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Epsilon Reports First Quarter 2019 Results

/EIN News/ -- HOUSTON, May 14, 2019 (GLOBE NEWSWIRE) -- Epsilon Energy Ltd. (“Epsilon” or the “Company”) (NASDAQ: EPSN) today reported first quarter 2019 financial and operating results.

Michael Raleigh, CEO, commented, “As previously planned with our operator in NE Pennsylvania, we recently received well proposals to drill and complete four Lower Marcellus wells. The first well is scheduled to spud in June, and the rig will move in a continuous fashion to drill all planned locations. We expect the operator to commence completion operations in October once all the wells are drilled.  We anticipate that these wells will provide 9,300 feet of completed lateral net to Epsilon’s interest.

In the NW Stack, we began our appraisal program during the first quarter. We have finished drilling the first 1-mile Meramec horizontal well, and the rig has commenced drilling the second 1-mile horizontal Meramec appraisal well. Completion operations on the first appraisal well are expected to commence at the end of the month.

We anticipate meeting our 2019 budgeted capital program as previously guided.”

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

  • Total Revenues of $7.9 million for the quarter
  • Net after tax income of $1.4 million for the quarter
  • EBITDA of $4.4 million for the quarter.
  • Marcellus working interest (WI) gas production averaged 23 MMcf/d for the first quarter of 2019.  Working interest gas production as of this release is approximately 26 MMcf/d.
  • Gathered and delivered 25 Bcfe gross (8.7 Bcfe net to Epsilon’s interest) during the quarter through the Auburn System which represents approximately 84% of the designed throughput capacity. 
  • Auburn Gas gathering and compression services included third party gas of 0.9 Bcfe during the quarter or approximately 9.5 MMcf/d.

Financial and Operating Results

  Three months ended
  March 31, 
  2019   2018
Revenues ($000)          
Natural gas revenue $   5,435   $   4,846
Volume (MMcf)     1,823       1,900
Avg. Price ($/Mcf) $   2.98   $   2.55
Exit Rate (MMcfpd)     24.6       23.3
Oil and other liquids revenue $   73   $   156
Volume (MBO)     3.1       3.4
Avg. Price ($/Bbl) $   23.81   $   46.34
Gathering system revenue $   2,438   $   2,776
Total Revenues $   7,946   $   7,778

Capital Expenditures

Epsilon’s capital expenditures were $2.2 million for the three months ended March 31, 2019.  The spending was mainly used for the drilling and completion of four wells in Pennsylvania and maintenance of the Auburn Gas Gathering system. The remaining capital was deployed in Oklahoma for a bolt-on lease acquisition.

Marcellus Operational Guidance

The Operator finished the completions of 4 wells during the fourth quarter of 2018.

The table below details Epsilon’s well development status at March 31, 2019:

  March 31, 2019   December 31, 2018
  Gross  Net   Gross  Net
Producing 103 24.1   96 23.1
Shut-in 1 0.5   4 1.1
Waiting on pipeline - -   - -
Waiting on completion - -   4 0.4
Drilling - -   - -

Subsequent to quarter end, Epsilon received four well proposals from the Operator.

First Quarter Results

Epsilon generated revenues of $7.9 million for the three months ended March 31, 2019 compared to $7.8 million for the three months ended March 31, 2018.

Realized natural gas prices averaged $2.96 per Mcf for Marcellus Upstream operations in the first quarter of 2019. Operating expenses for Marcellus Upstream operations in the first quarter were $1.4 million.

The Auburn Gas Gathering system delivered 24.9 Bcfe of natural gas during the quarter as compared to 25.2 Bcfe during the fourth quarter of 2018.  Primary gathering volumes increased 16.6% quarter over quarter to 13.0 Bcfe.  Imported cross-flow volumes decreased 12.1% to 11.9 Bcfe.

Epsilon reported net after tax income of $1.4 million attributable to common shareholders or $0.05 per basic and diluted common share outstanding for the three months ended March 31, 2019, compared to net income of $2.2 million, and $0.08 per basic and diluted common share outstanding for the three months ended March 31, 2018. 

For the three months ended March 31, 2019, Epsilon's Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $4.4 million as compared to $4.8 million for the three months ended March 31, 2018. The decrease in Adjusted EBITDA was primarily due to lower net income.

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:


Michael Raleigh
Chief Executive Officer

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.

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

  Three months ended March 31,     
  2019    2018 
Oil, gas, NGLs and condensate revenue $   5,507,663     $   5,001,796  
Gas gathering and compression revenue     2,438,351         2,776,206  
Total revenue     7,946,014         7,778,002  
Operating costs and expenses:          
Lease operating expenses     1,718,293         1,930,214  
Gathering system operating expenses     312,787         429,764  
Depletion, depreciation, amortization, and accretion     1,825,731         1,790,619  
General and administrative expenses:          
Stock based compensation expense     133,720         83,047  
Other general and administrative expenses     1,339,562         724,874  
Total operating costs and expenses     5,330,093         4,958,518  
Operating income     2,615,921         2,819,484  
Other income and (expense):          
Interest income     42,691         907  
Interest expense     (27,609 )       (45,396 )
Gain (loss) on derivative contracts     (510,754 )       370,981  
Other income     23         293  
Other income (expense), net     (495,649 )       326,785  
Income before tax     2,120,272         3,146,269  
Income tax expense     746,596         987,042  
NET INCOME $   1,373,676     $   2,159,227  
Currency translation adjustments     10,792         (56,509 )
NET COMPREHENSIVE INCOME $   1,384,468     $   2,102,718  
Net income per share, basic $   0.05     $   0.08  
Net income per share, diluted $   0.05     $   0.08  
Weighted average number of shares outstanding, basic     27,392,755         27,521,504  
Weighted average number of shares outstanding, diluted     27,408,374         27,532,557  

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

      March 31,
    December 31,
Current assets            
Cash and cash equivalents   $ 16,591,331     $ 14,401,257  
Accounts receivable     3,981,775       5,042,134  
Prepaid income taxes     785,739       205,711  
Other current assets     419,201       244,233  
Total current assets     21,778,046       19,893,335  
Non-current assets            
Property and equipment:            
Oil and gas properties, successful efforts method            
Proved properties     120,179,795       118,851,574  
Unproved properties     20,357,273       19,498,666  
Accumulated depletion, depreciation, and amortization     (85,131,120 )     (83,807,401 )
Total oil and gas properties, net     55,405,948       54,542,839  
Gathering system     41,065,956       41,040,847  
Accumulated depletion, depreciation, and amortization     (28,609,797 )     (28,137,573 )
Total gathering system, net     12,456,159       12,903,274  
   Total property and equipment, net     67,862,107       67,446,113  
Other assets:            
Restricted cash     558,597       558,261  
Fair value of derivatives     190,428        
Total non-current assets     68,611,132       68,004,374  
Total assets   $ 90,389,178     $ 87,897,709  
Current liabilities            
Accounts payable trade   $ 4,108,523     $ 2,585,324  
Royalties payable     1,178,331       1,300,539  
Other accrued liabilities     683,651       2,156,304  
Fair value of derivatives     813,961       297,023  
Total current liabilities     6,784,466       6,339,190  
Non-current liabilities            
Asset retirement obligation     1,654,944       1,625,154  
Deferred income taxes     10,735,874       9,989,278  
Total non-current liabilities     12,390,818       11,614,432  
Total liabilities     19,175,284       17,953,622  
Commitments and contingencies (See Note 8)            
Shareholders' equity            
Common shares, no par value, unlimited shares authorized and 27,355,247 shares and 27,385,133 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively; 0 and 26,953 treasury shares at March 31, 2019 and December 31, 2018, respectively.     143,362,642       143,611,023  
Additional paid-in capital     6,652,748       6,519,028  
Accumulated deficit     (88,610,218 )     (89,983,894 )
Accumulated other comprehensive income     9,808,722       9,797,930  
Total shareholders' equity     71,213,894       69,944,087  
Total liabilities and shareholders' equity   $ 90,389,178     $ 87,897,709  

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

    Three months ended March 31, 
    2019   2018
Cash flows from operating activities:            
Net income   $   1,373,676     $   2,159,227  
Adjustments to reconcile net income to net cash provided by operating activities:            
Depletion, depreciation, amortization, and accretion       1,825,731         1,790,619  
(Gain) loss on derivative contracts       510,754         (370,981 )
Cash received (paid) from settlements of derivative contracts       (184,244 )       106,456  
Stock-based compensation expense       133,720         83,047  
Deferred income tax expense (benefit)       746,596         (161,774 )
Changes in current assets and liabilities:            
Accounts receivable       1,060,359         (515,214 )
Prepaid income taxes and other current assets       (754,996 )       69,987  
Accounts payable, royalties payable and other accrued liabilities       (772,879 )       (774,088 )
Other long-term liabilities       —         35,431  
Net cash provided by operating activities       3,938,717         2,422,710  
Cash flows from investing activities:            
Acquisition of unproved oil and gas properties       (596,500 )       —  
Additions to unproved oil and gas properties       (262,107 )       (164,518 )
Additions to proved oil and gas properties       (586,815 )       (147,407 )
Additions to gathering system properties       (65,296 )       (6,239 )
Changes in restricted cash       (336 )       (539 )
Net cash used in investing activities       (1,511,054 )       (318,703 )
Cash flows from financing activities:            
Buyback of common shares       (248,381 )       (54,311 )
Net cash used in financing activities       (248,381 )       (54,311 )
Effect of currency rates on cash and cash equivalents       10,792         (56,509 )
Increase in cash and cash equivalents       2,190,074         1,993,187  
Cash and cash equivalents, beginning of year       14,401,257         9,998,853  
Cash and cash equivalents, end of year   $   16,591,331     $   11,992,040  
Supplemental cash flow disclosures:            
Income taxes paid   $   580,000     $   1,376,493  
Interest paid   $   31,391     $   45,396  
Non-cash investing activities:            
Change in proved properties accrued in accounts payable and accrued liabilities   $   741,406     $   18,785  
Change in gathering system accrued in accounts payable and accrued liabilities   $   (40,187 )   $   14,969  
Asset retirement obligation asset additions and adjustments   $   2     $   46  

Adjusted EBITDA Reconciliation
(All amounts stated in US $000)

(in thousands of dollars)   Three months ended March 31, 
    2019   2018
Net income   $   1,374     $   2,159  
Add Back:            
Net interest (income) expense       (15 )       44  
Income tax provision       747         987  
Depreciation, depletion, amortization, and accretion       1,826         1,791  
Stock based compensation expense       134         83  
Net change in unrealized (gain) loss on commodity contracts       327         (264 )
Other income       —         —  
Adjusted EBITDA   $   4,393     $   4,800  

Epsilon defines Adjusted EBITDA as earnings before (1) net interest expense, (2) taxes, (3) depreciation, depletion, amortization and accretion expense, (4) impairments of oil and gas properties, (5) non-cash stock compensation expense, (6) unrealized gain on derivatives, and (7) other income.  Adjusted EBITDA is not a measure of financial performance as determined under IFRS and should not be considered in isolation from or as a substitute for net income or cash flow measures prepared in accordance with IFRS 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 oil and gas companies providing corresponding non-IFRS financial measures or that have different financing and capital structures or tax rates. These non-IFRS financial measures should be considered in addition to, but not as a substitute for, measures for financial performance prepared in accordance with IFRS. The table above sets forth a reconciliation of Adjusted EBITDA to net income, which is the most directly comparable measure of financial performance calculated under IFRS and should be reviewed carefully.

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