HOUSTON, May 11, 2022 (GLOBE NEWSWIRE) -- 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.
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.
