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Epsilon Reports First Quarter 2020 Results

HOUSTON, May 13, 2020 (GLOBE NEWSWIRE) -- Epsilon Energy Ltd. (“Epsilon” or the “Company”) (EPSN) today reported first quarter 2020 financial and operating results and material subsequent events following the end of the quarter through the date of this release.

  • Marcellus net revenue interest (NRI) gas production averaged 29.4 MMcf/d (Working Interest of 33.8 MM/d).
     
  • Auburn System gathered and delivered 23 Bcfe gross (8.1 Bcfe net to Epsilon’s interest) which represents approximately 77% of the designed throughput capacity. 
     
  • Total Revenues of $6.4 MM for the quarter
     
  • Generated EBITDA of $4.6 MM and free cash flow (FCF) of $2.9 MM for the quarter.
     
  • Net income before tax of $0.64 MM for the quarter following a $1.76 MM write down of the Oklahoma producing assets resulting from the recent drastic price deterioration due to global oversupply of oil and demand destruction due to the COVID-19 virus.
     
  • Returned $1.5 MM to shareholders through the purchase of 488,029 shares through March 31, 2020 for an average price of $3.07/share
     
  • Realized gas prices of $1.47/Mcfe, (excluding hedges) and $1.99/Mcfe (including hedges)
     
  • Operating expenses including SG&A of $1.18/Mcfe
     
  • Cash at quarter end of $15.4 MM

Michael Raleigh, CEO, commented, “During the first quarter, Epsilon participated in the drilling of four gross wells (0.16 Net) in the Marcellus. Two of the four wells are long reach (>12,000 feet) horizontals. These wells were completed in April and are currently in the process of initial flow back and testing. Given the early indication of productivities and the cost efficiencies of the extended laterals, we believe this group of wells will exhibit attractive rates of return on invested capital. The team has now turned its attention to development plan options for 2021. We look forward to updating our shareholders regarding these plans at the appropriate time.

“We expect the recent precipitous decline in oil prices and distress throughout the E&P industry will lead to much less capital deployed and result in declines to associated natural gas production. Recent winter 2020/2021 supply forecasts in Appalachia are estimated to be approximately 2 Bcf/d below winter 2019/2020 levels. The supply/demand forecasts suggest we could expect a constructive natural gas pricing environment during calendar 2021.”

Financial and Operating Results

  Three months ended
  March 31,
  2020    2019 
Revenues          
Natural gas revenue $   4,019,764   $   5,434,935
Volume (MMcf)   2,727     1,823
Avg. Price ($/Mcf) $ 1.47   $ 2.98
PA Exit Rate (MMcfpd)   33.1     24.6
Oil and other liquids revenue $   91,380   $   72,728
Volume (MBO)   3.1     3.1
Avg. Price ($/Bbl) $ 29.22   $ 23.81
Gathering system revenue $   2,316,702   $   2,438,351
Total Revenues $   6,427,846   $   7,946,014
           

Capital Expenditures

Epsilon’s capital expenditures were $1.4 million for the three months ended March 31, 2020.  This capital was mainly residual spending for the completion of four wells drilled in Q4 2019 in Pennsylvania as well as maintenance of the Auburn Gas Gathering system.

Marcellus Operational Guidance

The operator spud and finished drilling 4 gross (0.16 net to EPSN) new wells during the first quarter of 2020. Subsequent to quarter end, these four new wells were completed and prepared to turn to production. As of the date of this release, these wells are in the process of initial flow back and testing.

First Quarter Results

Epsilon generated revenues of $6.4 million for the three months ended March 31, 2020 compared to $7.9 million for the three months ended March 31, 2019.

Realized natural gas prices averaged $1.47/Mcf (excluding hedges) for Marcellus Upstream operations in the first quarter of 2020. Operating expenses for Marcellus Upstream operations in the first quarter were $1.8 million.

The Auburn Gas Gathering system delivered 23.3 Bcfe of natural gas during the quarter as compared to 22.7 Bcfe during the fourth quarter of 2019.  Primary gathering volumes increased 4.4% quarter over quarter to 15.1 Bcfe.  Imported cross-flow volumes increased 2.6% to 8.2 Bcfe.

Epsilon reported net after tax income of $0.3 million attributable to common shareholders or $0.01 per basic and diluted common share outstanding for the three months ended March 31, 2020, compared to net income of $1.4 million, and $0.05 per basic and diluted common share outstanding for the three months ended March 31, 2019. 

For the three months ended March 31, 2020, Epsilon's Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $4.6 million as compared to $4.4 million for the three months ended March 31, 2019.

Recent Developments

Epsilon is closely monitoring the current and potential impacts of the COVID-19 pandemic on all aspects of our business and geographies, including how it has impacted, and may in the future impact our operations, financial results, liquidity, contractors, customers, employees and vendors. Epsilon has also taken, and is continuing to take, proactive steps to manage any disruption in our business caused by COVID-19. For instance, the Company was an early adopter in employing a work-from-home system, even before any government mandate on non-essential businesses was enacted. Epsilon increased its technology platform, infrastructure and security to allow for a work-from-home environment ahead of the actual need, and therefore, once the hypothetical became a reality, we believe Epsilon was ahead of many companies in this respect. Epsilon has also deployed additional layered safety protocols at our office in order to keep our employees safe and to keep our operations running without material disruption.

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 and the Anadarko Basin in Oklahoma.

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

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

  Three months ended March 31, 
  2020    2019 
Revenues from contracts with customers:          
Gas, oil, NGLs and condensate revenue $ 4,111,144     $ 5,507,663  
Gas gathering and compression revenue   2,316,702       2,438,351  
Total revenue   6,427,846       7,946,014  
           
Operating costs and expenses:          
Lease operating expenses   2,047,767       1,718,293  
Gathering system operating expenses   97,778       312,787  
Development geological and geophysical expenses   2,629        
Depletion, depreciation, amortization, and accretion   2,414,376       1,825,731  
Impairment of proved properties   1,760,000        
General and administrative expenses:          
Stock based compensation expense   173,919       133,720  
Other general and administrative expenses   1,008,113       1,339,562  
Total operating costs and expenses   7,504,582       5,330,093  
Operating income   (1,076,736 )     2,615,921  
           
Other income (expense):          
Interest income   21,529       42,691  
Interest expense   (28,006 )     (27,609 )
Gain (loss) on derivative contracts   1,721,018       (510,754 )
Other income (expense)   (2,225 )     23  
Other income (expense), net   1,712,316       (495,649 )
           
Income before income tax expense   635,580       2,120,272  
Income tax expense   325,281       746,596  
NET INCOME $ 310,299     $ 1,373,676  
Currency translation adjustments   (114 )     10,792  
NET COMPREHENSIVE INCOME $ 310,185     $ 1,384,468  
           
Net income per share, basic $ 0.01     $ 0.05  
Net income per share, diluted $ 0.01     $ 0.05  
Weighted average number of shares outstanding, basic   26,565,084       27,392,755  
Weighted average number of shares outstanding, diluted   26,565,084       27,408,374  
               

EPSILON ENERGY LTD.
Interim Unaudited Condensed Consolidated Statements of Financial Position
(All amounts stated in US$)

  March 31,    December 31, 
  2020    2019 
ASSETS          
Current assets          
Cash and cash equivalents $ 15,410,599     $ 14,052,417  
Accounts receivable   3,766,761       4,296,917  
Fair value of derivatives   2,374,878       1,999,802  
Prepaid income taxes   1,250,912       1,641,501  
Other current assets   345,736       433,687  
Total current assets   23,148,886       22,424,324  
Non-current assets          
Property and equipment:          
Oil and gas properties, successful efforts method          
Proved properties   131,965,089       130,819,256  
Unproved properties   21,109,490       21,047,512  
Accumulated depletion, depreciation, amortization and impairment   (92,842,748 )     (89,255,035 )
Total oil and gas properties, net   60,231,831       62,611,733  
Gathering system   41,525,671       41,445,225  
Accumulated depletion, depreciation, amortization and impairment   (30,493,041 )     (29,961,690 )
Total gathering system, net   11,032,630       11,483,535  
Land   375,314       375,314  
Buildings and other property and equipment, net   352,302       211,879  
   Total property and equipment, net   71,992,077       74,682,461  
Other assets:          
Restricted cash   562,647       561,294  
Prepaid drilling costs   880       1,124  
Total non-current assets   72,555,604       75,244,879  
Total assets $ 95,704,490     $ 97,669,203  
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Current liabilities          
Accounts payable trade $ 2,820,603     $ 2,828,495  
Royalties payable   1,102,167       1,306,922  
Accrued capital expenditures   93,930       627,356  
Accrued gathering fees   476,448       373,929  
Other accrued liabilities   567,958       858,188  
Asset retirement obligation   1,529,313       1,503,978  
Total current liabilities   6,590,419       7,498,868  
Non-current liabilities          
Asset retirement obligation   1,434,573       1,405,877  
Deferred income taxes   12,331,986       12,401,464  
Total non-current liabilities   13,766,559       13,807,341  
Total liabilities   20,356,978       21,306,209  
Commitments and contingencies (Note 10)          
Shareholders' equity          
Common shares, no par value, unlimited shares authorized and 26,790,982 issued  and 26,302,953 shares outstanding at March 31, 2020, and 26,790,982 shares issued and outstanding at December 31, 2019.   140,808,923       140,808,923  
Treasury shares, 488,029 at March 31, 2019   (1,499,586 )      
Additional paid-in capital   7,203,407       7,029,488  
Accumulated deficit   (80,975,596 )     (81,285,895 )
Accumulated other comprehensive income   9,810,364       9,810,478  
Total shareholders' equity   75,347,512       76,362,994  
Total liabilities and shareholders' equity $ 95,704,490     $ 97,669,203  
           

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

  Three months ended March 31, 
  2020   2019
Cash flows from operating activities:          
Net income $ 310,299     $ 1,373,676  
Adjustments to reconcile net income to net cash provided by operating activities:          
Depletion, depreciation, amortization, and accretion   2,414,376       1,825,731  
Impairment of proved properties   1,760,000        
(Gain) loss on derivative contracts   (1,721,018 )     510,754  
Cash received from (paid for) settlements of derivative contracts   1,345,942       (184,244 )
Stock-based compensation expense   173,919       133,720  
Deferred income tax expense (benefit)   (69,478 )     746,596  
Changes in assets and liabilities:          
Accounts receivable   530,156       1,060,359  
Prepaid income taxes and other current assets   478,540       (754,996 )
Accounts payable, royalties payable and other accrued liabilities   (9,215 )     (772,879 )
Net cash provided by operating activities   5,213,521       3,938,717  
Cash flows from investing activities:          
Acquisition of unproved oil and gas properties         (596,500 )
Additions to unproved oil and gas properties   (61,978 )     (262,107 )
Additions to proved oil and gas properties   (2,045,440 )     (586,815 )
Additions to gathering system properties   (101,472 )     (65,296 )
Additions to land, buildings and property and equipment   (145,640 )      
Prepaid drilling costs   244        
Net cash used in investing activities   (2,354,286 )     (1,510,718 )
Cash flows from financing activities:          
Buyback of common shares   (1,499,586 )     (248,381 )
Net cash used in financing activities   (1,499,586 )     (248,381 )
Effect of currency rates on cash, cash equivalents and restricted cash   (114 )     10,792  
Increase in cash, cash equivalents and restricted cash   1,359,535       2,190,410  
Cash, cash equivalents and restricted cash, beginning of period   14,613,711       14,959,518  
Cash, cash equivalents and restricted cash, end of period $ 15,973,246     $ 17,149,928  
           
Supplemental cash flow disclosures:          
Income taxes paid $     $ 580,000  
Interest paid $ (28,006 )   $ 31,391  
           
Non-cash investing activities:          
Change in proved properties accrued in accounts payable and accrued liabilities $ (903,544 )   $ 741,406  
Change in gathering system accrued in accounts payable and accrued liabilities $ (21,026 )   $ (40,187 )
Asset retirement obligation asset additions and adjustments $ 3,937     $ 2  
           

EPSILON ENERGY LTD.
Free Cash Flow Reconciliation
(All amounts stated in US$)

  Three months ended March 31, 
  2020   2019
Net income $ 310,299     $ 1,373,676  
Add Back:          
Net interest (income) expense   6,477       (15,082 )
Income tax expense   325,281       746,596  
Depreciation, depletion, amortization, and accretion   2,414,376       1,825,731  
Impairment expense   1,760,000        
Stock based compensation expense   173,919       133,720  
(Gain) loss on derivative contracts net of cash received or paid on settlement   (375,076 )     326,510  
Foreign currency translation (gain) loss   2,225       (23 )
Adjusted EBITDA $ 4,617,501     $ 4,391,128  
               

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. The table below sets forth a reconciliation of net income to Adjusted EBITDA for the three months ended March 31, 2020 and 2019, which is the most directly comparable measure of financial performance calculated under U.S. GAAP and should be reviewed carefully.

EPSILON ENERGY LTD.
Free Cash Flow Reconciliation
(All amounts stated in US$)

  Three months ended March 31, 
  2020   2019
Net cash provided by operating activities $ 5,213,521     $ 3,938,717  
Less: Net cash used in investing activities (Capital Expenditures)   (2,354,286 )     (1,510,718 )
Free cash flow $ 2,859,235     $ 2,427,999  
           

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, or amounts spent to buys back shares. Therefore, we believe it is important to view FCF as supplemental to our entire statement of cash flows.