Epsilon Reports Third Quarter 2022 Results

Rhea-AI Summary

Epsilon Energy Ltd. (NASDAQ: EPSN) reported a strong third quarter for 2022, with net income of $9.6 million, a 7% increase in total revenues to $21.2 million, and Adjusted EBITDA at $16.5 million.

The company maintained production levels at 27.6 MMcfe/d and achieved a heightened price of $7.54/Mcfe. Additionally, Epsilon generated $11.2 million in free cash flow, increased cash reserves to $40.8 million, and returned $3.1 million to shareholders through share buybacks and dividends.

Positive

• Net income reached $9.6 million, maintaining profitability.
• Total revenues increased by 7%, reaching $21.2 million.
• Adjusted EBITDA grew by 6%, totaling $16.5 million.
• Free cash flow generated was $11.2 million.
• Cash reserves increased by 32% to $40.8 million.
• No debt reported, ensuring a strong balance sheet.

Negative

• Net income decreased from $10.6 million in the prior quarter.
• Natural gas production volume dropped 5% quarter-over-quarter.

REPORTS NET INCOME OF $9.6 MILLION, ADJUSTED EBITDA OF $16.5 MILLION AND FREE CASH FLOW OF $11.2 MILLION

HOUSTON, Nov. 10, 2022 (GLOBE NEWSWIRE) -- Epsilon Energy Ltd. (“Epsilon” or the “Company”) (NASDAQ: EPSN) today reported third quarter 2022 financial and operating results, as well as material subsequent events following the end of the quarter through the date of this release.

Third Quarter Highlights:

• Maintained total net revenue interest (NRI) production of 27.6 MMcfe/d (Working Interest of 32.0 MMcfe/d) for the three months ended September 30, 2022;
  
• Continued to realize strong prices of $7.54/Mcfe including hedges ($7.55/Mcfe excluding hedges) for the three months ended September 30, 2022;
  
• Reported total revenues of $21.2 million, an increase of 7% compared to the prior quarter:
  
  • $19.2 million from natural gas, oil, and NGL sales;
    
  • $2.1 million from gathering and compression fees through our ownership in the Auburn Gas Gathering System, after eliminating revenue earned from Epsilon production ($0.37 million);
• Increased Adjusted EBITDA by 6% from the prior quarter to $16.5 million for the third quarter and $41.5 million year-to-date in 2022;
  
• Generated net cash from operations of $13.7 million and $29.4 million for the three and nine months ended September 30, 2022;
  
• Generated Free cash flow (FCF) before changes in working capital of $11.2 million and $26.0 million for the three and nine months ended September 30, 2022;
  
• Grew cash at quarter end by 32% from the prior quarter to $40.8 million while maintaining a strong, debt-free balance sheet;
  
• Returned a total of $3.1 million to shareholders in the third quarter of 2022:
  
  • $1.68 million through the repurchase of 285,400 shares, representing a 1% reduction of shares outstanding
  • $1.45 million through the quarterly dividend
    

^{Note: Adjusted EBITDA and Free Cash Flow are Non-GAAP financial measures and are described and reconciled to the closest GAAP measure at the end of this release.}

Jason Stabell, Epsilon’s Chief Executive Officer, commented, “We had a strong third quarter operationally and financially as we continue to generate significant free cash flow. A strong market for natural gas coupled with the higher than forecasted Koromlan 107HC well results, helped drive an increase in sequential quarterly revenue of 7%. Our cash balance grew by more than $9 million in the quarter, to over $40 million, and we remain largely unhedged with no debt.

The Koromlan well has been on-line since mid-August and has produced well above our pre-drill estimates with cumulative gross production of over 3.9 Bcf (EPSN 16% NRI). The Koromlan is a long lateral (nearly 14,000 ft.) completed in the Lower Marcellus. No material capital expenditures are expected in the fourth quarter of this year.

With our strong balance sheet, we have begun to actively pursue new opportunities. With our deep knowledge and long history in the basin, our initial focus will be on the Marcellus/Utica. We are poised for continued success in the current commodity price environment and are well-positioned to pursue attractive organic and inorganic growth opportunities.”

Financial and Operating Results

		Three months ended								Nine months ended
		September 30,								September 30,
		2022				2021				2022				2021
Revenues
Natural gas revenue		$	17,893,822			$	9,511,357			$	44,581,254			$	20,950,378
Volume (MMcf)			2,419				2,753				7,094				7,767
Avg. Price ($/Mcf)		$	7.40			$	3.46			$	6.28			$	2.70
Natural gas liquids revenue		$	497,843			$	490,535			$	1,500,668			$	588,685
Volume (MBO)			12.5				14.4				38.5				18.9
Avg. Price ($/Bbl)		$	39.91			$	34.02			$	38.96			$	31.13
Oil and condensate revenue		$	779,456			$	1,060,551			$	2,484,360			$	1,201,289
Volume (MBO)			7.6				15.0				24.1				17.4
Avg. Price ($/Bbl)		$	102.26			$	70.80			$	103.21			$	69.04
Gathering system revenue		$	2,072,806			$	2,038,616			$	6,180,747			$	5,891,868
Total Revenues		$	21,243,927			$	13,101,059			$	54,747,029			$	28,632,220

Third Quarter Results

Epsilon generated revenues of $21.2 million for the three months ended September 30, 2022, an increase of 7% compared to $19.9 million for the three months ended June 30, 2022.

Epsilon reported net after tax income of $9.6 million attributable to common shareholders or $0.42 per basic and $0.41 per diluted common share outstanding for the three months ended September 30, 2022, compared to net after tax income of $10.6 million, and $0.45 per basic and $0.44 per diluted common share outstanding for the three months ended June 30, 2022.

For the three months ended September 30, 2022, Epsilon's Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $16.5 million an increase of 6% as compared to $15.6 million for the three months ended June 30, 2022.

Epsilon’s capital expenditures were $1.6 million for the three months ended September 30, 2022. This capital was mainly related to the completion of one gross (0.16 net to EPSN) well in Pennsylvania and the completion of one gross (0.15 net to EPSN) well in Oklahoma.

The Auburn Gas Gathering System gathered and delivered 16.0 Bcf gross of natural gas during the quarter as compared to 16.7 Bcf during the second quarter of 2022. Primary gathering volumes increased 10.7% quarter over quarter to 12.6 Bcf. Imported cross-flow volumes decreased 38.7% to 3.3 Bcf (as a result of the increased primary volumes).

Earnings Call:

The Company will host a conference call to discuss its financial and operational results on Friday, November 11, 2022 at 10:00 a.m. Central Time (11:00 a.m. Eastern Time).

Interested parties in the United States and Canada may participate toll-free by dialing (833) 816-1385. International parties may participate by dialing (412) 317-0478. Participants should ask to be joined to the “Epsilon Energy Third Quarter 2022 Earnings Conference Call”

A webcast can be viewed at:

https://event.choruscall.com/mediaframe/webcast.html?webcastid=jg4bbE54. A webcast replay will be available on the Company’s website (www.epsilonenergyltd.com) following the call.

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.

Contact Information:

281-670-0002

Jason Stabell
Chief Executive Officer
Jason.Stabell@EpsilonEnergyLTD.com

Andrew Williamson
Chief Financial Officer
Andrew.Williamson@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.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
 (All amounts stated in US$)

		Three months ended September 30,								Nine months ended September 30,
		2022				2021				2022				2021
Revenues from contracts with customers:
Gas, oil, NGL, and condensate revenue		$	19,171,121			$	11,062,443			$	48,566,282			$	22,740,352
Gas gathering and compression revenue			2,072,806				2,038,616				6,180,747				5,891,868
Total revenue			21,243,927				13,101,059				54,747,029				28,632,220
Operating costs and expenses:
Lease operating expenses			2,399,092				2,240,259				6,791,496				5,618,585
Gathering system operating expenses			225,809				138,887				556,515				503,381
Development geological and geophysical expenses			2,387				11,583				7,159				34,573
Depletion, depreciation, amortization, and accretion			1,706,030				1,846,911				4,898,988				5,175,865
Gain on sale of oil and gas properties			—				—				(221,642	)			—
General and administrative expenses:
Stock based compensation expense			500,597				300,249				836,949				738,789
Other general and administrative expenses			2,015,272				1,461,703				4,651,547				4,837,164
Total operating costs and expenses			6,849,187				5,999,592				17,521,012				16,908,357
Operating income			14,394,740				7,101,467				37,226,017				11,723,863
Other income (expense):
Interest income			89,638				11,070				126,804				27,786
Interest expense			(17,501	)			(16,962	)			(33,565	)			(66,380	)
Loss on derivative contracts			(929,637	)			(5,055,130	)			(1,124,547	)			(6,417,123	)
Other (expense) income			(32,777	)			(907	)			(99,896	)			756
Other income (expense), net			(890,277	)			(5,061,929	)			(1,131,204	)			(6,454,961	)
Net income before income tax expense			13,504,463				2,039,538				36,094,813				5,268,902
Income tax expense			3,896,010				643,072				10,097,484				1,621,894
NET INCOME		$	9,608,453			$	1,396,466			$	25,997,329			$	3,647,008
Currency translation adjustments			(34,524	)			(15	)			(48,272	)			(1,256	)
NET COMPREHENSIVE INCOME		$	9,573,929			$	1,396,451			$	25,949,057			$	3,645,751
Net income per share, basic		$	0.42			$	0.06			$	1.11			$	0.15
Net income per share, diluted		$	0.41			$	0.06			$	1.11			$	0.15
Weighted average number of shares outstanding, basic			23,011,729				23,564,288				23,419,666				23,757,895
Weighted average number of shares outstanding, diluted			23,169,658				23,772,943				23,524,574				23,871,495

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

		September 30,				December 31,
		2022				2021
ASSETS
Current assets
Cash and cash equivalents		$	40,254,729			$	26,497,305
Accounts receivable			10,069,516				4,596,931
Fair value of derivatives			32,326				—
Other current assets			775,587				569,870
Total current assets			51,132,158				31,664,106
Non-current assets
Property and equipment:
Oil and gas properties, successful efforts method
Proved properties			147,196,218				138,032,413
Unproved properties			18,085,385				21,700,926
Accumulated depletion, depreciation, amortization and impairment			(106,457,257	)			(102,480,972	)
Total oil and gas properties, net			58,824,346				57,252,367
Gathering system			42,617,954				42,475,086
Accumulated depletion, depreciation, amortization and impairment			(34,262,838	)			(33,443,949	)
Total gathering system, net			8,355,116				9,031,137
Land			637,764				637,764
Buildings and other property and equipment, net			295,446				309,102
Total property and equipment, net			68,112,672				67,230,370
Other assets:
Restricted cash			569,883				568,118
Total non-current assets			68,682,555				67,798,488
Total assets		$	119,814,713			$	99,462,594
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable trade		$	2,203,443			$	1,189,905
Gathering fees payable			1,020,921				963,546
Royalties payable			2,827,880				1,853,508
Income taxes payable			3,119,671				1,098,425
Accrued capital expenditures			398,026				1,016,830
Other accrued liabilities			1,001,792				1,098,127
Fair value of derivatives			—				239,824
Asset retirement obligations			—				85,207
Total current liabilities			10,571,733				7,545,372
Non-current liabilities
Asset retirement obligations			2,758,831				2,748,449
Deferred income taxes			10,345,297				9,905,440
Total non-current liabilities			13,104,128				12,653,889
Total liabilities			23,675,861				20,199,261
Commitments and contingencies (Note 9)
Shareholders' equity
Common shares, no par value, unlimited shares authorized and 23,571,108 issued and 23,011,608 outstanding at September 30, 2022 and 24,202,218 issued and 23,668,203 shares outstanding at December 31, 2021			127,231,845				131,815,739
Treasury shares, 559,500 at September 30, 2022 and 534,015 at December 31, 2021			(3,326,880	)			(2,423,007	)
Additional paid-in capital			9,672,152				8,835,203
Accumulated deficit			(47,208,598	)			(68,783,207	)
Accumulated other comprehensive income			9,770,333				9,818,605
Total shareholders' equity			96,138,852				79,263,333
Total liabilities and shareholders' equity		$	119,814,713			$	99,462,594

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

		Nine months ended September 30,
		2022				2021
Cash flows from operating activities:
Net income		$	25,997,329			$	3,647,008
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation, amortization, and accretion			4,898,988				5,175,865
Loss on derivative contracts			1,124,547				6,417,123
Gain on sale of oil and gas properties			(221,642	)
Settlement paid on derivative contracts			(1,396,697	)			(2,488,702	)
Settlement of asset retirement obligation			(118,260	)
Stock-based compensation expense			836,949				738,789
Deferred income tax expense (benefit)			439,857				(651,606	)
Changes in assets and liabilities:
Accounts receivable			(5,472,585	)			(3,558,519	)
Other current assets			(205,717	)			(6,920	)
Accounts payable, royalties payable and other accrued liabilities			1,511,652				3,237,559
Income taxes payable			2,021,246				1,016,153
Net cash provided by operating activities			29,415,667				13,526,750
Cash flows from investing activities:
Additions to unproved oil and gas properties			(226,439	)			(140,498	)
Additions to proved oil and gas properties			(5,528,037	)			(3,479,386	)
Additions to gathering system properties			(129,985	)			(199,801	)
Additions to land, buildings and property and equipment			(13,258	)			(5,745	)
Proceeds from sale of oil and gas properties			200,000
Prepaid drilling costs							379
Net cash used in investing activities			(5,697,719	)			(3,825,051	)
Cash flows from financing activities:
Buyback of common shares			(6,234,879	)			(2,377,181	)
Exercise of stock options			747,112
Dividends			(4,422,720	)
Net cash used in financing activities			(9,910,487	)			(2,377,181	)
Effect of currency rates on cash, cash equivalents and restricted cash			(48,272	)			(1,257	)
Increase in cash, cash equivalents and restricted cash			13,759,189				7,323,261
Cash, cash equivalents and restricted cash, beginning of period			27,065,423				13,836,771
Cash, cash equivalents and restricted cash, end of period		$	40,824,612			$	21,160,032
Supplemental cash flow disclosures:
Income taxes paid		$	7,626,000			$	1,164,025
Interest paid		$	50,872			$	78,980
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		$	(194,391	)		$	(18,150	)
Change in gathering system accrued in accounts payable and accrued liabilities		$	12,882			$	16,225
Asset retirement obligation asset additions and adjustments		$	10,821			$	(29,853	)

EPSILON ENERGY LTD.
Adjusted EBITDA Reconciliation
 (All amounts stated in US$)

		Three months ended September 30,								Nine months ended September 30,
		2022				2021				2022				2021
Net income		$	9,608,453			$	1,396,466			$	25,997,329			$	3,647,008
Add Back:
Net interest expense			(72,137	)			5,892				(93,239	)			38,595
Income tax expense			3,896,010				643,072				10,097,484				1,621,894
Depreciation, depletion, amortization, and accretion			1,706,030				1,846,911				4,898,988				5,175,865
Stock based compensation expense			500,597				300,249				836,949				738,789
Loss on derivative contracts net of cash received or paid on settlement			908,227				2,593,888				(272,150	)			3,928,421
Foreign currency translation loss			(4,750	)			907				(419	)			1,517
Adjusted EBITDA		$	16,542,430			$	6,787,384			$	41,464,942			$	15,152,089

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 September 30								Nine months ended September 30
		2022				2021				2022				2021
Net cash provided by operating activities		$	13,653,133			$	5,489,631			$	29,415,667			$	13,526,750
Less: Net cash used in investing activities (Capital Expenditures)			(715,816	)			(2,108,750	)			(5,697,719	)			(3,825,051	)
Free cash flow		$	12,937,317			$	3,380,882			$	23,717,948			$	9,701,699
Changes in working capital			(1,716,480	)			563,867				2,326,913				(686,347	)
Free cash flow before Changes in Working Capital		$	11,220,837			$	3,944,748			$	26,044,861			$	9,015,352

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, adjusted to exclude changes in working capital. 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.

FAQ

What were Epsilon Energy's net income and revenues for Q3 2022?

Epsilon Energy reported a net income of $9.6 million and total revenues of $21.2 million for Q3 2022.

How much free cash flow did Epsilon Energy generate in Q3 2022?

Epsilon Energy generated free cash flow of $11.2 million during Q3 2022.

What was the Adjusted EBITDA reported by Epsilon Energy for Q3 2022?

Epsilon Energy's Adjusted EBITDA for Q3 2022 was $16.5 million.

How much cash did Epsilon Energy have at the end of Q3 2022?

At the end of Q3 2022, Epsilon Energy had $40.8 million in cash.

What is Epsilon Energy's stock symbol?

Epsilon Energy is traded under the stock symbol EPSN.