January 16, 2014 - 10:32am EST by
2014 2015
Price: 3.48 EPS $0.00 $0.00
Shares Out. (in M): 28 P/E 0.0x 0.0x
Market Cap (in $M): 96 P/FCF 0.0x 0.0x
Net Debt (in $M): 2 EBIT 0 0
TEV (in $M): 98 TEV/EBIT 0.0x 0.0x

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  • Sum Of The Parts (SOTP)
  • Micro Cap
  • Oil Price Exposure
  • E&P


USEG is a small, independent E&P company beginning to benefit from the emerging Buda Limestone play in Dimmit/Zavala county Texas.  As a result of its size, lack of focused public players in the play, and nascent stage of the Buda, the market has yet to appreciate the upside.  Early well results have been impressive and IRRs are fantastic since the natural formation of the rock does not require fracture stimulation (fracking) of horizontally drilled wells.  The Buda alone could be worth a net after tax $6/share to USEG.


Beyond its Buda oil exploration portfolio, USEG sports a handful of other value drivers:

  • Small net working interests (NWI) in Bakken wells currently producing 933 net boe/d net to USEG
  • Potential receipt of up to $40mm of contingent payments related to the pending sale of a legacy uranium mine asset
  • USEG owns a world class molybdenum deposit in Crested Butte, CO with $180mm invested to date ($175mm by prior owners Amax/Phelps Dodge/Thomson Creek) and a mine plan recently accepted for review by the US Forest Service.  It is actively being marketed…though it has been for sale for years. 


USEG produced a net 1,109 boe/d (almost all Bakken) across 101 gross wells (15.14 net wells) in the recent September quarter, however, this number should increase dramatically as higher participation Buda wells come online at 3 to 5 gross wells (1-1.5 net) per quarter .  USEG has a clean capital structure with $5.5mm in cash against $7.2mm in bank debt (with a $100mm limit).  There is neither preferred stock nor convertible debt, which makes for a uniquely simple capital structure in the E&P space.   


Buda Limestone

USEG participates in 3,678 net acres (14,383 gross) in the Southeast Texas Booth-Tortuga formation with Contango Oil and Gas (MCF).  MCF is the operator of the wells following its acquisition of USEG’s original partner, Crimson Exploration on 10/2/13.  To date, the company has participated in three successful wells out of three attempts (Beeler 2H, 3H and 4H).  The latest September quarter financials only reflect 1 well since Beeler 3H (average 550 boe/day in last 2 months) and 4H (973 boe/d in first full month) came on line in the 4th quarter.  Four more wells are in various stages drilling and completion (Beeler 5H, 6H, 7H, 8H).  Investors can get an edge on the information as individual well permitting and production is disclosed on a monthly basis on the Texas Railroad Commission website (http://www.rrc.state.tx.us/data/online/index.php). 


Since the Buda formation in this region is naturally fractured, the wells are horizontally drilled but not fracked. This keeps per well costs to a low $3.5-$3.75mm and increases the speed of drilling.  Wells have only taken approximately 45 to 60 days from spud date to commercial production.  Private operator Dan A Hughes was the first to successfully drill in the region with its Heitz 302 #3H well in June of 2012.  That well has produced 340,000 boe in 17 months and directly borders USEG’s acreage and target drilling area.  Every one of the 6 Buda wells in the 3 mile radius has been a winner with 30 initial pressures ranging from 500-1,200 boe/d.  The company estimates there are 30-40 drilling locations based on current spacing, however mgmt believes downspacing will substantially increase locations.  Dan A Hughes, has reportedly downsized from 320 acre spacing, which USEG/MCF is using, to 160 acre spacing already.


In August, USEG acquired an additional 636 net acres (4,243 gross, 15% NWI, 11.25% NRI) from private operator US Enercorp that is contiguous with their existing Booth-Tortuga acreage, bringing their total sweet-spot acreage to 4,314 net acres.


I have yet to see a type curve published for Buda wells, but here is a chart of recent wells:





USEG/MCF Buda wells to date have been approximately 80% oil w/ 30 day initial pressure ranges of 500-1,200 bod/d.  Since the Buda formation is naturally hydraulic fracturing is unnecessary.  This makes keeps the costs to a very low $3.75mm per well and results in very high IRRs.  In August, the company discussed EURs in the 325,000 range and pricing has been WTI+$3.  Putting it together, below is a valuation and sensitivity table for USEG’s Buda valuation:



Value of Booth Toruga acreage per share

Buda Economics


Estimated Ultimate Recovery (EUR) per Buda well

Potential wells








Cost per well








NWI (net working interest)








NRI (net royalty interest)


Oil price






EUR per well (boe)








Revenue on EUR








Production tax (19.25%)








Net revenue








Oil assumption



IRR (pretax)



Per well net to USEG



Value of Buda ($mm)



Pretax value of Buda/share



Net Value of Buda/share




Williston Basin/Bakken North Dakota

USEG participates in 3,225 net acres in the North Dakota Bakken with 82 productive gross wells (10.1 net; 12.32% NWI) currently producing approximately 900 boe/d net to USEG.  Approximately 17 new wells are in progress though the participation in these wells is very small at 2% NWI, and 1.53% NRI.  Mgmt believes there are approximately 390-520 gross well locations equating to 15-20 net wells, which would more than double their current well count. 


Value of ND Bakken




Value/flowing Bakken barrel


Value $mm


Value per share



Bakken North/Three Forks Montana

USEG maintains a 12.5% interest in 30,382 gross acres (2,367 net) in Montana in the Bakken/Three Forks.  The projected is currently being assessed by the operator and no wells have been drilled to date.  To maintain the lease, a well is required by 12/31/15. 


Other Texas/MCF Leona Acreage Block; KM Ranch

USEG also participates in 3,343 gross acres (1,003 net) with MCF in KM Ranch approximately 10 miles from Booth-Tortuga.  The first wells drilled and fracked in the Eagle Ford formation were mediocre given their $7-8mm cost per well. KM #2 was completed in September 2012 and peaked at 511 boe/d (90% oil).  With the success of Buda in the Booth-Tortuga, Leona/KM Ranch has been put on the backburner.


Mount Emmons Molybdenum

Company took over the project in 2006 after predecessors Cyprus Amax and Phelps Dodge  spent $160mm over a few decades on permitting, engineering, and ore delineation.  USEG brought in new partner Thomson Creek Minerals who spent another $12mm but withdrew from the project in 2011.  USEG currently owns the project outright and would like to monetize it.  Carrying costs are approximately $2mm per year to fulfill related water treatment obligations.  I have no expectation that anything happens in the near term since it’s been for sale forever, but it represents a potential option.  Given its proximity to Crested Butte and its incredible looking terrain, maybe it can be turned into a heli/cat-ski operation (3/4 kidding, but looking at photo has me salivating to make turns).


Shootaring Canyon Uranium

On October 30, 2013, nanocap Black Range Minerals announced a deal to purchase Uranium One’s US assets, primarily consisting of the Shootaring Canyon uranium processing facility.  USEG had sold Shootaring to Uranium One in 2006, however they never restarted production.  Black Range will assume the original contingent payments to USEG consisting of $20mm upon the mill reaching commercial production, $7.5mm on first delivery of the mill and up to $12.5mm in royalties on production from the mill.  The deal has not yet closed and the timing to reach commercial production is likely years out, but it represents a potential future windfall of up to $40mm to USEG (http://www.blackrangeminerals.com/content/wp-content/uploads/2013/10/30-Oct-2013-Black-Range-Transforms-Into-USAs-New-Fully-Integrated-Near-Term-Uranium-Producer.pdf).  USEG has not yet put out a press release about the deal, but plans to when it closes.



The Larsen family has controlled the company since it was founded by three Larsen brothers in 1966 and management from CEO to investor relations is still all Larsens.  They have historically adopted a scatter shot approach to natural resource investing, which has included businesses across uranium mining, gold mining, geothermal energy, real estate development and oil.  The company is human capital lean with only 15 full time employees.  I don’t think they win any awards for historical capital allocation but they certainly have skin in the game. CEO/COB Keith Larsen owns 8.1% of the equity and COO Mark Larsen owns 6% and their compensation is not egregious.   



US Energy is significantly undervalued on a sum of the parts basis. The value of their participation in the emerging  Buda limestone play alone is worth more than the whole company’s enterprise value.  There will be significant information supporting value in the near term in the form of earnings, well reports from USEG (and partner Contango), and an updated investor presentation.  The North Dakota Bakken wells provide another $2.50 of value on current production alone.  As a bonus, investors get a few more shots on goal in the form of contingent uranium payouts, a world class potential molybdenum deposit, and other E&P related acreage. 


Sum of the Parts



Per share

Booth-Tortuga Buda Limestone



North Dakota Bakken









Shootaring Canyon


up to $40mm

up to $1.44

Mount Emmons


cheap option

Montana Bakken acreage


free option

Leona-KM Ranch TX acreage

free option




While there is substantial upside if things work out for USEG, it falls on the speculative end of the investing curve.  

  • USEG is not the operator of its wells in the Buda. The decision on when and where to drill is driven by Contango.
  • Future wells in the Buda could come in poorly and EURs come in below 300k boe/well
  • WTI oil could decline dramatically. 
  • Management has not articulated what it will do with windfalls from the Buda, and the family controlled entity has not represented the best capital allocation policies historically



  • Continued success in Buda wells dramatically increasing production and cash flow
  • The company plans on updating its stale August presentation that only includes one Buda well and hitting the conference circuit.
  • Monetization of the Mount Emmons molybdenum project
  • Contingent payments from the sale of its legacy uranium project
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


  • Continued success in Buda wells dramatically increasing production and cash flow
  • The company plans on updating its stale August presentation that only includes one Buda well and hitting the conference circuit.
  • Monetization of the Mount Emmons molybdenum project
  • Contingent payments from the sale of its legacy uranium project
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