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Epsilon Announces Development Agreement on NW STACK Assets and Reports Second Quarter 2018 Results

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HOUSTON, Aug. 30, 2018 (GLOBE NEWSWIRE) -- Epsilon Energy Ltd. ("Epsilon" or the "Company") (TSX:EPS) recently reported second quarter 2018 financial and operating results and is announcing an agreement with an experienced local operator in the Anadarko Basin, Oklahoma to appraise Epsilon's acreage in the NW STACK.

Mr. Michael Raleigh, Chief Executive Officer, commented, "We are excited to begin the appraisal drilling process on our acreage in Dewey County, Oklahoma. An acreage trade and development agreement with an experienced operator will allow each company to manage risk through technical collaboration and increasing gross exposure in the over-pressured condensate window. Several industry participants have been active in the area providing us with encouraging results in both the Meramec and Osage intervals. The drilling phase is scheduled to begin with two wells planned before year end.

In the Marcellus, we have begun a leasing program of targeted acreage that Epsilon will operate with the intention to drill and complete wells next year. Additionally, realized natural gas prices are improving as Northeast Pennsylvania continues to increase transportation capacity out of the basin.  The much anticipated Atlantic Sunrise expansion to the Transco system (1.7 Bcf/d) is expected to commence service in September. Gas markets have reacted accordingly, narrowing the natural gas price differential to Henry Hub and improving summer prices to levels not experienced in many years.

Epsilon participated in an investor conference in Chicago on August 28th sponsored by Seaport Global to begin to spread the news about our company's attractive cash generation capability, extremely low debt, shareholder value and our excellent growth opportunities. Epsilon will post an updated company investor presentation in early September."

Highlights for the second quarter and material subsequent events following the end of the quarter through the date of this release include:

  • EBITDA of $3.6 million for the quarter.
     
  • After-tax Net Income of $0.7 million for the quarter or $0.013/share.
     
  • Marcellus working interest (WI) gas production averaged 23 MMcf/d for the second quarter of 2018. 
     
  • Gathered and delivered 22 Bcfe gross (7.5 Bcfe net to Epsilon's interest) during the quarter through the Auburn System which represents approximately 72% of the maximum throughput. 
     
  • Auburn Gas gathering and compression services included third party gas of 0.8 Bcfe during the quarter or approximately 9 MMcf/d.

Financial and Operating Results

 

         
    Three months ended June 30,   Six months ended June 30,
    2018   2017   2018   2017
Revenue by product - total period ($000)              
                 
  Natural gas revenue ($000) $    3,414   $    5,882   $    8,260   $    11,774
  Volume (MMcfe)     1,783       2,382       3,683       4,792
  Avg. Price ($/Mcfe) $   1.91   $   2.47   $   2.24   $   2.46
  Exit Rate (MMcfepd)     23.7       30.0       23.7       30.0
                 
  Oil and condensate revenue ($000) $    90   $    -   $    217   $    -
  Volume (MBOE)     1.37       -       3.48       -
  Avg. Price ($/bbl) $   66   $   -   $   62   $   -
                 
  Natural gas liquids revenue ($000) $    96   $    -   $    125   $    -
  Volume (MBOE)     4.43       -       6       -
  Avg. Price ($/bbl) $   22   $   -   $   22   $   -
                 
  Midstream gathering system revenue ($000) $    2,823   $    2,067   $    5,917   $    4,242
                 
  Total $    6,423   $    7,949   $    14,519   $    16,016
                 

Capital Expenditures

Epsilon's operational capital expenditures were $0.3 million net for the three months ended June 30, 2018.  Epsilon spent $0.3 million on an additional acquisition in the Anadarko Basin of Oklahoma, $0.2 million on completion costs of upstream wells and the Auburn Gas Gathering system, and $0.3 million on leasehold costs in Oklahoma and Pennsylvania. These expenditures were offset by a $0.5 million refund of an advance payment for a well that was developed for less than the original cost estimate.

Operational Guidance

Oklahoma Anadarko Basin

In March 2017, Epsilon entered the Anadarko basin to provide oil, liquids and natural gas exposure to complement our existing dry gas assets in Northeast Pennsylvania.  Today, Epsilon is announcing a partnership with a successful private operator with long term experience in the NW STACK to develop a portion of each company's Dewey County position in the over-pressured oil-condensate window.  Our partner has significant expertise in the design and execution of current generation horizontal wells targeting the Mississippian formation, having drilled and completed 40 wells, and the developed the requisite infrastructure systems to maximize production and minimize operating expense. Our partner will drill and complete the first well in each section with Epsilon retaining the right to drill and operate subsequent wells on Epsilon contributed sections in the agreement.

NE Pennsylvania Marcellus

Epsilon proposed three wells to the operator and other working interest owners in Q1 2018. All working interest owners elected to participate in the wells and the operator is obliged to drill these wells within the year.

The table below details Epsilon's well development status at June 30, 2018:

               
    March 31, 2018   June 30, 2018  
    Gross Net   Gross Net  
               
  Producing   98   23.7      91   20.3   
  Shut-in   1   0.5      8   3.9   
  Waiting on pipeline   1   0.0      -   -   
  Waiting on completion   -   -      1   0.0   
  Drilling   -   -      -   -   
               
               

Second Quarter Results

Epsilon generated revenues of $6.4 million for the three months ended June 30, 2018 compared to $7.9 million for the three months ended June 30, 2016. The Company's Upstream Marcellus net revenue interest production was 1.7 Bcfe in the second quarter.

Realized natural gas prices averaged $1.91 per Mcf in the second quarter of 2018 and have improved further subsequent to quarter end as a result of new transportation capacity becoming available in the Northeast as major projects commence service. Operating expenses for Marcellus Upstream operations in the second quarter were $1.6 million.

The Auburn Gas Gathering system delivered 21.5 Bcfe of natural gas during the quarter as compared to 28.2 Bcfe during the first quarter of 2018.  Primary gathering volumes decreased 10.9% quarter over quarter to 15.4 Bcfe.  Imported cross-flow volumes decreased 24.6% to 6.1 Bcfe from 11.1 Bcfe during Q1 2018.

Epsilon reported net after tax income of $0.7 million attributable to common shareholders or $0.01 per basic and diluted common share outstanding for the three months ended June 30, 2018, compared to net income of $2.5 million, and $0.05 per basic and diluted common share outstanding for the three months ended June 30, 2017. 

For the three months ended June 30, 2018, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $3.6 million as compared to $5.5 million for the three months ended June 30, 2017. The decrease in Adjusted EBITDA was primarily due to lower natural gas prices, and lower production volumes.

Adjusted EBITDA

Epsilon defines Adjusted EBITDA as earnings before (1) net interest expense, (2) depreciation, depletion and amortization expense, (3) recovery of prior impairments of oil and gas properties, (4) non-cash stock compensation expense, (5) unrealized gain on derivatives and (6) other income.  Adjusted EBITDA is not a measure of net income or cash flows as determined by IFRS.

Management believes these non-IFRS financial measures facilitate evaluation of the Company's business on a "normalized" or recurring basis and without giving effect to certain non-cash expenses and other items, thereby providing 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. 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, and that the reconciliations to the closest corresponding IFRS measure should be reviewed carefully.

About Epsilon

Epsilon Energy Ltd. is a North American onshore natural gas, oil and liquids production and midstream company with a current focus on the Marcellus Shale of Pennsylvania and the NW STACK area in the Anadarko Basin of 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 June 30,   Six months ended June 30, 
      2018       2017       2018       2017  
                 
Revenues:                 
Oil, gas, NGLs and condensate revenue   $   3,600,738     $   5,882,030     $   8,602,533     $   11,774,427  
Gas gathering and compression revenue        2,822,381         2,066,623         5,916,854         4,241,525  
Total revenue       6,423,119         7,948,653         14,519,387         16,015,952  
                 
Operating costs and expenses:                
Project operating costs        2,135,948         1,620,988         4,845,319         3,684,398  
Depletion, depreciation, amortization and
  decommissioning accretion
      1,416,089         2,377,016         2,847,467         4,780,482  
Stock based compensation  expense       113,540         89,237         228,552         142,519  
General and administrative        740,665         1,000,845         1,465,539         1,926,654  
Total operating costs and expenses        4,406,242         5,088,086         9,386,877         10,534,053  
Operating income       2,016,877         2,860,567         5,132,510         5,481,899  
                 
Other income and (expense):                
Interest income        1,524         332         2,432         25,756  
Finance expense       (50,514 )       (80,987 )       (95,910 )       (1,075,694 )
  Realized gain on commodity contracts        12,916         140,815         119,373         387,975  
  Net change in unrealized loss on commodity contracts       (857,984 )       1,538,097         (593,459 )       780,587  
Other expense       12,150         5,213         13,692         5,169  
Net other income (expense)       (881,908 )       1,603,470         (553,872 )       123,793  
                 
Net income before tax       1,134,969         4,464,037         4,578,638         5,605,692  
Income tax expense - current       632,141         -         1,772,824         -  
Income tax expense (recovery) - deferred       (197,755 )       1,916,992         (256,604 )       2,782,501  
NET INCOME    $   700,583     $   2,547,045     $   3,062,418     $   2,823,191  
                 
                 
Net income (loss) per share, basic   $ 0.01     $ 0.05     $ 0.06     $ 0.06  
Net income (loss) per share, diluted   $ 0.01     $ 0.05     $ 0.06     $ 0.06  
Weighted average number of shares outstanding, basic     54,961,824       52,898,013       55,002,193       49,387,496  
Weighted average number of shares outstanding, diluted     54,984,360       52,924,015       55,024,517       49,414,352  
                 


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

           
    June 30,   December 31,  
    2018   2017  
ASSETS          
Current assets          
Cash and cash equivalents   $   11,826,828     $   9,998,853    
Accounts receivable       3,037,744         3,366,021    
Restricted cash       557,403         556,864    
Commodity contracts       -         259,544    
Other current assets       134,361         252,631    
Total current assets       15,556,336         14,433,913    
Non-current assets          
Oil and gas interests:          
Intangible exploration and evaluation costs       18,006,834         17,451,553    
Property and equipment (net)       81,039,937         84,459,776    
Total non-current assets       99,046,771         101,911,329    
Total assets   $   114,603,107     $   116,345,242    
           
EQUITY AND LIABILITIES          
Current liabilities          
Accounts payable and accrued liabilities   $   4,700,205     $   5,433,824    
Commodity contracts       333,915         -    
Income taxes payable       914,128         2,644,527    
Revolving line of credit       900,000         2,900,000    
Total current liabilities       6,848,248         10,978,351    
Non-current liabilities          
Decommissioning liabilities       2,494,383         2,806,783    
Deferred tax liability       18,592,991         18,849,595    
Total non-current liabilities       21,087,374         21,656,378    
Total liabilities       27,935,622         32,634,729    
Equity          
Share capital       144,043,592         144,304,163    
Contributed surplus       11,563,086         11,334,534    
Deficit       (78,162,611 )       (81,242,299 )  
Accumulated other comprehensive income       9,223,418         9,314,115    
Total equity       86,667,485         83,710,513    
Total liabilities and shareholders' equity   $   114,603,107     $   116,345,242    
           


EPSILON ENERGY LTD.

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

       
    Six months ended June 30,   
      2018       2017    
           
Cash flows from operating activities:          
Net income   $   3,062,418     $   2,823,191    
Adjustments for:          
Depletion, depreciation, amortization and decommissioning accretion       2,847,467         4,780,482    
Debenture accretion and fee amortization       -         267,773    
Net change in unrealized loss on commodity contracts       593,459         (780,587 )  
Stock-based compensation expense        228,552         142,519    
Income tax expense        1,516,220         2,782,501    
Changes in non-cash balances related to operations       (3,789,378 )       (160,409 )  
Net cash provided by operating activities       4,458,738         9,855,470    
Cash flows from investing activities:          
Acquisition of oil and natural gas properties - E&E       (555,281 )       (4,699,951 )  
Acquisition of oil and natural gas properties - PP&E       -         (1,088,000 )  
Additions to oil and natural gas properties - PP&E       259,971         (91,208 )  
Change in working capital related to capital asset additions       (917 )       (51,337 )  
Deposits on acquisitions       -         (900,000 )  
Changes in restricted cash       (538 )       (25,333 )  
Net cash used in investing activities       (296,765 )       (6,855,829 )  
Cash flows from financing activities:          
Buyback of common shares       (243,301 )       -    
Common stock issued through rights offering       -         17,984,665    
Redemption of convertible debentures       -         (29,520,436 )  
Exercise of stock options       -         50,243    
Repayment of revolving line of credit       (2,000,000 )       (9,560,000 )  
Net cash used in financing activities       (2,243,301 )       (21,045,528 )  
Effect of currency rates on cash and cash equivalents       (90,697 )       1,360,105    
Increase (decrease) in cash and cash equivalents       1,827,975         (16,685,782 )  
Cash and cash equivalents, beginning of period       9,998,853         31,486,593    
Cash and cash equivalents, end of period   $   11,826,828     $   14,800,811    
           
Cash and cash equivalents consist of:          
Cash    $   11,826,828     $   14,800,811    
Cash and cash equivalents    $   11,826,828     $   14,800,811    
           


EPSILON ENERGY LTD.

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

           
    Three months ended June 30,   Six months ended June 30,  
    2018     2017       2018       2017    
                   
Net income (loss) $   701   $   2,547     $   3,063     $   2,823    
Add Back:                
  Net interest expense     49       81         93         1,050    
  Deferred income tax provision     434       1,917         1,516         2,783    
  Depreciation, depletion, amortization, and accretion     1,416       2,377         2,847         4,781    
  Stock based compensation expense      113       89         228         142    
  Net change in unrealized (gain) loss on commodity contracts     858       (1,538 )       593         (781 )  
  Other income     -       (5 )       (1 )       (5 )  
Adjusted EBITDA $   3,571   $   5,468     $   8,339     $   10,793    
   

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