Epsilon Energy Ltd.
TSX : EPS

Epsilon Energy Ltd.

July 23, 2015 17:50 ET

Epsilon Reports Second Quarter 2015 Results

HOUSTON, TEXAS--(Marketwired - July 23, 2015) - Epsilon Energy Ltd. ("Epsilon" or the "Company") (TSX:EPS) today reported second quarter 2015 financial and operating results.

Mr. Michael Raleigh, Chief Executive Officer, commented, "Despite the challenging macro energy environment, the company has continued to generate positive cash and at the end of Q2 had over $19MM in cash.

As in Q1 we voluntarily imposed production ceilings during the quarter. We are, as other operators in the area, attempting to balance local and regional demand with the very robust productivity of the basin.

We continue to develop our industry relationships in anticipation of better markets for our gas production and appraise and develop our considerable inventory of high productivity gas resources in the Lower and Upper Marcellus. We are pleased with the contribution of our Midstream assets to the positive cash flow position the company has established".

Highlights for the second 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 $3.0 million for the quarter.
  • Marcellus working interest (WI) gas production averaged 35 MMcf/d for the second quarter of 2015. Working interest gas production as of this release is approximately 30 MMcf/d in order to voluntarily manage production ceilings.
  • Gathered and delivered 30 Bcfe gross (10.5 Bcfe net to Epsilon's interest) during the quarter, or 329 MMcfe/d through the Auburn System which represents approximately 91% of maximum throughput. Current system throughput is averaging 267 MMcfe/d.
  • Auburn Gas gathering and compression services included third party gas of 4.1 Bcfe during the quarter or approximately 45 MMcf/d.

Financial and Operating Results

Three months ended
June 30,
Six months ended
June 30,
2015 2014 2015 2014
Revenue by product - total period ($000)
Natural gas revenue ($000) $ 3,450 $ 11,748 $ 6,671 $ 25,850
Volume (MMcfe) 2,751 4,109 5,055 8,205
Avg. Price ($/Mcfe) $ 1.25 $ 2.86 $ 1.32 $ 3.15
Exit Rate (MMcfepd) 30.7 48.5 30.7 48.5
Oil revenue ($000) $ - $ - $ 2 $ 196
Volume (MBOE) - - 2 2
Avg. Price ($/Bbl) $ - $ - $ 80.66 $ 80.66
Midstream gathering system revenue ($000) $ 3,719 $ 3,298 $ 7,142 $ 6,625
Total $ 7,169 $ 15,046 $ 13,815 $ 32,671

Capital Expenditures

Epsilon's total capital expenditures were $1.8 million for the three months ended June 30, 2015. $0.5 million was allocated to completing Marcellus wells, and $1.3 million was allocated to the Auburn Gas Gathering system.

Epsilon's 2015 capital forecast for the remainder of the year is revised to $10 million. Approximately $3.4 million is allocated to the Auburn Gas Gathering system. The remaining $6.6 million upstream budget remains discretionary and will be driven by natural gas pricing in the basin and management's elected pace of proving Upper Marcellus resource on Epsilon's leasehold.

Marcellus Operational Guidance

During the second quarter, Epsilon turned 4 (.12 net) new wells in line; however, the Operator continued to periodically shut-in various combinations of producing wells throughout the second quarter in response to poor natural gas prices. At quarter end, 15 (2.63 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 June 30, 2015:

March 31, 2015 June 30, 2015
Gross Net Gross Net
Procucing 81 23.38 81 21.58
Shut-in for adjacent frac 11 0.71 15 2.63
Waiting on pipeline - - - -
Waiting on completion 6 0.13 2 0.01
Drilling - - -

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

Second Quarter Results

Epsilon generated revenues of $7.2 million for the three months ended June 30, 2015 compared to $15.0 million for the three months ended June 30, 2014. The Company's Marcellus net revenue interest production was 2.8 Bcfe in the second quarter.

Realized natural gas prices averaged $1.25 per Mcf in the second 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 second quarter were $2.3 million.

The Auburn Gas Gathering system delivered 30 Bcfe of natural gas during the quarter as compared to 30 Bcfe during the first quarter of 2015. Primary gathering volumes increased 4.6% quarter over quarter to 16.1 Bcfe primarily as a result of improved well performance after the installation of a pressure regulating station at the interconnect of the Rome GGS and Auburn GGS. The regulating station reduces the pressure of the imported crossflow gas, thereby reducing the back pressure on the Auburn system wells. Imported cross-flow volumes increased 28.0% to 13.8 Bcfe.

Epsilon reported net after tax loss of $1.6 million attributable to common shareholders or ($0.03) per basic and diluted common shares outstanding for the three months ended June 30, 2015, compared to net income of $2.7 million, and $0.05 per basic and diluted common shares outstanding for the three months ended June 30, 2014.

For the three months ended June 30, 2015, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $4.1 million as compared to $11.0 million for the three months ended June 30, 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 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,
2015 2014 2015 2014
Revenues:
Oil & gas revenue $ 3,450,462 $ 11,748,130 $ 6,673,389 $ 26,046,196
Gas gathering & compression revenue 3,719,016 3,298,092 7,141,739 6,625,171
Total revenue 7,169,478 15,046,222 13,815,128 32,671,367
Operating costs and expenses:
Project operating costs 3,038,545 2,743,874 5,222,029 5,972,748
Depletion, depreciation, amortization and decommissioning accretion 4,038,799 6,581,698 7,406,703 13,161,095
Impairment recovery - - - (420,634 )
Stock based compensation 14,052 (941,635 ) 21,552 (918,747 )
General and administrative 484,609 571,579 1,002,565 990,935
Total operating costs and expenses 7,576,005 8,955,516 13,652,849 18,785,397
Operating income (loss) (406,527 ) 6,090,706 162,279 13,885,970
Other income and (expense):
Interest income 18 2,636 14,281 12,045
Finance expense (1,015,778 ) (989,334 ) (2,059,686 ) (2,234,120 )
Bad debt expense (525,777 ) - (525,777 ) -
Realized loss on commodity contracts - (1,622,450 ) - (4,206,580 )
Net change in unrealized loss on commodity contracts - 1,609,796 - (597,110 )
Loss on sale of fixed assets - 659,654 - 659,194
Other income 431,570 228,645 462,376 224,746
Net other expense (1,109,968 ) (111,053 ) (2,108,806 ) (6,141,825 )
Income tax expense - current - - 444,743 -
Income tax (recovery) expense - deferred 44,312 3,286,433 (129,172 ) 5,198,290
NET INCOME (LOSS) $ (1,560,806 ) $ 2,693,220 $ (2,262,098 ) $ 2,545,855
Net income (loss) per share, basic $ (0.03 ) $ 0.05 $ (0.05 ) $ 0.05
Net income (loss) per share, diluted $ (0.03 ) $ 0.05 $ (0.05 ) $ 0.05
Weighted average number of shares outstanding, basic 47,245,228 50,058,959 47,236,278 50,130,582
Weighted average number of shares outstanding, diluted 47,245,228 50,128,767 47,236,278 50,193,574
EPSILON ENERGY LTD.
Interim Unaudited Condensed Consolidated Statements of Financial Position
(All amounts stated in US$)
June 30, December 31,
2015 2014
ASSETS
Current assets
Cash and cash equivalents $ 19,500,373 $ 16,061,731
Accounts receivable 3,873,958 4,705,461
Other current assets 98,530 279,430
Total current assets 23,472,861 21,046,622
Non-current assets
Oil and gas interests:
Intangible exploration and evaluation assets 10,200 8,800
Property and equipment (net) 141,209,753 145,482,656
Total oil and gas interests 141,219,953 145,491,456
Total assets $ 164,692,814 $ 166,538,078
EQUITY AND LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 6,715,183 $ 5,868,563
Revolving line of credit 7,000,000 7,000,000
Total current liabilities 13,715,183 12,868,563
Non-current liabilities
Convertible debentures 29,887,532 31,493,461
Decommissioning liabilities 1,962,682 1,996,621
Deferred tax liability 28,366,625 28,495,797
Total non-current liabilities 60,216,839 61,985,879
Total liabilities 73,932,022 74,854,442
Equity
Share capital 129,891,295 130,231,489
Equity component of convertible debentures 5,024,361 5,024,690
Contributed surplus 5,697,802 5,693,058
Deficit (57,335,890 ) (54,975,850 )
Accumulated other comprehensive income 7,483,224 5,710,249
Total equity 90,760,792 91,683,636
Total liabilities and shareholders' equity $ 164,692,814 $ 166,538,078
EPSILON ENERGY LTD.
Interim Unaudited Condensed Consolidated Statements of Cash Flows
(All amounts stated in US$)
Six months ended June 30,
2015 2014
Cash flows from operating activities:
Net income (loss) $ (2,262,098 ) $ 2,545,855
Adjustments for:
Depletion, depreciation, amortization and decommissioning accretion 7,406,703 13,161,095
Debenture accretion and fee amortization 594,909 627,219
Impairment recovery - (420,634 )
Net change in unrealized loss on commodity contracts - 597,110
Stock-based compensation expense (recovery) 21,552 (918,747 )
Deferred income tax expense 315,571 5,198,290
Income taxes paid (400,000 ) (3,000 )
Bad debt expense 525,777 -
Loss on sale of assets - (659,194 )
Changes in non-cash balances related to operations 1,404,606 (3,224,283 )
Net cash provided by operating activities 7,607,020 16,903,711
Cash flows from investing activities:
Additions to oil and natural gas properties - E&E (1,400 ) (5,598 )
Additions to oil and natural gas properties - PP&E (3,167,740 ) (5,355,654 )
Change in working capital related to capital asset additions (216,101 ) (401,841 )
Proceeds from assets sold - 1,658,006
Net cash used in investing activities (3,385,241 ) (4,105,087 )
Cash flows from financing activities:
Proceeds from exercise of options - 548,963
Purchase and cancellation of options (16,808 ) -
Buyback of common shares (438,465 ) (1,722,808 )
Changes in restricted cash 100,000 -
Repayment of draw on revolving line of credit - (2,000,000 )
Net cash used in financing activities (355,273 ) (3,173,845 )
Effect of currency rates on cash and cash equivalents (427,864 ) 21,326
Increase in cash and cash equivalents 3,438,642 9,646,105
Cash and cash equivalents, beginning of period 16,061,731 3,624,398
Cash and cash equivalents, end of period $ 19,500,373 $ 13,270,503
Cash and cash equivalents consist of:
Cash $ 19,500,373 $ 9,311,840
Money market funds - 3,958,663
Cash and cash equivalents $ 19,500,373 $ 13,270,503
EPSILON ENERGY LTD.
Adjusted EBITDA Reconciliation
(All amounts stated in US $000)
Three months ended June 30, Six months ended June 30,
2015 2014 2015 2014
Net income (loss) $ (1,561 ) $ 2,693 $ (2,262 ) $ 2,546
Add Back:
Net interest expense 1,016 989 2,046 2,224
Income tax provision 44 3,286 315 5,198
Depreciation, depletion, amortization, and accretion 4,039 6,582 7,407 13,163
Stock based compensation expense (recovery) 14 (942 ) 22 (919 )
Net change in unrealized loss on commodity contracts - (1,610 ) - 597
Impairment recovery - - - (421 )
Other income (loss) 524 (9 ) 493 (5 )
Adjusted EBITDA $ 4,076 $ 10,989 $ 8,021 $ 22,383

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