SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 AND 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): FEBRUARY 17, 2004 (JANUARY
30, 2004)
U.S. ENERGY CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WYOMING 0-6814 83-205516
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(STATE OR OTHER JURISDICTION (COMMISSION
(I.R.S. EMPLOYER
OF INCORPORATION) FILE NO.) IDENTIFICATION NO.)
GLEN L. LARSEN BUILDING
877 NORTH 8TH WEST
RIVERTON, WY 82501
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (307) 856-9271
NOT APPLICABLE
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(FORMER NAME, FORMER ADDRESS OR FORMER FISCAL YEAR,
IF CHANGED FROM LAST REPORT)
ITEM 2. ACQUISITION OF ASSETS
GENERAL. ON JANUARY 30, 2004, RMG I, LLC ("RMG I"), A WHOLLY-OWNED
SUBSIDIARY OF ROCKY MOUNTAIN GAS, INC. ("RMG"), PURCHASED COALBED METHANE
PROPERTIES FROM HI - PRO PRODUCTION, LLC FOR $6,800,000. RMG IS A
MAJORITY-OWNED SUBSIDIARY OF U.S. ENERGY CORP. ("USE"), AND A SUBSIDIARY OF
CRESTED CORP.
THE PURCHASED PROPERTIES (ALL LOCATED IN THE WYOMING POWDER RIVER BASIN)
INCLUDE 247 COMPLETED WELLS; 138 WELLS NOW ARE PRODUCING APPROXIMATELY 6.0
MILLION CUBIC FEET OF GAS PER DAY (MMCFD), OR APPROXIMATELY 3.2 MMCFD NET TO RMG
I, AND 40,120 UNDEVELOPED FEE ACRES. AS A RESULT OF THE PURCHASE, RMG SUCCEEDS
HI - PRO AS THE CONTRACT OPERATOR FOR 89% OF THE WELLS. RMG I OWNS AN AVERAGE
58% WORKING INTEREST IN THE PRODUCING WELLS AND A 100% WORKING INTEREST IN ALL
OF THE UNDEVELOPED ACREAGE.
THE TRANSACTION WAS STRUCTURED AS AN ASSET PURCHASE, WITH RMG I AS THE
PURCHASER, IN CONNECTION WITH THE ESTABLISHMENT OF A MEZZANINE CREDIT FACILITY
FOR UP TO $25,000,000 OF SECURED LOANS TO ACQUIRE AND DEVELOP MORE COALBED
METHANE PROPERTIES. RMG WILL UTILIZE RMG I FOR FUTURE ACQUISITIONS (NONE
PRESENTLY UNDER CONTRACT OR AGREEMENT IN PRINCIPLE). SEE "MEZZANINE CREDIT
FACILITY." A SUBSTANTIAL PORTION OF THE CASH CONSIDERATION PAID TO HI - PRO WAS
FUNDED WITH THE INITIAL ADVANCE ON THE CREDIT FACILITY.
RMG NEGOTIATED THE PURCHASE BASED ON THE $7,113,000 PRESENT VALUE,
DISCOUNTED 10%, OF GAS RESERVES RECOVERABLE (AND THE ESTIMATED FUTURE NET
REVENUES TO BE DERIVED) FROM, THE PROVED RESERVES IN THE HI - PRO PROPERTIES, AS
STATED IN A RESERVE REPORT AS OF NOVEMBER 1, 2003 PREPARED BY NETHERLAND SEWELL
AND ASSOCIATES, INC. ("NSAI," HOUSTON, TEXAS), INDEPENDENT PETROLEUM ENGINEERS.
THE $6,800,000 PURCHASE PRICE REFLECTS A DEDUCTION, NEGOTIATED BY THE PARTIES,
TO ACCOUNT FOR THE DECREASE IN GAS PRODUCTION FROM NOVEMBER 2003 (COMPARED TO
THE ORIGINAL ESTIMATE IN NSAI'S REPORT) DUE TO THE IMPACT ON PRODUCTION OF
DEFERRED MAINTENANCE ON THE PROPERTIES, AND THE EXPECTED COST OF SUCH
MAINTENANCE WORK AFTER CLOSING.
NET PRODUCTION FROM THE PURCHASE PROPERTIES IS HEDGED (FIXED PRICE) AT
$4.15 TO $4.53 (NET OF GATHERING , MARKETING AND TRANSMISSION FEES) FOR 2.0
Mmcf/DAY IN 2004 AND $3.53 TO $3.91 (NET OF GATHERING , MARKETING AND
TRANSMISSION FEES) FOR 1.0 Mmcf/DAY IN 2005
TERMS OF THE PURCHASE. THE PURCHASE PRICE OF $6,800,000 WAS PAID:
X $ 776,655.91 CASH BY RMG.
X $ 588,344.09 NET REVENUES FROM NOVEMBER 1, 2003 TO DECEMBER 31, 2003
RETAINED BY HI - PRO.(1)
X $ 500,000.00 BY USE'S 30 DAY PROMISSORY NOTE (SECURED BY 166,667
RESTRICTED SHARES OF USE COMMON STOCK, VALUED AT $3.00 PER SHARE).
X $ 600,000.00 BY 200,000 RESTRICTED SHARES OF USE COMMON STOCK (VALUED
AT $3.00 PER SHARE).(2)
X $ 700,000.00 BY 233,333 RESTRICTED SHARES OF RMG COMMON STOCK (VALUED
AT $3.00 PER SHARE).(3)
X $ 3,635,000.00 CASH, LOANED TO RMG I UNDER THE CREDIT FACILITY
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AGREEMENT.(4)
$ 6,800,000.00
(1) RMG PAID NOVEMBER 2003 THROUGH JANUARY 2004 OPERATING COSTS AT
CLOSING. NET REVENUES FROM THE PURCHASED PROPERTIES FOR JANUARY
2004 WILL BE CREDITED TO RMG I'S OBLIGATIONS UNDER THE CREDIT
FACILITY AGREEMENT.
(2) USE HAS AGREED TO FILE A RESALE REGISTRATION STATEMENT WITH THE
SEC TO COVER PUBLIC RESALE OF THESE 200,000 SHARES.
(3) From November 1, 2004 to November 1, 2006, the RMG shares shall
be convertible at Hi-Pro's sole election into restricted shares
of common stock of USE. The number of USE shares to be issued to
Hi-Pro shall equal (A) the number of RMG shares to be converted,
multiplied by $3.00 per share, divided by (B) the average closing
sale price of the shares of USE for the 10 trading days prior to
notice of conversion. The conversion right is exercisable
cumulatively, as to at least 16,666 RMG shares per conversion.
(4) SEE "MEZZANINE CREDIT FACILITY."
PROPERTIES PURCHASED.
- RESERVE DATA
The following estimates of gas reserves recoverable from the purchased
properties are based on NSAI's reserve report as of November 1, 2003, using the
Colorado Interstate Gas prices paid or estimated to be paid to Wyoming Powder
River Basin producers. NSAI has estimated the future net revenues therefrom,
based on a $4.50 per Mcf price in 2003, $4.29 per Mcf in 2004, and $4.25 per Mcf
in 2005.
PDP is proved developed producing; PDNP is proved developed non-producing;
and PUD is proved undeveloped.
RESERVES NET PRESENT
(Mmcf) VALUE (THOUS.)
Gross Net (discounted 10%)
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TOTAL PROVED
PDP 5,521.7 2,767.0 $5,182
PDNP 839.1 503.9 $ 894
PUD 1,092.1 763.5 $1,037
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Total 7,452.8 4,034.5 $7,113
The present value, discounted 10% value ("PV10 value") was prepared on a
pre-income tax basis, and is not intended to represent the current market value
of the estimated gas reserves purchased from Hi - Pro. Note that the PV10
discount factor has been calculated net of ad valorem and production taxes, but
before income taxes. The PV10 discount factor is not the same as the
standardized measure of present value calculations which are determined on an
after-income tax basis.
There are numerous uncertainties inherent in estimating gas reserves and
their estimated values. Reservoir engineering is a subjective process of
estimating underground accumulations of gas that cannot be measured exactly.
Estimates of economically recoverable gas, and the future net cash flows which
may be realized from the reserves, necessarily depend on a number of variable
factors and assumptions, such as historical production from the area compared
with production from other areas, the assumed effects of regulations by
government agencies, assumptions about future gas prices and operating costs,
severance and excise taxes, development costs, and work-over and remedial costs.
The outcomes in fact may vary considerably from the assumptions.
Estimates of the economically recoverable quantities of gas attributable to
any particular property, the classification of reserves as to proved developed
and proved undeveloped based on risk of recovery, and estimates of the future
net cash flows expected from the properties, as prepared by different engineers
or by the same engineers but at different times, may vary substantially, and the
estimates may be revised up or down as assumptions change.
It is likely that actual production volumes, revenues from production, and
the amount of money spent on the properties, will vary from the estimates.
These variances could be material.
The PV10 discount factor, which is required by the SEC for use in
calculating discounted future net cash flows for reporting purposes, is not
necessarily the most appropriate discount factor, based on interest rates in
effect in the financial markets, and risks associated with the gas business.
The business of exploring for, developing, or acquiring reserves is capital
intensive. To the extent operating cash flow is reduced and external capital
becomes unavailable or limited, RMG's ability to make the necessary capital
investment to maintain or expand the gas reserves asset base would be impaired.
There is no assurance future exploration, development, and acquisition
activities will result in additional proved reserves. Even if revenues increase
because of higher gas prices, increased exploration and development costs could
neutralize cash flows from the increased revenues.
- FUTURE PLANS
RMG PLANS TO IMMEDIATELY DRILL 5 PROVEN UNDEVELOPED LOCATIONS (TO THE
WYODAK COAL FORMATION), AND BEGIN A REMEDIAL WORKOVER PROGRAM ON A NUMBER OF
EXISTING WELLS, AND UPGRADE THE GAS GATHERING AND PIPELINE FACILITIES INCLUDED
IN THE PURCHASE. THIS PROGRAM, DESIGNED TO ENHANCE PRODUCTION QUICKLY FROM
CURRENT LEVELS, IS ESTIMATED TO COST APPROXIMATELY $640,000. A LOAN TO FUND
THESE COSTS UNDER THE MEZZANINE CREDIT FACILITY HAS BEEN APPROVED BY THE
LENDERS.
Current production on the North and South Properties all is from the Wyodak
coal formation (200 to 600 feet from surface). The existing infrastructure on
the properties (gathering lines, compressors, and water disposal) will
significantly reduce drilling and completion costs for new wells to the deeper
Moyer and Dannar coals (900 to 1,100 feet). Subject to raising capital, up to
120 wells could be drilled and completed on the properties in 2004 and 2005 to
the deeper coals, all on locations now producing from the Wyodak coal. This
development activity is contingent upon obtaining future financing. It is not
expected that funding for this activity would be available through the mezzanine
credit facility.
MEZZANINE CREDIT FACILITY.
RMG I HAS SIGNED A CREDIT AGREEMENT WITH PETROBRIDGE INVESTMENT
MANAGEMENT, LLC (HOUSTON , TEXAS) AS LEAD ARRANGER, AND INSTITUTIONAL LENDERS,
FOR UP TO $25,000,000 OF LOANS TO RMG I. THE LOAN COMMITMENT IS THROUGH JUNE
30, 2006. ALL LOANS WILL HAVE A THREE YEAR TERM FROM FUNDING DATE WITH ANNUAL
INTEREST AT 11%, AND MAY BE REPAID WITHOUT PENALTY AT ANY TIME.
FUNDING TO ACQUIRE AND/OR IMPROVE ANY PROJECT IS SUBJECT TO THE LENDERS'
APPROVAL OF THE TRANSACTION AND RMG I'S DEVELOPMENT PLAN FOR THE PROPERTIES.
THE FIRST LOAN ($3,700,000 ON JANUARY 29, 2004) UNDER THE CREDIT FACILITY
HAS BEEN APPLIED TO THE HI - PRO ASSET PURCHASE AND TRANSACTION COSTS.
TERMS FOR ALL LOANS UNDER THE CREDIT FACILITY INCLUDE THE FOLLOWING:
X PRINCIPAL IS NOT AMORTIZED, BUT INTEREST MUST BE PAID MONTHLY. ALL
REVENUES FROM THE PROPERTIES OWNED BY RMG I (INCLUDING ALL CURRENT AND
NEW WELLS) IS PAID TO A LOCK BOX ACCOUNT CONTROLLED BY THE LENDERS,
FROM WHICH IS PAID BY THE LENDERS THE LEASE OPERATING COSTS AND RMG I
GENERAL ADMINISTRATIVE EXPENSE (BOTH AS APPROVED BY THE LENDERS). NO
REVENUES WILL BE AVAILABLE FOR RMG OPERATIONS UNTIL ALL LOANS ARE PAID
OFF. REVENUES TO RMG AS CONTRACT OPERATOR OF THE PROPERTIES IS NOT
PAID TO THE LOCK BOX ACCOUNT.
X THE LOANS ARE SECURED BY ALL OF RMG I'S PROPERTIES (TO DATE, ONLY THE
HI - PRO PROPERTIES) AND BY RMG'S EQUITY INTEREST IN RMG I.
X THE LENDERS, IN THE AGGREGATE, RECEIVE AN OVERRIDING ROYALTY INTEREST
OF 3% OF PRODUCTION FROM THE WELLS PRODUCING WHEN AN ACQUISITION IS
CLOSED, AND 2% OF PRODUCTION FROM NEW WELLS ON AN 8/8THS' BASIS. FOR
THE HI - PRO PROPERTIES, THE 3% RATE APPLIES TO ALL WELLS (PRODUCING
AND TO BE DRILLED) TO THE WYODAK FORMATION, AND 2% TO ALL WELLS TO
DEEPER FORMATIONS. THE AVERAGE WORKING INTEREST ON THE HI - PRO
PROPERTIES IS 58%, RESULTING IN AN AVERAGE OVERRIDING INTEREST OF
1.74% ON THE WELLS NOW PRODUCING. OVERRIDE PAYMENTS TO THE LENDERS ARE
NOT APPLIED TO THE LOAN BALANCES. THE PERCENTAGE OF OVERRIDES ON
FUTURE PROPERTIES MAY VARY.
X NEGATIVE COVENANTS: RMG I WILL NOT PERMIT THE RATIO OF (A) TOTAL DEBT
TO EBITDA TO EXCEED 2.00 TO 1.00; (B) EBITDA TO INTEREST EXPENSE AND
RENTS (LEASE EXPENSE) TO BE LESS THAN 3.00 TO 1.00; (C) CURRENT ASSETS
TO CURRENT LIABILITIES TO BE LESS THAN 1.00 TO 1.00; OR (D) PV 10
(PROVED DEVELOPED PRODUCING RESERVES) TO TOTAL DEBT TO BE LESS THAN
1.00 TO 1.00. ALL THESE RATIOS ARE TO BE DETERMINED QUARTERLY. IN
ADDITION, RMG I SHALL NOT PERMIT NET SALES VOLUME OF GAS FROM ITS
PROPERTIES TO BE LESS THAN 270 MMCF, 230 MMCF, 230 MMCF AND 210 MMCF
FOR EACH QUARTER IN 2004, OR LESS THAN 180 MMCF PER QUARTER IN 2005
AND THE FIRST TWO QUARTERS OF 2006.
THE MAIN EVENTS OF DEFAULT, IF ANY, LIKELY WOULD BE FAILURE OF NET CASH
FLOW TO PAY MONTHLY INTEREST, OR FAILURE TO COMPLY WITH THE NEGATIVE COVENANTS.
HOWEVER, NOTE THAT THE PRECEDING ONLY SUMMARIZE SOME OF THE CREDIT LINE TERMS,
AND IS QUALIFIED IN ITS ENTIRETY BY THE FULL TEXT OF THE AGREEMENT, FILED WITH
THIS REPORT AS AN EXHIBIT.
AT CLOSING OF THE HI - PRO ACQUISITION, USE ISSUED TO THE PARTICIPATING
LENDERS THREE YEAR WARRANTS TO PURCHASE A TOTAL OF 318,465 SHARES OF COMMON
STOCK OF USE (SUBJECT TO VESTING) AT $3.30 CASH PER SHARE. AT CLOSING OF THE HI
- PRO ACQUISITION, WARRANTS ON 63,693 SHARES VESTED. THE REMAINING WARRANTS
WILL VEST AT THE RATE OF THE RIGHT TO BUY ONE USE SHARE FOR EACH $78.50 WHICH
RMG I SUBSEQUENTLY BORROWS UNDER THE CREDIT FACILITY. REGARDLESS OF WHEN
VESTED, ALL WARRANTS WILL EXPIRE ON THE EARLIER OF JANUARY 30, 2007, OR THE
180TH DAY AFTER USE NOTIFIES THE WARRANTHOLDERS THAT USE' STOCK PRICE HAS
ACHIEVED OR EXCEEDED $6.60 PER SHARE FOR A CONSECUTIVE 15 BUSINESS DAY PERIOD.
USE HAS AGREED TO FILE A REGISTRATION STATEMENT WITH THE SEC TO COVER PUBLIC
RESALE OF THE WARRANT SHARES.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(A) AND (B) ON OR BEFORE APRIL 15, 2004, USE WILL FILE, ON FORM 8-K/A,
AUDITED STATEMENTS OF WORKING INTEREST REVENUES AND EXPENSES FOR THE PRODUCING
WELLS BOUGHT BY RMG I FROM HI - PRO, FOR THE THREE YEARS ENDED DECEMBER 31,
2003. NONE OF THIS FINANCIAL INFORMATION HAD BEEN PREPARED BY HI - PRO AS OF
THE CLOSING DATE OF JANUARY 30, 2004. THE INFORMATION IS IN THE GATHERING AND
SORTING STAGE AS OF THE DATE OF THIS REPORT, BUT NO PRIOR PERIOD INFORMATION
PRESENTLY CAN BE FILED.
(C) EXHIBITS.
HOLLIE: KEITH TO SIGN, DATE TODAY 2.13.04.
(2) PURCHASE AND SALE AGREEMENT (FOR THE HI - PRO ASSETS), WITH THREE
AMENDMENTS.
(10) CREDIT AGREEMENT, WITHOUT SCHEDULES, EXHIBITS OR ANNEXES; THE NATURE
OF THESE ITEMS IS DESCRIBED IN THE TABLE OF CONTENTS. UPON REQUEST, A
COPY OF ANY SUCH ITEM WILL BE PROVIDED TO THE COMMISSION
SUPPLEMENTALLY.