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
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:
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
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).
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:
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.
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 2021ASSETS 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 2021Cash 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 2021Net 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 2021Net 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.
