HOUSTON, March 18, 2020 (GLOBE NEWSWIRE) -- Epsilon Energy Ltd. (“Epsilon”) (NASDAQ: EPSN) today reported its financial results for the fourth quarter and full-year ended December 31, 2019.     

Epsilon’s highlights for 2019 and material subsequent events following year end through the date of this release include:

  • Total Revenues of $26.7 million for the year as compared to $29.7 million for the same period of 2018.
  • Net after tax income of $8.7 million for the year as compared to $6.7 million for the same period of 2018.
  • Adjusted EBITDA of $18.0 million for the year as compared to $15.6 million for the same period of 2018.
  • Marcellus net gas production averaged 21.4 MMcf/d for the year as compared to 20.8 MMcf/d net gas production in 2018.  Net gas production as of this release is approximately 27.8 MMcf/d (or 32 MMcf/d of gross working interest gas production).
  • Total estimated proved natural gas reserves of 124 Bcf as of December 31, 2019 after 2019 production of 7.8 Bcf, and 116 Mbbl of proved oil and condensate reserves after 2019 production of 5.9 Mbbl.
  • Gathered and delivered 87.8 Bcf gross (30.7 Bcf net to Epsilon’s interest) during the year, or 241 MMcf/d through the Auburn System which represents approximately 73% of designed throughput capacity.

Michael Raleigh, CEO, commented, “During 2019, Epsilon delivered upon its guidance of adding at least 10,000 net feet of completed lateral in the Marcellus.  The company ended the year with 124 Bcf of proved natural gas reserves, which represents an increase of 5 Bcf despite lower natural gas prices and net production of 7.8 Bcf.  While the current environment remains challenging, we are well prepared for an eventual turnaround.

For the first quarter of 2020 we anticipate net gas production of 25- 27 MMcf/d (29 - 31MMcfpd gross working interest production) and $4 - 4.5MM in EBITDA. Epsilon’s objective is to pursue capital investments that provide a suitable rate of return to our shareholders.  As such, we are deferring the majority of our 2020 drilling budget in response to the lower current natural gas prices.  However, we remain active in optimizing our assets to improve return to shareholders.  In February, we lowered the operating pressure of the Auburn GGS which increased both Epsilon’s net production and Auburn compression facility throughput without any investment of capital. Further compressor modifications may require some minor additional capital. We will consider additional operating pressure reductions if appropriate to manage our net production and midstream throughput as efficiently as possible throughout the year.

Natural gas prices declined throughout 2019 and into the first quarter of 2020 as growth in supply outpaced growth in demand and normal winter heating demand failed to materialize. We believe that the industry has begun to self-correct through much needed capital discipline as current market conditions are not sustainable. We expect Northeast natural gas production to flatten and then decline throughout 2020. In addition, the recently announced reduction in oil focused drilling due to the dramatic decrease in crude oil prices will result in lower future associated natural gas supply, thereby supporting future natural gas pricing improvement.”

Financial and Operating Results

   Twelve months ended December 31,
    2019  2018
Revenue by product - total period ($000)    
 Natural gas revenue ($000)  16,945  19,031
 Volume (MMcfe)  7,757  7,563
 Avg. Price ($/Mcfe) $2.18 $2.52
 Exit Rate (MMcfepd)  30.5  21.2
 Oil and other liquids revenue ($000) $ 425 $ 671
 Volume (MBOE)  15  17
 Avg. Price ($/Bbl) $29.24 $39.31
 Midstream gathering system revenue ($000) $ 9,320 $ 9,982
 Total Revenue $ 26,690 $ 29,684

Capital Expenditures

Epsilon’s development capital expenditures were $11.2 million for the year ended December 31, 2019.  A total of $7.6 million was spent participating in the drilling and completing four gross (1.07 Net) wells in Pennsylvania as well as completing four gross (0.39 Net) wells drilled in 2018. The Auburn Gas Gathering system required maintenance capital of $0.3 million. In Oklahoma, the Company spent $0.7 million drilling & completing one gross well (0.1 Net), and $2.6 million drilling, but, not completing, a second gross well (0.85 Net).  Remaining capital expenditures were related to lease acquisition as well as seismic data for portions of the Company’s Oklahoma property.  

Due to current market conditions, Epsilon has recently reduced the previous capital budget for 2020 to $2 million which will include participating in the drilling and completing of four gross (0.14 Net) wells in the Marcellus as well as maintenance capital for the Auburn GGS.

Fourth Quarter Results

Epsilon generated revenues of $6.8 million for the three months ended December 31, 2019 compared to $8.5 million for the three months ended December 31, 2018.  The Company’s net revenue interest production was 2.28 Bcf in the fourth quarter primarily in Pennsylvania.

Realized natural gas prices averaged $1.91 per Mcf in the fourth quarter of 2019.  Operating expenses for Marcellus Upstream operations in the fourth quarter were $1.5 million.

The Auburn Gas Gathering system delivered 22.7 Bcf of natural gas during the quarter as compared to 25.2 Bcf during the fourth quarter of 2018.  Primary gathering volumes increased 28.1% quarter over quarter to 14.6 Bcf.  Imported cross-flow volumes decreased 41.3% to 8.1 Bcf.

Epsilon reported a net after tax income of $2.0 million attributable to shareholders or $0.08 per basic and diluted shares outstanding for the three months ended December 31, 2019, compared to net income of $1.4 million, and $0.05 per basic and diluted shares outstanding for the three months ended December 31, 2018. 

For the three months ended December 31, 2019, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $4.5 million as compared to $3.4 million for the three months ended December 31, 2018. The increase in Adjusted EBITDA was primarily due to the increase in upstream revenue due to the turning online of four new wells in Pennsylvania.

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. 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 U.S. GAAP and should be reviewed carefully.

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 areas of operation are the Marcellus basin in northeast Pennsylvania and the Anadarko basin in Oklahoma.  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:


Michael Raleigh
Chief Executive Officer

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

  Year ended December 31,  
  2019  2018  
Revenues from contracts with customers:        
Gas, oil, NGLs and condensate revenue $17,369,963  $19,702,643  
Gas gathering and compression revenue  9,320,373   9,981,562  
Total revenue  26,690,336   29,684,205  
Operating costs and expenses:       
Lease operating expenses  6,571,394   6,665,856  
Gathering system operating expenses  1,337,409   1,279,821  
Development geological and geophysical expenses  83,748     
Depletion, depreciation, amortization, and accretion  7,387,681   7,181,753  
(Gain) loss on sale/disposal of property  (1,375,000)  189,142  
General and administrative expenses:       
Stock based compensation expense  510,460   330,232  
Other general and administrative expenses  3,989,540   4,605,506  
Total operating costs and expenses  18,505,232   20,252,310  
Operating income  8,185,104   9,431,895  
Other income (expense):       
Interest income  158,879   12,087  
Interest expense  (115,356)  (140,615) 
Gain (loss) on derivative contracts  4,246,057   (1,938,465) 
Other income (expense)  804   39,583  
Other income (expense), net  4,290,384   (2,027,410) 
Income before income tax expense  12,475,488   7,404,485  
Income tax expense  3,777,489   742,425  
NET INCOME $8,697,999  $6,662,060  
Currency translation adjustments  12,548   (115,306) 
NET COMPREHENSIVE INCOME $8,710,547  $6,546,754  
Net income per share, basic $0.32  $0.24  
Net income per share, diluted $0.32  $0.24  
Weighted average number of shares outstanding, basic  27,129,430   27,462,788  
Weighted average number of shares outstanding, diluted  27,129,430   27,474,125  

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

  December 31,  December 31,  
  2019  2018  
Current assets       
Cash and cash equivalents $14,052,417  $14,401,257  
Accounts receivable  4,296,917   5,042,134  
Fair value of derivatives  1,999,802     
Prepaid income taxes  1,641,501   205,711  
Other current assets  433,687   244,233  
Total current assets  22,424,324   19,893,335  
Non-current assets       
Property and equipment:       
Oil and gas properties, successful efforts method       
Proved properties  130,819,256   118,851,574  
Unproved properties  21,047,512   19,498,666  
Accumulated depletion, depreciation, and amortization  (89,255,035)  (83,807,401) 
Total oil and gas properties, net  62,611,733   54,542,839  
Gathering system  41,445,225   41,040,847  
Accumulated depletion, depreciation, and amortization  (29,961,690)  (28,137,573) 
Total gathering system, net  11,483,535   12,903,274  
Land  375,314     
Buildings and other property and equipment, net  211,879     
Total property and equipment, net  74,682,461   67,446,113  
Other assets:       
Restricted cash  561,294   558,261  
Prepaid drilling costs  1,124     
Total non-current assets  75,244,879   68,004,374  
Total assets $97,669,203  $87,897,709  
Current liabilities       
Accounts payable trade $2,828,495  $1,762,586  
Royalties payable  1,306,922   1,300,539  
Accrued capital expenditures  627,356   522,437  
Accrued gathering fees  373,929   300,301  
Other accrued liabilities  858,188   2,156,304  
Fair value of derivatives     297,023  
Asset retirement obligation  1,503,978     
Total current liabilities  7,498,868   6,339,190  
Non-current liabilities       
Asset retirement obligation  1,405,877   1,625,154  
Deferred income taxes  12,401,464   9,989,278  
Total non-current liabilities  13,807,341   11,614,432  
Total liabilities  21,306,209   17,953,622  
Commitments and contingencies (Note 10)       
Shareholders' equity       
Common shares, no par value, unlimited shares authorized and 26,790,985 issued and outstanding at December 31, 2019 and 27,385,133 shares issued and 27,358,180 shares outstanding at December 31, 2018.  140,808,923   143,705,441  
Treasury shares, 26,953 shares issued at December 31, 2018     (94,418) 
Additional paid-in capital  7,029,488   6,519,028  
Accumulated deficit  (81,285,895)  (89,983,894) 
Accumulated other comprehensive income  9,810,478   9,797,930  
Total shareholders' equity  76,362,994   69,944,087  
Total liabilities and shareholders' equity $97,669,203  $87,897,709  

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

  Year ended December 31,  
  2019  2018  
Cash flows from operating activities:       
Net income $8,697,999  $6,662,060  
Adjustments to reconcile net income to net cash provided by operating activities:       
Depletion, depreciation, amortization, and accretion  7,387,681   7,181,753  
(Gain) loss on sale/disposal of properties  (1,375,000)  189,142  
(Gain) loss on derivative contracts  (4,246,057)  1,938,465  
Cash received from (paid for) settlements of derivative contracts  1,949,232   (1,381,898) 
Stock-based compensation expense  510,460   330,232  
Deferred income tax expense (benefit)  2,412,186   (572,405) 
Changes in assets and liabilities:       
Accounts receivable  745,217   (1,707,239) 
Prepaid income taxes and other current assets  (1,625,244)  (173,513) 
Accounts payable, royalties payable and other accrued liabilities  (1,471,460)  (545,286) 
Other long-term liabilities     (1,615,313) 
Net cash provided by operating activities  12,985,014   10,305,998  
Cash flows from investing activities:       
Acquisition of unproved oil and gas properties  (596,500)  (260,000) 
Acquisition of proved oil and gas properties     (4,992) 
Additions to unproved oil and gas properties  (952,345)  (1,787,114) 
(Additions to) refunds of proved oil and gas properties  (9,411,916)  (22,481) 
Additions to gathering system properties  (366,059)  (148,360) 
Additions to land, buildings and other fixed assets  (588,325)    
Prepaid drilling costs  (1,124)    
Proceeds from sale of properties  1,375,000     
Net cash used in investing activities  (10,541,269)  (2,222,947) 
Cash flows from financing activities:       
Buyback of common shares  (2,856,350)  (663,944) 
Exercise of stock options  54,250     
Repayment of revolving line of credit     (2,900,000) 
Net cash used in financing activities  (2,802,100)  (3,563,944) 
Effect of currency rates on cash, cash equivalents and restricted cash  12,548   (115,306) 
Increase (decrease) in cash, cash equivalents and restricted cash  (345,807)  4,403,801  
Cash, cash equivalents and restricted cash, beginning of year  14,959,518   10,555,717  
Cash, cash equivalents and restricted cash, end of year $14,613,711  $14,959,518  
Supplemental cash flow disclosures:       
Income taxes paid $2,794,422  $4,130,493  
Interest paid $119,138  $136,833  
Non-cash investing activities:       
Change in proved properties accrued in accounts payable and accrued liabilities $1,464,965  $(587,472) 
Change in gathering system accrued in accounts payable and accrued liabilities $(40,782) $(48,961) 
Asset retirement obligation asset additions and adjustments $1,169,903  $(135,900) 

Adjusted EBITDA Reconciliation
 (All amounts stated in US$)

  Year ended December 31,  
  2019  2018  
Net income  $8,697,999  $6,662,060  
Add Back:       
Net interest (income) expense  (43,523)  128,528  
Income tax expense  3,777,489   742,425  
Depreciation, depletion, amortization, and accretion  7,387,681   7,181,753  
Stock based compensation expense  510,460   330,232  
(Gain) loss on derivative contracts net of cash received or paid on settlement  (2,296,825)  556,567  
Foreign currency translation (gain) loss  (437)  (1,330) 
Adjusted EBITDA $18,032,844  $15,600,235