EPSN Epsilon Energy Ltd

Epsilon Energy Ltd. (“Epsilon” or the “Company”) (NASDAQ: EPSN) today reported second quarter 2023 financial and operating results.

Second Quarter Financial Highlights:

• Reported net revenue interest (NRI) production of 2.3 Bcfe (24.9 MMcfe per day) for the quarter ended June 30, 2023.
• Realized average price of $2.45 per Mcfe including hedges ($1.89 per Mcfe excluding hedges) for the quarter ended June 30, 2023.
• Delivered total revenues of $6.5 million for the quarter ended June 30, 2023, a decrease of 31% compared to the prior quarter.
  • $4.3 million from natural gas, oil, and NGL sales (including $0.7 million from the recently acquired New Mexico properties), a decrease of 38% compared to the prior quarter
  • $2.2 million from gathering and compression fees through our ownership in the Auburn Gas Gathering System, after eliminating revenue earned from Epsilon production ($0.4 million), a decrease of 8% compared to the prior quarter

• Reported Adjusted EBITDA of $4.2 million for the quarter ended June 30, 2023.
• Cash, cash equivalents (including restricted cash), and short term investments totaled $36.8 million at June 30, 2023, a decrease of 26% compared to March 31, 2023, due to the Permian investments made during the quarter.
• Returned $3.1 million to shareholders during the quarter ended June 30, 2023.
  • $1.7 million through the repurchase of 325,055 shares (average price of $5.17 per share), representing a 1% reduction of shares outstanding
  • $1.4 million through the quarterly dividend
  • An additional 525,000 shares were repurchased after the quarter end in a block trade (at $5.00 per share)
  • 1.4 million shares remain under the approved buyback program (expires in March 2024)

• Realized gains of $0.6 million on Henry Hub (HH) and TGP Z4 basis swaps totaling 455,000 MMBTU. The current unrealized gain on the remaining hedge book for 2023 is $1.3 million at June 30, 2023.
• Closed two liquids focused investments in the Permian Basin, as previously disclosed.
• Closed a new $35 million credit facility, as previously disclosed.

Second Quarter Operating Results:

Epsilon’s capital expenditures were $12.4 million for the quarter ended June 30, 2023. This capital was primarily related to leasehold acquisitions costs in Ector Co. Texas ($7.5 million), the drilling of one gross (0.25 net) well in Ector Co. Texas ($2.4 million), the drilling and completion of two gross (0.2 net) wells in Eddy Co. New Mexico ($2.1 million), and the completion of one gross (0.11 net) well in Dewey Co. Oklahoma ($0.2 million).

At June 30, 2023, the Company has one gross (0.25 net) Ector Co. Texas well waiting on completion.

Jason Stabell, Epsilon's Chief Executive Officer, commented, "We had a solid quarter in a difficult natural gas price environment. We made two liquids focused investments in the Permian, added liquidity with a new credit facility, and returned $3.1 million to our shareholders through a combination of dividends and share buybacks.

Early results on our New Mexico investment are very encouraging and activity is continuing in Texas which we expect to add additional oil volumes in the 4th quarter of this year.

Epsilon’s increasingly diversified asset based and strong balance sheet keep us well positioned to continue to create value for our shareholders. An example of this is our opportunistic purchase of 525,000 shares in early July at $5 per share.”

Earning’s Call:

The Company will host a conference call to discuss its results on Friday, August 11, 2023 at 10:00 a.m. Central Time (11:00 a.m. Eastern Time).

Interested parties in the United States and Canada may participate toll-free by dialing (833) 816-1385. International parties may participate by dialing (412) 317-0478. Participants should ask to be joined to the “Epsilon Energy Second Quarter 2023 Earnings Conference Call”.

A webcast can be viewed at:

https://event.choruscall.com/mediaframe/webcast.html?webcastid=f2b93UmU. A webcast replay will be available on the Company’s website (www.epsilonenergyltd.com) following the call.

About Epsilon

Epsilon Energy Ltd. is a North American onshore natural gas and oil production and gathering company with assets in Pennsylvania, Texas, New Mexico, and Oklahoma.

For more information, please visit www.epsilonenergyltd.com, where we routinely post announcements, updates, events, investor information, presentations and recent news releases.

Forward-Looking Statements

Certain statements contained in this news release constitute forward looking statements. The use of any of the words “anticipate”, “continue”, “estimate”, “expect”, ‘may”, “will”, “project”, “should”, ‘believe”, and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated. Forward-looking statements are based on reasonable assumptions, but no assurance can be given that these expectations will prove to be correct and the forward-looking statements included in this news release should not be unduly relied upon.

Contact Information:

281-670-0002

Jason StabellChief Executive OfficerJason.Stabell@EpsilonEnergyLTD.com

Andrew Williamson Chief Financial Officer Andrew.Williamson@EpsilonEnergyLTD.com

EPSILON ENERGY LTD.Unaudited Consolidated Statements of Operations(All amounts stated in US$)
		Three months ended June 30,								Six months ended June 30,
		2023				2022				2023				2022
Revenues from contracts with customers:
Gas, oil, NGL, and condensate revenue		$	4,298,072			$	17,915,836			$	11,267,653			$	29,395,161
Gas gathering and compression revenue			2,202,064				1,987,168				4,588,759				4,107,941
Total revenue			6,500,136				19,903,004				15,856,412				33,503,102
Operating costs and expenses:
Lease operating expenses			1,440,521				2,252,017				2,844,800				3,657,507
Gathering system operating expenses			570,934				541,228				1,222,275				1,065,603
Development geological and geophysical expenses			—				2,386				—				4,772
Depletion, depreciation, amortization, and accretion			1,615,728				1,803,739				3,388,734				3,192,958
Loss (gain) on sale of oil and gas properties			1,449,871				(221,642	)			1,449,871				(221,642	)
General and administrative expenses:
Stock based compensation expense			179,748				194,050				359,496				336,352
Other general and administrative expenses			1,596,626				1,465,143				3,620,399				2,636,275
Total operating costs and expenses			6,853,428				6,036,921				12,885,575				10,671,825
Operating income (loss)			(353,292	)			13,866,083				2,970,837				22,831,277
Other income (expense):
Interest income			433,201				21,945				923,963				37,166
Interest expense			(34,422	)			(745	)			(62,859	)			(16,064	)
Gain (loss) on derivative contracts			628,178				776,994				1,696,838				(194,910	)
Other income (expense)			3,066				(61,713	)			4,701				(67,119	)
Other income (expense), net			1,030,023				736,481				2,562,643				(240,927	)
Net income before income tax expense			676,731				14,602,564				5,533,480				22,590,350
Income tax expense			246,142				4,019,576				1,573,064				6,201,474
NET INCOME		$	430,589			$	10,582,988			$	3,960,416			$	16,388,876
Currency translation adjustments			1,129				(19,150	)			(1,471	)			(13,748	)
Unrealized loss on securities			(47,006	)			—				(47,006	)			—
NET COMPREHENSIVE INCOME		$	384,712			$	10,563,838			$	3,911,939			$	16,375,128
Net income per share, basic		$	0.02			$	0.45			$	0.17			$	0.69
Net income per share, diluted		$	0.02			$	0.44			$	0.17			$	0.69
Weighted average number of shares outstanding, basic			22,749,322				23,576,746				22,869,440				23,627,015
Weighted average number of shares outstanding, diluted			22,783,987				23,822,123				22,904,922				23,796,166

EPSILON ENERGY LTD.Unaudited Consolidated Balance Sheets(All amounts stated in US$)
		June 30,				December 31,
		2023				2022
ASSETS
Current assets
Cash and cash equivalents		$	9,488,094			$	45,236,584
Accounts receivable			4,355,076				7,201,386
Short term investments			26,804,482				—
Fair value of derivatives			1,286,070				1,222,090
Prepaid income taxes			1,233,669				1,140,094
Other current assets			391,007				632,154
Operating lease right-of-use assets			—				31,383
Total current assets			43,558,398				55,463,691
Non-current assets
Property and equipment:
Oil and gas properties, successful efforts method
Proved properties			152,014,489				148,326,265
Unproved properties			25,989,679				18,169,157
Accumulated depletion, depreciation, amortization and impairment			(109,996,874	)			(107,729,293	)
Total oil and gas properties, net			68,007,294				58,766,129
Gathering system			42,673,506				42,639,001
Accumulated depletion, depreciation, amortization and impairment			(35,026,730	)			(34,500,740	)
Total gathering system, net			7,646,776				8,138,261
Land			637,764				637,764
Buildings and other property and equipment, net			312,830				286,035
Total property and equipment, net			76,604,664				67,828,189
Other assets:
Operating lease right-of-use assets, long term			495,842				—
Restricted cash			495,000				570,363
Total non-current assets			77,595,506				68,398,552
Total assets		$	121,153,904			$	123,862,243
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable trade		$	1,334,008			$	1,695,353
Gathering fees payable			498,438				935,012
Royalties payable			1,511,168				2,223,043
Accrued capital expenditures			134,224				41,694
Accrued compensation			405,448				598,351
Other accrued liabilities			467,387				690,655
Operating lease liabilities			24,748				35,299
Total current liabilities			4,375,421				6,219,407
Non-current liabilities
Asset retirement obligations			2,777,847				2,780,237
Deferred income taxes			10,847,721				10,617,394
Operating lease liabilities, long term			519,652				—
Total non-current liabilities			14,145,220				13,397,631
Total liabilities			18,520,641				19,617,038
Commitments and contingencies (Note 10)
Shareholders' equity
Preferred shares, no par value, unlimited shares authorized, none issued or outstanding			—				—
Common shares, no par value, unlimited shares authorized and 22,649,290 shares issued and 22,554,169 shares outstanding at June 30, 2023 and 23,117,144 issued and outstanding at December 31, 2022			121,348,004				123,904,965
Treasury shares, at cost, 95,121 at June 30, 2023 and 0 at December 31, 2022			(497,814	)			—
Additional paid-in capital			10,215,725				9,856,229
Accumulated deficit			(38,158,726	)			(39,290,540	)
Accumulated other comprehensive income			9,726,074				9,774,551
Total shareholders' equity			102,633,263				104,245,205
Total liabilities and shareholders' equity		$	121,153,904			$	123,862,243

EPSILON ENERGY LTD.Unaudited Consolidated Statements of Cash Flows(All amounts stated in US$)
		Six months ended June 30,
		2023				2022
Cash flows from operating activities:
Net income		$	3,960,416			$	16,388,876
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation, amortization, and accretion			3,388,734				3,192,958
Accretion of discount on available for sale securities			(343,328	)			—
Gain on available for sale securities			(47,659	)			—
Loss (gain) on sale of oil and gas properties			1,449,871				(221,642	)
(Gain) loss on derivative contracts			(1,696,838	)			194,910
Settlement received (paid) on derivative contracts			1,632,858				(1,375,287	)
Settlement of asset retirement obligation			—				(118,259	)
Stock-based compensation expense			359,496				336,352
Deferred income tax expense (benefit)			230,327				319,326
Changes in assets and liabilities:
Accounts receivable			2,846,310				(5,333,960	)
Prepaid income taxes and other assets and liabilities			332,214				328,872
Accounts payable, royalties payable and other accrued liabilities			(1,910,674	)			738,023
Income taxes payable			—				1,312,365
Net cash provided by operating activities			10,201,727				15,762,534
Cash flows from investing activities:
Additions to unproved oil and gas properties			(7,821,248	)			(162,445	)
Additions to proved oil and gas properties			(5,653,284	)			(4,935,370	)
Additions to gathering system properties			(30,264	)			(82,855	)
Additions to land, buildings and property and equipment			(47,933	)			(1,234	)
Purchases of short term investments			(32,812,974	)			—
Proceeds from short term investments			6,352,473				—
Proceeds from sale of oil and gas properties			12,498				200,000
Net cash used in investing activities			(40,000,732	)			(4,981,904	)
Cash flows from financing activities:
Buyback of common shares			(3,054,775	)			(3,956,403	)
Exercise of stock options			—				608,787
Dividends paid			(2,828,602	)			(2,969,677	)
Debt issuance costs			(140,000	)			—
Net cash used in financing activities			(6,023,377	)			(6,317,293	)
Effect of currency rates on cash, cash equivalents, and restricted cash			(1,471	)			(13,748	)
(Decrease) increase in cash, cash equivalents, and restricted cash			(35,823,853	)			4,449,589
Cash, cash equivalents, and restricted cash, beginning of period			45,806,947				27,065,423
Cash, cash equivalents, and restricted cash, end of period		$	9,983,094			$	31,515,012
Supplemental cash flow disclosures:
Income taxes paid		$	1,432,000			$	4,566,000
Interest paid		$	80,075			$	33,885
Non-cash investing activities:
Change in proved properties accrued in accounts payable and accrued liabilities		$	72,999			$	(1,097,247	)
Change in gathering system accrued in accounts payable and accrued liabilities		$	4,240			$	8,554
Change in share buybacks accrued in accounts payable and accrued liabilities		$	—			$	598,419
Asset retirement obligation asset additions and adjustments		$	4,640			$	7,666

EPSILON ENERGY LTD.Adjusted EBITDA Reconciliation (All amounts stated in US$)
		Three months ended June 30,								Six months ended June 30,
		2023				2022				2023				2022
Net income		$	430,589			$	10,582,988			$	3,960,416			$	16,388,876
Add Back:
Interest (income) expense, net			(398,779	)			(21,200	)			(861,104	)			(21,102	)
Income tax expense			246,142				4,019,576				1,573,064				6,201,474
Depreciation, depletion, amortization, and accretion			1,615,728				1,803,739				3,388,734				3,192,958
Stock based compensation expense			179,748				194,050				359,496				336,352
Loss (gain) on sale of assets			1,449,871				(221,642	)			1,449,871				(221,642	)
Loss (gain) on derivative contracts net of cash received or paid on settlement			641,380				(940,553	)			(63,980	)			(1,180,377	)
Foreign currency translation loss			(5	)			(1,071	)			(987	)			4,331
Adjusted EBITDA		$	4,164,674			$	15,415,887			$	9,805,510			$	24,700,870

Epsilon defines Adjusted EBITDA as earnings before (1) net interest expense, (2) taxes, (3) depreciation, depletion, amortization and accretion expense, (4) impairments of natural gas and oil properties, (5) non-cash stock compensation expense, (6) gain or loss on derivative contracts net of cash received or paid on settlement, and (7) other income. Adjusted EBITDA is not a measure of financial performance as determined under U.S. GAAP and should not be considered in isolation from or as a substitute for net income or cash flow measures prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity.

Additionally, Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. Epsilon has included Adjusted EBITDA as a supplemental disclosure because its management believes that EBITDA provides useful information regarding its ability to service debt and to fund capital expenditures. It further provides investors a helpful measure for comparing operating performance on a "normalized" or recurring basis with the performance of other companies, without giving effect to certain non-cash expenses and other items. This provides management, investors and analysts with comparative information for evaluating the Company in relation to other natural gas and oil companies providing corresponding non-U.S. GAAP financial measures or that have different financing and capital structures or tax rates. These non-U.S. GAAP financial measures should be considered in addition to, but not as a substitute for, measures for financial performance prepared in accordance with U.S. GAAP.