10-K: Epsilon Energy Reports Increased Reserves Despite Lower Natural Gas Prices in 2024

Sentiment:

Annual Results 19 March 2025 4:28 PM

Epsilon Energy Ltd. reports a net income of $1.9 million for 2024, accompanied by a 20% increase in total estimated net proved reserves, driven by acquisitions and revisions in development plans.

Worse than expectedNet income decreased from $6.9 million in 2023 to $1.9 million in 2024.Gathering system revenue decreased by $4.3 million, or 44% over 2023.Interest income decreased by $1.2 million, or 71%, from the same period in 2023.

Summary

Epsilon Energy Ltd. reported a net income of $1.9 million for the year ended December 31, 2024, compared to $6.9 million in 2023.
The company's total estimated net proved reserves increased by 20% to 84,097 MMcfe as of December 31, 2024, driven by revisions in previous estimates and acquisitions in Texas.
Epsilon's total estimated net proved developed reserves increased by 28% to 64,872 MMcfe as of December 31, 2024.
The company realized a natural gas price of $1.80 per Mcf in Pennsylvania, a 4% increase from 2023.
Natural gas sales in Pennsylvania decreased by 28% to 5.7 Bcf due to curtailed production volumes.
The realized price for all Permian Basin production was $53.52 per BOE, a 2% increase from 2023.
Total sales in the Permian Basin increased by 242% to 259 MBOE.
The realized price for all Oklahoma production was $4.34 per Mcfe, a 19% decrease from 2023.
Total sales in Oklahoma decreased by 32% to 0.41 Bcfe.
The realized price for Canada oil production was $46.04 per Bbl.
Total oil sales for Canada were 2.5 M Bbl.
The company paid $2.4 million to the Auburn GGS to gather and treat its natural gas production in Pennsylvania.
The standardized measure of discounted future net cash flows increased to $50.7 million as of December 31, 2024, from $33.0 million in 2023.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While reserves have increased, net income has decreased, and there are several risk factors to consider. The sentiment is neutral.

Positives

Total estimated net proved reserves increased by 20% to 84,097 MMcfe.
Total estimated net proved developed reserves increased by 28% to 64,872 MMcfe.
The company's standardized measure of discounted future net cash flows increased to $50.7 million.
Realized natural gas price increased by 4% to $1.80 per Mcf in Pennsylvania.
Total sales in the Permian Basin increased by 242% to 259 MBOE.
The company acquired a 25% working interest in three producing wells and 3,246 gross undeveloped acres in Ector County, Texas.
Epsilon made aggregate quarterly distributions of $5.5 million ($0.25 per share) during the year ended December 31, 2024.

Negatives

Net income decreased from $6.9 million in 2023 to $1.9 million in 2024.
Natural gas sales decreased by 28% to 5.7 Bcf in Pennsylvania due to curtailed production.
The realized price for all Oklahoma production decreased by 19% to $4.34 per Mcfe.
Total sales in Oklahoma decreased by 32% to 0.41 Bcfe.
Gathering system revenue decreased by $4.3 million, or 44% over 2023.
Interest income decreased by $1.2 million, or 71%, from the same period in 2023.
The company recorded an impairment of $1.45 million on the Killam project in Alberta, Canada.

Risks

The company's business is dependent on oil and natural gas prices, and any fluctuations or decreases in such prices could adversely affect results of operations and financial condition.
Reserve estimates may be inaccurate, and future net cash flows as well as the ability to replace any reserves are uncertain.
The company may be unable to obtain additional capital required to implement its business plan, which could restrict its ability to grow.
The borrowing base under the credit facility may be reduced in light of commodity price declines, which could limit the company in the future.
The terms of the revolving credit facility may restrict operations, particularly the ability to respond to changes or to take certain actions.
The company's operations are currently geographically concentrated and therefore subject to regional economic, regulatory and capacity risks.
The company depends on third-party operators and key personnel, and competition for experienced technical personnel may negatively affect operations.
The company's leasehold interests are subject to termination or expiration under certain conditions.
The company may be exposed to third-party credit risk, and defaults by third parties could adversely affect the company.
The company may not be insured against all of the operating risks to which it is exposed.
Investor sentiment towards climate change, fossil fuels, and sustainability could adversely affect the business and share price.
The company is subject to complex laws and regulations, including environmental regulations that can have a material adverse effect on the cost, manner and feasibility of doing business.
The company is subject to cybersecurity risks.
The company is a smaller reporting company and as a result of the reduced disclosure requirement applicable to smaller reporting companies, its common shares may be less attractive to investors.
If the company fails to establish and maintain proper disclosure or internal controls, its ability to produce accurate financial statements and supplemental information or comply with applicable regulations could be impaired.
Because of the natural decline in production from existing wells, the company's success depends on the Anchor Shippers economically developing the remaining Marcellus Shale reserves.
Prices for natural gas in Northeast Pennsylvania are volatile and are subject to significant discounts from pricing at Henry Hub.
The financial condition of the company's natural gas gathering businesses is dependent on the continued availability of natural gas supplies and demand for those supplies in the markets it serves.
The company's operations are subject to operational hazards and unforeseen interruptions.

Future Outlook

Epsilon expects to continue seeking opportunities in other North American basins to provide the Company the flexibility to respond to market conditions by allocating capital across multiple basins and commodities.

Industry Context

The report highlights the challenges faced by natural gas producers in the Marcellus Shale due to limited transportation capacity and ample supply, leading to price differentials. It also mentions the increasing focus on sustainability practices in the energy industry and the potential impact on companies with energy-related assets.

Comparison to Industry Standards

The report mentions that Epsilon uses DeGolyer and MacNaughton, an independent petroleum engineering consulting firm that has been providing petroleum consulting services throughout the world since 1936.
The report also mentions that Epsilon follows the guidelines established by the SEC and the Financial Accounting Standards Board (FASB) for estimating revenue values.
The report also mentions that Epsilon follows the reserves definitions of Rules 410(a) (1)(32) of Regulation SX of the SEC and with practices generally recognized by the petroleum industry as presented in the publication of the Society of Petroleum Engineers entitled Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information (revised June 2019) Approved by the SPE Board on 25 June 2019 and in Monograph 3 and Monograph 4 published by the Society of Petroleum Evaluation Engineers.

Stakeholder Impact

Shareholders may be impacted by the decrease in net income and the volatility of the company's stock price.
Employees may be impacted by changes in the company's operations and financial performance.
Customers may be impacted by changes in the supply and price of natural gas and oil.
Suppliers may be impacted by changes in the company's capital expenditures and production activities.
Creditors may be impacted by changes in the company's financial condition and ability to repay debt.

Next Steps

Epsilon expects to continue seeking opportunities in other North American basins to provide the Company the flexibility to respond to market conditions by allocating capital across multiple basins and commodities.
The company will provide a $7 million drilling carry during 2025 in favor of the operator in exchange for a 25% working interest in the leasehold in Alberta, Canada.

Key Dates

Date	Description
March 14, 2005	Epsilon Energy Ltd. was incorporated under the laws of the Province of Alberta, Canada.
January 1, 2012	Anchor Shippers dedicated approximately 18,000 mineral acres to the Auburn GGS for an initial term of 15 years.
February 14, 2019	Epsilons registration statement on Form 10 was declared effective by the United States Securities and Exchange Commission.
February 19, 2019	Epsilon began trading in the United States on the NASDAQ Global Market under the trading symbol EPSN.
June 2020	The design suction pressure at the Auburn compression facility was subsequently reduced to 550 psig at the request of the Anchor Shippers.
July 22, 2020	The Board adopted the 2020 Equity Incentive Plan.
September 1, 2020	Shareholders approved the 2020 Equity Incentive Plan at Epsilons 2020 Annual General and Special Meeting of shareholders.
January 20, 2021	President Biden issued an Executive Order providing that he was accepting the Paris Agreement on behalf of the United States.
January 2021	Jason Stankowski and David Winn joined the board of directors.
July 1, 2022	Jason Stabell and Andrew Williamson Executive Employment Agreements became effective.
March 9, 2023	The previous share repurchase program commenced.
June 28, 2023	The Company closed a senior secured reserve based revolving credit facility with Frost Bank.
January 1, 2024	Epsilon Energy USA, Inc. (Epsilon) executed a new Anchor Shipper Gas Gathering Agreement for Northern Pennsylvania (the ASGGA) with operator Appalachia Midstream Services, LLC for a primary term of ten years and an effective date of January 1, 2024.
January 14, 2024	Henry Clanton Executive Employment Agreement became effective.
February 26, 2024	Epsilon acquired a 25% interest in three producing wells and 3,620 gross undeveloped acres in Ector County, Texas.
March 19, 2024	The Board of Directors authorized a new share repurchase program of up to 2,191,320 common shares.
March 27, 2024	The share repurchase program commenced.
April 11, 2024	Epsilon acquired a 50% working interest in 14,243 gross undeveloped acres in Alberta, Canada.
May 17, 2024	Epsilon Energy USA, Inc. (Epsilon) executed a new Anchor Shipper Gas Gathering Agreement for Northern Pennsylvania (the ASGGA) with operator Appalachia Midstream Services, LLC.
October 2024	Epsilon formed a joint venture with a private operator covering approximately 130,000 gross acres in Garrington and Harmattan areas in Alberta, Canada.
December 31, 2024	Our Board made grants to our management, employees, and directors entitling them to receive an aggregate of 236,072 common shares.
January 2025	The design suction pressure at the Auburn compression facility was reduced further from 550 psig to 450 psig.
February 10, 2025	The current borrowing base was redetermined to $45 million.
February 12, 2025	The Board terminated and revoked authority under the share repurchase program.
February 12, 2025	The Board authorized a new share repurchase program of up to 2,200,876 common shares.
March 1, 2025	We had approximately 2,000 shareholders of record.
March 18, 2025	The last reported sales price of our common shares on the NASDAQ Global Market was $7.21 per share.

Keywords

reserves, natural gas, oil, production, Permian Basin, Marcellus Shale, gathering system, Epsilon Energy, financial results, Oklahoma, Alberta, Texas, Pennsylvania

Disclaimer:The information provided here is for general informational purposes only and does not constitute financial advice, recommendation, or endorsement of any kind. It may contain errors or omissions. You should not rely on this information to make financial decisions. Always seek the advice of a qualified financial professional before making any investment or financial decisions. Use of this information is at your own risk.