U.S. Energy Corporation: An Oil and Molybdenum Play

| About: U.S. Energy (USEG)

While covering companies that have exposure to oil in the Bakken Shale, such as Brigham (BEXP), Northern Oil and Gas (NYSEMKT:NOG), and GeoResources (NASDAQ:GEOI), I have come across another little gem, U.S. Energy Corporation (NASDAQ:USEG). Although I love this company's oil position in the Bakken, it has some added exposure to molybdenum. Strange bedfellows they may be, they have exciting prospects with different interests within the corporation.

Formed in 1966 in Riverton, Wyoming, USEG has positions in the Bakken and Three Forks formations with areas in the Gulf Coast. It also has interests in molybdenum, geothermal and real estate. U.S. Energy is trying to maximize the value of its existing assets. When looking at its oil assets, one thing stood out: It has partnered with Brigham to drill 18 wells. Brigham is arguably the best shale driller in the Bakken. I know I may get some hate mail on this one, but it has done well and has been a consistant performer in this area.

U.S. Energy plans to do more in the short term. It is going to keep working with partners in its onshore Gulf Coast production; it currently is partnered with Petroquest (NYSE:PQ), Yuma Exploration, and Houston Energy (NYSEMKT:HUSA). It successfully increased its Gulf production from 500 boe/d to 600 boe/d, and is currently at work with partners to drill new wells and further increase production of oil. To help fund these wells, it has opened a credit facility for funds up to $75 million. U.S. Energy is also showing interest in acquiring more JVs in the near term.

Long term plans are to work with Brigham on 90 gross wells (20-26 net). Looking to 2013 and beyond, this company has hinted it is interested in acquiring an exploration and production oil and gas company. This timeframe also includes its monetizing of geothermal and real estate projects, plus realizing the value of its molybdenum projects.

As of October of 2010, U.S. Energy has significant value to its current projects. It also has a net of approximately 800 boe/d net from its wells with Brigham. In Louisiana and the Texas Gulf Coast, its wells with Petroquest, it is averaging 450 boe/d, while its wells with Houston Energy are averaging 50 boe/d. In October of last year, U.S. Energy was averaging 1300 boe/d of daily production, with 65% of this being oil. At the end of 2009, it had 1.1 MMboe reserves, with 75% being oil.

U.S. Energy's contract with Brigham seems to be a profitable one. Not only is it positioned in a good area, it is also positioned with a good partner. It currently has a participation agreement to drill 15 wells. Brigham is to operate and drill wells, but U.S. Energy will have WI. U.S. Energy will have 19,200 gross acres and 5,500 net acres with respect to the first 15 wells. After pooled payout of initial wells, Brigham will back in for WI of initial wells only. Of the six initial well spaces, Brigham gets 35% and U.S. Energy gets 65% interest of Brigham's original working.

After combined payout, Brigham's WI will be 57.75% with U.S. Energy having 42.25% The next four spacing units will have Brigham getting 50% WI and U.S. Energy getting 50% of Brigham's original working interest. After combined payout, Brigham backs in for 35% of U.S. Energy's WI. The final five spaces have Brigham at 50% WI and U.S. Energy 50% of Brigham's original working interest. After initial well, final payout WI Brigham backs in for 27.7% of U.S. Energy's WI. Each 1,280 spacing unit may provide up to three wells in the Bakken, plus up to three in Three Forks, for drilling opportunities of up to 90 gross wells. Subsequent infill development of WI will be Brigham 64% and U.S. Energy 36%.

The Bakken does have some issues. Currently, take away capacity is difficult, with the oil mostly taken out by train and truck. This is not only expensive, but does not meet the demands that will soon be needed in this area. The Enbridge portal link project and Butt pipeline expansion should be online this quarter, and will help with getting an ever increasing supply of oil out of the Bakken.

The onshore Gulf Coast region has a partnership with Petroquest, and its two wells are currently producing a net of 450 Boe/d. The two wells with Yuma E&P are being evaluated as of October of last year. Its last partner, Houston Energy, has two wells in the Permian currently netting 50 Boe/d.

The wildcard for this company is its position with respect to molybdenum. There are a possible 800 million pounds of molybdenum in its acreages. Before U.S. Energy had this area, the previous company had put $160 million into it. U.S. Energy took over this space and is continuing where the last company left off. To give an idea of the value, from 1997 to 2003 the price of molybdenum was about $10,000 per ton. In June of 2005, the price peaked at $103,000 per ton, but settled down and was at $30,000 per ton in August of 2005. In August of 2008, a $400 million contract was signed with Thompson Creek Metals (TC) for the mining of the molybdenum. Thompson Creek will receive a 75% interest in the deal for the $400 million it spent.

U.S. Energy has seen quarterly revenue growth increase by 404% year over year. It has $40.77 in cash and currrent debt of $800,000. U.S. Energy is estimated to grow 115.8%, with 50% growth expected next year.

U.S. Energy has picked very good partners to help it drill or mine its commodities.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BEXP, TCM, USEG over the next 72 hours.