Epsilon Energy Ltd. (“
Epsilon” or the
“
Company”) (NASDAQ: EPSN) today reported first
quarter 2022 financial and operating results and material
subsequent events following the end of the quarter through the date
of this release.
- Cash provided by operations of $7.7
million for the three ended March 31, 2022, with free cash flow
(FCF) of $4.8 million for the same period.
- Realized natural gas prices of
$4.04/Mcf including hedges ($4.55/Mcf excluding hedges) for the
three months ended March 31, 2022.
- Total net revenue interest (NRI)
gas production averaged 26.1 MMcf/d (Working Interest of 30.1
MMcf/d) for the first quarter. There were 5 gross (.58 Net) wells
shut-in at quarter end. Working interest exit rate for the third
quarter was 25.3 MMcf/d.
- Auburn System gathered and
delivered 18.3 Bcf gross (6.4 Bcf net to Epsilon’s interest) during
the three months ended March 31, 2022 which represents
approximately 92% of maximum throughput as currently
configured.
- Total revenues of $13.6 million and
EBITDA of $9.3 million for the quarter.
- Cash at quarter end of $30.1
million ($30.6 million including restricted cash).
- Net income before tax of $8.0 million for the quarter ($5.8
million net income after tax).
- Operating expenses including
SG&A was $1.26/Mcfe.
Michael Raleigh, CEO, commented, “The Company
continued to perform exceptionally well during the first quarter of
2022, increasing our cash balance by $3.6 million while investing
to maintain our production, paying $1.5 million in dividends to our
shareholders and remaining debt free.
"While we continue to be encouraged by a
constructive pricing environment, the Company recently used NYMEX
costless collars and basis swaps for net realized prices between
$5.35 and $7.05 for 5.0 MM/day natural gas production between May
and December of 2022. Epsilon remains unhedged regarding its oil
and natural gas liquid production in Oklahoma.
"The Company continued its appraisal program on
our Oklahoma acreage with the completion of 2 incremental
gross (.55 net) wells during the quarter and immediately subsequent
to quarter end. While these wells are still in the early stages of
production flowback, we remain encouraged by the initial
productivity of the wells in this part of the play, especially
given that commodity prices now materially exceed our original
assumptions. We will provide a more comprehensive update with
the release of our Q2 2022 results.”
Financial and Operating Results
|
|
Three months ended |
|
|
March 31, |
|
|
2022 |
|
2021 |
Revenues |
|
|
|
|
|
|
Natural gas revenue |
|
$ |
|
10,703,084 |
|
$ |
6,332,099 |
Volume (MMcf) |
|
|
|
2,351 |
|
|
2,466 |
Avg. Price ($/Mcf) |
|
$ |
|
4.55 |
|
$ |
2.57 |
PA Exit Rate (MMcfpd) |
|
|
|
23.1 |
|
|
32.8 |
Oil and other liquids revenue |
|
$ |
|
776,241 |
|
$ |
107,056 |
Volume (MBO) |
|
|
|
14.9 |
|
|
3.7 |
Avg. Price ($/Bbl) |
|
$ |
|
52.22 |
|
$ |
28.58 |
Gathering system revenue |
|
$ |
|
2,120,773 |
|
$ |
2,002,157 |
Total Revenues |
|
$ |
|
13,600,098 |
|
$ |
8,441,312 |
Capital Expenditures
Epsilon’s capital expenditures were $2.5 million
for the three months ended March 31, 2022. This capital
was mainly related to the drilling of one gross (0.11 net to EPSN)
well and completion of two gross (0.55 net to EPSN) wells in
Oklahoma, as well as expenditures for the Auburn Gas Gathering
system.
Operations
During the first quarter of 2022, the operator
completed two gross (0.54 net to EPSN) wells in Oklahoma. One was
turned to production at the end of March and a second well was
turned to production at the end of April.
First Quarter Results
Epsilon generated revenues of $13.6 million for
the three months ended March 31, 2022 compared to $8.4 million for
the three months ended March 31, 2021.
Realized natural gas prices averaged $4.55/Mcf
(excluding hedges) for Upstream operations in the first quarter of
2022. Operating expenses for Upstream operations in the first
quarter were $1.8 million.
Auburn System gathered and delivered 18.3 Bcf
gross of natural gas during the quarter as compared to 16.6 Bcfe
during the fourth quarter of 2021. Primary gathering volumes
decreased 2.2% quarter over quarter to 11.5 Bcfe. Imported
cross-flow volumes increased 11.4% to 6.8 Bcfe as a result of the
normal increase in natural gas demand during peak winter in the
Northeast.
Epsilon reported a net after tax income of $5.8
million attributable to common shareholders or $0.25 per basic and
diluted common share outstanding for the three months ended March
31, 2022, compared to net after tax income of $2.7 million, and
$0.11 per basic and diluted common share outstanding for the three
months ended March 31, 2021.
For the three months ended March 31, 2022,
Epsilon's Adjusted Earnings Before Interest, Taxes, Depreciation,
Amortization ("Adjusted EBITDA") was $9.3 million as compared to
$5.4 million for the three months ended March 31, 2021.
About Epsilon
Epsilon Energy Ltd. is a North American onshore
natural gas production and midstream company with a current focus
on the Marcellus Shale of Pennsylvania.
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.
The reserves and associated future net revenue
information set forth in this news release are estimates only. In
general, estimates of oil and natural gas reserves and the future
net revenue therefrom are based upon a number of variable factors
and assumptions, such as production rates, ultimate reserves
recovery, timing and amount of capital expenditures, ability to
transport production, marketability of oil and natural gas, royalty
rates, the assumed effects of regulation by governmental agencies
and future operating costs, all of which may vary materially from
actual results. For those reasons, estimates of the oil and natural
gas reserves attributable to any particular group of properties, as
well as the classification of such reserves and estimates of future
net revenues associated with such reserves prepared by different
engineers (or by the same engineers at different times) may vary.
The actual reserves of the Company may be greater or less than
those calculated. In addition, the Company's actual production,
revenues, development and operating expenditures will vary from
estimates thereof and such variations could be material.
Statements relating to "reserves" are deemed to
be forward-looking statements as they involve the implied
assessment, based on certain estimates and assumptions, that the
reserves described exist in the quantities predicted or estimated
and can be profitably produced in the future. There is no assurance
that forecast price and cost assumptions will be attained and
variances could be material.
Proved reserves are those reserves which are
most certain to be recovered. There is at least a 90% probability
that the quantities actually recovered will equal or exceed the
estimated proved reserves. Undeveloped reserves are those reserves
expected to be recovered from known accumulations where a
significant expenditure (for example, when compared to the cost of
drilling a well) is required to render them capable of production.
They must fully meet the requirements of the reserves
classification (proved, probable) to which they are assigned.
Proved undeveloped reserves are those reserves that can be
estimated with a high degree of certainty and are expected to be
recovered from known accumulations where a significant expenditure
is required to render them capable of production.
The estimates of reserves and future net revenue
for individual properties may not reflect the same confidence level
as estimates of reserves and future net revenue for all properties
due to the effects of aggregation. The estimated future net
revenues contained in this news release do not necessarily
represent the fair market value of the Company's reserves.
Contact Information:
281-670-0002
Michael RaleighChief Executive
OfficerMichael.Raleigh@EpsilonEnergyLTD.com
Special note for news distribution in
the United States The securities described in the news
release have not been registered under the United Stated Securities
Act of 1933, as amended, (the “1933 Act”) or state securities laws.
Any holder of these securities, by purchasing such securities,
agrees for the benefit of Epsilon Energy Ltd. (the “Corporation”)
that such securities may not be offered, sold, or otherwise
transferred only (A) to the Corporation or its affiliates; (B)
outside the United States in accordance with applicable state laws
and either (1) Rule 144(as) under the 1933 Act or (2) Rule 144
under the 1933 Act, if applicable.
EPSILON ENERGY LTD. |
Unaudited Condensed Consolidated Statements of Operations
and Comprehensive Income |
(All amounts stated in US$) |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2022 |
|
|
|
2021 |
|
Revenues from contracts with customers: |
|
|
|
|
|
|
Gas, oil, NGL, and condensate revenue |
|
$ |
11,479,325 |
|
|
$ |
6,439,155 |
|
Gas gathering and compression revenue |
|
|
2,120,773 |
|
|
|
2,002,157 |
|
Total revenue |
|
|
13,600,098 |
|
|
|
8,441,312 |
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
Lease operating expenses |
|
|
1,770,654 |
|
|
|
1,594,188 |
|
Gathering system operating expenses |
|
|
159,211 |
|
|
|
190,947 |
|
Development geological and geophysical expenses |
|
|
2,386 |
|
|
|
11,539 |
|
Depletion, depreciation, amortization, and accretion |
|
|
1,389,219 |
|
|
|
1,682,860 |
|
General and administrative expenses: |
|
|
|
|
|
|
Stock based compensation expense |
|
|
142,302 |
|
|
|
202,499 |
|
Other general and administrative expenses |
|
|
1,171,132 |
|
|
|
1,327,161 |
|
Total operating costs and expenses |
|
|
4,634,904 |
|
|
|
5,009,194 |
|
Operating income |
|
|
8,965,194 |
|
|
|
3,432,118 |
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
Interest income |
|
|
15,221 |
|
|
|
7,813 |
|
Interest expense |
|
|
(15,319 |
) |
|
|
(27,073 |
) |
(Loss) gain on derivative contracts |
|
|
(971,904 |
) |
|
|
465,341 |
|
Other (expense) income |
|
|
(5,406 |
) |
|
|
1,941 |
|
Other (expense) income, net |
|
|
(977,408 |
) |
|
|
448,022 |
|
|
|
|
|
|
|
|
Net income before income tax expense |
|
|
7,987,786 |
|
|
|
3,880,140 |
|
Income tax expense |
|
|
2,181,898 |
|
|
|
1,144,573 |
|
NET INCOME |
|
$ |
5,805,888 |
|
|
$ |
2,735,567 |
|
Currency translation adjustments |
|
|
5,402 |
|
|
|
242 |
|
NET COMPREHENSIVE INCOME |
|
$ |
5,811,290 |
|
|
$ |
2,735,809 |
|
|
|
|
|
|
|
|
Net income per share, basic |
|
$ |
0.25 |
|
|
$ |
0.11 |
|
Net income per share, diluted |
|
$ |
0.24 |
|
|
$ |
0.11 |
|
Weighted average number of shares outstanding,
basic |
|
|
23,677,842 |
|
|
|
23,947,222 |
|
Weighted average number of shares outstanding,
diluted |
|
|
23,862,428 |
|
|
|
24,030,104 |
|
|
|
|
|
|
|
|
|
|
EPSILON ENERGY LTD. |
Unaudited Condensed Consolidated Balance
Sheets |
(All amounts stated in US$) |
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
|
2022 |
|
|
|
2021 |
|
ASSETS |
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
30,070,813 |
|
|
$ |
26,497,305 |
|
Accounts receivable |
|
|
6,468,261 |
|
|
|
4,596,931 |
|
Other current assets |
|
|
465,694 |
|
|
|
569,870 |
|
Total current assets |
|
|
37,004,768 |
|
|
|
31,664,106 |
|
Non-current assets |
|
|
|
|
|
|
Property and equipment: |
|
|
|
|
|
|
Oil and gas properties, successful efforts method |
|
|
|
|
|
|
Proved properties |
|
|
140,557,389 |
|
|
|
138,032,413 |
|
Unproved properties |
|
|
21,793,526 |
|
|
|
21,700,926 |
|
Accumulated depletion, depreciation, amortization and
impairment |
|
|
(103,558,669 |
) |
|
|
(102,480,972 |
) |
Total oil and gas properties, net |
|
|
58,792,246 |
|
|
|
57,252,367 |
|
Gathering system |
|
|
42,490,479 |
|
|
|
42,475,086 |
|
Accumulated depletion, depreciation, amortization and
impairment |
|
|
(33,727,110 |
) |
|
|
(33,443,949 |
) |
Total gathering system, net |
|
|
8,763,369 |
|
|
|
9,031,137 |
|
Land |
|
|
637,764 |
|
|
|
637,764 |
|
Buildings and other property and equipment, net |
|
|
300,318 |
|
|
|
309,102 |
|
Total property and equipment, net |
|
|
68,493,697 |
|
|
|
67,230,370 |
|
Other assets: |
|
|
|
|
|
|
Restricted cash |
|
|
568,854 |
|
|
|
568,118 |
|
Total non-current assets |
|
|
69,062,551 |
|
|
|
67,798,488 |
|
Total assets |
|
$ |
106,067,319 |
|
|
$ |
99,462,594 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
Accounts payable trade |
|
$ |
1,820,112 |
|
|
$ |
1,189,905 |
|
Gathering fees payable |
|
|
843,523 |
|
|
|
963,546 |
|
Royalties payable |
|
|
1,956,002 |
|
|
|
1,853,508 |
|
Income taxes payable |
|
|
3,255,717 |
|
|
|
1,098,425 |
|
Accrued capital expenditures |
|
|
732,523 |
|
|
|
1,016,830 |
|
Other accrued liabilities |
|
|
802,188 |
|
|
|
1,098,127 |
|
Fair value of derivatives |
|
|
— |
|
|
|
239,824 |
|
Asset retirement obligations |
|
|
11,209 |
|
|
|
85,207 |
|
Total current liabilities |
|
|
9,421,274 |
|
|
|
7,545,372 |
|
Non-current liabilities |
|
|
|
|
|
|
Asset retirement obligations |
|
|
2,774,709 |
|
|
|
2,748,449 |
|
Deferred income taxes |
|
|
9,928,126 |
|
|
|
9,905,440 |
|
Total non-current liabilities |
|
|
12,702,835 |
|
|
|
12,653,889 |
|
Total liabilities |
|
|
22,124,109 |
|
|
|
20,199,261 |
|
Commitments and contingencies (Note 9) |
|
|
|
|
|
|
Shareholders' equity |
|
|
|
|
|
|
Common shares, no par value, unlimited shares authorized and
23,706,953 issued and outstanding at March 31, 2022 and 24,202,218
issued and 23,668,203 shares outstanding at December 31, 2021. |
|
|
129,602,044 |
|
|
|
131,815,739 |
|
Treasury shares, 0 at March 31, 2022 and 534,015 at December 31,
2021 |
|
|
— |
|
|
|
(2,423,007 |
) |
Additional paid-in capital |
|
|
8,977,505 |
|
|
|
8,835,203 |
|
Accumulated deficit |
|
|
(64,460,346 |
) |
|
|
(68,783,207 |
) |
Accumulated other comprehensive income |
|
|
9,824,007 |
|
|
|
9,818,605 |
|
Total shareholders' equity |
|
|
83,943,210 |
|
|
|
79,263,333 |
|
Total liabilities and shareholders' equity |
|
$ |
106,067,319 |
|
|
$ |
99,462,594 |
|
|
|
|
|
|
|
|
EPSILON ENERGY LTD. |
Unaudited Condensed Consolidated Statements of Cash
Flows |
(All amounts stated in US$) |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2022 |
|
|
|
2021 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
Net income |
|
$ |
5,805,888 |
|
|
$ |
2,735,567 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
Depletion, depreciation, amortization, and accretion |
|
|
1,389,219 |
|
|
|
1,682,860 |
|
Plug and abandon of proved properties |
|
|
(73,998 |
) |
|
|
— |
|
Loss (gain) on derivative contracts |
|
|
971,904 |
|
|
|
(465,341 |
) |
Settlement (paid) received on derivative contracts |
|
|
(1,211,728 |
) |
|
|
64,200 |
|
Settlement of asset retirement obligation |
|
|
— |
|
|
|
(3,483 |
) |
Stock-based compensation expense |
|
|
142,302 |
|
|
|
202,499 |
|
Deferred income tax expense |
|
|
22,686 |
|
|
|
805,359 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
|
(1,871,330 |
) |
|
|
454,740 |
|
Prepaid income taxes and other current assets |
|
|
104,177 |
|
|
|
161,374 |
|
Accounts payable, royalties payable and other accrued
liabilities |
|
|
267,058 |
|
|
|
(349,705 |
) |
Income taxes payable |
|
|
2,157,292 |
|
|
|
336,798 |
|
Net cash provided by operating activities |
|
|
7,703,470 |
|
|
|
5,624,868 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
Additions to unproved oil and gas properties |
|
|
(92,600 |
) |
|
|
(23,702 |
) |
Additions to proved oil and gas properties |
|
|
(2,771,925 |
) |
|
|
(481,021 |
) |
Additions to gathering system properties |
|
|
3,612 |
|
|
|
(40,963 |
) |
Additions to land, buildings and property and equipment |
|
|
— |
|
|
|
(5,745 |
) |
Prepaid drilling costs |
|
|
— |
|
|
|
156 |
|
Net cash used in investing activities |
|
|
(2,860,913 |
) |
|
|
(551,275 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
Buyback of common shares |
|
|
— |
|
|
|
(492,479 |
) |
Exercise of stock options |
|
|
209,312 |
|
|
|
— |
|
Dividends |
|
|
(1,483,027 |
) |
|
|
— |
|
Net cash used in financing activities |
|
|
(1,273,715 |
) |
|
|
(492,479 |
) |
Effect of currency rates on cash, cash equivalents and restricted
cash |
|
|
5,402 |
|
|
|
242 |
|
Increase in cash, cash equivalents and restricted cash |
|
|
3,574,244 |
|
|
|
4,581,356 |
|
Cash, cash equivalents and restricted cash, beginning of
period |
|
|
27,065,423 |
|
|
|
13,836,771 |
|
Cash, cash equivalents and restricted cash, end of
period |
|
$ |
30,639,667 |
|
|
$ |
18,418,127 |
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures: |
|
|
|
|
|
|
Interest paid |
|
$ |
17,501 |
|
|
$ |
29,562 |
|
|
|
|
|
|
|
|
Non-cash investing activities: |
|
|
|
|
|
|
Change in unproved properties accrued in accounts payable and
accrued liabilities |
|
$ |
— |
|
|
$ |
(65,000 |
) |
Change in proved properties accrued in accounts payable and accrued
liabilities |
|
$ |
(253,632 |
) |
|
$ |
468,972 |
|
Change in gathering system accrued in accounts payable and accrued
liabilities |
|
$ |
19,005 |
|
|
$ |
(27,679 |
) |
Asset retirement obligation asset additions and adjustments |
|
$ |
6,684 |
|
|
$ |
(21,554 |
) |
|
|
|
|
|
|
|
EPSILON ENERGY LTD. |
Adjusted EBITDA Reconciliation |
(All amounts stated in US$) |
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2022 |
|
|
|
2021 |
|
Net income |
|
$ |
5,805,888 |
|
|
$ |
2,735,567 |
|
Add Back: |
|
|
|
|
|
|
Net interest expense |
|
|
98 |
|
|
|
19,260 |
|
Income tax expense |
|
|
2,181,898 |
|
|
|
1,144,573 |
|
Depreciation, depletion, amortization, and accretion |
|
|
1,389,219 |
|
|
|
1,682,860 |
|
Stock based compensation expense |
|
|
142,302 |
|
|
|
202,499 |
|
Loss on derivative contracts net of cash received or paid on
settlement |
|
|
(239,824 |
) |
|
|
(401,141 |
) |
Foreign currency translation loss |
|
|
5,402 |
|
|
|
332 |
|
Adjusted EBITDA |
|
$ |
9,284,983 |
|
|
$ |
5,383,950 |
|
|
|
|
|
|
|
|
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.
EPSILON ENERGY LTD. |
Free Cash Flow Reconciliation |
(All amounts stated in US$) |
|
|
|
|
|
|
|
Three months ended March 31 |
|
Three months ended March 31 |
|
|
|
2022 |
|
|
|
2021 |
|
|
|
2022 |
|
|
|
2021 |
|
Net cash provided by operating activities |
|
$ |
7,703,470 |
|
|
$ |
5,624,868 |
|
|
$ |
7,703,470 |
|
|
$ |
5,624,868 |
|
Less: Net cash used in investing activities (Capital
Expenditures) |
|
(2,860,913 |
) |
|
|
(551,275 |
) |
|
|
(2,860,913 |
) |
|
|
(551,275 |
) |
Free cash flow |
|
$ |
4,842,557 |
|
|
$ |
5,073,593 |
|
|
$ |
4,842,556 |
|
|
$ |
5,073,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Epsilon defines Free cash flow (“FCF”) as net
cash provided by operating activities in the period minus payments
for property and equipment made in the period. FCF is considered a
non-GAAP financial measure under the SEC’s rules. Management
believes, however, that FCF is an important financial measure for
use in evaluating the Company’s financial performance, as it
measures our ability to generate additional cash from our business
operations. FCF should be considered in addition to, rather than as
a substitute for, net income as a measure of our performance or net
cash provided by operating activities as a measure of our
liquidity. Additionally, our definition of FCF is limited and does
not represent residual cash flows available for discretionary
expenditures due to the fact that the measure does not deduct the
payments required for debt service and other obligations, payments
made for business acquisitions, amounts spent to buy back shares,
or pay dividends. Therefore, we believe it is important to view FCF
as supplemental to our entire statement of cash flows.
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