Epsilon Energy Ltd.
TSX : EPS

Epsilon Energy Ltd.

July 30, 2014 17:37 ET

Epsilon Reports Second Quarter 2014 Results

HOUSTON, TEXAS--(Marketwired - July 30, 2014) - Epsilon Energy Ltd. ("Epsilon" or the "Company") (TSX:EPS) today reported second quarter 2014 financial and operating results. Highlights for the second quarter and material subsequent events following the end of the quarter through the date of this release include:

  • Pre-tax income of $8.6 million and adjusted EBITDA of $11.0 million for the quarter; $12.5 million and $22.4 million, respectively, year to date.
  • Upstream EBITDA of $8.4 million and Midstream EBITDA of $2.6 million for the quarter; $17.1 million and $5.3 million, respectively, year to date.
  • Marcellus working interest (WI) gas production averaged 52 MMcf/d for the second quarter and for the six months ended June 30, 2014.
  • Gathered and delivered 29 Bcfe gross (10.2 Bcfe net to Epsilon's interest) during the quarter, or 319 MMcfe gross per day with the Auburn Gas Gathering system.
  • Repurchased 406,600 common shares at an average price (Cdn) $3.97during the quarter. As of the date of this release 1,281,710 common shares at an average price of (Cdn) $3.72 have been repurchased under the current Normal Course Issuer's Bid resulting in a current share count of 49,475,700 issued and outstanding.
Financial and Operating Results
Three months ended June 30, Six months ended June 30,
2014 2013 2014 2013
Revenue by product - total period ($000)
Natural gas revenue ($000) $ 11,748 $ 8,054 $ 25,850 $ 19,316
Volume (MMcfe) 4,109 2,501 8,205 5,699
Avg. Price ($/Mcfe) $ 2.86 $ 3.22 $ 3.15 $ 3.39
Exit Rate (MMcfepd) 48.5 33.3 48.5 33.3
Oil revenue ($000) $ - $ 367 $ 196 $ 499
Volume (MBOE) - 4 2 6
Avg. Price ($/Bbl) $ - $ 84.41 $ 80.66 $ 82.62
Midstream gathering system revenue ($000) $ 3,298 $ 869 $ 6,625 $ 3,447
Total $ 15,046 $ 9,290 $ 32,671 $ 23,262

Management Comments

Mr. Michael Raleigh, Chief Executive Officer, commented, "We are pleased with the significant free cash flow generation for the quarter, despite the challenging gas price environment in northeastern Pennsylvania. Managing our G&A and operating costs lower in anticipation of the current commodity price has been very beneficial to our shareholders. Our upstream production volumes were relatively flat quarter over quarter, despite only turning 2 gross (0.14 net) wells into the gathering system.

Epsilon's Midstream asset continues to perform well, operating at approximately 90% of capacity for the entire quarter and generating $2.6 million in EBITDA. We continue our planning discussions with our upstream and midstream partners, and anticipate strengthening these relationships in the future in an effort to optimize the contribution of both segments.

Overall, we continued to execute on our stated goals - minimize expenses, maximize cash generation from both segments and efficiently return capital to shareholders through our share repurchase program".

Capital Expenditures

Epsilon's total capital expenditures were $1.2 million for the three months ended June 30, 2014. $0.2 million was allocated to drilling ($0.1 million) and completing ($0.1 million) Marcellus wells, and $1.0 million was allocated to the ongoing expansion of Auburn Gas Gathering system.

There was, however, a working interest revision from the upstream operator that reduced segment capital spending by $0.6 million for the quarter.

Epsilon's 2014 capital forecast for the remainder of the year is $13.8 million. The majority of this capital ($12.5 million) is allocated to the ongoing expansion of the Auburn Gas Gathering system. This capital forecast for the remainder of the year could be reduced significantly if the Auburn compression facility expansion does not commence during the third quarter.

Marcellus Operational Guidance

During the second quarter, Epsilon turned 2 gross (0.14 net) new wells in line. The table below details Epsilon's well development status at June 30, 2014:

March 31, 2014 June 30, 2014
Gross Net Gross Net
Producing 78 23.70 76 23.13
Shut-in for adjacent frac - - 4 0.60
Waiting on pipeline 2 0.14 - -
Waiting on completion 10 0.32 11 0.33
Drilling 1 0.01 1 0.04

Subsequent to June 30th, Epsilon received and elected to participate in 2 wells (.04 net) which will spud during the third quarter.

Second Quarter Results

Epsilon generated revenues of $15.0 million for the three months ended June 30, 2014 compared to $9.3 million for the three months ended June 30, 2013. The Company's Upstream Marcellus working interest production was 4.7 Bcfe net in the second quarter.

Realized natural gas prices averaged $2.86 per Mcf in the second quarter of 2014. Although differentials narrowed temporarily at the beginning of the second quarter, realized natural gas prices continue to be negatively impacted by a significant differential to NYMEX. Operating expenses for Marcellus Upstream operations in the second quarter were $0.7 million.

The Midstream system delivered 29 Bcfe gross of natural gas during the quarter as compared to 28 Bcfe during the first quarter of 2014. Both primary gathering volumes and imported cross- flow volumes increased slightly quarter over quarter to 17.6 Bcfe and 11.4 Bcfe, respectively. Epsilon reported net after tax income of $5.3 million attributable to common shareholders or $0.11 per basic and diluted common shares outstanding for the three months ended June 30, 2014, compared to a net loss of $0.3 million, or $0.01 per basic and diluted common shares outstanding for the three months ended June 30, 2013.

For the three months ended June 30, 2014, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $11.0 million as compared to $4.5 million for the three months ended June 30, 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 June 30, Six months ended June 30,
2014 2013 2014 2013
Revenues:
Oil & gas revenue $ 11,748,130 $ 8,420,872 $ 26,046,196 $ 19,814,630
Gas gathering & compression revenue 3,298,092 869,140 6,625,171 3,447,072
Total revenue 15,046,222 9,290,012 32,671,367 23,261,702
Operating costs and expenses:
Project operating costs 2,743,874 2,038,331 5,972,748 5,344,042
Depletion, depreciation, amortization and decomissioning accretion
3,969,922

3,397,030

8,401,436

6,674,231
Impairment recovery - - (420,634 ) (384,068 )
Stock based compensation (941,635 ) 48,385 (918,747 ) 104,440
General and administrative 571,579 2,389,754 990,935 3,270,649
Total operating costs and expenses 6,343,740 7,873,500 14,025,738 15,009,294
Operating income 8,702,482 1,416,512 18,645,629 8,252,408
Other income and expense:
Interest income 2,636 2,034 12,045 2,099
Finance expense (989,334 ) (1,071,263 ) (2,234,120 ) (2,160,850 )
Realized (loss) gain on commodity contracts (1,622,450 ) (402,615 ) (4,206,580 ) 613,290
Net change in unrealized loss on commodity contracts 1,609,796 2,107,035 (597,110 ) (805,805 )
Gain on sale of fixed assets 659,654 - 659,194 -
Other income 228,645 9,624 224,746 9,624
Net other expense (111,053 ) 644,815 (6,141,825 ) (2,341,642 )
Income tax recovery - current - 1,978,331 - 4,294,256
Income tax expense - deferred 3,286,433 382,148 5,198,290 239,232
NET INCOME $ 5,304,996 $ (299,152 ) $ 7,305,514 $ 1,377,278
Net income per share, basic $0.11 ($0.01 ) $0.15 $0.03
Net income per share, diluted $0.11 ($0.01 ) $0.15 $0.03
Weighted average number of shares outstanding, basic 50,058,959 50,217,493 50,130,582 50,202,810
Weighted average number of shares outstanding, diluted 50,128,767 50,617,365 50,193,574 50,651,706
EPSILON ENERGY LTD.
Interim Unaudited Condensed Consolidated Statements of Financial Position
(All amounts stated in US$)
June 30, December 31,
2014 2013
ASSETS
Current assets
Cash and cash equivalents $ 13,270,503 $ 3,624,398
Accounts receivable 7,092,703 6,638,379
Restricted cash - current 163,418 163,505
Other current assets 41,385 122,136
Total current assets 20,568,009 10,548,418
Non-current assets
Oil and gas interests:
Intangible exploration and evaluation assets 1,894 300,000
Net property and equipment 158,109,137 161,207,478
Total oil and gas interests 158,111,031 161,507,478
Other assets:
Deposits 46,077 15,374
Total other assets 46,077 15,374
Total non-current assets 158,157,108 161,522,852
Total assets $ 178,725,117 $ 172,071,270
EQUITY AND LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 7,432,848 $ 11,142,277
Commodity contracts 2,167,098 1,569,988
Revolving line of credit 7,000,000 9,000,000
Total current liabilities 16,599,946 21,712,265
Non-current liabilities
Convertible debentures 33,592,198 33,070,745
Decommissioning liabilities 2,615,042 1,905,546
Deferred tax liability 27,880,461 22,685,171
Total non-current liabilities 64,087,701 57,661,462
Total liabilities 80,687,647 79,373,727
Equity
Share capital 136,048,765 136,726,805
Equity component of convertible debentures 5,028,761 5,028,761
Contributed surplus 5,790,892 7,205,445
Deficit (51,747,515 ) (59,053,029 )
Accumulated other comprehensive income 2,916,567 2,789,561
Total equity 98,037,470 92,697,543
Total liabilities and shareholders' equity $ 178,725,117 $ 172,071,270
EPSILON ENERGY LTD.
Interim Unaudited Condensed Consolidated Statements of Cash Flows
(All amounts stated in US$)
Six months ended June 30,
2014 2013
Cash flows from operating activities:
Net income (loss) $ 7,305,514 $ 1,377,278
Adjustments for:
Depletion, depreciation, amortization and decomissioning accretion 8,401,436 6,674,231
Debenture accretion and fee amortization 627,219 631,871
Impairment recovery (420,634 ) (384,068 )
Net change in unrealized (loss) on commodity contracts 597,110 805,805
Stock-based compensation expense (918,747 ) 104,440
Deferred income tax expense 5,198,290 239,232
Income taxes paid (3,000 ) (426,000 )
Gain on sale of assets (659,194 ) -
Changes in non-cash balances related to operations (3,224,283 ) 7,665,581
Net cash provided by operating activities 16,903,711 16,688,370
Cash flows from investing activities:
Additions to oil and natural gas properties - E&E (5,598 ) (300,582 )
Additions to oil and natural gas properties - P&E (5,355,654 ) (22,537,620 )
Change in working capital related to capital asset additions (401,841 ) 6,215,667
Additions to other property and equipment - (2,529 )
Proceeds from assets sold 1,658,006 -
Changes in restricted cash - current - 1,218
Net cash (used in) investing activities (4,105,087 ) (16,623,846 )
Cash flows from financing activities:
Proceeds from exercise of options 548,963 -
Buyback of common shares (1,722,808 ) (157,357 )
Repayment of draw on revolving line of credit (2,000,000 ) -
Net cash (used in) financing activities (3,173,845 ) (157,357 )
Effect of currency rates on cash and cash equivalents 21,326 123,597
Increase in cash and cash equivalents 9,646,105 30,764
Cash and cash equivalents, beginning of period 3,624,398 7,579,172
Cash and cash equivalents, end of period $ 13,270,503 $ 7,609,936
Cash and cash equivalents consist of:
Cash $ 9,311,840 $ 6,439,847
Money market funds 3,958,663 1,170,089
Cash and cash equivalents $ 13,270,503 $ 7,609,936
EPSILON ENERGY LTD.
Adjusted EBITDA Reconciliation
(All amounts stated in US$)
Three months ended June 30, Six months ended June 30,
2014 2013 2014 2013
Net income $ 5,304 $ (299 ) $ 7,305 $ 1,377
Add Back:
Net interest expense 987 1,069 2,222 2,159
Deferred income tax provision 3,286 2,360 5,198 4,533
Depreciation, depletion, amortization, and accretion 3,970 3,397 8,402 6,674
Stock based compensation expense (942 ) 48 (919 ) 104
Net change in unrealized loss on commodity contracts (1,610 ) (2,107 ) 597 806
Impairment recovery - - (421 ) (384 )
Other loss (6 ) (9 ) (1 ) (9 )
Adjusted EBITDA $ 10,989 $ 4,459 $ 22,383 $ 15,260

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