absence from the Executive's duties with the Company on a full-time basis for 60 days, as a result of incapacity due to physical or mental illness, unless within 30 days after Notice of Termination is given following such absence the Executive shall have returned to the full-time performance of duties as _________________________ or other officer of the Company.

(e)            Exchange Act means the Securities Exchange Act of 1934, as amended.
 
 
 
 
2
 

 
(f)            Good Reason shall mean termination subsequent to a Change in Control of the Company following:

(i) the assignment to the Executive of any duties inconsistent with the positions, responsibilities and status of the Executive with the Company immediately prior to the Change in Control, or a change in the Executive's reporting responsibilities, titles or offices, as in effect immediately prior to the Change in Control;

(ii) any removal of the Executive from, or any failure to re-elect the Executive to, any of such positions, except in connection with termination of employment for Cause, Disability, Retirement or as a result of the Executive's death or termination by the Executive, other than for Good Reason;

(iii) a reduction by the Company in the Executive's base salary as in effect immediately prior to the Change in Control;

(iv) reassignment of the Executive to offices more than 25 miles from the location of the Company's principal executive offices immediately prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with the Executive's business travel obligations prior to the Change in Control;

(v) failure by the Company to continue in effect any benefit or compensation plan, stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health and accident plan, or disability plan in which the Executive is participating immediately prior to the Change in Control (or a plan providing the Executive substantially similar benefits), the taking of any action by the Company which would adversely affect the Executive's participation in or materially reduce his benefits under any such plan, deprive the Executive of any material fringe benefit enjoyed immediately prior to the Change in Control, including, but not limited to any failure by the Company to provide the Executive with the number of vacation days to which the Executive is entitled in accordance with the Company's normal vacation policy in effect immediately prior to the Change in Control; provided, that if the Company or a successor seeks to provide the Executive with substantially similar benefits under a different plan, the Company must solicit and obtain the Executive's written consent to the substitution of such plan, which consent shall not be unreasonably withheld;

(vi) the failure by the Company to obtain the assumption of the obligations to perform this Agreement by any successor, as contemplated in Section 8 hereof, or

(vii) any purported termination of the Executive's employment by the Company which is not effected pursuant to a Notice of Termination.

In the event the Executive believes that any of the events set forth in subparagraphs (i), (ii), (iv), (v) or (vii) have occurred, the Executive shall promptly give written notice to the Company of his belief that such event has occurred.
 
 
 
 
3
 

 
(g)            Market Value shall mean the closing price for a security reported by the principal stock exchange on which such security is traded, or if the security is not listed for trading on a stock exchange, the closing price reported by the National Market System ("NMS"), or if the security is not listed for trading on a stock exchange or included in the NMS, the mean of the closing bid and asked prices reported by NASDAQ, or if the security is not listed for trading on a stock exchange, included in the NMS or included in the NASDAQ system, the average of the bid and asked prices reported by market makers for the security to the National Quotation Bureau, all at the close of business on the applicable date.

(h)            Notice of Termination shall mean a written notice whereby the Company or a successor advises the Executive that his employment with the Company is or shall be terminated, which document shall indicate the specific termination provision in this Agreement relied upon by the Company or the successor and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under those provisions.

(i)            Person shall mean any natural person, corporation, partnership, limited partnership, limited liability company, joint venture, trust, association, syndicate, business entity, governmental body or any combination thereof

(j)            Retirement shall mean termination in accordance with a Company retirement policy in effect prior to the Change in Control.

2.            Employment of Executive - Company's Right to Terminate Benefits Upon Certain Terminations . Continuing from the date of this Agreement, the Executive will perform such duties as____________________________, as well as such other duties which may be assigned by the Board. If any Change in Control shall occur, the Executive shall be entitled to the following benefits, upon the subsequent termination of the Executive's employment within three years of the Change in Control, unless such termination is because of the Executive's death or Retirement, by the Company for Cause or Disability, or by the Executive other than for Good Reason:

(a) the Executive's full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus cash payment for any accrued vacation accumulated by the Executive at the Date of Termination and any bonus for a past or the current fiscal year which has been awarded or earned but not yet paid under any Bonus Plan(s). The Executive shall be considered to have earned the right to participate in bonus Plans of the Company for any fiscal year for which service of more than six months has been provided, and the bonus ultimately owed for any such period shall be adjusted proportionately to reflect the service of the Executive for the applicable portion of the year;
 
 
 
4
 

 
(b)           severance pay in any amount equal to 2.999 times the average annual compensation includible in the Executive's gross income paid by the Company during the Executive's three taxable years ending before the Change in Control that preceded the Executive's termination, such severance compensation being payable on or before the expiration of ten days from the Date of Termination;

(c)           all reasonable legal fees and expenses incurred by the Executive as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreements), such fees and expenses being payable on or before the expiration of ten days from the presentation of applicable invoices by the Executive to the Company or any successor;

(d)           a cash payment equal to the difference between the Market Value of securities underlying the vested options held by the Executive immediately on the Date of Termination, less the exercise price of the applicable options, multiplied by the number of shares underlying the corresponding options, which cash payment shall be compensation to the Executive for services provided by the Executive to the Company prior to the Date of Termination, said amount being payable in cash to the Executive on or before the expiration of ten days after the Date of Termination.

(e)           The Company agrees that when it is in sufficient cash position as determined by its Board, the Company will obtain a term life insurance policy for $1,000,000.00 including disability coverage with the understanding that the heirs or beneficiaries under such policy, will pay the Company out of the proceeds of such policy upon the death of the Executive, an amount equal to all premium payments made by the Company on the policy from the date the Company made such premium payments.

(f) The Company has issued options to the Executive to purchase common shares of the Company and the Company agrees that any such options shall vest in the Executive's wife and children upon Executive's death.

Any amounts owing to the Executive by the Company or any successor under this Paragraph 2, or under Paragraph 5, shall bear interest at the rate of 18% per annum, compounded daily from the due date.

3.            Procedures for Certain Terminations by Company . Within three years following any Change in Control, the employment of the Executive may be terminated by the Company only after a Notice of Termination has been given in accordance with this agreement. The date on which the Notice of Termination is effective shall be as follows:

(a)            Disability : Termination because of Disability shall be effective 30 days after Notice of Termination is given, provided the Executive shall not have returned to the performance of his duties on a full-time basis during such 30 day period;
 
 
 
5
 
 
 
(b)            Cause : Termination for Cause shall occur only after an opportunity has been provided for the Executive, and counsel of his choice, to be heard before the Board. Termination for Cause, shall be effective on the date specified in the Notice of Termination, which shall be no earlier than the conclusion of such hearing, and

(c)            Other Termination : If the Executive is terminated for any other reason, the termination shall be effective on the date the Notice of Termination is given, but if the Executive notifies the Company, within five business days after such Notice of Termination is given, that a dispute exists concerning the reasons or basis of the termination, the notice shall be effective on the date on which the dispute is finally resolved, either by mutual agreement of the parties, by a binding and final arbitration award, or by final judgment, order or decree of a court of competent jurisdiction entered upon such arbitration award (the time and appeal therefrom having expired with no appeal having been perfected).

The effective date of a Notice of Termination shall be the Date of Termination, as that term is used herein.

4.            Non-compete Covenant . During the two years following the Date of Termination of the Executive by the Company or a successor, following a Change in Control, otherwise than for Cause, Disability or Retirement, the Executive will not, directly or indirectly, own, manage, operate, join, control, be employed by, or participate in the partnership, management, operation or control of, or be connected in any manner, including but not limited to the positions of 5% or greater shareholder, director, officer, consultant, independent contractor, employee, partner or investor of more than $100,000, with any Person conducting business anywhere within the States of Arizona, California, Colorado, Idaho, Montana, New Mexico, Nevada, Utah or Wyoming, which is engaged in exploration and development activities for uranium, molybdenum, gold, silver oil or natural gas. The Executive shall not be obligated to seek employment of any type during the three year period following the Date of Termination. The Executive may seek and obtain employment which does not conflict with the non-compete obligations of this paragraph.

In exchange for the non-compete covenant of this Paragraph 4, and as fair and reasonable compensation for his agreement not to compete with the Company or a successor during such period, such Executive shall receive:

(a)           a payment of $200,000 per annum, payable in equal monthly installments, in arrears for the period of non-compete; and

(b)           coverage under all life insurance, medical, health, accident, and disability programs or arrangements in which the Executive was entitled to participate immediately prior to the Change in Control, if the Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred by virtue of non-employee status, the Company shall promptly arrange to provide benefits substantially similar to those which the Executive was entitled to receive under such plans and programs immediately before the Change in Control.
 
 
 
6
 

 
Notwithstanding anything set forth in this paragraph, the Executive shall not be in any way restricted in seeking other employment if the Company is not actively engaged in exploration and development activities for uranium, molybdenum, silver or gold, or if the Company or its successor is adjudicated bankrupt under Chapter 7 the Bankruptcy Code.

5.            Restrictions on Certain Actions Following_ Employment Termination . The Executive agrees that during any period while he receives payments in exchange for his non-compete covenants under Paragraph 4, he will not perform or do any other act which is prejudicial or injurious to the business or goodwill of the Company. In furtherance of the foregoing, but not in limitation thereof, the Executive agrees that during such period he will refrain from making public comments concerning the Company which are adverse to or critical of the Company.

6.            Reasonableness Of Scope; Non-Compete Agreement . The Company and Executive agree that the duration and geographic scope for the non-compete covenants contained in Paragraph 4 have been selected by mutual agreement of the Company and the Executive. It is further agreed by both parties that the duration and geographic scope of such covenant is reasonable, and does not significantly impede competition in the industry in which the Company intends to engage, nor does the scope of the non-compete agreement significantly restrict the Executive's ability to support himself and employ his skills as an entrepreneur and manager.

The Executive agrees that in the event it is necessary for the Company to seek judicial enforcement of the non-compete agreement of Paragraph 4, he will not resist enforcement of the non-compete provisions on the basis that they are over-broad or violate public policy by virtue of their duration or geographic scope. Furthermore, the Company and the Executive agree that in the event the non-compete agreement contained in Paragraph 4 is found by a court to be unenforceable for any reason, the provisions thereon shall be modified by the court, to the minimum extent possible, so as to ensure the protection to the Company or its successor sought to be obtained through the non-compete agreement, while avoiding any unacceptable impairment of competition, freedom of employment of the Executive, or other overly broad, believed by such court to make the non-compete provisions unenforceable as originally written.

7.            Modification of Agreement . This Agreement shall continue in effect until its amendment, modification or rescission, which must be in writing executed by each of the parties hereto.

8.            Successors . The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise), to all or substantially all of the business and/or assets of the Company, by agreement in form and substance reasonably satisfactory to the Executive and his counsel, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled hereunder if he terminates his employment for Good Reason. For purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of
 
 
 
7
 
 
 
Termination. As used in this Agreement "Company" shall mean the Company as hereinabove defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Paragraph or which otherwise becomes bound by all the terms and provisions of the Agreement by operation of law.

9.            Binding Agreement: Successors to Executive . The Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder, if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee, or if there be no such designee, to the Executive's estate.

10.            Notice . For the purposes of the Agreement, notices and all other communications provided for under the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed in accordance with this Paragraph. All notices to the Company shall be directed to the attention of the President, with a copy to the Secretary, at the Company's principal executive offices, 877 North 8th West, Riverton, WY 82501, as such address may be changed hereafter from time to time, provided notice of such change of address is given to the Executive in accordance with this provision. All notices to the Executive shall be directed to the address identified on the following signature page; as such address may be changed hereafter from time to time, provided notice of such change of address is given to the Company in accordance with this provision.

11.            Implied Waiver . No waiver by either party hereto of any breach by the other party hereto, or failure to comply with any condition or provision of the Agreement required to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or actions at the same or at any prior or subsequent time.

12.            Agreement . This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof. No agreements or representations, oral or otherwise, express or implied, with respect hereto have been made by either party which are not expressly set forth in the Agreement.

13.            Validity. The unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of the Agreement, which shall remain in full force and effect.

14.            Arbitration . Any dispute or controversy arising with respect to or in connection with this Agreement (including, without limitation, any controversies concerning the formation thereof) shall be settled by final and binding arbitration in Denver, Colorado in accordance with the Rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The arbitrator(s) shall have the power to award equitable as well as legal relief against a defaulting party.
 
 
 
8
 

 
15.            Specific Performance . It is agreed that in the event of a breach of the provisions of this Agreement, the non-defaulting party may not be satisfactorily compensated through payment of damages, and in the event of any breach or anticipated breach thereof, the non-defaulting party will be entitled, without proof of damages, to an award specifically prohibiting the breach thereof or providing such other equitable relief as may be deemed appropriate. Such equitable relief shall be in addition to any legal remedies to which the non-defaulting may be entitled.

IN WITNESS WHEEREOF the parties hereto have executed this Agreement, as of the day and year first above written.

U.S.ENERGY CORP.                                                                                     EXECUTIVE


By:                                                   By:                        
Keith G. Larsen                                                                                 Executive
Chief Executive Officer                                                                           
877 N.8 th W.                                                                                     
Riverton, WY  82501                                                                  
 
 
 
9
 
                   
 
 
 
Exhibit 31.1

CERTIFICATION

I, Keith G. Larsen, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of U.S. Energy Corp.;

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 transition report;

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;

4.
The registrant's other certifying officer and I are 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:

 
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;

 
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;

 
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

 
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

5.
The registrant's other certifying officer and I have disclosed, based on our 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):

 
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

 
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.

DATED this 10 th day of May, 2013.


 
/s/  Keith G. Larsen
 
 
Keith G. Larsen
 
 
Chief Executive Officer
 

 
 
 
Exhibit 31.2

CERTIFICATION

I, Steven D. Richmond, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of U.S. Energy Corp.;

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 transition report;

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;

4.
The registrant's other certifying officer and I are 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:

 
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;

 
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;

 
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

 
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

5.
The registrant's other certifying officer and I have disclosed, based on our 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):

 
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

 
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.

DATED this 10 th day of May, 2013.


 
/s/ Steven D. Richmond
 
 
Steven D. Richmond
 
 
Chief Financial Officer
 

 
 
 
Exhibit 32.1



Certification of CEO 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 of U.S. Energy Corp. (the "Company") on Form 10-Q for the period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Keith G. Larsen Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:

(1)           The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.



 
  /s/ Keith G. Larsen
 
 
Keith G. Larsen,
 
 
Chief Executive Officer
 
 
May 10, 2013
 


This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by Section 906 has been provided to U.S. Energy Corp. and will be retained by U.S. Energy Corp. and furnished to the Securities and Exchange Commission or its staff upon request.
 
 
 

Exhibit 32.2



Certification of CFO 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 of U.S. Energy Corp. (the "Company") on Form 10-Q for the period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Steven D. Richmond, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:

(1)           The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.




 
  /s/  Steven D. Richmond
 
Steven D. Richmond,
 
Chief Financial Officer
 
May 10, 2013


This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by Section 906 has been provided to U.S. Energy Corp. and will be retained by U.S. Energy Corp. and furnished to the Securities and Exchange Commission or its staff upon request.