EPSN Epsilon Energy Ltd

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

Third Quarter Financial Highlights:

• Reported net revenue interest (NRI) production of 2.0 Bcfe (21.5 MMcfe per day) for the quarter ended September 30, 2023, a decrease of 14% compared to the prior quarter.
  • As previously disclosed in our August operational update, the quarter over quarter decrease was caused in part by seven wells brought offline for 52 days during the quarter in Pennsylvania to accommodate a workover operation (cumulative NRI production rate for the wells before shut-in was 3.5 MMcf per day). These wells are now back online.

• Realized average price of $2.32 per Mcfe including hedges ($1.64 per Mcfe excluding hedges) for the quarter ended September 30, 2023, a decrease of 5% compared to the prior quarter.
• Reported total revenues of $6.3 million for the quarter ended September 30, 2023, a decrease of 3% compared to the prior quarter.
  • $3.2 million from natural gas, oil, and NGL sales, a decrease of 25% compared to the prior quarter
  • $3.1 million from gathering and compression fees through our ownership in the Auburn Gas Gathering System, after eliminating revenue earned from Epsilon production ($0.3 million), an increase of 39% compared to the prior quarter. This included $1.0 million of revenue received from a backward looking fee adjustment as a result of an internal audit by the system operator.

• Reported Adjusted EBITDA of $3.9 million for the quarter ended September 30, 2023.
• Cash, cash equivalents (including restricted cash), and short term investments totaled $31.9 million at September 30, 2023.
• Returned $4.0 million to shareholders during the quarter ended September 30, 2023.
  • $2.6 million through the repurchase of 525,000 shares at $5.00 per share, over a 2% reduction of shares outstanding
  • $1.4 million through the quarterly dividend
  • 1.4 million shares remain under the approved buyback program (expires in March 2024)
• Realized gains of $1.3 million on Henry Hub (HH) and TGP Z4 basis swaps totaling 455,000 MMBTU.
• Placed Henry Hub (HHUB) and TGP Z4 basis swaps for November 2023 through March 2024 (at a net realized price of $2.59 per MMBTU, for 380,000 MMBTU) and April 2024 through October 2024 (at a net realized price of $2.05 per MMBTU, for 1,070,000 MMBTU).
  • After quarter-end, we placed additional Henry Hub (HHUB) and TGP Z4 basis swaps for November 2023 through March 2024 (at a net realized price of $2.65 per MMBTU, for 380,000 MMBTU) and April 2024 through October 2024 (at a net realized price of $2.09 per MMBTU, for 535,000 MMBTU).

Third Quarter Operating Results:

Epsilon’s capital expenditures were $5.5 million for the quarter ended September 30, 2023, including certain pre-paid well costs. This capital was primarily related to the drilling of one gross (0.25 net) well and the completion of two gross (0.5 net) wells in Ector Co. Texas ($4.8 million).

During the quarter, we received well proposals from our operating partner in Pennsylvania for the drilling and completion of seven gross wells (0.74 net). The first three wells have been drilled, and drilling is expected to commence on the fourth this month. All seven wells are expected to be drilled by year end with completions expected in the first half of 2024.

In addition, initial investment plans for 2024 on our position in Ector Co. Texas call for the drilling and completion of up to four gross (1.0 net) wells, starting in the first quarter. The two gross (0.5 net) wells drilled in 2023 are now completed and on flowback. Initial results are encouraging and in-line with our pre-drill projections.

Jason Stabell, Epsilon's Chief Executive Officer, commented, "Our announced investments and ongoing activities in Pennsylvania and Texas position the company for per share volume and cash flow growth next year, and represent the next step in our objective to deliver sustainable and attractive returns across a more diversified portfolio. These investments will be comfortably funded from cash flow and cash on hand while allowing us to pursue additional opportunities on existing assets and in new areas, to pay our annual dividend and to repurchase our shares opportunistically.”

Earning’s Call:

The Company will host a conference call to discuss its results on Friday, November 10, 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 Third Quarter 2023 Earnings Conference Call.”

A webcast can be viewed at: https://event.choruscall.com/mediaframe/webcast.html?webcastid=TKIiaI4y. 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 September 30,								Nine months ended September 30,
		2023				2022				2023				2022
Revenues from contracts with customers:
Gas, oil, NGL, and condensate revenue		$	3,241,531			$	19,171,121			$	14,509,184			$	48,566,282
Gas gathering and compression revenue			3,068,996				2,072,806				7,657,755				6,180,747
Total revenue			6,310,527				21,243,927				22,166,939				54,747,029
Operating costs and expenses:
Lease operating expenses			1,559,957				2,024,229				4,404,757				5,681,736
Gathering system operating expenses			631,725				600,672				1,854,000				1,666,275
Development geological and geophysical expenses			-				2,387				-				7,159
Depletion, depreciation, amortization, and accretion			1,392,032				1,706,030				4,780,766				4,898,988
Loss (gain) on sale of oil and gas properties			-				-				1,449,871				(221,642	)
General and administrative expenses:
Stock based compensation expense			439,653				500,597				799,149				836,949
Other general and administrative expenses			1,540,358				2,015,272				5,160,757				4,651,547
Total operating costs and expenses			5,563,725				6,849,187				18,449,300				17,521,012
Operating income			746,802				14,394,740				3,717,639				37,226,017
Other income (expense):
Interest income			384,732				89,638				1,308,695				126,804
Interest expense			(8,760	)			(17,501	)			(71,619	)			(33,565	)
(Loss) gain on derivative contracts			(24,303	)			(929,637	)			1,672,535				(1,124,547	)
Other income (expense), net			468				(32,777	)			5,169				(99,896	)
Other income (expense), net			352,137				(890,277	)			2,914,780				(1,131,204	)
Net income before income tax expense			1,098,939				13,504,463				6,632,419				36,094,813
Income tax expense			710,164				3,896,010				2,283,228				10,097,484
NET INCOME		$	388,775			$	9,608,453			$	4,349,191			$	25,997,329
Currency translation adjustments			(846	)			(34,524	)			(2,317	)			(48,272	)
Unrealized gain (loss) on securities			24,641				-				(22,365	)			-
NET COMPREHENSIVE INCOME		$	412,570			$	9,573,929			$	4,324,509			$	25,949,057
Net income per share, basic		$	0.02			$	0.42			$	0.19			$	1.11
Net income per share, diluted		$	0.02			$	0.41			$	0.19			$	1.11
Weighted average number of shares outstanding, basic			22,118,984				23,011,729				22,616,539				23,419,666
Weighted average number of shares outstanding, diluted			22,178,686				23,169,658				22,631,550				23,524,574

        

EPSILON ENERGY LTD.
Unaudited Consolidated Balance Sheets
(All amounts stated in US$)
		September 30,				December 31,
		2023				2022
ASSETS
Current assets
Cash and cash equivalents		$	12,498,051			$	45,236,584
Accounts receivable			4,006,278				7,201,386
Short term investments			18,870,468				-
Fair value of derivatives			-				1,222,090
Prepaid income taxes			1,954,788				1,140,094
Other current assets			920,224				632,154
Operating lease right-of-use assets			-				31,383
Total current assets			38,249,809				55,463,691
Non-current assets
Property and equipment:
Oil and gas properties, successful efforts method
Proved properties			154,190,226				148,326,265
Unproved properties			26,185,843				18,169,157
Accumulated depletion, depreciation, amortization and impairment			(111,142,288	)			(107,729,293	)
Total oil and gas properties, net			69,233,781				58,766,129
Gathering system			42,694,512				42,639,001
Accumulated depletion, depreciation, amortization and impairment			(35,241,595	)			(34,500,740	)
Total gathering system, net			7,452,917				8,138,261
Land			637,764				637,764
Buildings and other property and equipment, net			303,211				286,035
Total property and equipment, net			77,627,673				67,828,189
Other assets:
Operating lease right-of-use assets, long term			468,833				-
Restricted cash			495,000				570,363
Fair value of derivatives, long term			42,005				-
Prepaid drilling costs			2,891,250				-
Total non-current assets			81,524,761				68,398,552
Total assets		$	119,774,570			$	123,862,243
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable trade		$	1,855,591			$	1,695,353
Gathering fees payable			556,437				935,012
Royalties payable			1,241,533				2,223,043
Accrued capital expenditures			195,917				41,694
Accrued compensation			631,646				598,351
Other accrued liabilities			556,814				690,655
Fair value of derivatives			126,508				-
Operating lease liabilities			55,656				35,299
Total current liabilities			5,220,102				6,219,407
Non-current liabilities
Asset retirement obligations			2,794,743				2,780,237
Deferred income taxes			11,805,453				10,617,394
Operating lease liabilities, long term			498,155				-
Total non-current liabilities			15,098,351				13,397,631
Total liabilities			20,318,453				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 22,126,800 shares issued and outstanding at September 30, 2023 and 23,117,144 issued and outstanding at December 31, 2022			118,209,690				123,904,965
Additional paid-in capital			10,655,378				9,856,229
Accumulated deficit			(39,158,820	)			(39,290,540	)
Accumulated other comprehensive income			9,749,869				9,774,551
Total shareholders' equity			99,456,117				104,245,205
Total liabilities and shareholders' equity		$	119,774,570			$	123,862,243

EPSILON ENERGY LTD.
Unaudited Consolidated Statements of Cash Flows
(All amounts stated in US$)
		Nine months ended September 30,
		2023				2022
Cash flows from operating activities:
Net income		$	4,349,191			$	25,997,329
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation, amortization, and accretion			4,780,766				4,898,988
Accretion of discount on available for sale securities			(574,341	)			-
Gain on available for sale securities			(60,494	)			-
Loss (gain) on sale of oil and gas properties			1,449,871				(221,642	)
(Gain) loss on derivative contracts			(1,672,535	)			1,124,547
Settlement received (paid) on derivative contracts			2,979,128				(1,396,698	)
Settlement of asset retirement obligation			(3,482	)			(118,259	)
Stock-based compensation expense			799,149				836,949
Deferred income tax expense (benefit)			1,188,059				439,857
Changes in assets and liabilities:
Accounts receivable			3,195,108				(5,472,585	)
Prepaid income taxes			(814,694	)			-
Other assets and liabilities			(67,008	)			(205,717	)
Accounts payable, royalties payable and other accrued liabilities			(1,191,558	)			1,511,652
Income taxes payable			-				2,021,246
Net cash provided by operating activities			14,357,160				29,415,667
Cash flows from investing activities:
Additions to unproved oil and gas properties			(8,017,412	)			(226,439	)
Additions to proved oil and gas properties			(7,860,073	)			(5,528,037	)
Additions to gathering system properties			(52,069	)			(129,985	)
Additions to land, buildings and property and equipment			(49,689	)			(13,258	)
Purchases of short term investments			(32,812,974	)			-
Proceeds from short term investments			14,554,976				-
Proceeds from sale of oil and gas properties			12,498				200,000
Prepaid drilling costs			(2,891,250	)			-
Net cash used in investing activities			(37,115,993	)			(5,697,719	)
Cash flows from financing activities:
Buyback of common shares			(5,695,275	)			(6,234,879	)
Exercise of stock options			-				747,112
Dividends paid			(4,217,471	)			(4,422,720	)
Debt issuance costs			(140,000	)			-
Net cash used in financing activities			(10,052,746	)			(9,910,487	)
Effect of currency rates on cash, cash equivalents, and restricted cash			(2,317	)			(48,272	)
(Decrease) increase in cash, cash equivalents, and restricted cash			(32,813,896	)			13,759,189
Cash, cash equivalents, and restricted cash, beginning of period			45,806,947				27,065,423
Cash, cash equivalents, and restricted cash, end of period		$	12,993,051			$	40,824,612
Supplemental cash flow disclosures:
Income taxes paid		$	1,442,304			$	7,626
Interest paid		$	88,835			$	50,872
Non-cash investing activities:
Change in proved properties accrued in accounts payable and accrued liabilities		$	41,947			$	(194,391	)
Change in gathering system accrued in accounts payable and accrued liabilities		$	3,441			$	12,882
Asset retirement obligation asset additions and adjustments		$	4,640			$	10,821

		Three months ended September 30,								Nine months ended September 30,
		2023				2022				2023				2022
Net income		$	388,775			$	9,608,453			$	4,349,191			$	25,997,329
Add Back:
Interest (income) expense, net			(375,972	)			(72,137	)			(1,237,076	)			(93,239	)
Income tax expense			710,164				3,896,010				2,283,228				10,097,484
Depreciation, depletion, amortization, and accretion			1,392,032				1,706,030				4,780,766				4,898,988
Stock based compensation expense			439,653				500,597				799,149				836,949
Loss (gain) on sale of assets			-				-				1,449,871				(221,642	)
Loss (gain) on derivative contracts net of cash received or paid on settlement			1,370,573				908,227				1,306,593				(272,151	)
Foreign currency translation loss			(98	)			907				(1,086	)			1,517
Adjusted EBITDA		$	3,925,127			$	16,548,087			$	13,730,636			$	41,245,235

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.