HOUSTON, TEXAS--(Marketwired - March 16, 2016) - Epsilon Energy Ltd. ("Epsilon") (TSX:EPS) today reported its financial results for the fourth quarter and full-year ended December 31, 2015.
Mr. Michael Raleigh, Chief Executive Officer, commented, "Epsilon's natural gas production continues to be below potential as a result of voluntarily imposed production ceilings. Rotating well shut-ins began early in 2015 and have continued throughout the year with approximately 50% of our net wells shut-in, during the 4th quarter. The commodity price environment in northeast Pennsylvania, while depressed, is somewhat uncorrelated to NYMEX as our price realizations had been relatively flat during 2015 while NYMEX dropped more than 25%. We continue to generate a positive cash flow contribution from the upstream and a significant cash flow contribution from our midstream asset. We are maintaining our cost control discipline and management of capital expenditures in the current price environment. Due to the attractive Cdn$/US$ exchange rate, we have been transferring US$ generated cash to Cdn$ accounts, to both partially hedge future debenture liabilities and to fund the previously announced continuation of the stock buy-back program."
Highlights for the year and material subsequent events following the end of the quarter through the date of this release include:
- Maintained cash balance of approximately $17 million throughout 2015.
- Purchased and retired just over 1 million shares of stock.
- Purchased and retired Cdn$1 million of convertible debentures. Subsequent to the quarter end, we retired an additional Cdn$0.5 million of convertible debentures.
- Upstream EBITDA of $2.7 million and Midstream EBITDA of $9.7 million for the year ($0.2 million and $1.4 million respectively for the quarter).
- Total estimated proved and probable reserves at 194 Bcf as of December 31, 2015 with 2015 production of 9 Bcf.
- Marcellus working interest (WI) gas averaged 26 MMcf/d for the fourth quarter of 2015. Working interest gas production as of this release is approximately 32 MMcf/d.
- Gathered and delivered 97 Bcf gross (34.0 Bcf net to Epsilon's interest) during the year, or 266 MMcfe/d through the Auburn System which represents approximately 78% of maximum throughput.
- Gathered and delivered 17 Bcf gross (6.1 Bcf net to Epsilon's interest) during the fourth quarter of 2015. Midstream system throughput from year end through February averaged 203 MMcfe/d.
Financial and Operating Results
| Three months ended December 31, | Twelve months ended December 31, | |||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||
| Revenue By Product - Total Period ($000) | ||||||||||
| Natural gas revenue ($000) | $ | 2,215 | $ | 5,705 | $ | 11,266 | $ | 39,392 | ||
| Volume (MMCF) | 2,102 | 2,651 | 9,343 | 14,849 | ||||||
| Avg. Price ($/MCF) | $ | 1.05 | $ | 2.15 | $ | 1.21 | $ | 2.65 | ||
| Exit Rate (MMCFPD) | 20.3 | 25.4 | 20.3 | 25.4 | ||||||
| Oil revenue ($000) | $ | 2 | $ | 2 | $ | 3 | $ | 202 | ||
| Volume (MBO) | 1 | 1 | 3 | 3 | ||||||
| Avg. Price ($/Bbl) | $ | 40.22 | $ | 80.00 | $ | 45.92 | $ | 83.75 | ||
| Midstream gathering system revenue ($000) | $ | 2,421 | $ | 3,532 | $ | 12,561 | $ | 13,342 | ||
| Total | $ | 4,638 | $ | 9,239 | $ | 23,830 | $ | 52,936 | ||
Capital Expenditures
Epsilon's total capital expenditures were $4.1 million for the year ended December 31, 2015. $1.7 million was allocated to drilling and completing Marcellus wells, and $2.3 million was allocated to the ongoing build-out of the Auburn Gas Gathering system.
Epsilon plans capital expenditures of $5 million for 2016. Of this, $3.5 million is budgeted for the ongoing development of the midstream system and $1.0 million for anticipated upstream maintenance capital. The 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 did not turn any new wells in line. The Operator continued to shut-in various combinations of producing wells throughout the fourth quarter in response to poor natural gas prices. At quarter end, 41 (11.04 net) wells remained shut-in.
The Operator did not drill or propose any new wells during the quarter. The table below details Epsilon's well development status at December 31, 2015:
| Sept 30, 2015 | Dec 31, 2015 | |||
| Gross | Net | Gross | Net | |
| Producing | 51 | 12.13 | 55 | 13.17 |
| Shut-in | 45 | 12.08 | 41 | 11.04 |
| Waiting on pipeline | - | - | - | - |
| Waiting on completion | 2 | 0.01 | 2 | 0.01 |
| Drilling | - | - | - | - |
On February 23rd, Epsilon signed an agreement to acquire roughly an additional 4% working interest in the producing, developed non-producing and undeveloped acreage within the Auburn Gas Gathering system for $11.3 million. Also, as part of the agreement, Epsilon will assume operatorship of these properties. This agreement is pending the necessary consents and approvals and is scheduled to close during the second quarter 2016.
Fourth Quarter Results
Epsilon generated revenues of $4.6 million for the three months ended December 31, 2015 compared to $9.2 million for the three months ended December 31, 2014. The Company's Marcellus net revenue interest production was 2.1 Bcfe in the fourth quarter.
Realized natural gas prices averaged $1.05 per Mcf in the fourth quarter of 2015. Realized natural gas prices in Northeast Pennsylvania continue to be negatively impacted by a significant differential to depressed NYMEX Henry Hub prices. Operating expenses for Marcellus Upstream operations in the fourth quarter were $1.5 million. Also, due to the continuing depressed gas prices management recorded a $24.5 million impairment on the Upstream assets.
The Auburn Gas Gathering system delivered 17 Bcfe of natural gas during the quarter as compared to 24 Bcfe during the third quarter of 2015. Primary gathering volumes decreased 11.5% quarter over quarter to 11.3 Bcfe primarily as a result of voluntary production curtailment by the Operator and working interest owners. Imported cross-flow volumes also decreased 44.8% to 6.0 Bcfe as a result of similar curtailments by adjacent operators.
Epsilon reported net after tax loss of $15.6 million attributable to common shareholders or ($0.34) per basic and diluted common shares outstanding for the three months ended December 31, 2015, compared to net income of $3.6 million, and $0.07 per basic and diluted common shares outstanding for the three months ended December 31, 2014.
For the three months ended December 31, 2015, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $1.6 million as compared to $6.8 million for the three months ended December 31, 2014. The decrease in Adjusted EBITDA was primarily due to decreased production and lower natural gas 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 States 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. |
| Interim Unaudited Condensed Consolidated Statements of Operations |
| (All amounts stated in US$) |
| Years ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Revenues: | ||||||||
| Oil & gas revenue | $ | 11,269,090 | $ | 39,593,718 | ||||
| Gas gathering & compression revenue | 12,561,331 | 13,342,458 | ||||||
| Total revenue | 23,830,421 | 52,936,176 | ||||||
| Operating costs and expenses: | ||||||||
| Project operating costs | 9,950,115 | 11,323,288 | ||||||
| Depletion, depreciation, amortization and decommissioning accretion | 13,225,816 | 23,467,793 | ||||||
| Impairment loss (recovery) | 34,510,200 | (420,634 | ) | |||||
| Stock based compensation expense (recovery) | 120,426 | (1,016,581 | ) | |||||
| General and administrative | 1,858,585 | 1,949,373 | ||||||
| Total operating costs and expenses | 59,665,142 | 35,303,239 | ||||||
| Operating income (loss) | (35,834,721 | ) | 17,632,937 | |||||
| Other income and (expense): | ||||||||
| Interest income | 14,298 | 76,576 | ||||||
| Finance expense | (3,933,672 | ) | (4,396,418 | ) | ||||
| Bad debt expense | (525,777 | ) | - | |||||
| Realized loss on commodity contracts | - | (3,892,308 | ) | |||||
| Net change in unrealized loss on commodity contracts | - | 1,569,988 | ||||||
| Gain on sale of fixed assets | - | 1,198,931 | ||||||
| Other income | 486,377 | 236,872 | ||||||
| Net other income (expense) | (3,958,774 | ) | (5,206,359 | ) | ||||
| Income tax (recovery) expense - deferred | (14,269,838 | ) | 5,810,626 | |||||
| NET (LOSS) INCOME | $ | (25,523,657 | ) | $ | 6,615,952 | |||
| Net (loss) income per share, basic | $ | (0.54 | ) | $ | 0.13 | |||
| Net (loss) income per share, diluted | $ | (0.54 | ) | $ | 0.13 | |||
| Weighted average number of shares outstanding, basic | 47,049,955 | 49,557,914 | ||||||
| Weighted average number of shares outstanding, diluted | 47,049,955 | 49,624,096 | ||||||
| EPSILON ENERGY LTD. |
| Interim Unaudited Condensed Consolidated Statements of Financial Position |
| (All amounts stated in US$) |
| December 31, | December 31, | |||||||
| 2015 | 2014 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 16,954,664 | $ | 16,061,731 | ||||
| Accounts receivable | 3,214,406 | 4,705,461 | ||||||
| Other current assets | 138,985 | 279,430 | ||||||
| Total current assets | 20,308,055 | 21,046,622 | ||||||
| Non-current assets | ||||||||
| Oil and gas interests: | ||||||||
| Intangible exploration and evaluation assets | - | 8,800 | ||||||
| Property and equipment (net) | 102,159,208 | 145,482,656 | ||||||
| Total oil and gas interests | 102,159,208 | 145,491,456 | ||||||
| Total assets | $ | 122,467,263 | $ | 166,538,078 | ||||
| EQUITY AND LIABILITIES | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 4,596,083 | $ | 5,868,563 | ||||
| Revolving line of credit | 7,000,000 | 7,000,000 | ||||||
| Total current liabilities | 11,596,083 | 12,868,563 | ||||||
| Non-current liabilities | ||||||||
| Convertible debentures | 26,790,579 | 31,493,461 | ||||||
| Decommissioning liabilities | 2,327,785 | 1,996,621 | ||||||
| Deferred tax liability | 14,225,959 | 28,495,797 | ||||||
| Total non-current liabilities | 43,344,323 | 61,985,879 | ||||||
| Total liabilities | 54,940,406 | 74,854,442 | ||||||
| Equity | ||||||||
| Share capital | 127,371,404 | 130,231,489 | ||||||
| Equity component of convertible debentures | 5,019,523 | 5,024,690 | ||||||
| Contributed surplus | 5,796,676 | 5,693,058 | ||||||
| Deficit | (79,877,471 | ) | (54,975,850 | ) | ||||
| Accumulated other comprehensive income | 9,216,725 | 5,710,249 | ||||||
| Total equity | 67,526,857 | 91,683,636 | ||||||
| Total liabilities and shareholders' equity | $ | 122,467,263 | $ | 166,538,078 | ||||
| EPSILON ENERGY LTD. |
| Interim Unaudited Condensed Consolidated Statements of Cash Flows |
| (All amounts stated in US$) |
| Years ended December 31 | |||||||
| 2015 | 2014 | ||||||
| Cash flows from operating activities: | |||||||
| Net (loss) income | $ | (25,523,657 | ) | $ | 6,615,952 | ||
| Adjustments for: | |||||||
| Depletion, depreciation, amortization and decommissioning accretion | 13,225,816 | 23,467,793 | |||||
| Debenture accretion and fee amortization | 1,176,450 | 1,203,859 | |||||
| Impairment loss (recovery) | 34,510,200 | (420,634 | ) | ||||
| Net change in unrealized loss on commodity contracts | - | (1,569,988 | ) | ||||
| Stock-based compensation expense (recovery) | 120,426 | (1,016,581 | ) | ||||
| Deferred income tax (recovery) expense | (14,269,838 | ) | 5,810,626 | ||||
| Bad debt expense | 525,777 | - | |||||
| Gain on sale of assets | - | (1,198,931 | ) | ||||
| Changes in non-cash balances related to operations | 760,982 | (1,623,703 | ) | ||||
| Net cash provided by operating activities | 10,526,156 | 31,268,393 | |||||
| Cash flows from investing activities: | |||||||
| Additions to oil and natural gas properties - E&E | (1,400 | ) | (12,504 | ) | |||
| Additions to oil and natural gas properties - PP&E | (4,071,204 | ) | (7,933,360 | ) | |||
| Change in working capital related to capital asset additions | (1,067,740 | ) | (1,231,432 | ) | |||
| Proceeds from assets sold | - | 1,717,152 | |||||
| Net cash used in investing activities | (5,140,344 | ) | (7,460,144 | ) | |||
| Cash flows from financing activities: | |||||||
| Proceeds from exercise of options | - | 548,963 | |||||
| Purchase and cancellation of options | (16,808 | ) | - | ||||
| Buyback of common shares | (2,238,378 | ) | (10,111,721 | ) | |||
| Purchase of convertible debenture | (752,442 | ) | - | ||||
| Changes in restricted cash | 140,000 | - | |||||
| Repayment of draw on revolving line of credit | - | (2,000,000 | ) | ||||
| Net cash used in financing activities | (2,867,628 | ) | (11,562,758 | ) | |||
| Effect of currency rates on cash and cash equivalents | (1,625,251 | ) | 191,842 | ||||
| Increase in cash and cash equivalents | 892,933 | 12,437,333 | |||||
| Cash and cash equivalents, beginning of period | 16,061,731 | 3,624,398 | |||||
| Cash and cash equivalents, end of period | $ | 16,954,664 | $ | 16,061,731 | |||
| Cash and cash equivalents consist of: | |||||||
| Cash | $ | 16,954,664 | $ | 16,061,731 | |||
| Money market funds | - | - | |||||
| Cash and cash equivalents | $ | 16,954,664 | $ | 16,061,731 | |||
| EPSILON ENERGY LTD. |
| Adjusted EBITDA Reconciliation |
| (All amounts stated in US$) |
| Years ended December 31, |
|||||||
| 2015 | 2014 | ||||||
| Net income (loss) | $ | (25,524 | ) | $ | 6,616 | ||
| Add Back: | |||||||
| Net interest expense | 3,919 | 4,319 | |||||
| Deferred income tax (recovery) provision | (14,271 | ) | 5,810 | ||||
| Depreciation, depletion, amortization, and accretion | 13,227 | 23,468 | |||||
| Stock based compensation expense (recovery) | 121 | (1,017 | ) | ||||
| Net change in unrealized (gain) loss on commodity contracts | - | (1,570 | ) | ||||
| Impairment expense (recovery) | 34,510 | (421 | ) | ||||
| Bad debt expense | 526 | ||||||
| Other income | (56 | ) | (14 | ) | |||
| Adjusted EBITDA | $ | 12,452 | $ | 37,191 | |||
Contact Information:
Michael Raleigh
Chief Executive Officer
281-670-0002
Michael.Raleigh@EpsilonEnergyLTD.com