Epsilon Reports Third Quarter 2017 Results

HOUSTON, Nov. 14, 2017 (GLOBE NEWSWIRE) — Epsilon Energy Ltd. (“Epsilon” or the “Company”) (TSX:EPS) today reported third quarter 2017 financial and operating results.

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

  • Epsilon is continuing to add key personnel to its leadership team and is pleased to announce the hiring of Shannon Lemke as Vice President, Exploration. Shannon has over 17 years of experience in exploration and exploitation of oil and gas reserves while working for public and private equity backed companies. Of note, Shannon was recently a significant contributor to the success of Vitruvian I & II which sold to Gulfport earlier in the year. Shannon started her career at Newfield.
  • Year-to-date, Epsilon has acquired varying interests in over 88 sections of land, all held by production from shallower intervals, including operations covering 21 sections in the NW STACK trend, of the Anadarko Basin in Oklahoma, with rights to the prospective and deeper Meramec, Osage and Woodford formations. This position covers a wide footprint encompassing oil, condensate and liquids rich gas prone areas in the over-pressured window of the Basin. 
  • Adjusted EBITDA of $4.0 million for the quarter and $14.8 million for the nine month period. Net Income per diluted share was $0.01 for the quarter and $0.07 for the nine month period.
  • Marcellus working interest (WI) gas production averaged 25 MMcf/d and our Auburn System gathered and delivered 17 Bcfe gross (5.8 Bcfe net to Epsilon’s interest) during the quarter which represents approximately 50% of the maximum throughput.  Auburn Gas gathering and compression services included third party gas of 1.0 Bcfe during the quarter or approximately 11 MMcf/d.

Mr. Michael Raleigh, Chief Executive Officer, commented, “Epsilon is pleased to have Shannon Lemke join our talented team of professionals including Henry Clanton COO, Paul Atwood VP Financial Planning & Analysis, and Lane Bond, CFO. We are beginning the budgeting process for 2018, and will provide further details in regards to capital allocation to both the NW STACK project and the Marcellus project as that process concludes. Epsilon expects further natural gas price improvement in the NE during 2018 due to the anticipated commissioning of significant pipeline projects including Access South, Adair Southwest, Leach Xpress, Rover Phase II, and Atlantic Sunrise.  These pipelines, coupled with the Cove Point LNG export facility, represent over 6 Bcf per day of incremental demand for Marcellus-Utica production.”

Financial and Operating Results

    Three months ended September 30,     Nine months ended September 30,
     2017    2016    2017    2016
Revenue by product – total period ($000)                
Natural gas revenue ($000)   $   3,376   $   3,294   $   15,148   $   10,216
              Volume (MMcfe)         2,017        2,620       6,809       8,047
Avg. Price ($/Mcfe)   $   1.67   $   1.26   $   2.22   $   1.27
Exit Rate (MMcfepd)        21.4       37.7       21.4       37.7
Oil revenue ($000)   $   18   $   –   $   20   $    –
Volume (MBOE)       0.41       –       0.46       –
Avg. Price ($/Bbl)   $   43.87   $   –   $    44.23   $   –
Midstream gathering system revenue ($000)                                      $   1,568   $   2,624   $   5,810   $   7,563
Total   $   4,962   $    5,918   $   20,978   $   17,779

Capital Expenditures

Epsilon’s operational capital expenditures were $0.1 million for the three months ended September 30, 2017.  Acquisition capital expenditures in the mid-continent totaled $11.4 million.

Epsilon expects to complete 6 gross (0.13 net) wells in the fourth quarter of 2017; however, the Marcellus capital forecast for 2017 remains unchanged at $1 million.

Marcellus Operational Guidance

The Operator turned 2 gross (.01 net) new wells on line during the third quarter.

The Operator did not drill or propose any new wells during the quarter.  The table below details Epsilon’s well development status at September 30, 2017:

  June 30, 2017    September 30, 2017 
    Gross      Net       Gross     Net  
Producing   87     22.81           78       19.58  
Shut-in   4     1.28       15     4.51  
Waiting on pipeline   –       –        –     –   
Waiting on completion                    9     0.14       7     0.13  
Drilling   –     –        –     –   

Epsilon has not received any well proposals from the Operator subsequent to quarter end.

Third Quarter Results

Epsilon generated revenues of $5.0 million for the three months ended September 30, 2017 compared to $5.9 million for the three months ended September 30, 2016.  The Company’s Upstream Marcellus net revenue interest production was 2.0 Bcfe in the third quarter.

Realized natural gas prices averaged $1.67 per Mcf in the third quarter of 2017. Realized natural gas prices in Northeast Pennsylvania declined in response to mild weather coupled with increasing production in anticipation of interstate pipeline startups and the associated volume commitments to those projects. Operating expenses for Marcellus Upstream operations in the third quarter were $1.4 million.

The Auburn Gas Gathering system delivered 16.7 Bcfe of natural gas during the quarter as compared to 24.8 Bcfe during the second quarter of 2017.  Primary gathering volumes decreased 16.7% quarter over quarter to 9.6 Bcfe.  Imported cross-flow volumes decreased 33.7% to 7.0 Bcfe.

Epsilon reported net after tax income of $0.8 million attributable to common shareholders or $0.01 per basic and diluted common share outstanding for the three months ended September 30, 2017, compared to a net loss of $0.7 million, and ($0.01) per basic and diluted common share outstanding for the three months ended September 30, 2016. 

For the three months ended September 30, 2017, Epsilon’s Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization (“Adjusted EBITDA”) was $4.0 million as compared to $3.4 million for the three months ended September 30, 2016. The increase in Adjusted EBITDA was primarily due to higher natural gas prices.

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 September 30,   Nine months ended September 30,
      2017       2016         2017       2016  
Oil and gas revenue   $   3,393,732     $   3,294,834     $   15,168,159     $   10,216,232  
Gas gathering and compression revenue       1,568,257         2,623,575         5,809,782         7,562,700  
Total revenue       4,961,989         5,918,409          20,977,941         17,778,932  
Operating costs and expenses:                
Project operating costs       1,854,151         2,044,354         5,538,548         6,677,897  
Depletion, depreciation, amortization and
  decommissioning accretion
      2,009,068         2,902,950         6,789,550         8,912,214  
Stock based compensation  expense       54,749          32,091         197,268         179,266  
General and administrative       677,715         483,665         2,604,369         1,489,515  
Total operating costs and expenses       4,595,683         5,463,060         15,129,735         17,258,892  
Operating income (loss)       366,306         455,349         5,848,206         520,040  
Other income and (expense):                
Interest income       336         27,980         26,092         44,270  
Finance expense        (46,485 )       (985,778 )       (1,122,179 )       (3,017,929 )
       Realized gain on commodity contracts       1,524,930         –         1,912,905          –  
       Net change in unrealized loss on commodity contracts       (474,338 )       –         306,249         –  
Other expense       21,621         (45 )       26,790         (96,580 )
   Net other expense       1,026,064         (957,843 )       1,149,857         (3,070,239 )
Income tax expense – current       –         –         –         23,800  
Income tax expense (recovery) – deferred       620,986          153,041         3,403,487         261,234  
NET INCOME (LOSS)   $   771,384     $   (655,535 )   $   3,594,576     $   (2,835,233 )
Net income (loss) per share, basic   $ 0.01     $ (0.01 )   $ 0.07     $ (0.06 )
Net income (loss) per share, diluted   $ 0.01     $ (0.01 )   $ 0.07     $ (0.06 )
Weighted average number of shares outstanding, basic     55,045,705       45,837,864       51,294,292       45,896,859  
Weighted average number of shares outstanding, diluted     55,072,197       45,837,864       51,321,026       45,896,859  

Interim Unaudited Condensed Consolidated Statements of Financial Position
(All amounts stated in US$)
    September 30,   December 31,
                    2017       2016  
Current assets        
Cash and cash equivalents   $   7,809,273     $   31,486,593  
Accounts receivable       2,533,905         4,387,487  
Deposits on acquisition       900,000         –  
Restricted cash       555,871          530,538  
Other  current assets       191,844         139,991  
Total current assets       11,990,893         36,544,609  
Non-current assets        
Oil and gas interests:        
Intangible exploration and evaluation costs       15,499,296         –  
Property and equipment (net)       85,908,965         90,716,131  
Total non-current assets       101,408,261         90,716,131  
Total assets   $   113,399,154     $   127,260,740  
Current liabilities        
Accounts payable and accrued liabilities   $   3,518,562     $    5,003,737  
Commodity contracts-liability       30,103         336,352  
Revolving line of credit       2,900,000         12,460,000  
Convertible debentures        –         28,388,210  
Total current liabilities       6,448,665         46,188,299  
Non-current liabilities        
Decommissioning liabilities       2,583,218          2,442,935  
Deferred tax liability       18,480,552         15,077,065  
Total non-current liabilities       21,063,770         17,520,000  
Total liabilities       27,512,435         63,708,299  
Share capital       144,304,163         126,315,325  
Equity component of convertible debentures       –         5,033,884  
Contributed surplus       11,218,477         6,017,972  
Deficit       (78,961,487 )       (82,556,063 )
Accumulated other comprehensive income       9,325,566         8,741,323  
Total equity       85,886,719         63,552,441  
Total liabilities and shareholders’ equity   $   113,399,154     $   127,260,740  
Interim Unaudited Condensed Consolidated Statements of Cash Flows
(All amounts stated in US$)
    Nine months ended September 30,
      2017       2016  
Cash flows from operating activities:        
Net income (loss)   $   3,594,576     $   (2,835,233 )
Adjustments for:        
Depletion, depreciation, amortization and decommissioning accretion        6,789,550         8,912,214  
Debenture accretion and fee amortization       267,773         864,470  
Net change in unrealized loss on commodity contracts       (306,249 )       –  
Stock-based compensation expense       197,268         179,266  
Income tax expense (recovery)       3,403,487         285,034  
Income taxes paid       –         (23,800 )
Changes in non-cash balances related to operations       360,101         (411,184 )
Net cash provided by operating activities       14,306,506         6,970,767  
Cash flows from investing activities:        
Acquisition of oil and natural gas properties – E&E       (15,499,296 )       –  
Acquisition of oil and natural gas properties – PP&E       (1,677,000 )       –  
Additions to oil and natural gas properties – PP&E       (165,103 )       (254,756 )
Change in working capital related to capital asset additions       (43,547 )       (462,773 )
Change in investment       –         –  
Deposits on acquisitions        (900,000 )       –  
Changes in restricted cash       (25,333 )       (430,265 )
Net cash used in investing activities       (18,310,279 )       (1,147,794 )
Cash flows from financing activities:        
Buyback of common shares       –         (780,340 )
Common stock issued through rights offering
  (net of issuance costs)
      17,907,187         –  
Purchase of convertible debentures       –         (357,842 )
Redemption of convertible debentures       (29,520,436 )        –  
Exercise of stock options       50,243         –  
Repayment of revolving line of credit       (9,560,000 )       (5,540,000 )
Net cash used in financing activities       (21,123,006 )       (6,678,182 )
Effect of currency rates on cash and cash equivalents       1,449,459         869,523  
Increase (decrease)  in cash and cash equivalents        (23,677,320 )       14,314  
Cash and cash equivalents, beginning of period       31,486,593         16,954,664  
Cash and cash equivalents, end of period   $   7,809,273     $    16,968,978  
Cash and cash equivalents consist of:                
Cash   $ 7,809,273     $ 16,968,978  
Cash and cash equivalents   $ 7,809,273     $ 16,968,978  

Adjusted EBITDA Reconciliation
(All amounts stated in US $000)
                              Three months ended September 30,   Nine months ended September 30,
      2017     2016       2017       2016  
Net income (loss) $   771   $   (655 )   $   3,594     $   (2,835 )
Add back:              
Net interest expense       46       958         1,096         2,974  
Deferred income tax provision       621       153          3,404         285  
Depreciation, depletion, amortization, and accretion       2,009       2,903         6,790         8,912  
Stock based compensation expense        55       32         197         179  
Net change in unrealized (gain) loss on commodity contracts       474       –          (307 )       –  
Foreign Currency Translation       2       (1 )       (3 )       90  
Adjusted EBITDA $   3,978   $   3,390     $   14,771     $   9,605  

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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