Epsilon Energy Ltd.

Epsilon Energy Ltd.

March 11, 2015 17:46 ET

Epsilon Energy Ltd. Announces Full Year 2014 Results

HOUSTON, TEXAS--(Marketwired - March 11, 2015) - Epsilon Energy Ltd. ("Epsilon") (TSX:EPS) today reported its financial results for the fourth quarter and full-year ended December 31, 2014. Highlights for the year and material subsequent events following the end of the quarter through the date of this release include:

  • Increased total estimated proved and probable reserves to 196 Bcf as of December 31, 2014. With 2014 production of 15 Bcf, this represents a 250% production replacement.
  • Reduced operating costs 13% from $0.87 per Mcf in 2013 to $0.76 per Mcf in 2014;
  • Reduced Overhead from a normalized $3.6 million per year to $1.9 million per year;
  • Increased adjusted EBITDA from $29.4 million in 2013 to $37.2 million in 2014;
  • Auburn Facility averaged 325 MMcf/d during December 2014 and 329 MMcf/d for the quarter;
  • Completed Canadian Asset Sales;
  • Commissioned engineering evaluation of Upper Marcellus - study indicates the reservoir properties compare favorably to Lower Marcellus.

Financial and Operating Results

Three months ended December 31, Twelve months ended December 31,
2014 2013 2014 2013
Revenue By Product - Total Period ($000)
Natural gas revenue ($000) $ 5,705 $ 10,022 $ 39,392 $ 37,651
Volume (MMCF) 2,651 3,838 14,849 13,062
Avg. Price ($/MCF) $ 2.15 $ 2.61 $ 2.65 $ 2.88
Exit Rate (MMCFPD) 25.4 46.8 25.4 46.8
Oil revenue ($000) $ 2 $ 380 $ 202 $ 1,231
Volume (MBO) 1 5 3 15
Avg. Price ($/Bbl) $ 80.00 $ 76.00 $ 83.75 $ 82.08
Midstream gathering system revenue ($000) $ 3,532 $ 2,242 $ 13,342 $ 7,632
Total $ 9,239 $ 12,644 $ 52,936 $ 46,514

Management Comments

Overall, management is extremely pleased with the financial results for 2014. Natural gas pricing in the northeast Marcellus basin will likely continue to experience significant discounts to Nymex Henry Hub in 2015, but management is confident that our reduced overhead and our singular focus on improving Marcellus operations will enable Epsilon to continue generating positive cash flows.

In the next few years, 4+ Bcf/d of interstate pipeline projects are scheduled to commence service in Epsilon's immediate vicinity of northeast Pennsylvania. These projects will have a direct and meaningful impact on pricing differentials. Management believes the current cash on hand coupled with the increased borrowing capacity on our line of credit will afford Epsilon the capital flexibility necessary to not only withstand the current environment, but to also maximize the long term value of our Marcellus assets for our shareholders as natural gas pricing improves.

Capital Expenditures

Epsilon's total capital expenditures were $7.9 million for the year ended December 31, 2014. $2.7 million was allocated to drilling and completing Marcellus wells, and $5.2 million was allocated to the ongoing build-out of the Auburn Gas Gathering system.

In regards to the potential expansion of the Auburn compression facility, there has been no material progress during the quarter. All upstream producers in the vicinity of the Auburn facility continue to be impacted by weak natural gas prices and limited downstream takeaway capacity. Until there is improved visibility in regards to these issues, Epsilon does not expect any decision to be forthcoming.

Epsilon plans capital expenditures of $20 million for 2015. Of this, $8.6 million is budgeted for the ongoing development of the midstream system and $1.0 million for accrued drilling costs and completing costs of 14 gross (0.14 net) drilled wells. The remaining upstream budget is discretionary and will be driven by natural gas prices and management's elected pace of proving Upper Marcellus resource on Epsilon's leasehold.

Marcellus Operational Guidance

During the fourth quarter, Epsilon turned 4 gross (0.09 net) new wells in line. 4 wells (.62 net) were returned to production, and 1 well (0.00 net) remained shut-in for adjacent fracing operations. The Operator drilled 4 wells (0.09 net) during the quarter. Epsilon did not receive any new drilling proposals from the Operator during the quarter. The table below details Epsilon's well development status at September 30, 2014:

September 30, 2014 December 31, 2014
Gross Net Gross Net
Producing 75 23.10 83 23.81
Shut-in for adjacent frac 5 0.62 1 -
Waiting on pipeline - - - -
Waiting on completion 14 0.41 14 0.41
Drilling - - - -

Fourth Quarter Results

Epsilon generated revenues of $9.2 million for the three months ended December 31, 2014 compared to $12.6 million for the three months ended December 31, 2013. The Company's Upstream Marcellus net revenue interest production was 2.7 Bcfe in the fourth quarter.

Realized natural gas prices averaged $2.15 per Mcf in the fourth quarter of 2014. Realized natural gas prices in Northeast Pennsylvania continue to be negatively impacted by a significant differential to NYMEX Henry Hub prices. Operating expenses for Marcellus Upstream operations in the fourth quarter were $1.7 million.

The Midstream system delivered 30 Bcfe gross of natural gas during the quarter as compared to 29 Bcfe during the third quarter of 2014. Primary gathering volumes declined 8.8% quarter over quarter to 14.8 Bcfe while imported cross-flow volumes increased 18.4% to 15.5 Bcfe.

Epsilon reported net after tax income of $3.6 million attributable to common shareholders or $0.07 per basic and diluted common shares outstanding for the three months ended December 31, 2014, compared to net loss of $15.0 million, or a loss of $.30 per basic and diluted common shares outstanding for the three months ended December 31, 2013.

For the three months ended December 31, 2014, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $6.8 million as compared to $8.0 million for the three months ended December 31, 2013. The decrease in Adjusted EBITDA was primarily due to decreased production and decreased prices.

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 exploration and production 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 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.

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.

Consolidated Statements of Operations
(All amounts stated in US$)

Years ended December 31,
2014 2013
Oil & gas revenue $ 39,593,718 $ 38,881,902
Gas gathering & compression revenue 13,342,458 7,632,463
Total revenue 52,936,176 46,514,365
Operating costs and expenses:
Project operating costs 11,323,288 11,400,285
Depletion, depreciation, amortization and decommissioning accretion 23,467,793 16,991,304
Impairment recovery (expense) (420,634) 13,312,358
Stock based compensation recovery (1,016,581) (121,392)
General and administrative 1,949,373 7,189,389
Total operating costs and expenses 35,303,239 48,771,944
Operating income 17,632,937 (2,257,579)
Other income and expense:
Interest income 76,576 13,864
Finance expense (4,396,418) (4,444,897)
Realized (loss) gain on commodity contracts (3,892,308) 1,533,906
Net change in unrealized gain (loss) on commodity contracts 1,569,988 (3,558,053)
Gain (loss) on sale of oil & gas interests 1,198,931 -
Other income (loss) 236,872 1,842
Net other income (expense) (5,206,359) (6,453,338)
Income tax recovery - current - -
Income tax expense - deferred 5,810,626 4,811,364
NET INCOME $ 6,615,952 $ (13,522,281)
Net income per share, basic $0.13 ($0.27)
Net income per share, diluted $0.13 ($0.27)
Weighted average number of shares outstanding, basic 49,557,914 50,258,559
Weighted average number of shares outstanding, diluted 49,624,096 50,258,559

Consolidated Statements of Financial Position
(All amounts stated in US$)

December 31, December 31,
2014 2013
Current assets
Cash and cash equivalents $ 16,061,731 $ 3,624,398
Accounts receivable 4,705,461 6,638,379
Other current assets 279,430 301,015
Total current assets 21,046,622 10,563,792
Non-current assets
Oil and gas interests:
Intangible exploration and evaluation assets 8,800 300,000
Net property and equipment 145,482,656 161,207,478
Total oil and gas interests 145,491,456 161,507,478
Total assets $ 166,538,078 $ 172,071,270
Current liabilities
Accounts payable and accrued liabilities $ 5,868,563 $ 11,142,277
Commodity contracts - 1,569,988
Revolving line of credit 7,000,000 9,000,000
Total current liabilities 12,868,563 21,712,265
Non-current liabilities
Convertible debentures 31,493,461 33,070,745
Decommissioning liabilities 1,996,621 1,905,546
Deferred tax liability 28,495,797 22,685,171
Total non-current liabilities 61,985,879 57,661,462
Total liabilities 74,854,442 79,373,727
Share capital 130,231,489 136,726,805
Equity component of convertible debentures 5,024,690 5,028,761
Contributed surplus 5,693,058 7,205,445
Deficit (54,975,850) (59,053,029)
Accumulated other comprehensive income 5,710,249 2,789,561
Total equity 91,683,636 92,697,543
Total liabilities and shareholders' equity $ 166,538,078 $ 172,071,270
Approved by the Board of Directors:
(signed) "John V. Lovoi" (signed) "Ryan Roebuck"
John V. Lovoi, Chairman of the Board Ryan Roebuck, Chairman of the Audit Committee

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

Years ended December 31
2014 2013
Cash flows from operating activities:
Net income (loss) $ 6,615,952 $ (13,522,281)
Adjustments for: -
Depletion, depreciation, amortization and decommissioning accretion 23,467,793 16,991,304
Debenture accretion and fee amortization 1,203,859 1,258,032
Impairment recovery (420,634) 13,312,358
Net change in unrealized (gain) loss on commodity contracts (1,569,988) 3,558,053
Stock-based compensation expense (recovery) (1,016,581) (121,392)
Deferred income tax expense 5,810,626 4,811,364
Income taxes paid - (26,000)
(Gain) loss on sale of assets (1,198,931) 52,950
Changes in non-cash balances related to operations (1,623,703) 5,922,109
Net cash provided by operating activities 31,268,393 32,236,497
Cash flows from investing activities:
Additions to oil and natural gas properties - E&E (12,504) (348,568)
Additions to oil and natural gas properties - PP&E (7,933,360) (40,712,151)
Change in working capital related to capital asset additions (1,231,432) (4,254,525)
Additions to other property and equipment - (4,150)
Proceeds from assets sold 1,717,152 1,146,200
Net cash (used in) investing activities (7,460,144) (44,173,194)
Cash flows from financing activities:
Proceeds from exercise of options 548,963 628,809
Buyback of common shares (10,111,721) (1,642,889)
Proceeds (repayment) of draw on revolving line of credit (2,000,000) 9,000,000
Net cash provided by (used in) financing activities (11,562,758) 7,985,920
Effect of currency rates on cash and cash equivalents 191,842 (3,997)
Increase in cash and cash equivalents 12,437,333 (3,954,774)
Cash and cash equivalents, beginning of period 3,624,398 7,579,172
Cash and cash equivalents, end of period $ 16,061,731 $ 3,624,398
Cash and cash equivalents consist of:
Cash $ 16,061,731 $ 2,107,198
Money market funds - 1,517,200
Cash and cash equivalents $ 16,061,731 $ 3,624,398

Adjusted EBITDA Reconciliation
(All amounts stated in US$)

Years ended December 31,
2014 2013
Net income (loss) $ 6,616 $ (13,522)
Add Back:
Net interest expense 4,319 4,431
Deferred income tax (recovery) provision 5,810 4,811
Depreciation, depletion, amortization, and accretion 23,468 16,991
Stock based compensation expense (recovery) (1,017) (121)
Net change in unrealized (gain) loss on commodity contracts (1,570) 3,558
Impairment expense (recovery) (421) 13,312
Other income (14) (2)
Adjusted EBITDA $ 37,191 $ 29,458

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