Epsilon Energy Ltd.

Epsilon Energy Ltd.

January 18, 2010 19:22 ET

Epsilon Energy Ltd. Signs Letter of Intent on Highway 706 Marcellus Shale Joint Venture Project with Chesapeake Energy Corporation

CONCORD, ONTARIO--(Marketwire - Jan. 18, 2010) - Epsilon Energy Ltd. ("Epsilon" or the "Company") (TSX:EPS) today announced the execution of a letter of intent for the development of its Highway 706 Prospect in the Marcellus Shale with Chesapeake Energy Corporation (NYSE: CHK) ("Chesapeake"). Chesapeake will earn a 50% interest in the proposed joint venture of Epsilon's Highway 706 Prospect by paying $5 million in cash upfront and by carrying the first $95 million of Epsilon's 50% share of leasehold, drilling, completing, equipping and gathering costs attributable to the Prospect. The carry obligation is expected to be completed within 30 months after the closing date of February 1, 2010. The joint venture arrangement is subject to the completion of a Purchase and Sale Agreement.

The assets subject to the proposed Epsilon-Chesapeake joint venture include approximately 11,500 net acres of leasehold in the Highway 706 area in Susquehanna County, Pennsylvania, approximately 10 MMcf/day of current natural gas production and related compression, pipeline and tap site facilities. In addition, Epsilon believes that its leasehold position will support the drilling of approximately 120-150 additional net locations (60-75 net to Epsilon).

Zoran Arandjelovic, Epsilon's Executive Chairman, President and CEO, stated, "We are very pleased and honored to partner with Chesapeake, the world's leading shale gas operator. Chesapeake is the second largest producer of natural gas in the United States. This transaction will allow Epsilon to reduce its future capital expenditures and further position us to improve our exploration and development costs and returns on capital for years to come as well as develop our expertise in unconventional hydrocarbons."

Mr. Arandjelovic added "This proposed joint venture will allow Epsilon to invest in the development of its other North American properties including other Marcellus Shale assets in New York, Bakken Oil assets in Saskatchewan and Utica Shale assets in Quebec."

Aubrey K. McClendon, Chesapeake's Chief Executive Officer, added, "We are very pleased to have been selected by Epsilon to lead the development of their Highway 706 Prospect. Epsilon's acreage is located in an area of Susquehanna County where we expect average estimated ultimate reserve recoveries to be substantially greater than those found on average in the Marcellus. We congratulate Epsilon on acquiring this very high quality acreage and we are eager to begin development work in the prospect area soon after closing."

Clarus Securities Inc. is acting as financial advisor to Epsilon with respect to the transaction.

GMP Securities L.P. and Cormark Securities Inc. are being engaged to provide independent strategic advice to Epsilon.

Epsilon Energy Ltd. is engaged in the exploration and production of natural gas reserves targeting the Marcellus Shale. The company also has participating interests and production sharing agreements in other natural gas and oil plays within North America, the Middle East, and Africa. Established in 2005, the Corporation has been a producer of natural gas and oil since 2006. Epsilon's ongoing business strategy involves focused targeting of lower risk natural gas properties within the Marcellus Shale and other parts of Canada and the United States, as well as the high potential oil & gas properties in the Middle East and Africa. The common shares of Epsilon trade on The Toronto Stock Exchange under the symbol "EPS".

Chesapeake Energy Corporation is the second-largest producer of natural gas in the U.S. Headquartered in Oklahoma City, the company's operations are focused on the development of onshore unconventional and conventional natural gas in the U.S. in the Barnett Shale, Haynesville Shale, Fayetteville Shale, Marcellus Shale, Anadarko Basin, Arkoma Basin, Appalachian Basin, Permian Basin, Delaware Basin, South Texas, Texas Gulf Coast and East Texas regions of the United States. Further information is available at www.chk.com.

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 in such forward-looking statements are based on reasonable assumption 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.

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.

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