Epsilon Energy Ltd.
TSX : EPS

Epsilon Energy Ltd.

October 29, 2014 17:45 ET

Epsilon Reports Third Quarter 2014 Results

HOUSTON, TEXAS--(Marketwired - Oct. 29, 2014) - Epsilon Energy Ltd. ("Epsilon" or the "Company") (TSX:EPS) today reported third quarter 2014 financial and operating results. Highlights for the third quarter and material subsequent events following the end of the quarter through the date of this release include:

  • Pre-tax income of $5.3 million and adjusted EBITDA of $8.0 million for the quarter; $17.8 million and $30.4 million, respectively, year to date.
  • Upstream EBITDA of $5.6 million and Midstream EBITDA of $2.4 million for the quarter; $22.6 million and $7.8 million, respectively, year to date.
  • Marcellus working interest (WI) gas production averaged 49.6 MMcf/d for the third quarter and 51.1 MMcf/d for the nine months ended September30, 2014.
  • Gathered and delivered 29 Bcfe gross (10.3 Bcfe net to Epsilon's interest) during the quarter, or 319 MMcfe gross per day with the Auburn Gas Gathering system.
  • Repurchased 353,210 common shares at an average price of (Cdn) $4.08 during the third quarter. 1,296,710 common shares were repurchased at an average price of (Cdn) $3.73 under the Normal Course Issuer's Bid ("NCIB") that expired in September. The NCIB was renewed in October; and, as of the date of this release, 105,700 additional common shares at an average price of (Cdn) $3.95 have been purchased resulting in a current share count of 49,362,864 issued and outstanding.

Financial and Operating Results

Three months ended September 30, Nine months ended September 30,
2014 2013 2014 2013
Revenue by product - total period ($000)
Natural gas revenue ($000) $ 7,837 $ 8,313 $ 33,687 $ 27,629
Volume (MMcfe) 3,994 3,524 12,214 9,224
Avg. Price ($/Mcfe) $ 1.96 $ 2.36 $ 2.76 $ 3.00
Exit Rate (MMcfepd) 40.0 38.6 40.0 38.6
Oil revenue ($000) $ 3 $ 352 $ 199 $ 851
Volume (MBOE) 1 4 3 10
Avg. Price ($/Bbl) $ 80.00 $ 88.00 $ 80.66 $ 85.10
Midstream gathering system revenue ($000) $ 3,186 $ 1,943 $ 9,811 $ 5,390
Total $ 11,026 $ 10,608 $ 43,697 $ 33,870

Management Comments

Mr. Michael Raleigh, Chief Executive Officer, commented, "Although we continue to experience the headwinds of a challenging natural gas price environment and constrained downstream takeaway capacity, we remain pleased with the significant free cash flow generation for the quarter. We are optimistic that both of these issues are being addressed for the medium term by several major pipeline projects that are scheduled to be in service over the next two years."

"Overall, we remain steadfast in our effort to maximize free cash flow and to return capital opportunistically to shareholders through our share repurchase program."

Capital Expenditures

Epsilon's total capital expenditures were $1.8 million for the three months ended September 30, 2014. $0.5 million was allocated to drilling and completing Marcellus wells, and $2.3 million was allocated to the ongoing build-out of the Auburn Gas Gathering system. Total capital expenditures for the quarter reflect a $1.0 million reversal for an overstated accrual during the prior quarter.

Epsilon's 2014 capital forecast for the remainder of the year is $3 million. Approximately $1 million will be allocated to drilling & completing wells, and $2 million will be allocated to the Auburn Gas Gathering system.

As of the end of the third quarter, the expression of interest to expand the Auburn compression facility from the current capacity of approximately 330 MMcf/d to 550 MMcf/d has not materialized into a firm commitment. Epsilon believes that the significant basis differential experienced by all operators in the NE Marcellus region has a material effect on the business decisions of the surrounding upstream producers. Until sufficient downstream takeaway capacity has materialized, Epsilon does not expect any decision to be forthcoming with regards to the expansion of the facility. Epsilon will continue to add incrementally to the pipeline gathering network. As of quarter end, the first 3rd party pads were tied in to the network and preparing to flow gas.

Marcellus Operational Guidance

During the third quarter, Epsilon did not turn any new wells in line. 2 wells (.02 net) were returned to production, but 3 wells (0.04 net) were shut-in for adjacent fracing operations. The Operator drilled 2 wells (0.04 net) during the quarter. Also during the quarter, Epsilon received two drilling proposals from the Operator and elected to participate in 2 wells (.07 net). The table below details Epsilon's well development status at September 30, 2014:

June 30, 2014 September 30, 2014
Gross Net Gross Net
Producing 76 23.13 75 23.10
Shut-in for adjacent frac 4 0.60 5 0.62
Waiting on pipeline - - - -
Waiting on completion 11 0.33 14 0.41
Drilling 1 0.04 - -

Subsequent to September 30th, Epsilon received a drilling proposal and elected to participate in 1 well (.01 net) which will spud during the fourth quarter.

Third Quarter Results

Epsilon generated revenues of $11.0 million for the three months ended September 30, 2014 compared to $10.6 million for the three months ended September 30, 2013. The Company's Upstream Marcellus working interest production was 4.0 Bcfe net in the third quarter.

Realized natural gas prices averaged $1.96 per Mcf in the third quarter of 2014. Realized natural gas prices in Northeast Pennsylvania continue to be negatively impacted by a significant differential to NYMEX Henry Hub prices. Operating expenses for Marcellus Upstream operations in the third quarter were $2.2 million.

The Midstream system delivered 29 Bcfe gross of natural gas during the quarter as compared to 29 Bcfe during the second quarter of 2014. Primary gathering volumes declined 7.6% quarter over quarter to 16.2 Bcfe while imported cross-flow volumes increased 14.7% to 13.1 Bcfe.

Epsilon reported net after tax income of $3.0 million attributable to common shareholders or $0.06 per basic and diluted common shares outstanding for the three months ended September 30, 2014, compared to net income of $0.1 million, or less than $0.01 per basic and diluted common shares outstanding for the three months ended September 30, 2013.

For the three months ended September 30, 2014, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $8.0 million as compared to $6.6 million for the three months ended September 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 September 30, Nine months ended September 30,
2014 2013 2014 2013
Revenues:
$ 7,840,262 $ 8,665,035 $ 33,886,457 $ 28,479,665
Gas gathering & compression revenue 3,185,569 1,943,166 9,810,740 5,390,238
Total revenue 11,025,831 10,608,201 43,697,197 33,869,903
Operating costs and expenses:
Project operating costs 2,959,528 2,781,305 8,932,275 8,125,347
Depletion, depreciation, amortization and decomissioning accretion 3,900,330 4,851,099 12,301,766 11,525,330
Impairment recovery - - (420,634) (384,068)
Stock based compensation (109,278) 10,492 (1,028,025) 114,932
General and administrative 425,659 2,424,448 1,416,595 5,695,097
Total operating costs and expenses 7,176,239 10,067,344 21,201,977 25,076,638
Operating income 3,849,592 540,857 22,495,220 8,793,265
Other income and expense:
Interest income 47,389 7,017 59,433 9,117
Finance expense (1,102,779) (1,130,599) (3,336,899) (3,291,450)
Realized (loss) gain on commodity contracts 314,273 1,186,105 (3,892,308) 1,799,395
Net change in unrealized loss on commodity contracts 2,167,098 (1,182,260) 1,569,988 (1,988,065)
Gain (loss) on sale of fixed assets 50,628 (52,950) 709,822 (52,950)
Other income (loss) (922) 48,194 223,825 57,818
Net other income (expense) 1,475,686 (1,124,493) (4,666,139) (3,466,135)
Income tax recovery - current - (4,294,256) - -
Income tax expense - deferred 2,331,910 3,609,201 7,530,200 3,848,433
NET INCOME $ 2,993,368 $ 101,419 $ 10,298,881 $ 1,478,697
Net income per share, basic $0.06 $0.00 $0.21 $0.03
Net income per share, diluted $0.06 $0.00 $0.21 $0.03
Weighted average number of shares outstanding, basic 49,522,518 50,466,412 49,926,734 50,306,242
Weighted average number of shares outstanding, diluted 49,608,377 50,543,871 49,993,831 50,427,048

EPSILON ENERGY LTD.
Interim Unaudited Condensed Consolidated Statements of Financial Position
(All amounts stated in US$)

September 30, December 31,
2014 2013
ASSETS
Current assets
Cash and cash equivalents $ 17,549,450 $ 3,624,398
Accounts receivable 5,326,961 6,638,379
Restricted cash - current 162,305 163,505
Other current assets 128,054 122,136
Total current assets 23,166,770 10,548,418
Non-current assets
Oil and gas interests:
Intangible exploration and evaluation assets 3,878 300,000
Net property and equipment 156,083,982 161,207,478
Total oil and gas interests 156,087,860 161,507,478
Other assets:
Deposits 38,739 15,374
Total other assets 38,739 15,374
Total non-current assets 156,126,599 161,522,852
Total assets $ 179,293,369 $ 172,071,270
EQUITY AND LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 5,940,482 $ 11,142,277
Commodity contracts - 1,569,988
Revolving line of credit 7,000,000 9,000,000
Total current liabilities 12,940,482 21,712,265
Non-current liabilities
Convertible debentures 32,311,274 33,070,745
Decommissioning liabilities 2,694,736 1,905,546
Deferred tax liability 30,212,371 22,685,171
Total non-current liabilities 65,218,381 57,661,462
Total liabilities 78,158,863 79,373,727
Equity
Share capital 135,685,201 136,726,805
Equity component of convertible debentures 5,028,761 5,028,761
Contributed surplus 5,681,614 7,205,445
Deficit (49,724,094) (59,053,029)
Accumulated other comprehensive income 4,463,024 2,789,561
Total equity 101,134,506 92,697,543
Total liabilities and shareholders' equity $ 179,293,369 $ 172,071,270

EPSILON ENERGY LTD.
Interim Unaudited Condensed Consolidated Statements of Cash Flows
(All amounts stated in US$)

Nine months ended September 30,
2014 2013
Cash flows from operating activities:
Net income (loss) $ 10,298,881 $ 1,478,697
Adjustments for:
Depletion, depreciation, amortization and decomissioning accretion 12,301,766 11,525,330
Debenture accretion and fee amortization 948,626 948,969
Impairment recovery (420,634) (384,068)
Net change in unrealized (gain) loss on commodity contracts (1,569,988) 1,988,065
Stock-based compensation expense (recovery) (1,028,025) 114,932
Deferred income tax expense 7,530,200 3,848,433
Income taxes paid (3,000) (26,000)
(Gain) loss on sale of assets (709,822) 52,950
Changes in non-cash balances related to operations (2,278,345) 5,010,838
Net cash provided by operating activities 25,069,659 24,558,146
Cash flows from investing activities:
Additions to oil and natural gas properties - E&E (7,582) (347,344)
Additions to oil and natural gas properties - PP&E (7,159,652) (36,900,249)
Change in working capital related to capital asset additions (1,153,736) 5,316,321
Additions to other property and equipment - (4,150)
Proceeds from assets sold 1,717,152 -
Net cash (used in) investing activities (6,603,818) (31,935,422)
Cash flows from financing activities:
Proceeds from exercise of options 548,963 628,810
Buyback of common shares (3,056,318) (964,754)
Proceeds (repayment) of draw on revolving line of credit (2,000,000) 9,000,000
Net cash provided by (used in) financing activities (4,507,355) 8,664,056
Effect of currency rates on cash and cash equivalents (33,434) 26,084
Increase in cash and cash equivalents 13,925,052 1,312,864
Cash and cash equivalents, beginning of period 3,624,398 7,579,172
Cash and cash equivalents, end of period $ 17,549,450 $ 8,892,036
Cash and cash equivalents consist of:
Cash $ 12,934,600 $ 7,925,840
Money market funds 4,614,850 966,196
Cash and cash equivalents $ 17,549,450 $ 8,892,036

EPSILON ENERGY LTD.
Adjusted EBITDA Reconciliation
(All amounts stated in US$)

Three months ended September 30, Nine months ended September 30,
(in thousands of dollars) 2014 2013 2014 2013
Net income $ 2,993 $ 101 $ 10,298 $ 1,479
Add Back:
Net interest expense 1,055 1,124 3,277 3,283
Deferred income tax provision 2,333 (685) 7,531 3,848
Depreciation, depletion, amortization, and accretion 3,900 4,851 12,302 11,525
Stock based compensation expense (109) 10 (1,028) 114
Net change in unrealized loss on commodity contracts (2,167) 1,182 (1,570) 1,988
Impairment recovery - - (421) (384)
Other loss 1 5 (1) (5)
Adjusted EBITDA $ 8,006 $ 6,588 $ 30,388 $ 21,848

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