Epsilon Energy Ltd. Announces Full Year 2017 Results
March 22, 2018 - 5:05 PM EDT
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Epsilon Energy Ltd. Announces Full Year 2017 Results
HOUSTON, March 22, 2018 (GLOBE NEWSWIRE) -- Epsilon Energy Ltd. (“Epsilon”) (TSX:EPS) today reported its financial results for the fourth quarter and full-year ended December 31, 2017.
Mr. Michael Raleigh, Chief Executive Officer, commented, “We are excited by the current prospects for Epsilon given the talented additions to our operational team in 2017, an unlevered balance sheet, a cash flowing asset and the opportunity to allocate capital to economically attractive gas and liquids projects in the Marcellus and Anadarko basins.
In the Marcellus, Epsilon recently proposed seven wells to hasten development and increase our working interest production in this attractive asset. In the Anadarko, Epsilon is participating with small working interests in multiple locations with several operators in order to gather data, improve our technical understanding and position us to begin de-risking and growing this asset. As validation of our strategy, Epsilon has been approached by several operators and lease holders in our Anadarko assets to jointly develop portions of our acreage.”
Highlights for the year and material subsequent events following the end of the quarter through the date of this release include:
Retired Cdn$38.5 million (US$29.5 million) of convertible debentures.
Executed rights offering raising Cdn$24.6 million (US$18.0 million) of capital.
Closed four transactions totaling approximately 7,000 net held-by-production acres across 100 sections (64,000 gross acres) of the NW STACK in Dewey County, Oklahoma.
Total estimated proved and probable natural gas reserves of 266 Bcf as of December 31, 2017 after 2017 production of 9.0 Bcf, and 45 Mbbl of proved oil and condensate reserves after 2017 production of 3 Mbbl.
Marcellus working interest (WI) gas averaged 27 MMcf/d for the fourth quarter of 2017. Working interest gas production as of this release is approximately 25 MMcf/d.
Gathered and delivered 88.2 Bcf gross (30.9 Bcf net to Epsilon’s interest) during the year, or 242 MMcfe/d through the Auburn System which represents approximately 73% of maximum throughput.
Gathered and delivered 20.9 Bcf gross (7.3 Bcf net to Epsilon’s interest) during the fourth quarter of 2017.
Epsilon is closing in on fully satisfying the regulatory requirements for US companies and to obtain a listing on a major US stock exchange
Financial and Operating Results
Three months ended December 31,
Twelve months ended December 31,
2017
2016
2017
2016
Revenue by product - total period ($000)
Natural gas revenue ($000)
$
4,057
$
5,047
$
19,204
$
15,263
Volume (MMcfe)
2,211
2,969
9,010
11,016
Avg. Price ($/Mcfe)
$
1.83
$
1.70
$
2.13
$
1.39
Exit Rate (MMcfepd)
27.0
32.5
27.0
32.5
Oil and other liquids revenue ($000)
$
101
$
-
$
122
$
-
Volume (MBOE)
2.60
-
3.10
-
Avg. Price ($/Bbl)
$
38.85
$
-
$
39.35
$
-
Midstream gathering system revenue ($000)
$
1,804
$
2,570
$
7,614
$
10,133
Total Revenue
$
5,962
$
7,617
$
26,940
$
25,396
Capital Expenditures
Epsilon’s total capital expenditures were $19.3 million for the year ended December 31, 2017. Of this, $19.1 million was spent on acquisition of producing properties with deep rights to the Mississippian and Woodford intervals in the Anadarko Basin of Oklahoma, USA. The remainder of the capital spending, $0.2 million, was allocated to the ongoing build-out and maintenance of the Auburn Gas Gathering system.
Epsilon is planning capital expenditures of $32.5 million for 2018. In the Marcellus Basin, Epsilon is budgeting $24 million for drilling & completing wells, $6 million for lease acquisition and $0.5 million for the Auburn Gas Gathering system. The upstream budget is discretionary and will be driven by natural gas prices and the participation elections of Epsilon’s working interest partners in outstanding well proposals. In the Anadarko Basin, Epsilon is budgeting $2 million to participate in drilling & completing wells with various operators.
Marcellus Operational Guidance
The Operator did not drill any wells during the fourth quarter of 2017. The table below details Epsilon’s well development status at December 31, 2017:
September 30, 2017
December 31, 2017
Gross
Net
Gross
Net
Producing
78
19.58
91
22.60
Shut-in
15
4.51
4
1.54
Waiting on pipeline
-
-
-
-
Waiting on completion
7
0.13
5
0.09
Drilling
-
-
-
-
Epsilon proposed seven wells subsequent to quarter end. The Operator and other working interest parties have elected to participate in three of the wells. The election results of the four remaining proposals are not known at the date of this release.
Fourth Quarter Results
Epsilon generated revenues of $6.0 million for the three months ended December 31, 2017 compared to $7.6 million for the three months ended December 31, 2016. The Company’s Marcellus net revenue interest production was 2.1 Bcf in the fourth quarter, and Oklahoma was 20,378 BOE.
Realized natural gas prices averaged $1.80 per Mcf in the fourth quarter of 2017. Operating expenses for Marcellus Upstream operations in the fourth quarter were $1.3 million.
The Auburn Gas Gathering system delivered 20.9 Bcf of natural gas during the quarter as compared to 22.7 Bcf during the fourth quarter of 2016. Primary gathering volumes increased 31.0% quarter over quarter to 12.6 Bcf. Imported cross-flow volumes increased 18.3% to 8.3 Bcf.
Epsilon reported a net after tax income of $8.5 million attributable to common shareholders or $0.16 per basic and diluted common shares outstanding for the three months ended December 31, 2017, compared to net loss of $0.3 million, and $(0.00) per basic and diluted common shares outstanding for the three months ended December 31, 2016.
For the three months ended December 31, 2017, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $2.3 million as compared to $4.7 million for the three months ended December 31, 2016. The decrease in Adjusted EBITDA was primarily due to decreased upstream production and a decrease in the gathering rate charged on midstream throughput.
Adjusted EBITDA
Epsilon defines Adjusted EBITDA as earnings before (1) net interest expense, (2) taxes, (3) depreciation, depletion, amortization and accretion expense, (4) impairments of oil and gas properties, (5) non-cash stock compensation expense, (6) unrealized gain on derivatives, and (7) other income. Adjusted EBITDA is not a measure of financial performance as determined under IFRS and should not be considered in isolation from or as a substitute for net income or cash flow measures prepared in accordance with IFRS 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 oil and gas companies providing corresponding non-IFRS financial measures or that have different financing and capital structures or tax rates. 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. The table above sets forth a reconciliation of Adjusted EBITDA to net income, which is the most directly comparable measure of financial performance calculated under IFRS and should be reviewed carefully.
About Epsilon
Epsilon Energy Ltd. is a value creating natural gas and liquids development, production and midstream company focussed on the Marcellus Shale of Pennsylvania and the NW STACK in Oklahoma.
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 States 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$)
Years ended December 31,
2017
2016
Revenues:
Oil, gas, NGLs and condensate revenue
$
19,325,528
$
15,263,438
Gas gathering and compression revenue
7,614,075
10,132,911
Total revenue
26,939,603
25,396,349
Operating costs and expenses:
Project operating costs
7,770,772
9,051,980
Depletion, depreciation, amortization and decommissioning accretion
8,443,134
11,873,017
Stock based compensation expense
313,325
221,296
General and administrative
4,189,065
1,908,572
Total operating costs and expenses
20,716,296
23,054,865
Operating income
6,223,307
2,341,484
Other income and (expense):
Interest income
26,520
75,474
Finance expense
(1,170,006
)
(3,911,881
)
Realized gain on commodity contracts
2,027,791
(151,198
)
Net change in unrealized loss on commodity contracts
595,896
(336,352
)
Other expense
27,313
(96,952
)
Net other income (expense)
1,507,514
(4,420,909
)
Net income (loss) before tax
7,730,821
(2,079,425
)
Income tax expense - current
400,909
157,064
Income tax expense (recovery) - deferred
(4,805,052
)
854,532
NET INCOME (LOSS)
$
12,134,964
$
(3,091,021
)
Net income (loss) per share, basic
$
0.23
($
0.07
)
Net income (loss) per share, diluted
$
0.23
($
0.07
)
Weighted average number of shares outstanding, basic
52,239,854
45,882,030
Weighted average number of shares outstanding, diluted
52,266,589
45,882,030
EPSILON ENERGY LTD.
Interim Unaudited Condensed Consolidated Statements of Financial Position
(All amounts stated in US$)
December 31,
December 31,
2017
2016
ASSETS
Current assets
Cash and cash equivalents
$
9,998,853
$
31,486,593
Accounts receivable
3,366,021
4,387,487
Restricted cash
556,864
530,538
Commodity contracts-asset
259,544
-
Other current assets
252,631
139,991
Total current assets
14,433,913
36,544,609
Non-current assets
Oil and gas interests:
Intangible exploration and evaluation costs
17,451,553
-
Property and equipment (net)
84,459,776
90,716,131
Total non-current assets
101,911,329
90,716,131
Total assets
$
116,345,242
$
127,260,740
EQUITY AND LIABILITIES
Current liabilities
Accounts payable and accrued liabilities
$
5,433,824
$
5,003,737
Income taxes payable
2,644,527
2,243,618
Commodity contracts-liability
-
336,352
Revolving line of credit
2,900,000
12,460,000
Convertible debentures
-
28,388,210
Total current liabilities
10,978,351
48,431,917
Non-current liabilities
Decommissioning liabilities
2,806,783
2,442,935
Deferred tax liability
18,849,595
23,654,647
Total non-current liabilities
21,656,378
26,097,582
Total liabilities
32,634,729
74,529,499
Equity
Share capital
144,304,163
126,315,325
Equity component of convertible debentures
-
5,033,884
Contributed surplus
11,334,534
6,017,972
Deficit
(81,242,299
)
(93,377,263
)
Accumulated other comprehensive income
9,314,115
8,741,323
Total equity
83,710,513
52,731,241
Total liabilities and shareholders' equity
$
116,345,242
$
127,260,740
EPSILON ENERGY LTD.
Interim Unaudited Condensed Consolidated Statements of Cash Flows
(All amounts stated in US$)
Years ended December 31,
2017
2016
Cash flows from operating activities:
Net income (loss)
$
12,134,964
$
(3,091,021
)
Adjustments for:
Depletion, depreciation, amortization and decommissioning accretion
8,443,134
$
11,873,017
Debenture accretion and fee amortization
267,773
$
1,147,828
Net change in unrealized loss on commodity contracts
(595,896
)
336,352
Stock-based compensation expense
313,325
221,296
Income tax expense (recovery)
(4,404,143
)
987,796
Changes in non-cash balances related to operations
1,394,863
(297,269
)
Net cash provided by operating activities
17,554,020
11,177,999
Cash flows from investing activities:
Acquisition of oil and natural gas properties - E&E
(17,451,553
)
-
Acquisition of oil and natural gas properties - PP&E
(1,643,735
)
-
Additions to oil and natural gas properties - PP&E
(179,197
)
(314,790
)
Change in working capital related to capital asset additions
(55,950
)
(469,164
)
Changes in restricted cash
(26,326
)
(530,538
)
Net cash used in investing activities
(19,356,761
)
(1,314,492
)
Cash flows from financing activities:
Buyback of common shares
-
(780,340
)
Shares issued through rights offering (net of issuance costs)
17,907,187
-
Purchase of convertible debentures
-
(357,842
)
Redemption of convertible debentures
(29,520,436
)
-
Exercise of stock options
50,243
-
Draw on (repayment of) revolving line of credit
(9,560,000
)
5,460,000
Net cash used in financing activities
(21,123,006
)
4,321,818
Effect of currency rates on cash and cash equivalents
1,438,007
346,604
Increase (decrease) in cash and cash equivalents
(21,487,740
)
14,531,929
Cash and cash equivalents, beginning of period
31,486,593
16,954,664
Cash and cash equivalents, end of period
$
9,998,853
$
31,486,593
Cash and cash equivalents consist of:
Cash
$
9,998,853
$
31,486,593
Cash and cash equivalents
$
9,998,853
$
31,486,593
EPSILON ENERGY LTD.
Adjusted EBITDA Reconciliation
(All amounts stated in US$)
Years ended December 31,
2017
2016
Net income (loss)
$
12,135
$
(3,091
)
Add Back:
Net interest expense
1,142
3,836
Deferred income tax provision
(4,404
)
1,012
Depreciation, depletion, amortization, and accretion
8,443
11,873
Stock based compensation expense
313
221
Net change in unrealized (gain) loss on commodity contracts
