US ENERGY CORP

1. ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Operations

U.S. Energy Corp. (collectively with its wholly-owned subsidiaries, Energy One LLC (“Energy One”) and New Horizon Resources LLC (“New Horizon Resources”), referred to as the “Company” in these notes to unaudited Condensed Consolidated Financial Statements) is incorporated in the State of Delaware. The Company’s principal business activities are focused on the acquisition, exploration, and development of onshore oil and natural gas properties in the United States, which the Company considers a single operating segment. Our principal properties and operations are in the Rockies region (Montana, Wyoming and North Dakota), the Mid-Continent (Oklahoma, Kansas and North and East Texas) region, and the West Texas, South Texas, and Gulf Coast region.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”) and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included.

For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form10-K for the year ended* December 31, 2023*, as filed with the SEC on* March 26, 2024*. Our financial condition as of* March 31, 2024*, and operating results for thethree months ended* March 31, 2024*, arenot necessarily indicative of the financial condition and results of operations that* maybe expected for any future interim period or for the year ending December 31, 2024*.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of oil and gas properties acquired, oil and natural gas reserves that are used in the calculation of depreciation, depletion, amortization, and impairment of the carrying value of evaluated oil and natural gas properties; production and commodity price estimates used to record accrued oil and natural gas sales receivables; future prices of commodities used in the valuation of commodity derivative contracts; and the cost and timing of future asset retirement obligations. The Company evaluates its estimates on an on-going basis and bases its estimates on historical experience and on various other assumptions the Company believes to be reasonable. Due to inherent uncertainties, including the future prices of oil and natural gas, these estimates could change in the near term and such changes could be material.

Principles of Consolidation

The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with GAAP and include the accounts of U.S. Energy Corp. and its wholly-owned subsidiaries Energy One and New Horizon Resources. U.S. Energy Corp. accounts for its share of oil and gas exploration and production activities, in which it has a direct working interest, by reporting its proportionate share of assets, liabilities, revenues, costs, and cash flows within the relevant lines on the balance sheets, statements of operations, and statements of cash flows. All inter-company balances and transactions have been eliminated in consolidation.

Reclassifications

Certain prior year amounts are reclassified to conform to the current year presentation.

Historically, the Company included gathering, transportation, and treating costs within lease operating expense on the Condensed Consolidated Statements of Operations. Effective* July**1,* 2023, the Company began classifying gathering, treating, and transportation costs in a separate line item, titled Gathering, transportation, and treating, on the Condensed Consolidated Statements of Operations and recast prior period results for this reclassification. This reclassification hadno impact on the Company's net income, earnings per share, cash flows, or financial position. The Company revised historical periods to reflect this change in presentation.

The Company has historically included revenue and royalties payable within accounts payables and accrued liabilities on the Condensed Consolidated Balance Sheets. Effective* December**31,* 2023, the Company began classifying revenue and royalties payable as a separate line item on the Condensed Consolidated Balance Sheet. The Condensed Consolidated Statements of Cash Flows has been updated to separate changes in operating assets and liabilities from revenue and royalties payable and accounts payable and accrued liabilities. This reclassification hadno impact on the Company's net income (loss), income (loss) per share, cash flows, or financial position. The Company revised historical periods to reflect this change in presentation.

2. ACQUISITIONS AND DIVESTITURES

Divestitures

During the year ended* December 31, 2023,the Company closed on a series of individual divestitures for a total of $7.0 million in net proceeds before transaction costs of $0.4 million. The divestitures included the Company’s non-operated interests in 152 wells across North Dakota, New Mexico, and Texas, and overriding royalty interests inseven wells in Karnes County, Texas. These divestitures didnot* have a significant impact to reserves volumes or the full cost pool depletion rate. As such, the Company recorded the proceeds, net of transaction costs and purchase price adjustments, to the full cost pool, withno gain or loss recognized. Relief of associated asset retirement obligations of $0.5 million were also recorded to the full cost pool.

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3. REVENUE RECOGNITION

The Company disaggregates revenues from its share of revenue from the sale of oil and natural gas and liquids by region. The Company’s revenues in the Rockies region, West Texas, South Texas, and Gulf Coast region, and Mid-Continent region for thethree months ended* March 31, 2024and2023*, are presented in the following table:

Significant concentrations of credit risk

The Company has exposure to credit risk in the event of non-payment of oil and natural gas receivables by purchasers of its operated oil and natural gas properties. The following table presents the purchasers that accounted for10% or more of the Company’s total oil and natural gas revenue for at leastone of the periods presented:

4. LEASES

The Company’s operating lease right-of-use asset and lease liability are recognized at their discounted present value under the following captions in the Condensed Consolidated Balance Sheets on* March 31, 2024* and* December 31, 2023*:

The Company recognizes lease expense on a straight-line basis excluding short-term and variable lease payments, which are recognized as incurred. Short-term lease cost represents payments for oilfield equipment with original lease terms less thanone year. Following are the amounts recognized as components of lease cost for thethree months ended* March 31, 2024and2023*:

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The Company’s Houston office operating lease doesnot contain implicit interest rates that can be readily determined; therefore, the Company used the incremental borrowing rates in effect at the time the Company entered into the leases.

Maturity of operating lease liabilities with terms ofone year or more as of* March 31, 2024* are presented in the following table:

5. OIL AND NATURAL GAS PRODUCING ACTIVITIES

Full Cost Method Ceiling Test and Impairment

The reserves used in the ceiling test incorporate assumptions regarding pricing and discount rates over which management hasno influence in the determination of present value. In the calculation of the ceiling test as of* March 31, 2024*, the Company used $77.48 per barrel for oil and $2.45 perone million British Thermal Units (MMbtu) for natural gas (as further adjusted for property, specific gravity, quality, local markets and distance from markets) to compute the future cash flows of the Company’s producing properties. The discount factor used was 10%.

The Company recorded a $5.4 million ceiling test write-down of its oil and gas properties during thethree months ended* March 31, 2024*, due to a reduction in the value of proved oil and natural gas reserves primarily as a result of a decrease in crude oil and natural gas prices, as well as reserves revisions related to wells shut-in during thefirst quarter of2024 and updates to the decline curves for certain wells.

6. DEBT

On* January 5, 2022,the Company entered into afour*-year credit agreement (“Credit Agreement”) with FirstBank Southwest (“FirstBank”) as administrative agent forone or more lenders (the “Lenders”), which provided for a revolving line of credit with an initial borrowing base of $15 million, and a maximum credit amount of $100 million. Borrowings under the Credit Agreement are collateralized by afirst priority, perfected lien and security interests on substantially all assets of the Company (subject to permitted liens and other customary exceptions). On* July 26, 2022,*the Company, in anticipation of the closing of the ETXENERGY East Texas acquisition entered into a letter agreement with FirstBank whereby it increased the borrowing base under the Credit Agreement from $15 million to $20 million.

Under the Credit Agreement, revolving loans* maybe borrowed, repaid and re-borrowed until January 5, 2026,when all outstanding amounts must be repaid. Interest on the outstanding amounts under the Credit Agreement will accrue at an interest rate equal to the greater of (i) the prime rate in effect on such day, and (ii) the Federal Funds rate in effect on such day (as determined in the Credit Agreement) plus 0.50%, and an applicable margin that ranges between 0.25% to 1.25% depending on utilization of the amount of the borrowing base (the “Applicable Margin”). Interest expense recognized on the Credit Agreement and the weighted average interest rates for thethree* months ended* March 31, 2024and2023* are presented in the following table:

The Credit Agreement contains various restrictive covenants and compliance requirements, which include: (i) maintenance of certain financial ratios, as defined in the Credit Agreement tested quarterly, that limit the Company’s ratio of total debt to EBITDAX (as defined in the Credit Agreement) to 3:1 and require its ratio of consolidated current assets to consolidated current liabilities (as each is described in the Credit Agreement) to remain at 1:1 or higher; (ii) restrictions on making restricted payments as defined in the Credit Agreement, including the payment of cash dividends and repurchases of equity interests (subject to certain limited rights to make restricted payments as long asno event of default has occurred, or would result from the restricted payment, certain financial ratios are met and the borrowing availability after giving pro forma effect to any borrowing to be made on the date of the restricted payment is greater than, or equal to,20% of the then existing borrowing base); (iii) limits on the incurrence of additional indebtedness; (iv) a prohibition on the entry into commodity swap contracts exceeding a specified percentage of our expected production; and (v) restrictions on the disposition of assets. As of* March 31, 2024*, the borrowing base was $20 million, and the Company was in compliance with all financial covenants related to the Credit Agreement.

The amount outstanding on the Credit Agreement as of* March 31, 2024* and* December 31, 2023*, was $5.0 million.

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7. COMMODITY DERIVATIVES

The Company’s results of operations and cash flows are affected by changes in market prices for crude oil and natural gas. To manage a portion of its exposure to price volatility from producing crude oil and natural gas, the Company* mayenter into commodity derivative contracts to protect against price declines in future periods. The Company doesnot* enter into derivative contracts for speculative purposes. The Company doesnot apply hedge accounting. Accordingly, changes in the fair value of the derivative contracts are recorded in the Condensed Consolidated Statements of Operations and are included as a non-cash adjustment to net income in the operating activities section in the Condensed Consolidated Statements of Cash Flows.

As of* March 31, 2024*, the Company had commodity derivative contracts outstanding as summarized in the tables below:

The following table details the fair value of commodity derivative contracts recorded in the accompanying Condensed Consolidated Balance Sheets by category:

As of* March 31, 2024*, all commodity derivative contracts held by the Company were subject to a master netting arrangement with its counterparty. The terms of the Company’s derivative agreements provide for offsetting of amounts payable or receivable between it and the counterparty for contracts that settle on the same date. The Company’s agreements also provide that in the event of an early termination, the counterparty has the right to offset amounts owed or owing under that and any other agreement. The Company’s accounting policy is to offset positions when we have a right of offset or master netting arrangement. SeeNote13**-Fair Value Measurementsfor disclosure of the fair value of derivative assets and liabilities on a gross and net basis.

The following table summarizes the components of the commodity derivative settlement gain (loss) as well as the components of the net commodity derivative (gain) loss line-item presentation in the accompanying Condensed Consolidated Statements of Operations:

8. COMMITMENTS AND CONTINGENCIES

Contingencies

The Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the anticipated results of any pending litigation and claims arenot expected to have a material effect on the results of operations, the financial position, or the cash flows of the Company.

9. SHAREHOLDERS’** EQUITY**

At* March 31, 2024*, the Company had 25,343,013 shares of common stock outstanding and 245,000,000 authorized. In addition, as of* March 31, 2024*, the Company had 5,000,000 authorized but unissued shares of preferred stock.

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Stock Option Plans

From time to time, the Company* may*grant stock options under its incentive plan covering shares of common stock to employees of the Company. Stock options, when exercised, are settled through the payment of the exercise price in exchange for new shares of stock underlying the option. These awards typically expireten years from the grant date.

For thethree months ended* March 31, 2024and2023*, there wasno compensation expense related to stock options. As of* March 31, 2023*, all stock options had vested. No stock options were granted, exercised, or expired during thethree months ended* March 31, 2024and2023*. The stock options had de minimis intrinsic values for the periods reported. Presented below is information for stock options outstanding and exercisable as of* March 31, 2024*, and* December 31, 2023*:

The following table summarizes information for stock options outstanding and for stock options exercisable at* March 31, 2024* by the remaining contractual term:

Restricted Stock

The Company grants restricted stock under its incentive plan covering shares of common stock to employees and directors of the Company. Significantly all of the restricted stock awards are time-based awards and are amortized ratably over a requisite service period. Time-based awards vest ratably following the grant date, provided the grantee is employed on the vesting date. The Company hasone restricted stock award that vests if the Company's share price is equal to or greater than $2.00 for20 consecutive trading days within the period beginning* March 19, 2025and ending March 18, 2027.The grant date fair value of this award is amortized over a derived requisite service period from the fair value model. Forfeitures of restricted stock awards are recognized as they occur. Restricted stock granted to employees, when vested, maybe settled through the net issuance of shares, reduced by the number of shares required to pay withholding taxes. Non-vested shares of restricted stock arenot* included in common shares outstanding until vesting has occurred.

The following table presents the changes in non-vested restricted stock awards to all employees and directors for thethree months ended* March 31, 2024*:

For thethree months ended* March 31, 2024and2023*, the Company recognized $0.2 million and $0.7 million, respectively, of stock compensation expense related to restricted stock grants. Total compensation cost related to non-vested awardsnot yet recognized in the Company’s Condensed Consolidated Statements of Operations as of* March 31, 2024* was $1.6 million. This cost is expected to be recognized over a weighted average period of 1.6 years.

Dividends

On* February 23, 2023,the Company paid a quarterly cash dividend of $0.0225 per share of common stock outstanding to stockholders of record at the close of business on February 10, 2023.The total amount of dividends paid for thethree* months ended* March 31, 2023* was $0.6 million. On* August 9, 2023,the Board of Directors suspended the Company’s dividend payment program. As a result, no dividends were paid for thethree* months ended* March 31, 2024*.

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Share Repurchase Program

On* April 26, 2023,the Board of Directors of the Company authorized and approved a share repurchase program for up to $5.0 million of the outstanding shares of the Company’s common stock. On March 19, 2024,the Board of Directors authorized and approved an extension of the ongoing share repurchase program. Subject to any future extensions, the repurchase program is scheduled to expire on the earlier of June 30, 2025,*when a maximum of $5.0 million of the Company’s common stock has been repurchased, or when the program is discontinued by the Board of Directors.

Under the stock repurchase program, shares are repurchased from time to time in the open market or through negotiated transactions at prevailing market prices, or by other means in accordance with federal securities laws. Repurchases are made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase program is funded using the Company’s working capital. The repurchased shares are cancelled and therefore willnot be held in treasury or reissued.

During thethree months ended* March 31, 2024*, the Company repurchased 318,200 shares for $337 thousand, at a weighted average price of $1.06 per share. There wereno share repurchases during thethree months ended* March 31, 2023*.

10. ASSET RETIREMENT OBLIGATIONS

The Company has asset retirement obligations (“ARO”) associated with the future plugging and abandonment of proved properties. Initially, the fair value of a liability for an ARO is recorded in the period in which the ARO is incurred with a corresponding increase in the carrying amount of the related asset. The liability is accreted to its present value each period and the capitalized cost is depleted over the life of the related asset. If the liability is settled for an amount other than the recorded amount, an adjustment to the full cost pool is recognized. The Company hadno assets that are restricted for the purpose of settling ARO.

In the fair value calculation for the ARO there are numerous assumptions and judgments, including the ultimate retirement cost, inflation factors, credit-adjusted risk-free discount rates, timing of retirement and changes in legal, regulatory, environmental, and political environments. To the extent future revisions to assumptions and judgments impact the present value of the existing ARO, a corresponding adjustment is made to the oil and natural gas property balance.

The following is a reconciliation of the changes in the Company’s liabilities for asset retirement obligations as of* March 31, 2024* and* December 31, 2023*:

11. INCOME TAXES

The Company’s tax provision or benefit from income taxes for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any. Each quarter the Company updates its estimate of the annual effective tax rate and makes a year-to-date adjustment to the provision. The Company’s effective tax rate was approximately 0% and 5% for thethree months ended* March 31, 2024and2023*, respectively. The primary difference in the Company’s effective tax rate and the statutory rate for both periods is related to the movement in the valuation allowance against the Company’s net deferred tax assets.

Deferred taxes are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets, liabilities, net operating losses and tax credit carry-forwards. We review our deferred tax assets (“DTAs”) and valuation allowance on a quarterly basis. As part of our review, we consider positive and negative evidence, including cumulative results in recent years. The Company has limitations on net operating losses (“NOLs”) generated prior to2022 and other tax attributes as a result of an Internal Revenue Code ("IRC") Section382 ownership change from a* January 5, 2022acquisition. As such, the Company is projecting that as of March 31, 2024*, it willnot have sufficient DTAs available to fully offset the expected future taxable income that will be generated by the realization of the Company’s deferred tax liabilities and thus has recorded a net deferred tax liability.

The Company recognizes, measures, and discloses uncertain tax positions whereby tax positions must meet a “more-likely-than-not” threshold to be recognized. During thethree months ended* March 31, 2024and2023*,no adjustments were recognized for uncertain tax positions.

12. INCOME (LOSS) PER SHARE

Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding for the respective period. Diluted net income per common share is calculated by dividing adjusted net income by the diluted weighted average number of common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for this calculation consist of stock options and unvested shares of restricted common stock, which are measured using the treasury stock method. When the Company recognizes a net loss, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of dilutive net loss per common share. Unvested shares of restricted stock participate in dividend distributions; however, they donot participate in losses. Therefore, dividends attributable to participating securities arenot included as a reduction in the calculation of loss attributable to common shareholders.

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The following table sets forth the calculation of basic and diluted net income (loss) per share for thethree months ended* March 31, 2024and2023*:

For thethree months ended* March 31, 2024and2023*, potentially dilutive securities excluded from the calculation of weighted average shares because they were anti-dilutive were as follows:

13. FAIR VALUE MEASUREMENTS

The Company’s fair value measurements are estimated pursuant to a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving highest priority to quoted prices in active markets (Level1) and the lowest priority to unobservable data (Level3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability, and* mayaffect the valuation of the assets and liabilities and their placement within the hierarchy level. Thethree* levels of inputs that* may*be used to measure fair value are defined as:

Level1 - Quoted prices for identical assets and liabilities traded in active markets.

Level2 - Observable inputs other than Level1 that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in active markets, or other observable inputs that can be corroborated by observable market data.

Level3 - Unobservable inputs supported by little orno market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The following is a description of the valuation methodologies used for complex financial instruments measured at fair value:

Recurring Fair Value Measurements

Commodity Derivative Instruments

The Company measures the fair value of commodity derivative contracts using an income valuation technique based on the contract price of the underlying positions, crude oil and natural gas forward curves, discount rates, and Company or counterparty non-performance risk. The fixed-price swaps and collar derivative contracts are included in Level2. The fair value of commodity derivative contracts and their presentation in our unaudited Condensed Consolidated Balance Sheet as of* March 31, 2024* and* December 31, 2023* are presented below:

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Marketable Equity Securities

We measure the fair value of marketable equity securities based on quoted market prices obtained from independent pricing services. The Company has an investment in the marketable equity securities of Anfield Energy (“Anfield”), which it acquired as consideration for sales of certain mining operations. Anfield is traded in an active market under the trading symbol AEC:TSXV and has been classified as Level1.

Credit Facility

The Company’s credit facility approximates fair value because the interest rate is variable and reflective of market rates.

Other Financial Instruments

The carrying value of financial instruments included in current assets and current liabilities approximate fair value due to the short-term nature of those instruments.

Nonrecurring Fair Value Measurements

Asset Retirement Obligations

The Company measures the fair value of asset retirement obligations as of the date a well is acquired, the date a well begins drilling, or the date the Company revises its ARO assumptions. The Company’s estimated asset retirement obligations are based on historical experience in plugging and abandoning wells, estimated economic lives, estimated plugging and abandonment costs and federal and state regulatory requirements, all unobservable inputs, and therefore, are designated as Level3 within the valuation hierarchy. The liability is discounted using the credit-adjusted risk-free rate estimated at the time the liability is incurred or revised upwards. The credit adjusted risk-free rate used to discount the Company’s plugging and abandonment liabilities range from 7.30% to 19.00%. SeeNote10**-Asset Retirement Obligations.

Other Assets and Liabilities

The Company evaluates the fair value on a non-recurring basis of its Riverton, Wyoming real estate assets when circumstances indicate that the value has been impaired. As of* March 31, 2024*, the Company estimated the fair value of its real estate assets based on a market approach, using the value from a binding offer on the real estate assets accepted on* February 27, 2024.The sale closed on April 5, 2024.*

14. OTHER CURRENT ASSETS AND ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Other Current Assets

The following table presents the components of other current assetsas of the dates indicated:

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Accounts Payable and Accrued Liabilities.

The following table presents the components of accounts payable and accrued liabilities as of the dates indicated:

15. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

16. SUBSEQUENT EVENTS

Derivative Activities

On* April 2, 2024,the Company entered into crude oil swap agreements, agreeing to pay monthly the average NYMEX WTI price for the month of settlement and receive a fixed price. The contracts are for a total of 164,125 barrels of oil, extending from January 2025to December 2025*with a weighted average fixed price of $73.71.

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