MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

This information should be read in conjunction with the interim unaudited Condensed Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited Consolidated Financial Statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the year ended December 31, 2025, filed with the Securities and Exchange Commission on March 13, 2026 (the "Annual Report").

Certain abbreviations and oil and gas industry terms used throughout this Report are described and defined in greater detail under "Glossary of Oil, Natural and Industrial Gas Terms" on page 5 of our Annual Report.

Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our unaudited Condensed Consolidated Financial Statements included above under "Part I - Financial Information" - "Item 1. Financial Statements".

In this Quarterly Report on Form 10-Q, we may rely on and refer to information regarding the industries in which we operate in general from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, we have not independently verified any of it, and we have not commissioned any such information.

See also "Cautionary Statement About "Forward-Looking Statements" above.

Unless the context requires otherwise, references to the "Company," "we," "us," "our," "U.S. Energy", and "U.S. Energy Corp." refer specifically to U.S. Energy Corp. and its consolidated subsidiaries.

In addition, unless the context otherwise requires and for the purposes of this report only:

●	"Bbl" refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons;
●	"BOE" refers to barrels of oil equivalent, determined using the ratio of one Bbl of crude oil, condensate, or natural gas liquids, to six Mcf of natural gas;
●	"Bopd" refers to barrels of oil per day;
●	"Industrial gases" refers to helium, carbon dioxide, and hydrocarbons;
●	"Mcf" refers to a thousand cubic feet of natural gas;
●	"Mcfe" means 1,000 cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids;
●	"MMCF" refers to a million cubic feet of natural or industrial gasses;
●	"MMCF/d" refers to a million cubic feet of natural or industrial gasses;
●	"NGL" refers to natural gas liquids;
●	"Exchange Act" refers to the Securities Exchange Act of 1934, as amended;
●	"SEC" or the "Commission" refers to the United States Securities and Exchange Commission;
●	"Securities Act" refers to the Securities Act of 1933, as amended; and
●	"WTI" means West Texas Intermediate.

Where You Can Find Other Information

We file annual, quarterly, and current reports, proxy statements and other information with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC like us at https://www.sec.gov (our filings can be found at https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000101594) and on the "Investors - SEC Filings" page of our website at https://usnrg.com. Copies of documents filed by us with the SEC are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report.

Summary of The Information Contained in Management's Discussion and Analysis of Financial Condition and Results of Operations

Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying unaudited Condensed Consolidated Financial Statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:

	●	General Overview. A general overview of the Company and our operations.
	●	Recent Developments. Discussion of recent developments affecting the Company and our operations.
	●	Plan of Operations and Strategy. Discussion of our strategy moving forward and how we plan to seek to increase stockholder value.
	●	Critical Accounting Policies and Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
	●	Results of Operations. An analysis of our financial results comparing the three months ended March 31, 2026 and 2025.
	●	Liquidity and Capital Resources. A discussion of our financial condition, including descriptions of balance sheet information and cash flows.

General Overview

U.S. Energy Corp. (collectively with its wholly-owned subsidiaries are referred to as the "Company") is incorporated in the State of Delaware. The Company's principal business activities are focused on the acquisition, exploration, and development of industrial gases, oil and natural gas properties in the United States.

Recent Developments

Final Investment Decision -Big Sky Carbon Hub

During the first quarter of 2026, the Company reached a final investment decision ("FID") for the construction of its processing facility at the Big Sky Carbon Hub in Montana and executed a fixed-scope engineering, procurement and construction agreement, initiating capital deployment for the project. The planned facility is designed with an initial inlet capacity of approximately 8.0 MMCF/d, targeting approximately 12 MMCF of annual helium production and 125,000 metric tons of refined CO₂ per year. The Company expects to commence gathering pipeline installation in spring 2026, with commissioning targeted for the third quarter of 2026 and initial helium sales and carbon management operations anticipated in 2027.

In anticipation of reaching FID, during three months ended March 31, 2026, the Company generated $17.2 million in proceeds from equity issuances. Additionally, on April 17, 2026, the Company entered into an amendment to its Credit Facility with FirstBank Southwest that among other things, (i) increased the borrowing base from $10.0 million to $20.0 million, (ii) revised the applicable margin on outstanding borrowings to a fixed 2.00% per annum, and (iii) suspended testing of financial covenants through the fiscal quarter ending March 31, 2027. The Credit Facility maturity date remains May 31, 2029.

Helium Sales Agreement

On April 27, 2026, the Company executed a five-year helium sales agreement with an investment-grade global industrial gas company for the sale of contained helium to be produced at the Company's Big Sky Carbon Hub in Montana. The Agreement provides for a 100% take-or-pay commitment by the Counterparty for up to approximately 1.2 MMCF per month (14.4 MMCF annually) of helium production, with fixed pricing of $285 per MCF at the plant gate, subject to annual (consumer price index) CPI-based escalation beginning March 1, 2028, and includes a price redetermination mechanism in year three with a right of first refusal.

Plan of Operations and Strategy

During the remainder of 2026 and beyond, we intend to pursue opportunities across the industrial gas sector, with a strategic emphasis on the next phase of development and monetization of our helium and carbon dioxide resources. While we will continue to operate oil and gas assets, our primary focus is on maximizing value from associated industrial gases. Our activities may include the acquisition of assets, participation with industry partners in development projects, acquisition of existing companies, and the purchase or development of industrial gas-related assets. Planned operations include construction of processing facilities, negotiating operating arrangements, finalizing gathering and infrastructure designs, and pursuing the use of a portion of produced CO₂ in tertiary recovery operation in our Montana oil operations

Key elements of our business strategy include:

●

Deploy our Capital in a Conservative and Strategic Manner and Review Opportunities to Bolster our Liquidity. In the current industry environment, maintaining liquidity remains critical. We intend to be selective in evaluating projects, prioritizing those that enhance industrial gas value, and to review opportunities to strengthen our liquidity and financial position through disciplined capital allocation and other means.

●	Evaluate and Pursue Value-Enhancing Transactions. We plan to continuously evaluate strategic alternatives, including transactions that expand our industrial gas platform or optimize our oil and gas assets, with the objective of enhancing long-term stockholder value.

Critical Accounting Policies and Estimates

The preparation of our unaudited Condensed Consolidated Financial Statements in conformity with generally accepted accounting principles in the United States ("GAAP") requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies is detailed in Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2025 Annual Report on Form 10-K filed with the SEC on March 13, 2026.

Results of Operations

Comparison of our Statements of Operations for the Three Months Ended March 31, 2026 and 2025

For the three months ended March 31, 2026, we recorded a net loss of $3.2 million, which was primarily due to lower production resulting from divestitures in prior periods. In the following sections, we discuss our revenue, operating expenses, and other income (expense) for the three months ended March 31, 2026 compared to the three months ended March 31, 2025.

Revenue. Presented below is a comparison of our oil and natural gas sales, production quantities and average sales prices for the three months ended March 31, 2026 and 2025:

		Three months ended March 31,								Change
		2026				2025				Amount				Percent
		(in thousands except average prices and production quantities)
Revenue:
Oil		$	1,376			$	1,770			$	(394	)			(22	)%
Natural gas and liquids			228				423				(195	)			(46	)%
Total revenue		$	1,604			$	2,193			$	(589	)			(27	)%
Production quantities:
Oil (Bbls)			21,842				29,994				(8,152	)			(27	)%
Natural gas and liquids (Mcfe)			74,688				102,090				(27,402	)			(27	)%
BOE			34,290				47,008				(12,718	)			(27	)%
BOE/Day			381				522				(141	)			(27	)%
Average sales prices:
Oil (Bbls)		$	63.00			$	59.01			$	3.99				7	%
Natural gas and liquids (Mcfe)		$	3.05			$	4.14			$	(1.09	)			(26	)%
BOE		$	46.78			$	46.65			$	0.13				0	%

The decrease in our oil and natural gas revenue of $0.6 million for the three months ended March 31, 2026, as compared to the three months ended March 31, 2025, was primarily due to a decrease of 27% in production quantities. For the three months ended March 31, 2026, we produced 34,290 BOE, or an average of 381 BOE per day, as compared to 47,008 BOE or an average of 522 BOE per day during the comparable period in 2025. The decrease in our production quantities primarily relates to the divestitures of our properties in Wyoming and West Texas and the natural decline in production in remaining producing assets. During the three months ended March 31, 2026, our production was 64% oil and 36% natural gas and liquids compared to 64% oil and 36% natural gas and liquids produced during the three months ended March 31, 2025.

Oil and Natural Gas Production Costs. Presented below is a comparison of our oil and natural gas production costs for the three months ended March 31, 2026 and 2025:

		Three months ended March 31,								Change
		2026				2025				Amount				Percent
		(in thousands)
Lease operating expenses		$	910			$	1,625			$	(715	)			(44	)%
Production taxes			130				148			$	(18	)			(12	)%
Exploration expense			101				-			$	101				100	%
Total		$	1,141			$	1,773			$	(632	)			(36	)%
Lease operating expense per BOE		$	26.54			$	34.57			$	(8.03	)			(23	)%

For the three months ended March 31, 2026, lease operating expenses were $0.9 million or $26.54 per BOE. While lease operating expenses decreased by $0.7 million when compared to $1.6 million or $34.57 per BOE for the three months ended March 31, 2025, the cost on a BOE basis decreased as the mix of properties changed as a result of the divestment of our Wyoming and West Texas properties.

For the three months ended March 31, 2026, production taxes consistently remain between 6% and 8% of revenue. This decrease in production taxes was attributable to the decrease in revenue of 27% discussed above.

Exploration expense increased $101 thousand, which was attributable to an increase in exploration activities for our industrial gas development, namely professional services supporting resource estimation and analysis and legal work.

Depreciation, Depletion and Amortization. Our depreciation, depletion, and amortization ("DD&A") was $0.6 million and $1.1 million for the three months ended March 31, 2026 and 2025, respectively. Depletion expense on our oil and natural gas properties is the primary driver of DD&A expense. Our depletion rate was $10.94 per BOE and $13.35 per BOE for the three months ended March 31, 2026 and 2025, respectively. Our depletion rate can fluctuate modestly because of acquisitions, changes in drilling and completion costs, impairments, revisions in asset retirement obligation cost estimates or timing, divestitures, changes in the mix of our production, the underlying proved reserve volumes and estimated future development costs.

General and Administrative Expenses. Presented below is a comparison of our general and administrative expenses for the three months ended March 31, 2026 and 2025:

		Three months ended March 31,								Change
		2026				2025				Amount				Percent
		(in thousands)
Compensation and benefits		$	1,650			$	772			$	878				114	%
Stock-based compensation			446				471				(25	)			(5	)%
Professional fees, insurance and other			952				1,146				(194	)			(17	)%
Total general and administrative expenses		$	3,048			$	2,389			$	659				28	%

General and administrative expenses increased by $0.7 million for the three months ended March 31, 2026 as compared to the prior year period. The increase was primarily attributable to the timing of discretionary compensation, which occurred during the three months ended March 31, 2026. Professional fees decreased primarily due to a reduction in acquisition-related costs relative to the activity in the three months ended March 31, 2025.

Other Income (Expense). Presented below is a comparison of our other income (expense) for the three months ended March 31, 2026 and 2025:

		Three months ended March 31,								Change
		2026				2025				Amount				Percent
		(in thousands)
Interest expense, net			(63	)			(47	)			(16	)			(34	)%
Other income (expense), net			22				24				(2	)			(8	)%
Total other income (expense)		$	(41	)		$	(23	)		$	(18	)			(78	)%

Interest expense primarily represents the interest and fees on our credit facility with FirstBank Southwest. As of December 31, 2025 and March 31, 2026, we had $2.5 million outstanding on our credit facility. For the three months ended March 31, 2026, interest expense included interest incurred on the outstanding loan and fees to maintain our credit facility. For the three months ended March 31, 2025, we had no amounts outstanding under the credit facility and our interest expense comprised of fees to maintain our credit facility.

Liquidity and Capital Resources

Based on the current commodity price environment and our existing working capital, we believe we have sufficient liquidity and capital resources to execute our business plan and meet our current financial obligations. As of March 31, 2026, the Company was in compliance with all financial covenants under its credit facility. We continue to actively manage our capital commitments to maintain flexibility with respect to the timing and level of our development activities and capital expenditures.

For the remainder of 2026, the Company's capital program is designed to advance the Big Sky project toward initial commercial operations targeted for the first quarter of 2027. We anticipate an aggregate near-term capital program to range between $28.0 million and $32.0 million, primarily related to the construction of our gas processing plant, production gathering system, and related infrastructure at our industrial gas development project. In addition, we may incur up to approximately $0.6 million for plugging and abandonment activities, depending on regulatory requirements, timing, and weather conditions. We expect these expenditures to be funded through a combination of cash on hand, operating cash flows, proceeds from the divestiture of oil and natural gas properties, borrowings under our credit facility, additional equity issuances, and potential project-specific financing, including equity and debt capital.

Sources of Cash

For the three months ended March 31, 2026, we funded our capital expenditures primarily through cash on hand and proceeds from equity issuances. During the period, we generated approximately $17.2 million from equity sales and issuances and had cash and cash equivalents of approximately $10.5 million as of March 31, 2026.

On April 17, 2026, the Company entered into an amendment to its credit facility with FirstBank Southwest, which, among other things, increased the borrowing base from $10.0 million to $20.0 million, revised the applicable margin on outstanding borrowings to a fixed 2.00% per annum, and suspended testing of financial covenants through the fiscal quarter ending March 31, 2027. The maturity date of the credit facility remains May 31, 2029. The increased borrowing base provides us access to an additional $17.5 million of capital.

In future periods, if cash flows from operations are insufficient to fund capital expenditures and operating requirements, we may seek additional financing through public or private equity or debt offerings or other financing arrangements. We may also adjust the timing and scope of our capital program based on market conditions and capital availability. Our ability to access capital is subject to prevailing economic conditions, including changes in commodity prices, interest rates, capital markets, regulatory requirements, and other factors beyond our control.

Uses of Cash

We use cash primarily for the development of our industrial gas assets, including construction of processing and gathering infrastructure, as well as for operating expenses, general and administrative costs, and debt service obligations. During the three months ended March 31, 2026, we spent approximately $4.4 million on the acquisition and development of industrial gas properties and expect to continue allocating capital to the Big Sky project for the remainder of the year.

Cash Flows

The following table summarizes our cash flows for the three months ended March 31, 2026 and 2025:

		Three months ended March 31,
		2026				2025				Change
		(in thousands)
Net cash provided by (used in):
Operating activities		$	(2,452	)		$	(4,544	)		$	2,092
Investing activities			(4,431	)			(2,422	)			(2,009	)
Financing activities			16,905				9,745				7,160

Operating Activities. Cash used in operating activities of $2.5 million for the three months ended March 31, 2026 was mainly due to a $3.2 million net loss and a reduction of working capital of $0.3 million and $0.6 million of depreciation, depletion, accretion. Cash used by operating activities of $4.5 million for the three months ended March 31, 2025, was mainly due to a net loss of $3.1 million, reduction of payables of $2.6 million offset by $1.1 million of depreciation, depletion, accretion, and amortization.

Investing Activities. Cash used in investing activities for the three months ended March 31, 2026 was $4.4 million as compared to cash used in investing activities of $2.4 million for the comparable period in 2025. The primary use of cash in our investing activities for the three months ended March 31, 2026 was attributable to initial plant construction costs. For the three months ended March 31, 2025, the cash investment was primarily attributed to the Synergy acquisition discussed in Note 2 - Acquisitions and Divestitures.

Financing Activities. Cash provided by financing activities for the three months ended March 31, 2026 was $16.9 million as compared to $9.8 million for the comparable period in 2025. The primary drivers of this cash inflow were equity issuances of $17.2 million during the three months ended March 31, 2026, compared to $11.9 million in the prior period, which in the prior period were reduced by a related party share repurchase of $1.6 million.