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Epsilon Reports Second Quarter 2022 Results

HOUSTON, Aug. 11, 2022 (GLOBE NEWSWIRE) -- Epsilon Energy Ltd. ("Epsilon" or the "Company") (NASDAQ: EPSN) today reported second quarter 2022 financial and operating results and material subsequent events following the end of the quarter through the date of this release.

Jason Stabell, CEO, commented, "The second quarter results reflect the strong back drop for commodity prices, particularly natural gas. Sequentially, revenues increased 46%, driven largely by an increase of 68% on realized natural gas prices. We remain largely unhedged with a pristine balance sheet (no debt) and robust liquidity including $30.9 million of cash and a $14.0 million undrawn line of credit.

During the quarter, we returned $6.1 million to our shareholders in dividends and buybacks. Through August 9, 2022, under our authorized NCIB, we have purchased 978,600 shares at an average cost of $6.35 of which 281,500 shares have been purchased since quarter end (avg. $5.88 per share). We have 204,810 shares remaining in our authorized NCIB.

I have been with the Company for only a short time, but I am very excited about the prospects ahead. We continue to maintain a lean organization focused on disciplined capital allocation. At current prices, we project our cash balances to continue to grow this year. For 2H22, we are well positioned to opportunistically invest in our project areas, purchase shares, and evaluate new opportunities."

Financial and Operating Results

  Three months ended  Six months ended   
  June 30, June 30,  
  2022 2021  2022 2021   
Natural gas revenue $ 15,984,348 $5,106,922  $ 26,687,432 $11,439,021   
Volume (MMcf)   2,324  2,548    4,675  5,014   
Avg. Price ($/Mcf) $ 6.88 $2.00  $ 5.71 $2.28   
Oil and other liquids revenue $ 1,931,488 $131,832  $ 2,707,729 $238,888   
Volume (MBO)   27.6  3.2    42.5  6.9   
Avg. Price ($/Bbl) $ 69.92 $41.68  $ 63.73 $34.58   
Gathering system revenue $ 1,987,168 $1,851,095  $ 4,107,941 $3,853,252   
Total Revenues $ 19,903,004 $7,089,849  $ 33,503,102 $15,531,161   
Total Daily Production, Mcfe/d   27.4  28.2    27.2  27.9   

Capital Expenditures

Epsilon's capital expenditures were $1.5 million for the three months ended June 30, 2022. This capital was mainly related to the drilling of three gross (0.03 net to EPSN) wells in Pennsylvania and the drilling of one gross (0.15 net to EPSN) and completion of one gross (0.11 net to EPSN) wells in Oklahoma.

Second Quarter Results

Epsilon generated revenues of $19.9 million for the three months ended June 30, 2022 compared to $7.1 million for the three months ended June 30, 2021.

Realized natural gas prices averaged $6.88/Mcf (excluding hedges) for Upstream operations in the second quarter of 2022. Operating expenses for Upstream operations in the second quarter were $2.6 million.

Epsilon reported a net after tax income of $10.6 million attributable to common shareholders or $0.45 per basic and $0.44 per diluted common share outstanding for the three months ended June 30, 2022, compared to net after tax loss of $0.5 million, and $0.02 per basic and diluted common share outstanding for the three months ended June 30, 2021.

For the three months ended June 30, 2022, Epsilon's Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $15.6 million as compared to $3.0 million for the three months ended June 30, 2021.

The Auburn Gas Gathering System gathered and delivered 16.7 Bcf gross of natural gas during the quarter as compared to 18.3 Bcf during the first quarter of 2022. Primary gathering volumes decreased 2.4% quarter over quarter to 11.3 Bcf. Imported cross-flow volumes decreased 22.1% to 5.4 Bcf as a result of the normal decrease in gas demand following the peak winter season.

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.

Contact Information:


Jason Stabell
Chief Executive Officer

Andrew Williamson
Chief Financial Officer

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.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
(All amounts stated in US$)

  Three months ended June 30, Six months ended June 30,
  2022  2021  2022  2021 
Revenues from contracts with customers:             
Gas, oil, NGL, and condensate revenue $17,915,836  $5,238,754  $29,395,161  $11,677,909 
Gas gathering and compression revenue  1,987,168   1,851,095   4,107,941   3,853,252 
Total revenue  19,903,004   7,089,849   33,503,102   15,531,161 
Operating costs and expenses:            
Lease operating expenses  2,621,750   1,784,138   4,392,404   3,378,327 
Gathering system operating expenses  171,495   173,547   330,706   364,494 
Development geological and geophysical expenses  2,386   11,451   4,772   22,990 
Depletion, depreciation, amortization, and accretion  1,803,739   1,646,094   3,192,958   3,328,954 
Gain on sale of oil and gas properties  (221,642)  ?   (221,642)  ? 
General and administrative expenses:            
Stock based compensation expense  194,050   236,041   336,352   438,540 
Other general and administrative expenses  1,465,143   2,048,300   2,636,275   3,375,461 
Total operating costs and expenses  6,036,921   5,899,571   10,671,825   10,908,766 
Operating income  13,866,083   1,190,278   22,831,277   4,622,395 
Other income (expense):            
Interest income  21,945   8,904   37,166   16,717 
Interest expense  (745)  (22,345)  (16,064)  (49,418)
Gain (loss) on derivative contracts  776,994   (1,827,334)  (194,910)  (1,361,993)
Other (expense) income  (61,713)  (279)  (67,119)  1,663 
Other income (expense), net  736,481   (1,841,054)  (240,927)  (1,393,031)
Net income (loss) before income tax expense  14,602,564   (650,776)  22,590,350   3,229,364 
Income tax expense (benefit)  4,019,576   (165,751)  6,201,474   978,822 
NET INCOME (LOSS) $10,582,988  $(485,025) $16,388,876  $2,250,542 
Currency translation adjustments  (19,150)  242   (13,748)  (1,242)
NET COMPREHENSIVE INCOME (LOSS) $10,563,838  $(484,783) $16,375,128  $2,249,300 
Net income (loss) per share, basic $0.45  $(0.02) $0.69  $0.09 
Net income (loss) per share, diluted $0.44  $(0.02) $0.69  $0.09 
Weighted average number of shares outstanding, basic  23,576,746   23,779,205   23,627,015   23,862,749 
Weighted average number of shares outstanding, diluted 23,822,123   23,779,205   23,796,166   23,941,340 

Unaudited Condensed Consolidated Balance Sheets
(All amounts stated in US$)

  June 30, December 31,
Current assets      
Cash and cash equivalents $30,945,605  $26,497,305 
Accounts receivable  9,930,891   4,596,931 
Fair value of derivatives  940,553   ? 
Other current assets  240,998   569,870 
Total current assets  42,058,047   31,664,106 
Non-current assets      
Property and equipment:      
Oil and gas properties, successful efforts method      
Proved properties  145,697,537   138,032,413 
Unproved properties  18,021,391   21,700,926 
Accumulated depletion, depreciation, amortization and impairment  (105,047,754)  (102,480,972)
Total oil and gas properties, net  58,671,174   57,252,367 
Gathering system  42,566,495   42,475,086 
Accumulated depletion, depreciation, amortization and impairment  (33,995,327)  (33,443,949)
Total gathering system, net  8,571,168   9,031,137 
Land  637,764   637,764 
Buildings and other property and equipment, net  292,727   309,102 
Total property and equipment, net  68,172,833   67,230,370 
Other assets:      
Restricted cash  569,407   568,118 
Total non-current assets  68,742,240   67,798,488 
Total assets $110,800,287  $99,462,594 
Current liabilities      
Accounts payable trade $1,786,570  $1,189,905 
Gathering fees payable  1,052,168   963,546 
Royalties payable  2,471,969   1,853,508 
Income taxes payable  2,410,790   1,098,425 
Accrued capital expenditures  224,179   1,016,830 
Other accrued liabilities  834,779   1,098,127 
Fair value of derivatives  ?   239,824 
Asset retirement obligations  ?   85,207 
Total current liabilities  8,780,455   7,545,372 
Non-current liabilities      
Asset retirement obligations  2,735,965   2,748,449 
Deferred income taxes  10,224,766   9,905,440 
Total non-current liabilities  12,960,731   12,653,889 
Total liabilities  21,741,186   20,199,261 
Commitments and contingencies (Note 9)      
Shareholders' equity      
Common shares, no par value, unlimited shares authorized and 23,356,453 issued and 23,082,353 outstanding at June 30, 2022 and 24,202,218 issued and 23,668,203 shares outstanding at December 31, 2021  127,093,520   131,815,739 
Treasury shares, 274,100 at June 30, 2022 and 534,015 at December 31, 2021  (1,646,823)  (2,423,007)
Additional paid-in capital  9,171,555   8,835,203 
Accumulated deficit  (55,364,008)  (68,783,207)
Accumulated other comprehensive income  9,804,857   9,818,605 
Total shareholders' equity  89,059,101   79,263,333 
Total liabilities and shareholders' equity $110,800,287  $99,462,594 

Unaudited Condensed Consolidated Statements of Cash Flows
(All amounts stated in US$)

  Six months ended June 30, 
  2022  2021  
Cash flows from operating activities:       
Net income $16,388,876  $2,250,542  
Adjustments to reconcile net income to net cash provided by operating activities:       
Depletion, depreciation, amortization, and accretion  3,192,958   3,328,954  
Loss on derivative contracts  194,910   1,361,993  
Gain on sale of oil and gas properties  (221,642)  ?  
Settlement paid on derivative contracts  (1,375,287)  (27,460) 
Settlement of asset retirement obligation  (118,259)  (3,483) 
Stock-based compensation expense  336,352   438,540  
Deferred income tax expense  319,326   230,863  
Changes in assets and liabilities:       
Accounts receivable  (5,333,960)  388,912  
Prepaid income taxes and other current assets  328,872   (12,476) 
Accounts payable, royalties payable and other accrued liabilities  738,023   77,248  
Income taxes payable  1,312,365   ?  
Net cash provided by operating activities  15,762,534   8,033,633  
Cash flows from investing activities:       
Additions to unproved oil and gas properties  (162,445)  (70,058) 
Additions to proved oil and gas properties  (4,935,370)  (1,557,869) 
Additions to gathering system properties  (82,855)  (79,419) 
Additions to land, buildings and property and equipment  (1,234)  (5,745) 
Proceeds from sale of oil and gas properties  200,000   ?  
Prepaid drilling costs  ?   273  
Net cash used in investing activities  (4,981,904)  (1,712,818) 
Cash flows from financing activities:       
Buyback of common shares  (3,956,403)  (1,061,468) 
Exercise of stock options  608,787   ?  
Dividends  (2,969,677)  ?  
Net cash used in financing activities  (6,317,293)  (1,061,468) 
Effect of currency rates on cash, cash equivalents and restricted cash  (13,748)  (1,242) 
Increase in cash, cash equivalents and restricted cash  4,449,589   5,258,105  
Cash, cash equivalents and restricted cash, beginning of period  27,065,423   13,836,771  
Cash, cash equivalents and restricted cash, end of period $31,515,012  $19,094,876  
Supplemental cash flow disclosures:       
Income taxes paid $4,566,000  $1,074,025  
Interest paid $33,885  $27,073  
Non-cash investing activities:       
Change in unproved properties accrued in accounts payable and accrued liabilities $?  $(65,000) 
Change in proved properties accrued in accounts payable and accrued liabilities $(1,097,247) $805,443  
Change in gathering system accrued in accounts payable and accrued liabilities $8,554  $(8,915) 
Change in prepaid drilling costs $?  $979,358  
Asset retirement obligation asset additions and adjustments $7,666  $(29,853) 
Non-cash financing activities:       
Change in share buybacks accrued in accounts payable and accrued liabilities $598,419  $?  

Adjusted EBITDA Reconciliation
(All amounts stated in US$)

  Three months ended June 30, Six months ended June 30, 
  2022  2021  2022  2021  
Net income $10,582,988  $(485,025) $16,388,876  $2,250,541  
Add Back:             
Net interest expense  (21,200)  13,441   (21,102)  32,701  
Income tax expense  4,019,576   (165,751)  6,201,474   978,822  
Depreciation, depletion, amortization, and accretion  1,803,739   1,646,094   3,192,958   3,328,954  
Stock based compensation expense  194,050   236,041   336,352   438,540  
Loss on derivative contracts net of cash received or paid on settlement  (940,553)  1,735,674   (1,180,377)  1,334,533  
Foreign currency translation loss  (1,071)  279   4,331   611  
Adjusted EBITDA $15,637,529  $2,980,753  $24,922,512  $8,364,702  

Epsilon defines Adjusted EBITDA as earnings before (1) net interest expense, (2) taxes, (3) depreciation, depletion, amortization and accretion expense, (4) impairments of natural gas and oil properties, (5) non-cash stock compensation expense, (6) gain or loss on derivative contracts net of cash received or paid on settlement, and (7) other income. Adjusted EBITDA is not a measure of financial performance as determined under U.S. GAAP and should not be considered in isolation from or as a substitute for net income or cash flow measures prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity.

Additionally, Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. Epsilon has included Adjusted EBITDA as a supplemental disclosure because its management believes that EBITDA provides useful information regarding its ability to service debt and to fund capital expenditures. It further provides investors a helpful measure for comparing operating performance on a "normalized" or recurring basis with the performance of other companies, without giving effect to certain non-cash expenses and other items. This provides management, investors and analysts with comparative information for evaluating the Company in relation to other natural gas and oil companies providing corresponding non-U.S. GAAP financial measures or that have different financing and capital structures or tax rates. These non-U.S. GAAP financial measures should be considered in addition to, but not as a substitute for, measures for financial performance prepared in accordance with U.S. GAAP.

Free Cash Flow Reconciliation
(All amounts stated in US$)

  Three months ended June 30 Six months ended June 30
  2022  2021  2022  2021 
Net cash provided by operating activities $8,059,064  $2,408,765  $15,762,534  $8,033,633 
Less: Net cash used in investing activities (Capital Expenditures)  (2,120,991)  (1,161,543)  (4,981,904)  (1,712,818)
Free cash flow $5,938,073  $1,247,222  $10,780,630  $6,320,815 
Changes in working capital  3,611,896   149,524   2,954,700   (453,685)
Free cash flow before Changes in Working Capital $9,549,969  $1,396,746  $13,735,330  $5,867,130 

Epsilon defines Free cash flow ("FCF") as net cash provided by operating activities in the period minus payments for property and equipment made in the period. FCF is considered a non-GAAP financial measure under the SEC's rules. Management believes, however, that FCF is an important financial measure for use in evaluating the Company's financial performance, as it measures our ability to generate additional cash from our business operations. FCF should be considered in addition to, rather than as a substitute for, net income as a measure of our performance or net cash provided by operating activities as a measure of our liquidity. Additionally, our definition of FCF is limited and does not represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other obligations, payments made for business acquisitions, amounts spent to buy back shares, or pay dividends. Therefore, we believe it is important to view FCF as supplemental to our entire statement of cash flows.

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