Executive Summary / Key Takeaways

• U.S. Energy Corp. is undergoing a strategic transformation, pivoting from a legacy oil and gas producer to a growth-oriented, non-hydrocarbon industrial gas company focused on its dominant acreage position in the Kevin Dome, Montana.
• The company's core investment thesis centers on developing a full-cycle industrial gas platform (production, processing, carbon management) leveraging the unique non-hydrocarbon nature of its resource for lower environmental footprint and competitive advantage.
• Recent financial results reflect this transition, with declining revenue from divested legacy oil and gas assets offset by increased cash from asset sales and a recent equity offering, funding initial development in Montana.
• Key near-term catalysts include operational results from initial industrial gas wells (expected Q2 2025), commencement of processing plant construction (June 2025), and progress on carbon management initiatives (permits expected June 2025, MRV plan submission July 2025).
• While facing risks inherent in development projects and legacy asset valuation (expected Q2 2025 write-down), USEG's clean balance sheet and access to capital from asset monetization differentiate it from many peers in both the traditional E&P and emerging industrial gas sectors.

A Strategic Pivot Towards Industrial Gas

U.S. Energy Corp. has historically operated as an independent oil and gas exploration and production company, primarily focused on acquiring and developing hydrocarbon properties across various U.S. basins. While this strategy aimed to build a growth platform through aggregation, the landscape for small and mid-cap E&P companies presents significant challenges, particularly concerning capital access, efficiency, and market valuation. Recognizing these dynamics, U.S. Energy has embarked on a deliberate and transformative strategic pivot, shifting its primary focus towards the acquisition, exploration, and development of industrial gases, specifically helium, carbon dioxide, and nitrogen, centered around its growing position in the Kevin Dome structure in Montana.

This strategic evolution is not merely an addition to the existing business but represents a fundamental reorientation of the company's identity and growth drivers. Management explicitly views the Montana Industrial Gas project as a "transformational opportunity" and the new core focus, designed to deliver scale and relevance in the public markets. The rationale is grounded in the belief that this platform is ideally positioned to meet growing market demand for industrial gases while supporting attractive economics.

The competitive landscape for U.S. Energy is thus bifurcated. In its legacy E&P operations, the company competes with larger, more established players like Devon Energy (DVN), Continental Resources (CLR), and Marathon Oil (MRO). These competitors benefit from significant economies of scale, advanced drilling technologies, and greater operational efficiencies, often resulting in lower operating costs per barrel and higher profitability margins compared to smaller operators like USEG. For example, while USEG's lease operating expenses per BOE increased to $34.23 in Q1 2025 (from $29.02 in Q1 2024) due to a changing asset mix, larger peers typically operate with lower per-unit costs. USEG's historical financial performance, including negative net income and EBITDA margins (TTM EBITDA margin of -49.22%), reflects the challenges of competing at scale in the mature E&P market. Its competitive advantage in this segment has historically been centered on opportunistic, value-driven acquisitions and regional expertise, but these advantages are often overshadowed by the scale and technological lead of larger rivals.

However, in the emerging industrial gas sector, particularly for non-hydrocarbon sources, the competitive dynamics are different. Management highlights that many potential competitors in this nascent space are constrained by "complex equity structures, stressed balance sheets, limited capital access and exchange listings that deter institutional investors." U.S. Energy aims to differentiate itself by leveraging its relatively clean balance sheet, access to capital (both internally generated and through capital markets), and its rapidly consolidating land position in a geologically favorable area. By controlling approximately 160,000 net acres across the Kevin Dome, the company believes it holds a "dominant land position" that secures years of future growth potential and positions it as a "first mover."

A critical element of USEG's competitive positioning in the industrial gas sector is the nature of its resource itself. Unlike the majority of U.S. helium production, which is tied to hydrocarbon extraction as a byproduct, the Kevin Dome gas stream is non-hydrocarbon based. Management emphasizes this as a significant competitive advantage, resulting in a "significantly lower environmental footprint." This technological differentiation is expected to become increasingly important as sustainability factors influence market preferences. The raw gas stream from the Duperow zone is expected to be comprised of approximately 80% to 85% CO2 and 0.5% to 1% helium. The company's strategy involves building a full-cycle platform that not only produces and processes this gas but also manages the CO2 component through permanent sequestration. This carbon management capability, leveraging the Kevin Dome's geology which is described as "exceptionally well suited for carbon storage," allows the company to potentially benefit from federal incentives related to CO2 sequestration, adding another layer to its economic model and competitive moat.

Financial Performance Reflecting Transition and Investment

U.S. Energy's recent financial performance clearly illustrates the ongoing strategic transition. For the three months ended March 31, 2025, the company reported total revenue of $2.193 million, a significant decrease from $5.391 million in the same period of 2024. This 59% decline was primarily driven by a 57% decrease in production quantities, a direct consequence of strategic divestitures of legacy oil and natural gas properties in the second half of 2024, including assets in Karnes County, East Texas, and the Mid-continent regions. A 5% decrease in realized commodity pricing on a BOE basis also contributed to the revenue reduction.

Operating expenses saw a mixed trend. Total lease operating expenses decreased in absolute terms but increased on a per BOE basis to $34.23 in Q1 2025, reflecting the change in the mix of properties retained after divestitures. Gathering, transportation, and treating costs saw a substantial 75% decrease, also attributable to divested properties. Production taxes declined by 57%, moving in line with the decrease in revenue. Depreciation, depletion, and amortization (DDA) decreased from $2.20 million in Q1 2024 to $1.10 million in Q1 2025, primarily due to lower depletion expense on the reduced base of proved oil and natural gas properties.

General and administrative (G&A) expenses, however, increased by $0.2 million to $2.389 million in Q1 2025 compared to $2.206 million in Q1 2024. This increase was attributed to higher professional fees related to divestiture and acquisition activities, incremental costs from partially outsourcing the accounting function, and increased stock-based compensation. Management expects normalized quarterly G&A costs to be around $1.6 million, representing an anticipated 18% reduction from Q1 2024 levels, as transition costs subside and efficiency efforts take hold.

The company reported a net loss of $3.111 million for the three months ended March 31, 2025, compared to a net loss of $9.537 million in the prior-year period. The Q1 2024 loss included a $5.4 million ceiling test write-down of oil and natural gas properties, whereas no such write-down occurred in Q1 2025. However, the company expects to record a further write-down of approximately $7.0 million to $8.0 million in the second quarter of 2025 due to lower commodity prices impacting the ceiling test calculation.

From a liquidity perspective, U.S. Energy significantly bolstered its cash position. Cash and equivalents increased from $7.723 million at December 31, 2024, to $10.502 million at March 31, 2025. This increase was primarily driven by net proceeds of approximately $11.9 million from an underwritten public offering of 4.87 million shares of common stock in January 2025. This capital raise, along with cash on hand and potential future operating cash flows and divestiture proceeds, is intended to fund the industrial gas development program. As of March 31, 2025, the company had no outstanding balance on its $20 million revolving credit facility and was in compliance with all financial covenants. The company is in discussions to renew and extend this facility through 2029, anticipating completion in Q2 2025.

Operational Momentum and Forward Outlook

The core of U.S. Energy's forward outlook is the execution of its industrial gas development plan in Montana. The initial phase, which began in Q1 2025 and is expected to be completed by June 2025, involves workovers and flow testing of existing wells and drilling two new development wells targeting the helium and CO2 rich Duperow zone. Each of these new wells is budgeted at approximately $1.2 million. Management anticipates having operational results from these four wells by the end of Q2 2025, which will inform the full-cycle development strategy.

Upon completing this initial program in June 2025, the company plans to begin construction of its processing plant at Kevin Dome. This facility is expected to process approximately 17 million cubic feet of raw gas per day and is estimated to cost $15 million. Construction is anticipated to take roughly 40 weeks, suggesting potential completion around Q1 or Q2 2026. The plant is expected to be funded through the current balance sheet and modest strategic use of debt.

Concurrently, the company is advancing its carbon management initiatives. It holds multiple Class II injection permits and expects to receive more in June 2025. Successful injection tests have demonstrated the Kevin Dome's suitability for CO2 storage. The monitoring, reporting, and verification (MRV) plan, necessary for potentially leveraging federal sequestration incentives, is being drafted and is expected to be submitted to the EPA in July 2025. Once the processing plant is operational, the company anticipates sequestering approximately 250,000 metric tons of CO2 annually. The company is also evaluating near-term opportunities for merchant CO2 sales.

Management intends to continue monetizing legacy oil and gas assets opportunistically throughout 2025 and beyond, redeploying that capital into the Montana project. While production from these legacy assets is declining due to divestitures and natural decline (Q1 2025 production averaged 522 BOE per day, down from 1,207 BOE per day in Q1 2024), they still provide cash flow and balance sheet strength.

Shareholder value creation remains a stated priority. The company extended its share repurchase program through June 30, 2026, with $3.60 million remaining available as of March 31, 2025. Approximately 832,000 shares were repurchased year-to-date in 2025 (as of the Q1 call), representing about 2.5% of the outstanding float. Management's continued increase in personal holdings underscores their conviction that shares are undervalued relative to the company's potential.

Risks and Considerations

Investing in U.S. Energy Corp. involves several key risks. The success of the strategic pivot is heavily reliant on the execution and economic viability of the Montana Industrial Gas project. Development risks, including drilling success, reservoir performance, construction timelines and costs for the processing plant, and the ability to secure favorable offtake agreements for helium and monetize CO2, are significant. Weather conditions in Montana can impact operational timing and costs.

The company's legacy oil and gas assets remain subject to commodity price volatility, which directly impacts revenue and can lead to non-cash impairment charges under the full-cost accounting method, as evidenced by the expected Q2 2025 write-down. While the company has reduced debt, it remains subject to financial covenants under its credit facility.

Furthermore, the company identified a material weakness in its internal control over financial reporting as of December 31, 2024, related to its accounting system. While steps are being taken to remediate this through outsourcing and a new system, the effectiveness of these measures is yet to be fully assessed and confirmed.

Conclusion

U.S. Energy Corp. is in the midst of a significant transformation, strategically shifting its focus from a traditional, geographically diverse oil and gas producer to a specialized, growth-oriented industrial gas company centered on its unique Kevin Dome asset in Montana. The investment thesis is predicated on the successful development of this non-hydrocarbon resource into a full-cycle platform encompassing production, processing, and carbon management.

While recent financial results reflect the declining contribution from divested legacy assets and increased investment in the new strategy, the company's strengthened balance sheet, fueled by asset monetization and a recent equity offering, provides the necessary capital foundation for this pivot. Key operational milestones in Montana, including drilling results and plant construction, are critical near-term catalysts. The company's differentiated asset base and clean capital structure position it uniquely against peers. Despite inherent development risks and challenges related to legacy asset valuation, USEG's focused strategy and execution plan for 2025 aim to unlock the potential of its industrial gas platform, representing a compelling narrative for investors willing to embrace the transition.