Epsilon Energy Ltd.
TSX : EPS

Epsilon Energy Ltd.

August 07, 2012 09:54 ET

Epsilon Energy Ltd. Announces 2012 Second Quarter Results

CONCORD, ONTARIO--(Marketwire - Aug. 7, 2012) - Epsilon Energy Ltd. ("Epsilon") (TSX:EPS) is pleased to announce its second quarter 2012 results. Interim Unaudited Condensed Consolidated Financial Statements and Management Discussion and Analysis for the three and six months ended June 30, 2012 and 2011 are available on Sedar at www.sedar.com or on Epsilon's website at www.epsilonenergyltd.com.

EPSILON ENERGY LTD. HIGHLIGHTS
Three months ended June 30, Six months ended June 30,
2012 2011 2012 2011
Revenue By Product - Total Period ($000)
Nat'l gas revenue ($000) $ 8,499.5 $ 1,676.3 $ 14,325.0 $ 3,495.9
Volume (MMcfe) 3,676.0 436.9 5,933.9 812.4
Avg. Price ($/Mcfe) $ 2.31 $ 3.84 $ 2.41 $ 4.30
Exit Rate (MMcfepd) 43.8 5.4 43.8 5.4
Oil revenue ($000) $ 230.3 $ (0.4 ) $ 498.7 $ 191.5
Volume (MBOE) 2.0 - 5.0 2.6
Avg. Price ($/Bbl) $ 112.75 $ 84.62 $ 99.90 $ 73.69
Exit Rate (BOEpd) 36.0 - 36.0 -
Midstream gathering system revenue ($000) $ 1,970.5 $ - $ 3,324.1 $ -
Total $ 10,700.3 $ 1,675.9 $ 18,147.8 $ 3,687.4

In the second quarter of 2012, revenues increased 538% compared to the second quarter of 2011, and 44% sequentially from the first quarter of 2012. The increase in revenues was driven by a significant increase in production and sales volumes from Epsilon's activities in the Marcellus Shale in Pennsylvania and revenues from Epsilon's gas gathering and compression system serving that same region. The increase in production volume was offset by a $1.53 or 40% decrease in the realized price per Mcf of gas in the second quarter of 2012 versus 2011, and a $0.27 or 10% decrease in the second quarter of 2012 versus the first quarter of 2012. Epsilon's natural gas production exit rate as of June 30, 2012 was 43.8 Mmcf/day compared to 36.8 Mmcf/day as of March 31, 2011 and 5.4 Mmcf/day as of June 30, 2011.

The Auburn gas gathering system ("Auburn GGS"), of which Epsilon owns 35%, contributed approximately $2.0 million in revenue during the second quarter 2012, a 46% increase from $1.4 million in the first quarter 2012. The Auburn gas gathering system began operating in September 2011 and gas began free flowing through the Auburn compressor station to Tennessee Gas Pipeline in mid-March 2012. Construction of the compression facility was completed in July 2012 and reached operational capacity of 300 Mmcf/day.

Three months ended June 30, Six months ended June 30,
2012 2011 2012 2011
Revenues:
Oil & gas revenues $ 10,700,325 $ 1,675,910 $ 18,147,826 $ 3,687,423
Total revenues 10,700,325 1,675,910 18,147,826 3,687,423
Operating costs and expenses:
Project operating costs 4,355,173 112,442 5,997,934 548,251
Depletion, depreciation and amortization 6,528,082 650,047 11,636,883 1,482,335
Accretion of de-commissioning liabilities 2,054 2,953 7,828 5,745
Impairment - 1,057,187 - 1,057,187
Stock based compensation 193,244 358,310 175,844 551,507
General and administrative 861,896 1,087,980 1,624,631 1,607,792
Total operating costs and expenses 11,940,449 3,268,919 19,443,120 5,252,817
Operating Loss (1,240,124 ) (1,593,009 ) (1,295,294 ) (1,565,394 )
Other income and expense:
Gain on farmout agreement - 24,281,556 - 24,281,556
Interest income 16,474 10,128 60,350 21,127
Finance Expense (1,084,148 ) - (1,445,415 ) -
Net other income (expense) (1,067,674 ) 24,291,684 (1,385,065 ) 24,302,683
Deferred income tax (recovery) expense (172,615 ) - 332,749 -
NET (LOSS) EARNINGS $ (2,135,183 ) $ 22,698,675 $ (3,013,108 ) $ 22,737,289
Net income per share, basic ($0.04 ) $0.46 ($0.06 ) $0.46
Net income per share, diluted ($0.04 ) $0.45 ($0.06 ) $0.45
Weighted average number of shares outstanding, basic 49,773,900 49,716,252 49,760,076 49,716,252
Weighted average number of shares outstanding, diluted 50,044,128 50,403,463 50,144,594 50,403,463

In 2012, Epsilon significantly reduced its drilling and completion pace in the Marcellus Shale in response to lower natural gas prices. As of June 30, 2012, 54 gross JV wells, (15.1 net) had been drilled and completed. 46 of the 54 wells were online at June 30, 2012 and produced at a combined gross exit rate of 173.2 Mmcf per day (43.8 net Mmcf per day).

The Company remains active in the core areas of Torquay and Ceylon in southeast Saskatchewan. In November 2011, Epsilon's operating partner commenced a six well program of vertical and horizontal wells at Torquay targeting Midale and Bakken light oil. Of the six gross wells (three net), five are in various stages of completion or production and one well was drilled and abandoned. In Ceylon, the Company participated in the drilling of three gross wells (1.5 net) targeting the Bakken and Birdbear formations during the first half of 2012. One of the wells is waiting on completion, and the remaining wells were drilled and abandoned.

Net income for the three and six months ended June 30, 2012 decreased significantly as compared to the same periods in 2011 due primarily to the recognition in the prior period of a $24.3 million gain on the Chesapeake farmout agreement assets. During the period ended June 30, 2011, Chesapeake fulfilled its first earning period carry obligation of $50.0 million. Epsilon transferred ownership of 25% of its assets pertaining to the Farmout Agreement with Chesapeake, and recognized a gain on disposal of the assets. Excluding this gain, there was a decrease in net income for the three and six months ending June 30, 2012 as compared to the same periods in 2011 due to interest expense in 2012 associated with the convertible debenture that was issued in February 2012 to fund capital expenditures.

The term EBITDA consists of net income plus interest, taxes, depreciation and amortization. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered in isolation from or as a substitute for net income or cash flow measures prepared in accordance with generally accepted accounting principles or as a measure of profitability or liquidity. Additionally, EBITDA may not be comparable to other similarly titled measures of other companies. Epsilon has included EBITDA as a supplemental disclosure because its management believes that EBITDA provides useful information regarding our ability to service debt and to fund capital expenditures and provides investors a helpful measure for comparing its operating performance with the performance of other companies that have different financing and capital structures or tax rates. The following table sets forth a reconciliation of EBITDA to net income, which is the most directly comparable measure of financial performance calculated under generally accepted accounting principles.

Three Months Ended Six Months Ended
30-Jun-12 30-Jun-11 30-Jun-12 30-Jun-11
NET (LOSS) EARNINGS $ (2,135,183 ) $ 22,698,675 $ (3,013,108 ) $ 22,737,289
Add Back:
Interest expense 1,084,148 - 1,445,415 -
Deferred income tax (recovery) provision (172,615 ) - 332,749 -
Depreciation, depletion, amortization, and accretion 6,528,082 650,047 11,636,883 1,482,335
Non-cash share based compensation 193,224 358,310 175,844 551,507
Impairment - 1,057,187 - 1,057,187
Gain on farmout agreement - (24,281,556 ) - (24,281,556 )
EBITDA $ 5,497,656 $ 482,663 $ 10,577,783 $ 1,546,762

Epsilon Energy Ltd. is a North American onshore exploration and production company with a current focus in the Marcellus Shale in Pennsylvania, Bakken Shale in Saskatchewan and Lower Smackover in Mississippi.

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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