EPSN

Epsilon Energy Ltd. (EPSN) 2025 Annual Report Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2025. Epsilon Energy Ltd. is a North American onshore independent natural gas and oil company operating in the Appalachian Basin (PA), Powder River Basin (WY), Permian Basin (TX/NM), and Western Canadian Sedimentary Basin (AB). The company operates two segments: Upstream (acquisition, exploration, development, production) and Gathering System (35% interest in the Auburn Gas Gathering System in PA).

Key 2025 developments include the acquisition of Peak Exploration & Production LLC (Powder River Basin assets) for $88.5 million in November 2025 and the divestiture of all Oklahoma assets in December 2025.

Key Financial Metrics

Note: The 2025 Net Loss includes a $19.3 million loss on the sale of Oklahoma assets and $2.9 million in transaction costs related to the Peak acquisition.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 64% to $51.6 million, driven by a 65% increase in Pennsylvania natural gas sales volumes (9.4 Bcf vs. 5.7 Bcf) and higher realized gas prices ($2.98/Mcf vs. $1.80/Mcf). Wyoming production contributed $4.0 million in revenue post-acquisition.
• Reserve Expansion: Total proved reserves increased 86% to 156,037 MMcfe, primarily due to the acquisition of 77,029 MMcfe in Wyoming. Proved developed reserves increased 69%.
• Asset Divestiture: The company sold all interests in the Anadarko Basin (Oklahoma) for $2.5 million, resulting in a $19.3 million loss on sale of assets.
• Debt Financing: The company closed a new $80 million senior secured revolving credit facility in October 2025. As of December 31, 2025, the outstanding balance was $50.5 million, utilized to fund the Peak acquisition.
• Production Mix: Pennsylvania accounted for 67% of revenue in 2025 (up from 50% in 2024), while Texas/Permian revenue share dropped to 19% (from 40%) due to volume declines and asset sales.

Guidance, Outlook, and Risks

Management Commentary: Management maintains a disciplined capital allocation strategy, intending to maintain a strong balance sheet and liquidity. The company plans to continue paying quarterly dividends ($0.25/share in 2025) and has authorized a new share repurchase program of up to $15.0 million (effective Feb 2026).

Outlook: The acquisition of Peak assets in Wyoming is expected to materially increase geographic diversification and provide flexibility to allocate capital across multiple basins. The company anticipates sufficient cash flow and borrowings to meet requirements for the next 12 months.

Risks and Contingencies:

• Commodity Price Volatility: Revenues are highly dependent on oil and natural gas prices. The company hedges a portion of production (50% of forecasted PDP production required by credit facility).
• Geographic Concentration: Despite the Wyoming acquisition, the company remains exposed to regional supply/demand factors, particularly in Pennsylvania where gas prices are discounted to Henry Hub.
• Internal Controls: Management identified a material weakness in internal control over financial reporting related to the accounting for significant and non-standard transactions. Remediation efforts are ongoing.
• Legal Proceedings: The company is involved in litigation regarding a contractor non-performance in Wyoming and has intervened in litigation challenging BLM lease issuances. Additionally, shareholder complaints were filed regarding disclosures related to the Peak acquisition; the company has supplemented disclosures to moot claims.

Investor Verification Checklist

• Peak Acquisition Integration: Verify the successful integration of Peak's Wyoming assets and the realization of anticipated synergies, given the material weakness in internal controls noted post-acquisition.
• Debt Covenants: Confirm continued compliance with the new credit facility covenants, specifically the leverage ratio (<2.5:1) and the requirement to hedge 50% of forecasted production.
• Reserve Revisions: Monitor future reserve reports for revisions to the 77,029 MMcfe acquired in Wyoming, as valuation is sensitive to forward commodity prices and production estimates.
• Dividend Sustainability: Assess whether operating cash flows ($20.6M) and free cash flow generation can sustain the $6.0M annual dividend payout alongside capital expenditures and debt service.
• Legal Resolution: Track the status of the shareholder complaints regarding the Peak acquisition proxy disclosures and the outcome of the BLM lease litigation.