Epsilon Energy Ltd.

TSX : EPS


Epsilon Energy Ltd.

April 16, 2014 17:36 ET

Epsilon Reports First Quarter 2014 Results

HOUSTON, TEXAS--(Marketwired - April 16, 2014) - Epsilon Energy Ltd. ("Epsilon" or the "Company") (TSX:EPS) today reported first quarter 2014 financial and operating results. Highlights for the first quarter and material subsequent events following the end of the quarter through the date of this release include:

  • Pre-tax income of $3.9 million and adjusted EBITDA of $11.4 million.
  • Upstream EBITDA of $8.7 million and Midstream EBITDA of $2.7 million.
  • Increased Marcellus working interest (WI) gas production exit rate from 47 MMcf/d (avg. Dec 2013) to 52 MMcf/d (avg. Mar 2014) and reached up to 60 Mmcf per day at March 31, 2014.
  • Gathered and delivered 28 Bcfe gross (9.8 Bcfe net to Epsilon's interest) during the quarter, or 311 MMcfe gross per day with the Auburn Gas Gathering system.
  • Repurchased 70,500 common shares at an average price (Cdn) $3.60.

Financial and Operating Results

Three months ended
March 31,
2014 2013
Revenue By Product - Total Period ($000)
Nat'l gas revenue ($000) $ 14,102 $ 11,262
Volume (MMcfe) 4,096 3,198
Avg. Price ($/Mcfe) $ 3.44 $ 3.52
Exit Rate (MMcfepd) 59.7 36.0
Oil revenue ($000) $ 196 $ 132
Volume (MBO) 2 2
Avg. Price ($/Bbl) $ 80.66 $ 78.11
Midstream gathering system revenue ($000) $ 3,327 $ 2,578
Total $ 17,625 $ 13,972

Management Comments

Mr. Michael Raleigh, Chief Executive Officer, commented, "The value of Epsilon's Midstream asset is apparent from this quarter's operating results. Throughput increased 28% quarter over quarter, primarily as the result of a 57% increase of imported gas from adjacent gathering systems (cross-flow) that require additional compression capacity to reach the Tennessee Gas Pipeline system. Revenues for our Midstream asset increased 29% to $3.3 million resulting in $2.7 million in EBITDA net to Epsilon's interest. We expect continued growth in imported cross-flow gas volumes over the next several years.

"Our Upstream segment also experienced robust growth during the 1st quarter. Average daily gas net (of royalty) sales of 45.5 MMcf/d during the quarter (working interest produced gas of 52 MMcf/d) increased 6.5% compared to the 4th quarter of 2013. We are especially pleased to note that production growth accelerated into the end of the 1st quarter, with Epsilon exiting the quarter producing working interest gas of approximately 60 MMcf/d. This exit rate represents an increase of more than 15% over the quarter's average working interest production.

"Previously we noted that our upstream operating partner had begun implementing a new design for Lower Marcellus completions which should materially enhance the recovery of Epsilon's proved undeveloped reserves. Five recently completed wells had average frac spacing intervals of 288' versus 522' for the older design. Furthermore, early indications are that completion costs for these wells are comparable to the older design despite having almost twice the number of stages. Based on the results of an independent engineering study commissioned by Epsilon on our well data, it is our expectation that these and future wells will have higher initial production rates and commensurately higher EURs than our previous well completions.

"In aggregate, we are very pleased with the financial and operating performance of the company."

Capital Expenditures

Epsilon's total capital expenditures were $4.2 million for the three months ended March 31, 2014. $2.6 million was allocated to drilling ($0.5 million) and completing ($2.1 million) Marcellus wells, and $1.6 million was allocated to the ongoing expansion of Auburn Gas Gathering system.

Epsilon's 2014 capital budget reflects our singular focus on the development and optimization of our Marcellus assets. We anticipate net capital expenditures of approximately $15 million for the remainder of 2014, the majority ($13.4 million) of which will be allocated to the expansion of Auburn Gas Gathering system and includes capital for the expansion of the Auburn compression facility ($5.2 million). Epsilon has not yet received the updated reservoir forecast from the upstream operator, which will enable it to commit the capital required to expand the compression facility for maximum throughput. The remaining $8.2 million in Midstream capital is primarily for the extension of existing trunk lines and the construction of new gathering lines, including a project to connect the first third party pad directly to the system.

Marcellus Operational Guidance

During the first quarter, Epsilon turned 5 gross (1 net) new wells in line, and returned 2 wells (0.5 net) to production that had been shut-in for adjacent fracing operations. The table below details Epsilon's well development status at March 31, 2014:

Dec 31, 2013 Mar 31, 2014
Gross Net Gross Net
Producing 71 22.23 78 23.70
Shut-in for adjacent frac 2 0.49 0 0.00
Waiting on pipeline 1 0.00 2 0.14
Waiting on completion 4 0.16 9 0.19
Drilling 3 0.06 1 0.01
Completing 4 0.98 0 0.00

Subsequent to quarter end, Epsilon turned 2 gross (.14 net) new wells in line.

Near-term, northeastern Marcellus gas pricing is being pressured by strong local supply growth which has outpaced infrastructure and takeaway capacity. This infrastructure bottleneck is driving pricing differentials to benchmark indexes, which in turn incentivizes the construction of new pipelines and the reversal of existing pipelines bringing gas into the region. Longer term, we expect pipeline capacity expansions to provide additional northeast Marcellus takeaway capacity to be realized by mid-2015. Such capacity expansion should reduce the long term Marcellus transportation costs and pricing differentials.

Epsilon hedges portions of its expected production volumes to increase the predictability of its cash flow and to help maintain a strong financial position. For the remainder of 2014, Epsilon has entered into NYMEX natural gas swaps for 30,000 mmbtu per day at an average price of $4.02.

First Quarter Results

Epsilon generated revenues of $17.6 million for the three months ended March 31, 2014 compared to $11.4 million for the three months ended March 31, 2013. Marcellus natural gas production levels increased as compression operations at the Auburn facility reduced back pressure on the wells. In addition, 2 gross (0.5 net) shut-in wells and 5 gross (1 net) new wells were turned in line during the quarter. The Company's Upstream Marcellus working interest production was 4.7 Bcfe net in the first quarter.

Realized natural gas prices averaged $3.44 per Mcf in the first quarter of 2014. Although the realized natural gas price was negatively impacted by a differential to NYMEX that averaged ($1.49) during the quarter, this differential, while volatile, has narrowed considerably (less than $1.00) thus far in the second quarter. Operating expenses for Marcellus Upstream operations in the first quarter were $2.5 million.

Increased production levels and increased cross-flow gas from adjacent gathering system resulted in historically high levels of throughput, revenue and EBITDA for the Auburn Gas Gathering system. The Midstream system delivered 28.0 Bcfe gross of natural gas during the quarter as compared to 21.8 Bcfe during the fourth quarter of 2013. Primary gathering volumes increased 14.4% quarter over quarter to 17.0 Bcfe, and imported cross-flow volumes increased 57.7% to 11.0 Bcfe. Revenues increased 29.1% quarter over quarter to $3.3 million from $2.6 million. Midstream EBITDA increased to $2.7 million.

Epsilon reported net after tax income of $2.0 million attributable to common shareholders or $0.04 per basic and diluted common shares outstanding for the three months ended March 31, 2014, compared to a net income of $1.7 million, or $0.03 per basic and diluted common shares outstanding for the three months ended March 31, 2013.

For the three months ended March 31, 2014, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $11.4 million as compared to $10.8 million for the three months ended March 31, 2013. The increase in Adjusted EBITDA was primarily due to increased production, increased cross-flow gas and decreased general and administrative costs.

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.

EPSILON ENERGY LTD.
Interim Unaudited Condensed Consolidated Statements of Operations
(All amounts stated in US$)
Three months ended
March 31,
2014 2013
Revenues:
Oil & gas revenue $ 14,298,067 $ 11,393,759
Gas gathering & compression revenue 3,327,079 2,577,931
Total revenue 17,625,146 13,971,690
Operating costs and expenses:
Project operating costs 3,228,875 3,305,712
Depletion, depreciation, amortization and decomissioning accretion 4,431,514 3,277,200
Impairment recovery (420,634 ) (384,068 )
Stock based compensation 22,888 56,055
General and administrative 419,356 880,894
Total operating costs and expenses 7,681,999 7,135,793
Operating income 9,943,147 6,835,897
Other income and expense:
Interest income 9,409 66
Finance expense (1,244,786 ) (1,089,587 )
Realized gain (loss) on commodity contracts (2,584,130 ) 1,015,904
Net change in unrealized loss on commodity contracts (2,206,905 ) (2,912,840 )
Loss on sale of fixed assets (460 ) -
Other loss (3,899 ) -
Net other expense (6,030,771 ) (2,986,457 )
Income tax recovery - current - -
Income tax expense - deferred 1,911,857 2,173,009
NET INCOME $ 2,000,519 $ 1,676,431
Net income per share, basic $ 0.04 $ 0.03
Net income per share, diluted $ 0.04 $ 0.03
Weighted average number of shares outstanding, basic 50,265,606 50,233,243
Weighted average number of shares outstanding, diluted 50,329,877 50,683,965
EPSILON ENERGY LTD.
Interim Unaudited Condensed Consolidated Statements of Financial Position
(All amounts stated in US$)
March 31, December 31,
2014 2013
ASSETS
Current assets
Cash and cash equivalents $ 5,200,550 $ 3,624,398
Accounts receivable 8,494,938 6,638,379
Restricted cash - current 162,603 163,505
Other current assets 76,346 122,136
Total current assets 13,934,437 10,548,418
Non-current assets
Oil and gas interests:
Intangible exploration and evaluation assets 271,832 300,000
Net property and equipment 160,781,215 161,207,478
Total oil and gas interests 161,053,047 161,507,478
Other assets:
Deposits 45,352 15,374
Total other assets 45,352 15,374
Total non-current assets 161,098,399 161,522,852
Total assets $ 175,032,836 $ 172,071,270
EQUITY AND LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 8,724,179 $ 11,142,277
Commodity contracts 3,776,893 1,569,988
Revolving line of credit 7,000,000 9,000,000
Total current liabilities 19,501,072 21,712,265
Non-current liabilities
Convertible debentures 32,103,939 33,070,745
Decommissioning liabilities 2,513,505 1,905,546
Deferred tax liability 24,594,028 22,685,171
Total non-current liabilities 59,211,472 57,661,462
Total liabilities 78,712,544 79,373,727
Equity
Share capital 137,539,992 136,726,805
Equity component of convertible debentures 5,028,761 5,028,761
Contributed surplus 6,732,527 7,205,445
Deficit (57,052,510 ) (59,053,029 )
Accumulated other comprehensive income 4,071,522 2,789,561
Total equity 96,320,292 92,697,543
Total liabilities and shareholders' equity $ 175,032,836 $ 172,071,270
EPSILON ENERGY LTD.
Interim Unaudited Condensed Consolidated Statements of Cash Flows
(All amounts stated in US$)
Three months ended
March 31,
2014 2013
Cash flows from operating activities:
Net income (loss) $ 2,000,519 $ 1,676,431
Adjustments for:
Depletion, depreciation, amortization and decomissioning accretion 4,431,514 3,277,200
Debenture accretion and fee amortization 302,340 314,552
Impairment recovery (420,634 ) (384,068 )
Net change in unrealized (loss) on commodity contracts 2,206,905 2,912,840
Stock-based compensation expense 22,888 56,055
Deferred income tax expense 1,911,857 2,173,009
Income taxes paid (3,000 ) (426,000 )
(Gain) loss on sale of assets 460 -
Changes in non-cash balances related to operations (3,455,866 ) 4,132,048
Net cash provided by operating activities 6,996,983 13,732,067
Cash flows from investing activities:
Additions to oil and natural gas properties - E&E (3,877 ) (125,381 )
Additions to oil and natural gas properties - P&E (4,471,695 ) (10,559,284 )
Additions to other property and equipment - (428 )
Proceeds from assets sold 723,642 -
Changes in restricted cash - current - 420
Net cash (used in) investing activities (3,751,930 ) (10,684,673 )
Cash flows from financing activities:
Proceeds from exercise of options 548,963 -
Buyback of common shares (231,581 ) -
Repayment of draw on revolving line of credit (2,000,000 ) -
Net cash provided by financing activities (1,682,618 ) -
Effect of currency rates on cash and cash equivalents 13,717 75,649
Increase in cash and cash equivalents 1,576,152 3,123,043
Cash and cash equivalents, beginning of period 3,624,398 7,579,172
Cash and cash equivalents, end of period $ 5,200,550 $ 10,702,215
Cash and cash equivalents consist of:
Cash $ 2,857,228 $ 8,482,129
Money market funds 2,343,322 2,220,086
Cash and cash equivalents $ 5,200,550 $ 10,702,215
EPSILON ENERGY LTD.
Adjusted EBITDA Reconciliation
(All amounts stated in US$)
Three months ended
March 31,
2014 2013
Net income $ 2,000 $ 1,676
Add Back:
Net interest expense 1,235 1,090
Deferred income tax provision 1,912 2,173
Depreciation, depletion, amortization, and accretion 4,432 3,277
Stock based compensation expense 23 56
Net change in unrealized loss on commodity contracts 2,207 2,913
Impairment recovery (421 ) (384 )
Other loss 3 -
Adjusted EBITDA $ 11,391 $ 10,801

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