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Epsilon Energy Ltd. Announces Full Year 2020 Results

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Epsilon Energy Ltd.
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HOUSTON, March 25, 2021 (GLOBE NEWSWIRE) -- Epsilon Energy Ltd. (“Epsilon”) (NASDAQ: EPSN) today reported its financial results for the fourth quarter and full-year ended December 31, 2020.

Epsilon’s highlights for 2020 and material subsequent events following year end through the date of this release include:

  • Total Revenues of $24.4 million for the year as compared to $26.7 million for the same period of 2019.

  • Net after tax income of $0.9 million for the year as compared to $8.7 million for the same period of 2019.

  • Adjusted EBITDA of $15.7 million for the year as compared to $18.0 million for the same period of 2019.

  • Average net natural gas prices of $1.36/Mcf for the year as compared to $2.18/Mcf for the same period in 2019.

  • Cash and cash equivalents at the end of 2020 was $13.8 million as compared to $14.6 million at the end of 2019.

  • Total estimated proved natural gas reserves of 88.7 Bcf as of December 31, 2020 after 2020 production of 11.2 Bcf, and 371.3 Mbbl of proved oil and condensate reserves after 2020 production of 6.5 Mbbl.

  • Gathered and delivered 69.5 Bcf gross (24.3 Bcf net to Epsilon’s interest) during the year, or 190 MMcf/d through the Auburn Gas Gathering System.

  • Marcellus net gas production averaged 30.0 MMcf/d for the year as compared to 21.4 MMcf/d net gas production in 2019. Net gas production as of this release is approximately 24.6 MMcf/d (or 28.3 MMcf/d of working interest gas production) Epsilon has 9 gross (1.84 Net) wells offline for adjacent operations. The shut-in wells (1.84 Net) were producing, in aggregate, slightly more than 1.75 MMcf/d net (or 2.0 MMcf/d working interest gas production) prior to shut-in to accommodate current activity.

  • Hedged 4.0 Bcf of Q2 2021 – Q1 2022 natural gas production via Henry Hub costless collars with an average floor of $2.79 and an average ceiling of $3.29.

Michael Raleigh, CEO, commented, “Epsilon managed to achieve excellent results in 2020 despite a very challenged natural gas price environment and increased our produced volumes by 40% over the prior period in 2019. Natural gas prices rebounded in the first two months of 2021, but have subsequently weakened as natural gas supply appears to be adequate in the short term. We expect Northeast natural gas production to remain flat for the remainder of 2021 which should be supportive of more constructive prices as natural gas storage levels are currently 7% below the five year average and 21% below 2020 levels.

For the first quarter of 2021 we anticipate net gas production of 26- 28 MMcf/d (30 – 32 MMcfpd gross working interest production) and $4.7 - 5.3 million in EBITDA. Epsilon participated with the operator in the drilling of one gross well (.22 Net) in the Auburn Gas Gathering System during the first quarter. It is currently planned for this well to be completed and turned to production in the third quarter. In late 2020, Epsilon filed for and received four well permits from the PA DEP. Epsilon intends to pursue its plans to develop these locations as expeditiously as possible.”

Financial and Operating Results

Twelve months ended December 31,

2020

2019

Revenue by product - total period ($000)

Natural gas revenue ($000)

$

15,207

$

16,945

Volume (MMcfe)

11,204

7,757

Avg. Price ($/Mcfe)

$

1.36

$

2.18

Exit Rate (MMcfepd)

32.8

30.5

Oil and other liquids revenue ($000)

$

338

$

425

Volume (MBOE)

15

15

Avg. Price ($/Bbl)

$

22.66

$

29.24

Midstream gathering system revenue ($000)

$

8,880

$

9,320

Total Revenue

$

24,425

$

26,690

Capital Expenditures

Epsilon’s development capital expenditures were $3.8 million for the year ended December 31, 2020. A total of $1.3 million was spent on lagging completion costs during 2020 for four gross (1.18 Net) wells developed in 2019 in Pennsylvania. An additional $1.7 million was spent participating in the drilling and completing of nine gross (0.22 Net) wells during 2020 in Pennsylvania. The Auburn Gas Gathering system required maintenance capital of $0.7 million. Remaining capital expenditures were related to lease acquisition, permitting new wells to be drilled in Pennsylvania and drill planning.

During the first quarter of 2021, Epsilon participated with the operator in the drilling of one extended lateral well (.22 Net) in the Auburn GGS targeting both the upper and lower Marcellus. The well has been drilled to target depth and is awaiting completion operations. In addition, Epsilon has received four well permits from the PA DEP and is proceeding with well planning for the development of these wells as expeditiously as possible.

Fourth Quarter Results

Epsilon generated revenues of $5.9 million for the three months ended December 31, 2020 compared to $6.8 million for the three months ended December 31, 2019. The Company’s net revenue interest production was 2.60 Bcf in the fourth quarter primarily in Pennsylvania.

Realized natural gas prices averaged $1.45 per Mcf in the fourth quarter of 2020. Operating expenses for Marcellus Upstream operations in the fourth quarter were $1.6 million.

The Auburn Gas Gathering system delivered 15.3 Bcf of natural gas during the quarter as compared to 22.7 Bcf during the fourth quarter of 2019. Primary gathering volumes decreased 8.9% quarter over quarter from 14.6 Bcf to 13.3 Bcf. Imported cross-flow volumes decreased 75% from 8.0 Bcf to 2.0 Bcf.

Epsilon reported a net after tax income of $1.4 million attributable to shareholders or $0.06 per basic and diluted shares outstanding for the three months ended December 31, 2020, compared to net income of $2.0 million, and $0.08 per basic and diluted shares outstanding for the three months ended December 31, 2019.

For the three months ended December 31, 2020, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $4.0 million as compared to $4.5 million for the three months ended December 31, 2019. The decrease in Adjusted EBITDA was primarily due to the decrease in upstream revenue due to the lower natural gas prices.

Adjusted EBITDA

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.

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. Our assets are concentrated in areas with known hydrocarbon resources, which are conducive to multi-well, repeatable drilling programs. 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.

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 Raleigh
Chief Executive Officer
Michael.Raleigh@EpsilonEnergyLTD.com


EPSILON ENERGY LTD.
Audited Consolidated Statements of Operations
(All amounts stated in US$)

Year ended December 31,

2020

2019

Revenues from contracts with customers:

Gas, oil, NGLs and condensate revenue

$

15,545,552

$

17,369,963

Gas gathering and compression revenue

8,879,728

9,320,373

Total revenue

24,425,280

26,690,336

Operating costs and expenses:

Lease operating expenses

8,052,471

6,571,394

Gathering system operating expenses

429,749

1,337,409

Development geological and geophysical expenses

12,910

83,748

Depletion, depreciation, amortization, and accretion

9,557,891

7,387,681

Impairment of proved properties

1,760,000

Gain on sale of property

(1,375,000

)

Bad debt expense

General and administrative expenses:

Stock based compensation expense

849,631

510,460

Other general and administrative expenses

4,740,332

3,989,540

Total operating costs and expenses

25,402,984

18,505,232

Operating income (loss)

(977,704

)

8,185,104

Other income (expense):

Interest income

43,540

158,879

Interest expense

(114,515

)

(115,356

)

Gain on derivative contracts

2,503,655

4,246,057

Other income (expense)

(4,385

)

804

Other income, net

2,428,295

4,290,384

Net income before income tax expense

1,450,591

12,475,488

Income tax expense

575,420

3,777,489

NET INCOME

$

875,171

$

8,697,999

Currency translation adjustments

10,169

12,548

NET COMPREHENSIVE INCOME

$

885,340

$

8,710,547

Net income per share, basic

$

0.03

$

0.32

Net income per share, diluted

$

0.03

$

0.32

Weighted average number of shares outstanding, basic

25,122,501

27,129,430

Weighted average number of shares outstanding, diluted

25,122,501

27,129,430


EPSILON ENERGY LTD.
Audited Consolidated Balance Sheets
(All amounts stated in US$)

December 31,

December 31,

2020

2019

ASSETS

Current assets

Cash and cash equivalents

$

13,270,913

$

14,052,417

Accounts receivable

3,917,288

4,296,917

Fair value of derivatives

1,999,802

Prepaid income taxes

89,285

1,641,501

Other current assets

500,583

433,687

Total current assets

17,778,069

22,424,324

Non-current assets

Property and equipment:

Oil and gas properties, successful efforts method

Proved properties

133,902,723

130,819,256

Unproved properties

21,552,063

21,047,512

Accumulated depletion, depreciation, amortization and impairment

(98,200,111

)

(89,255,035

)

Total oil and gas properties, net

57,254,675

62,611,733

Gathering system

42,202,644

41,445,225

Accumulated depletion, depreciation, amortization and impairment

(32,101,624

)

(29,961,690

)

Total gathering system, net

10,101,020

11,483,535

Land

637,764

375,314

Buildings and other property and equipment, net

338,419

211,879

Total property and equipment, net

68,331,878

74,682,461

Other assets:

Restricted cash

565,858

561,294

Prepaid drilling costs

379

1,124

Total non-current assets

68,898,115

75,244,879

Total assets

$

86,676,184

$

97,669,203

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities

Accounts payable trade

$

1,592,451

$

2,828,495

Royalties payable

1,155,698

1,306,922

Accrued capital expenditures

139,766

627,356

Accrued gathering fees

512,796

373,929

Other accrued liabilities

1,002,935

858,188

Asset retirement obligation

106,734

1,503,978

Total current liabilities

4,510,380

7,498,868

Non-current liabilities

Asset retirement obligation

3,043,509

1,405,877

Deferred income taxes

10,102,852

12,401,464

Total non-current liabilities

13,146,361

13,807,341

Total liabilities

17,656,741

21,306,209

Commitments and contingencies (Note 10)

Shareholders' equity

Common shares, no par value, unlimited shares authorized and 23,985,799 issued and outstanding at December 31, 2020 and 26,790,985 shares issued and outstanding at December 31, 2019.

131,730,401

140,808,923

Additional paid-in capital

7,879,119

7,029,488

Accumulated deficit

(80,410,724

)

(81,285,895

)

Accumulated other comprehensive income

9,820,647

9,810,478

Total shareholders' equity

69,019,443

76,362,994

Total liabilities and shareholders' equity

$

86,676,184

$

97,669,203


EPSILON ENERGY LTD.
Audited Consolidated Statements of Cash Flows
(All amounts stated in US$)

Year ended December 31,

2020

2019

Cash flows from operating activities:

Net income

$

875,171

$

8,697,999

Adjustments to reconcile net income to net cash provided by operating activities:

Depletion, depreciation, amortization, and accretion

9,557,891

7,387,681

Impairment of proved properties

1,760,000

Gain on sale/disposal of properties

(1,375,000

)

Gain on derivative contracts

(2,503,655

)

(4,246,057

)

Cash received from settlements of derivative contracts

4,503,457

1,949,232

Settlement of asset retirement obligation

(79

)

Stock-based compensation expense

849,631

510,460

Deferred income tax expense (benefit)

(2,298,612

)

2,412,186

Changes in assets and liabilities:

Accounts receivable

379,629

745,217

Prepaid income taxes and other current assets

1,485,320

(1,625,244

)

Accounts payable, royalties payable and other accrued liabilities

207,613

(1,471,460

)

Net cash provided by operating activities

14,816,366

12,985,014

Cash flows from investing activities:

Acquisition of unproved oil and gas properties

(596,500

)

Additions to unproved oil and gas properties

(504,551

)

(952,345

)

Additions to proved oil and gas properties

(4,870,976

)

(9,411,916

)

Additions to gathering system properties

(731,046

)

(366,059

)

Additions to land, buildings and property and equipment

(419,125

)

(588,325

)

Prepaid drilling costs

745

(1,124

)

Proceeds from sale of leases

1,375,000

Net cash used in investing activities

(6,524,953

)

(10,541,269

)

Cash flows from financing activities:

Buyback of common shares

(9,078,522

)

(2,856,350

)

Exercise of stock options

54,250

Net cash used in financing activities

(9,078,522

)

(2,802,100

)

Effect of currency rates on cash, cash equivalents and restricted cash

10,169

12,548

(Decrease) in cash, cash equivalents and restricted cash

(776,940

)

(345,807

)

Cash, cash equivalents and restricted cash, beginning of period

14,613,711

14,959,518

Cash, cash equivalents and restricted cash, end of period

$

13,836,771

$

14,613,711

Supplemental cash flow disclosures:

Income taxes paid

$

1,320,000

$

2,794,422

Interest paid

$

114,515

$

119,138

Non-cash investing activities:

Change in proved properties accrued in accounts payable and accrued liabilities

$

(1,825,230

)

$

1,464,965

Change in gathering system accrued in accounts payable and accrued liabilities

$

26,373

$

(40,782

)

Asset retirement obligation asset additions and adjustments

$

37,722

$

1,169,903


EPSILON ENERGY LTD.
Adjusted EBITDA Reconciliation

(All amounts stated in US$)

Year ended December 31,

2020

2019

Net income (loss)

$

875,171

$

8,697,999

Add Back:

Net interest (income) expense

70,975

(43,523

)

Income tax expense (benefit)

575,420

3,777,489

Depreciation, depletion, amortization, and accretion

9,557,891

7,387,681

Impairment expense

1,760,000

Stock based compensation expense

849,631

510,460

(Gain) loss on derivative contracts net of cash received or paid on settlement

1,999,802

(2,296,825

)

Foreign currency translation (gain) loss

2,065

(437

)

Adjusted EBITDA

$

15,690,955

$

18,032,844