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Oil and Gas Producing Activities

12 Months Ended

Dec. 31, 2017

4.	OIL AND GAS PRODUCING ACTIVITIES

Divestitures

On October 3, 2017, U.S. Energy Corp. (the “Company”), the Company’s wholly owned subsidiary Energy One LLC and Statoil Oil and Gas LP (“Statoil”) entered into a purchase and sale agreement (the “Purchase Agreement”), pursuant to which, on the terms, and subject to the conditions of the Purchase Agreement, the Company assigned, sold, and conveyed certain non-operated assets in the Williston Basin, North Dakota in consideration for the elimination of $4.0 million in outstanding liabilities to StatOil and payment by Statoil to the Company of $2.0 million in cash. U.S. Energy has historically accounted for the eliminated liabilities on the Company’s balance sheet under “Payable to major operator” and “Contingent ownership interests.” The Purchase Agreement was unanimously approved by the board of directors of the Company and closed on October 5, 2017, with an effective date of August 1, 2017.

A gain/loss calculation must be performed on any transaction which impacts reserves greater than 25%.The gain/loss calculation first identifies the total consideration received, followed by a fair market valuation regarding the amount of reserves sold versus the Company’s remaining reserves. The purpose of the fair market valuation is to proportionately bifurcate the considerations received between the refunding of historical capitalized costs and the gain/loss calculation on the asset sale. As a result of this analysis, the Company recorded a gain of $4.3 million relate to the divestiture.

Ceiling Test and Impairment

The reserves used in the Ceiling Test incorporate assumptions regarding pricing and discount rates over which management has no influence in the determination of present value. In the calculation of the Ceiling Test for the year ended December 31, 2017, the Company used $51.34 per barrel for oil and $2.976 per 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%.

For the years ended December 31, 2017, 2016, and 2015 impairment of the Company’s oil and gas properties amounted to $0.0 million, $9.6 million and $57.7 million, respectively. These impairment charges were primarily due to a decline in the price of oil, additional capitalized well costs and changes in production. Recent declines in the price of oil have significantly increased the risk of Ceiling Test write-downs in future periods.

Capitalized Costs

The following table presents the Company’s capitalized costs associated with oil and gas producing activities as of December 31, 2017 and 2016:

	2017			2016

Oil and Gas Properties
Unevaluated properties:
Unproved leasehold costs	$	4,664		$	4,664
Exploratory wells in progress		-			-
Evaluated properties in full cost pool		86,313			87,834
Less accumulated depreciation, depletion and amortization		(83,362	)		(82,640	)

Net capitalized costs	$	7,615		$	9,858

The Company’s depreciation, depletion and amortization per equivalent BOE was $3.86 for 2017, $11.93 for 2016, and $26.80 for 2015.

Unevaluated Oil and Gas Properties

Unevaluated oil and gas properties consist of leasehold costs and exploratory wells in progress which are excluded from the DD&A calculation and the Ceiling Test until a determination about the existence of proved reserves can be completed. As of December 31, 2017 and 2016, unevaluated oil and gas properties consisted solely of unproved lease acquisition costs of $4.7 million.

On a quarterly basis, management reviews market conditions and other changes in circumstances related to the Company’s unevaluated properties and transfers the costs to evaluated properties within the full cost pool as warranted.

Results of Operations

Presented below are the results of operations from oil and gas producing activities for the years ended December 31, 2017, 2016 and 2015:

	2017			2016			2015

Oil and gas sales	$	6,545		$	5,746		$	10,296
Production costs		(3,402	)		(2,728	)		(7,352	)
Depreciation, depletion and amortization		(753	)		(2,529	)		(8,412	)
Impairment of oil and gas properties		-			(9,568	)		(57,676	)

Results of operations from oil and gas producing activities	$	2,390		$	(9,079	)	$	(63,144	)