Epsilon Energy Ltd.

Epsilon Energy Ltd.

August 06, 2013 17:19 ET

Epsilon Reports Second Quarter 2013 Results and Closes $100 Million Senior Bank Credit Facility

HOUSTON, TEXAS--(Marketwired - Aug. 6, 2013) - Epsilon Energy Ltd. ("Epsilon" or the "Company") (TSX:EPS) today reported second quarter 2013 financial and operating results. Highlights for the second quarter and material subsequent events following the end of the quarter through date of this release include:

Net production of 2.5 billion cubic feet equivalent (Bcfe) from Marcellus during the 2nd quarter
Reduced operating expenses 34% to $0.78 per Mcfe, compared to $1.18 per Mcfe for the second quarter 2012
Reconstituted the Board of Directors and appointed John Lovoi as Chairman
Appointed Michael Raleigh as Chief Executive Officer and Board member
Obtained $100 million senior bank credit facility with an initial borrowing base of $20 million, currently undrawn
Initiated Canadian asset sale process as part of strategic plan to focus exclusively on Marcellus asset development and optimization

Financial and Operating Results

Three months ended June 30,
2013 2012
Revenue by product
Natural gas revenue ($000) $ 8,054 $ 8,499
Volume (MMcfe) 2,501 3,676
Avg. Price ($/Mcfe) $ 3.22 $ 2.31
Exit Rate (MMcfepd) 33.3 43.8
Oil revenue ($000) $ 367 $ 230
Volume (MBOE) 4 2
Avg. Price ($/Bbl) $ 84.41 $ 112.89
Midstream gathering system revenue ($000) $ 869 $ 1,971
Total $ 9,290 $ 10,700

Management Comments

Mr. Michael Raleigh, Chief Executive Officer, commented, "We have completed the first steps in executing our strategic plan to develop a pure play company focused on exploitation of our high quality assets in the Marcellus. Epsilon is pleased to partner with Texas Capital Bank as the provider of its new credit facility, and is well positioned for continued development of our Marcellus assets. Our net upstream production is expected to exit the year at 45 - 50 Mmcf per day. Obtaining a senior credit facility provides liquidity to fund our Marcellus completion program, and management hopes that the initiation of our Canadian asset sales process will add to that liquidity. Based on input from third parties and our technical assessment of resource potential, we anticipate further completion and exploitation of the current interval and other Marcellus benches will significantly add to the value of this important asset for years to come."

Capital Expenditures

Epsilon's total upstream and midstream capital expenditures were $13.7 million for the three months ended June 30, 2013. Total Marcellus related capital expenditures were $10.1 million with $7.6 million for well completions and $2.5 million for expansion of the midstream gathering and compression system. The Company has allocated a significant portion of its 2013 upstream capital budget to the Marcellus Shale and plans to focus exclusively on development and optimization of these assets during the remainder of 2013. Canadian capital expenditures were $3.6 million for the three months ended June 30, 2013. The Company has discontinued investment in Canada and is currently marketing the Canadian assets for disposition.

Senior Credit Facility

Epsilon Energy USA Inc., a wholly owned subsidiary of the Company, has executed a three year senior secured revolving credit facility (the "Credit Facility") in an amount up to $100 million with Texas Capital Bank of Dallas. The Credit Facility provides for an initial borrowing base of $20 million.

The proceeds of the Credit Facility will be used to provide working capital, to fund Marcellus focused drilling, completion and midstream expenditures and for general corporate purposes. The Credit Facility contains certain mandatory covenants, including current ratio, interest coverage ratio and leverage ratio requirements, as well as other standard business operating and expenditure covenants.

Marcellus Operational Guidance

During the 3rd quarter we anticipate 9 new gross (3.0 net) wells will be placed into production. Epsilon's net production from this asset was approximately 35 Mmcf per day on August 1st, 2013 and is expected to reach approximately 45 - 50 Mmcf per day at year end based on the current anticipated completion schedule and the commencement of compression prior to year end.

Compression systems will be placed in final stage testing at the Auburn Compression Facility. Compression is scheduled to commence in late 2013 to mitigate elevated pressure levels in Tennessee Gas Pipeline, which hampered second quarter production volumes. Compression is anticipated to increase production roughly 10% to 15%.

Epsilon hedges portions of its expected production volumes to increase the predictability of its cash flow and to help maintain a strong financial position. Epsilon entered into summer 2013 (April - October) NYMEX fixed-price commodity hedge contracts. The Company has hedged 35 Mmcf per day at an average price of $3.88 per Mcf.

Second Quarter Results

Epsilon generated revenues of $9.3 million for the three months ended June 30, 2013 compared to $10.7 million for the three months ended June 30, 2012. Marcellus natural gas production levels were impacted by natural production decline as wells mature, high line pressures on Tennessee Gas Pipeline and by the shut-in of four gross (1.2 net) wells while adjacent wells were undergoing fracture stimulation and flow back. Realized natural-gas prices averaged $3.22 per Mcf in the second quarter of 2013, up from $2.31 in the second quarter of 2012. Marcellus production levels, a reduction in the gathering rate for 2013 versus 2012 and a one-time revenue adjustment made by our midstream system operator negatively impacted midstream revenues in the second quarter 2013.

The Company's upstream Marcellus asset produced net 2.5 Bcfe of natural gas in the second quarter 2013 compared to 3.7 Bcfe in the second quarter 2012. The decrease in production was driven primarily by natural decline rates as wells mature coupled with a reduction in drilling and completion activities in 2012. During the last two weeks of the second quarter 2013, Epsilon placed 7 gross (2.5 net) new wells on initial production. Production was negatively impacted during the quarter due to producing wells being shut-in while the adjacent wells were completed.

Epsilon reported a net loss of $0.3 million attributable to common shareholders or ($0.01) per basic and diluted common shares outstanding for the three months ended June 30, 2013, compared to a net loss of $2.1 million, or ($0.04) per basic and diluted common shares outstanding for the three months ended June 30, 2012.

For the three months ended June 30, 2013, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $4.5 million as compared to $5.5 million for the three months ended June 30, 2012. The decrease in Adjusted EBITDA was primarily due to a one-time $1.4 million executive severance payment associated with management changes made in June 2013 and a one-time $0.5 million inception to date prior period adjustment to midstream revenues not anticipated to recur on a go-forward basis.

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.

Interim Unaudited Condensed Consolidated Statements of Operations
(All amounts stated in US$)
Three months ended June 30,
2013 2012
Oil & gas revenue $ 8,420,872 $ 8,729,831
Gas gathering & compression revenue $ 869,140 $ 1,970,494
Total revenue 9,290,012 10,700,325
Operating costs and expenses:
Project operating costs 2,038,331 4,355,173
Depletion, depreciation, amortization and decomissioning accretion 3,397,030 6,530,136
Impairment recovery - -
Stock based compensation 48,385 193,244
General and administrative 2,389,754 861,896
Total operating costs and expenses 7,873,500 11,940,449
Operating income (loss) 1,416,512 (1,240,124 )
Other income and expense:
Interest income 2,034 16,474
Finance expense (1,071,263 ) (1,084,148 )
Realized gain (loss) on commodity contracts (402,615 ) -
Unrealized gain (loss) on commodity contracts 2,107,035 -
Other income 9,624 -
Net other income (expense) 644,815 (1,067,674 )
Income tax expense - current 1,978,331 -
Income tax expense (recovery) - deferred 382,148 (172,615 )
NET INCOME (LOSS) $ (299,152 ) $ (2,135,183 )
Net income (loss) per share, basic ($0.01 ) ($0.04 )
Net income (loss) per share, diluted ($0.01 ) ($0.04 )
Weighted average number of shares outstanding, basic 50,217,493 49,773,900
Weighted average number of shares outstanding, diluted 50,617,365 50,044,128
Interim Unaudited Condensed Consolidated Statements of Financial Position
(All amounts stated in US$)
June 30, December 31,
2013 2012
Current assets
Cash and cash equivalents $ 7,609,936 $ 7,579,172
Accounts receivable 4,920,891 9,063,110
Restricted cash - current 163,783 165,000
Commodity contracts 1,182,260 1,988,065
Other current assets 413,599 143,729
Total current assets 14,290,469 18,939,076
Non-current assets
Oil and gas interests:
Intangible exploration and evaluation assets 7,372,014 7,071,432
Net property and equipment 160,262,681 143,925,439
Total oil and gas interests 167,634,695 150,996,871
Other assets:
Deposits 15,374 7,874
Total other assets 15,374 7,874
Total non-current assets 167,650,069 151,004,745
Total assets $ 181,940,538 $ 169,943,821
Current liabilities
Accounts payable and accrued liabilities $ 21,929,922 $ 11,913,521
Total current liabilities 21,929,922 11,913,521
Non-current liabilities
Convertible debentures 32,840,591 33,996,268
Decommissioning liabilities 1,044,252 956,995
Deferred tax liability 17,713,039 17,899,807
Total non-current liabilities 51,597,882 52,853,070
Total liabilities 73,527,804 64,766,591
Share capital 137,171,493 137,328,850
Equity component of convertible debentures 5,028,761 5,028,761
Contributed surplus 7,843,311 7,738,871
Deficit (44,153,470 ) (45,530,748 )
Accumulated other comprehensive income 2,522,639 611,496
Total equity 108,412,734 105,177,230
Total liabilities and shareholders' equity $ 181,940,538 $ 169,943,821
Interim Unaudited Condensed Consolidated Statements of Cash Flows
(All amounts stated in US$)
Six months ended June 30,
2013 2012
Cash flows from operating activities:
Net income (loss) $ 1,377,278 $ (3,013,108 )
Adjustments for:
Depletion, depreciation, amortization and decomissioning accretion 6,674,231 11,644,711
Debenture accretion and fee amortization 631,871 411,652
Translation changes in debenture - (778,699 )
Impairment recovery (384,068 ) -
Unrealized loss on commodity contracts 805,805 -
Stock-based compensation expense (recovery) 104,440 175,844
Income tax expense 239,232 332,749
Income taxes paid (426,000 ) -
Changes in non-cash balances related to operations 7,665,581 (3,419,364 )
Net cash provided by operating activities 16,688,370 5,353,785
Cash flows from investing activities:
Additions to oil and natural gas properties - E&E (300,582 ) -
Additions to oil and natural gas properties - P&E (16,321,953 ) (49,302,073 )
(Additions to) dispositions of other property and equipment (2,529 ) 258
Changes in restricted cash - current 1,218 96,140
Changes in restricted cash - long-term - 100,000
Net cash (used in) investing activities (16,623,846 ) (49,105,675 )
Cash flows from financing activities:
Proceeds from exercise of options - 66,450
Buyback of shares (157,357 ) -
Proceeds from convertible debentures - 37,854,423
Net cash provided by financing activities (157,357 ) 37,920,873
Effect of currency rates on cash and cash equivalents 123,597 483,872
Increase in cash and cash equivalents 30,764 (5,347,145 )
Cash and cash equivalents, beginning of period 7,579,172 17,183,681
Cash and cash equivalents, end of period $ 7,609,936 $ 11,836,536
Cash and cash equivalents consist of:
Cash $ 6,439,847 $ 1,283,316
Money market funds 1,170,089 1,511,015
Interest bearing short-term deposits - 9,042,205
Cash and cash equivalents $ 7,609,936 $ 11,836,536
Adjusted EBITDA Reconciliation
(All amounts stated in US$)
Three months ended June 30,
2013 2012
NET INCOME (LOSS) $ (299,152 ) $ (2,135,183 )
Net interest expense 1,069,229 1,067,674
Income tax expense (recovery) 2,360,479 (172,615 )
Depletion, depreciation, amortization and decomissioning accretion 3,397,030 6,530,136
Stock based compensation 48,385 193,244
Unrealized gain on commodity contracts (2,107,035 ) -
Other income (9,624 ) -
ADJUSTED EBITDA $ 4,459,312 $ 5,483,256
Executive severance 1,406,382 -
Midstream operator prior period adjustment 479,969 -

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