Epsilon Reports First Quarter 2023 Results

HOUSTON, May 10, 2023 (GLOBE NEWSWIRE) -- Epsilon Energy Ltd. (“Epsilon” or the “Company”) (NASDAQ: EPSN) today reported first quarter 2023 financial and operating results along with the announcement of a new transaction.

First Quarter Financial Highlights:

  • Reported net revenue interest (NRI) production of 2.5 Bcfe (27.3 MMcfe per day) for the quarter ended March 31, 2023

  • Realized average price of $2.98 per Mcfe including hedges ($2.83 per Mcfe excluding hedges) for the quarter ended March 31, 2023

  • Delivered total revenues of $9.4 million for the quarter ended March 31, 2023, a decrease of 39% compared to the prior quarter.

    • $7.0 million from natural gas, oil, and NGL sales;
    • $2.4 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);
  • Reported Adjusted EBITDA of $5.6 million for the quarter ended March 31, 2023.

  • Reported free cash flow (FCF) before changes in working capital of $3.6 million for the quarter ended March 31, 2023

  • Cash, cash equivalents (including restricted cash), and short term investments totaled $49.8 million at March 31, 2023, an increase of 9% compared to December 31, 2022.

  • Returned $2.8 million to shareholders during the quarter ended March 31, 2023

    • $1.4 million through the repurchase of 237,920 shares (average price of $5.72 per share), representing a 1% reduction of shares outstanding
    • $1.4 million through dividends
    • An additional 70,406 shares were purchased after the quarter end (average price of $5.35 per share)
    • 2.2 million shares remain under the approved buyback (expires March 2024)
  • Realized gains of $0.4 million on Henry Hub (HH) and TGP Z4 basis swaps totaling 150,000 MMBTU. The current unrealized gain on the remaining hedge book for 2023 is over $1.9 million at March 31, 2023.

First Quarter Operating Results:

Epsilon’s capital expenditures were $1.2 million for the quarter ended March 31, 2023. This capital was primarily related to the completion of two gross (0.02 net) Marcellus wells and the continuation of drilling one gross (0.11 net) well in Oklahoma.

At March 31, 2023, the Company has one gross (0.11 net) Oklahoma well waiting on completion.

Recent Transaction:

Epsilon is pleased to announce the closing of a drilling focused transaction with a private operator in the Permian Basin.

Epsilon acquired a 10% wellbore interest in two wells recently drilled and completed by a Houston-based private operator. The wells are located in Eddy County, New Mexico in the Northern Delaware Basin and were completed in the Wolfcamp A and C formations. The wells are currently on flow-back. Total capital expenditures (net to Epsilon) are estimated at $2.1 million.

Jason Stabell, Epsilon’s Chief Executive Officer, commented, “We delivered strong results in the first quarter. In a challenging commodity price environment we grew our cash balance 9% to $50 million while simultaneously returning $2.8 million to shareholders in dividends and buybacks.

We are excited to announce a development-focused transaction in a new project area in the Permian Basin, partnered with a basin-focused operator whose principals have a long operating history. We see this as a first step toward our growth objectives and a blueprint for future transactions.

Epsilon’s strong balance sheet, diversified (upstream/midstream) revenue stream and large liquidity position, keep us well positioned to create value for our shareholders in this uncertain economic environment.”

Earning’s Call

The Company will host a conference call to discuss its results on Thursday, May 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 First Quarter 2023 Earnings Conference Call”

A webcast can be viewed at:

https://event.choruscall.com/mediaframe/webcast.html?webcastid=b7kL4WcF. 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 on-shore focused independent exploration and production company engaged in the acquisition, development, gathering and production of oil and gas reserves. Our primary area of operation is the Marcellus basin in Northeast Pennsylvania. 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:


Jason Stabell
Chief Executive Officer

Andrew Williamson
Chief Financial Officer

Unaudited Consolidated Statements of Operations
 (All amounts stated in US$)

  Three months ended March 31,
  2023  2022 
Revenues from contracts with customers:       
Gas, oil, NGL, and condensate revenue $6,969,581  $11,479,325 
Gas gathering and compression revenue  2,386,695   2,120,773 
Total revenue  9,356,276   13,600,098 
Operating costs and expenses:      
Lease operating expenses  1,404,279   1,405,490 
Gathering system operating expenses  651,341   524,375 
Development geological and geophysical expenses      2,386 
Depletion, depreciation, amortization, and accretion  1,773,006   1,389,219 
General and administrative expenses:  -    
Stock based compensation expense  179,748   142,302 
Other general and administrative expenses  2,023,773   1,171,132 
Total operating costs and expenses  6,032,147   4,634,904 
Operating income  3,324,129   8,965,194 
Other income (expense):      
Interest income  490,762   15,221 
Interest expense  (28,437)  (15,319)
Gain (loss) on derivative contracts  1,068,660   (971,904)
Other income (expense)  1,635   (5,406)
Other income (expense), net  1,532,620   (977,408)
Net income before income tax expense  4,856,749   7,987,786 
Income tax expense  1,326,922   2,181,898 
NET INCOME $3,529,827  $5,805,888 
Currency translation adjustments  (2,600)  5,402 
NET COMPREHENSIVE INCOME $3,527,227  $5,811,290 
Net income per share, basic $0.15  $0.25 
Net income per share, diluted $0.15  $0.24 
Weighted average number of shares outstanding, basic  22,990,893   23,677,842 
Weighted average number of shares outstanding, diluted  23,027,684   23,862,428 

Unaudited Consolidated Balance Sheets
 (All amounts stated in US$)

  March 31, December 31, 
  2023  2022  
Current assets       
Cash and cash equivalents $19,110,225  $45,236,584  
Accounts receivable  4,805,320   7,201,386  
Short term investments  30,138,743   -  
Fair value of derivatives  1,927,450   1,222,090  
Prepaid income taxes  -   1,140,094  
Other current assets  496,731   632,154  
Operating lease right-of-use assets  -  31,383  
Total current assets  56,478,469   55,463,691  
Non-current assets       
Property and equipment:       
Oil and gas properties, successful efforts method       
Proved properties  149,323,372   148,326,265  
Unproved properties  18,275,226   18,169,157  
Accumulated depletion, depreciation, amortization and impairment  (109,194,701)  (107,729,293) 
Total oil and gas properties, net  58,403,897   58,766,129  
Gathering system  42,660,626   42,639,001  
Accumulated depletion, depreciation, amortization and impairment  (34,778,321)  (34,500,740) 
Total gathering system, net  7,882,305   8,138,261  
Land  637,764   637,764  
Buildings and other property and equipment, net  318,805   286,035  
Total property and equipment, net  67,242,771   67,828,189  
Other assets:       
Operating lease right-of-use assets, long term  532,013   -  
Restricted cash  571,324   570,363  
Total non-current assets  68,346,108   68,398,552  
Total assets $124,824,577  $123,862,243  
Current liabilities       
Accounts payable trade $1,900,847  $1,695,353  
Gathering fees payable  867,533   935,012  
Royalties payable  1,898,177   2,223,043  
Income taxes payable  196,131   -  
Accrued capital expenditures  348,135   41,694  
Accrued compensation  233,172   598,351  
Other accrued liabilities  257,788   690,655  
Operating lease liabilities  2,756   35,299  
Total current liabilities  5,704,539   6,219,407  
Non-current liabilities       
Asset retirement obligations  2,801,056   2,780,237  
Deferred income taxes  10,605,286   10,617,394  
Operating lease liabilities, long term  541,396   -  
Total non-current liabilities  13,947,738   13,397,631  
Total liabilities  19,652,277   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 22,926,444 shares issued and 22,879,224 shares outstanding at March 31, 2023 and 23,117,144 issued and outstanding at December 31, 2022  122,789,659   123,904,965  
Treasury shares, at cost, 47,220 at March 31, 2023 and 0 at December 31, 2022  (252,119)  -  
Additional paid-in capital  10,035,977   9,856,229  
Accumulated deficit  (37,173,168)  (39,290,540) 
Accumulated other comprehensive income  9,771,951   9,774,551  
Total shareholders' equity  105,172,300   104,245,205  
Total liabilities and shareholders' equity $124,824,577  $123,862,243  

Unaudited Consolidated Statements of Cash Flows
 (All amounts stated in US$)

  Three months ended March 31, 
  2023  2022  
Cash flows from operating activities:       
Net income $3,529,827  $5,805,888  
Adjustments to reconcile net income to net cash provided by operating activities:       
Depletion, depreciation, amortization, and accretion  1,773,006   1,389,219  
(Gain) loss on derivative contracts  (1,068,660)  971,904  
Settlement received (paid) on derivative contracts  363,300   (1,211,728) 
Settlement of asset retirement obligation  -   (73,998) 
Stock-based compensation expense  179,748   142,302  
Deferred income tax expense (benefit)  (12,108)  22,686  
Changes in assets and liabilities:       
Accounts receivable  2,396,066   (1,871,330) 
Other assets and liabilities  143,646   104,177  
Accounts payable, royalties payable and other accrued liabilities  (1,062,898)  267,058  
Income taxes payable  1,336,225   2,157,292  
Net cash provided by operating activities  7,578,152   7,703,470  
Cash flows from investing activities:       
Additions to unproved oil and gas properties  (106,069)  (92,600) 
Additions to proved oil and gas properties  (621,132)  (2,771,925) 
(Additions) disposals to gathering system properties  (12,423)  3,612  
Additions to land, buildings and property and equipment  (42,703)  -  
Purchases of short term investments  (30,138,743)  -  
Net cash used in investing activities  (30,921,070)  (2,860,913) 
Cash flows from financing activities:       
Buyback of common shares  (1,367,425)  -  
Exercise of stock options  -   209,312  
Dividends paid  (1,412,455)  (1,483,027) 
Net cash used in financing activities  (2,779,880)  (1,273,715) 
Effect of currency rates on cash, cash equivalents, and restricted cash  (2,600)  5,402  
(Decrease) increase in cash, cash equivalents, and restricted cash  (26,125,398)  3,574,244  
Cash, cash equivalents, and restricted cash, beginning of period  45,806,947   27,065,423  
Cash, cash equivalents, and restricted cash, end of period $19,681,549  $30,639,667  
Supplemental cash flow disclosures:       
Interest paid $17,216  $17,501  
Non-cash investing activities:       
Change in proved properties accrued in accounts payable and accrued liabilities $375,242  $(253,632) 
Change in gathering system accrued in accounts payable and accrued liabilities $9,201  $19,005  
Asset retirement obligation asset additions and adjustments $736  $6,684  

Adjusted EBITDA Reconciliation
 (All amounts stated in US$)

  Three months ended March 31, 
  2023  2022  
Net income $3,529,827  $5,805,888  
Add Back:       
Interest (income) expense, net  (462,325)  98  
Income tax expense  1,326,922   2,181,898  
Depreciation, depletion, amortization, and accretion  1,773,006   1,389,219  
Stock based compensation expense  179,748   142,302  
Gain on derivative contracts net of cash received or paid on settlement  (705,360)  (239,824) 
Foreign currency translation loss  (983)  5,402  
Adjusted EBITDA $5,640,835  $9,284,983  

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.

Free Cash Flow Reconciliation
 (All amounts stated in US$)

  Three months ended March 31
  2023  2022 
Net cash provided by operating activities $7,578,152  $7,703,470 
Less: Net cash used in investing activities (Capital Expenditures)  (782,327)  (2,860,913)
Free cash flow $6,795,825  $4,842,557 
Changes in working capital  (3,197,481)  4,839,153 
Free cash flow before Changes in Working Capital $3,598,344  $9,681,710 

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, adjusted to exclude changes in working capital. 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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