Epsilon Energy Ltd.

Epsilon Energy Ltd.

May 05, 2016 17:40 ET

Epsilon Reports First Quarter 2016 Results

HOUSTON, TEXAS--(Marketwired - May 5, 2016) - Epsilon Energy Ltd. ("Epsilon" or the "Company") (TSX:EPS) today reported first quarter 2016 financial and operating results.

Mr. Michael Raleigh, Chief Executive Officer, commented, "Epsilon's natural gas production remained below potential during the first quarter with approximately 12 gross (4 net) wells shut-in on average. Overall industry production was curtailed during the quarter in order to balance supply as a consequence of the unseasonably warm weather and weak heating demand. As a comparison, our gross average production was 35 MMcf/d during the past quarter compared to 29 MMcf/d during the same period of 2015.

Epsilon's realized gas prices remain relatively low. We received $1.15 per Mcf on average during the past quarter versus $1.40 per Mcf during the first quarter of 2015. Operators are responding to these prices by curtailing production and restraining capital spending. Natural gas supply from the northeast Marcellus basin is flat to declining, and interstate pipeline capacity is slowly increasing. We remain confident that over the medium to long term Marcellus natural gas prices will improve. April price realizations have improved approximately 15% relative to the first quarter."

Highlights for the first quarter and material subsequent events following the end of the quarter through the date of this release include:

  • Upstream EBITDA of $1.1 million and Midstream EBITDA of $1.8 million for the quarter.
  • Marcellus working interest (WI) gas production averaged 35 MMcf/d for the first quarter of 2016. Working interest gas production as of this release is approximately 34 MMcf/d.
  • Gathered and delivered 19 Bcfe gross (6.5 Bcfe net to Epsilon's interest) during the quarter, or 204 MMcfe/d through the Auburn System which represents approximately 57% of the maximum throughput. Current system throughput is averaging 200 MMcfe/d.
  • Auburn Gas gathering and compression services included third party gas of 2.0 Bcfe during the quarter or approximately 22 MMcf/d.

Financial and Operating Results

Three months ended March 31,
2016 2015
Revenue By Product - Total Period ($000)
Nat'l gas revenue ($000) $ 3,189 $ 3,221
Volume (MMcfe) 2,762 2,303
Avg. Price ($/Mcfe) $ 1.15 $ 1.40
Exit Rate (MMcfepd) 38.1 31.3
Oil revenue ($000) $ - $ 2
Volume (MBO) - < 1
Avg. Price ($/Bbl) $ - $ 56.77
Midstream gathering system revenue ($000) $ 2,427 $ 3,423
Total $ 5,616 $ 6,646

Capital Expenditures

Epsilon's total capital expenditures were $0.3 million for the three months ended March 31, 2016. All capital was allocated to the ongoing build-out and maintenance of the Auburn Gas Gathering system.

Epsilon's 2016 capital forecast for the remainder of the year is $12.2 million. $11.3 million is allocated to complete the previously announced purchase of additional working interest in the producing, developed non-producing and undeveloped acreage served by the Auburn Gas Gathering system. $0.9 million is allocated to ongoing build-out and maintenance of the Auburn Gas Gathering system.

Marcellus Operational Guidance

Epsilon did not turn any new wells in line. The Operator continued to shut-in various combinations of producing wells throughout the first quarter in response to natural gas prices. At quarter end, 10 gross (2.08 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 March 31, 2016:

Dec. 31, 2015 March 31, 2016
Gross Net Gross Net
Producing 55 13.17 86 22.13
Shut-in 41 11.04 10 2.08
Waiting on pipeline - - - -
Waiting on completion 2 0.01 2 0.01
Drilling - -

Epsilon has not received any well proposals from the Operator subsequent to quarter end.

First Quarter Results

Epsilon generated revenues of $5.6 million for the three months ended March 31, 2016 compared to $6.6 million for the three months ended March 31, 2015. The Company's Upstream Marcellus net revenue interest production was 2.8 Bcfe in the first quarter.

Realized natural gas prices averaged $1.15 per Mcf in the first quarter of 2016. 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 first quarter were $1.6 million.

The Auburn Gas Gathering system delivered 18.6 Bcfe of natural gas during the quarter as compared to 17.4 Bcfe during the fourth quarter of 2015. Primary gathering volumes increased 23.1% quarter over quarter to 14.0 Bcfe primarily as a result of returning to production various shut-in wells inside the Auburn system boundary. Imported cross-flow volumes decreased 23.9% to 4.6 Bcfe primarily as a result of voluntary well shut-ins and production ceilings in adjacent systems as a response to natural gas prices.

Epsilon reported net after tax loss of $1.3 million attributable to common shareholders or ($0.03) per basic and diluted common share outstanding for the three months ended March 31, 2016, compared to a net loss of $0.7 million, and ($0.01) per basic and diluted common share outstanding for the three months ended March 31, 2015.

For the three months ended March 31, 2016, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $2.8 million as compared to $3.9 million for the three months ended March 31, 2015. The decrease in Adjusted EBITDA was primarily due to 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 natural gas production and midstream 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. Forward-looking statements are based on reasonable assumptions, 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.

Interim Unaudited Condensed Consolidated Statements of Operations
(All amounts stated in US$)
Three months ended March 31,
Notes 2016 2015
Oil and gas revenue $ 3,188,779 $ 3,222,927
Gas gathering and compression revenue 2,427,153 3,422,722
Total revenue 5,615,932 6,645,649
Operating costs and expenses:
Project operating costs 2,297,876 2,183,484
Depletion, depreciation, amortization and decommissioning accretion 4 3,058,139 3,367,904
Stock based compensation expense 72,973 7,499
General and administrative 473,334 517,955
Total operating costs and expenses 5,902,322 6,076,842
Operating income (loss) (286,390 ) 568,807
Other income and (expense):
Interest income 1 14,263
Finance expense (950,716 ) (1,043,907 )
Other income (expense) (96,879 ) 30,806
Net other income (expense) (1,047,594 ) (998,838 )
Income tax expense - current 23,800 444,743
Income tax (recovery) expense - deferred (72,400 ) (173,484 )
NET (LOSS) INCOME $ (1,285,384 ) $ (701,290 )
Net (loss) income per share, basic 10 $ (0.03 ) $ (0.01 )
Net (loss) income per share, diluted 10 $ (0.03 ) $ (0.01 )
Weighted average number of shares outstanding, basic 10 46,015,497 47,254,546
Weighted average number of shares outstanding, diluted 10 46,015,497 47,254,546
Interim Unaudited Condensed Consolidated Statements of Financial Position
(All amounts stated in US$)
March 31, December 31,
2016 2015
Current assets
Cash and cash equivalents $ 17,795,617 $ 16,954,664
Accounts receivable 2,985,317 3,214,406
Investment 11,314,286 -
Other current assets 98,961 138,985
Total current assets 32,194,181 20,308,055
Non-current assets
Oil and gas interests:
Property and equipment (net) 99,546,450 102,159,208
Total non-current assets 99,546,450 102,159,208
Total assets $ 131,740,631 $ 122,467,263
Current liabilities
Accounts payable and accrued liabilities $ 4,362,602 $ 4,596,083
Revolving line of credit 17,460,000 7,000,000
Convertible debentures 28,507,363 -
Total current liabilities 50,329,965 11,596,083
Non-current liabilities
Convertible debentures - 26,790,579
Decommissioning liabilities 2,498,220 2,327,785
Deferred tax liability 14,153,559 14,225,959
Total non-current liabilities 16,651,779 43,344,323
Total liabilities 66,981,744 54,940,406
Share capital 126,315,325 127,371,404
Equity component of convertible debentures 5,033,884 5,019,523
Contributed surplus 5,869,649 5,796,676
Deficit (80,887,116 ) (79,877,471 )
Accumulated other comprehensive income 8,427,145 9,216,725
Total equity 64,758,887 67,526,857
Total liabilities and shareholders' equity $ 131,740,631 $ 122,467,263
Interim Unaudited Condensed Consolidated Statements of Cash Flows
(All amounts stated in US$)
Three months ended March 31
2016 2015
Cash flows from operating activities:
Net (loss) income $ (1,285,384 ) $ (701,290 )
Adjustments for:
Depletion, depreciation, amortization and decommissioning accretion 3,058,139 3,367,904
Debenture accretion and fee amortization 278,895 213,113
Stock-based compensation expense 72,973 7,499
Deferred income tax (recovery) expense (72,400 ) 271,259
Income taxes paid - (400,000 )
Changes in non-cash balances related to operations 18,390 (1,290,276 )
Net cash provided by operating activities 2,070,613 1,468,209
Cash flows from investing activities:
Additions to oil and natural gas properties - E&E - (1,400 )
Additions to oil and natural gas properties - PP&E (274,947 ) (1,386,315 )
Change in working capital related to capital asset additions 17,242 (271,194 )
Change in investment (11,314,286 ) -
Net cash used in investing activities (11,571,991 ) (1,658,909 )
Cash flows from financing activities:
Purchase and cancellation of options - (16,808 )
Buyback of common shares (780,340 ) (8,404 )
Purchase of convertible debenture (357,842 ) -
Additional draw on revolving line of credit (net of repayments) 10,460,000 -
Net cash used in financing activities 9,321,818 (25,212 )
Effect of currency rates on cash and cash equivalents 1,020,513 (33,624 )
Increase (decrease) in cash and cash equivalents 840,953 (249,536 )
Cash and cash equivalents, beginning of period 16,954,664 16,061,731
Cash and cash equivalents, end of period $ 17,795,617 $ 15,812,195
Cash and cash equivalents consist of:
Cash $ 17,795,617 $ 15,812,195
Cash and cash equivalents $ 17,795,617 $ 15,812,195
Adjusted EBITDA Reconciliation
(All amounts stated in US $000)
Three months ended March 31,
(in thousands of dollars) 2016 2015
Net loss $ (1,285 ) $ (701 )
Add Back:
Net interest expense 951 1,030
Deferred income tax provision (49 ) 271
Depreciation, depletion, amortization, and accretion 3,058 3,368
Stock based compensation expense 73 8
Other income 92 (31 )
Adjusted EBITDA $ 2,840 $ 3,945

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