Epsilon Energy Ltd. (EPSN) - Q1 2026 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2026. Epsilon Energy Ltd. is a North American onshore independent natural gas and oil company operating in the Appalachian, Powder River, Permian, and Western Canadian Sedimentary Basins. The company recently expanded its portfolio through the acquisition of Peak Exploration and Production LLC in November 2025, adding significant assets in Wyoming.
Key Financial Metrics
| Metric | Q1 2026 | Q1 2025 |
|---|---|---|
| Total Revenue | $25.60 million | $16.16 million |
| Net Income | $0.73 million | $4.02 million |
| Adjusted EBITDA | $13.39 million | $10.61 million |
| Operating Cash Flow | $10.10 million | $8.58 million |
| Capital Expenditures | $4.26 million | $6.78 million |
| Cash and Equivalents | $7.91 million | $8.96 million |
| Debt (Credit Facility) | $45.50 million | $50.50 million |
| Working Capital | $2.15 million | $7.62 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 58% year-over-year, driven by a 189% increase in oil and condensate revenue and a 26% increase in natural gas revenue. This was primarily due to higher volumes from the Peak acquisition in Wyoming and higher realized gas prices in Pennsylvania ($5.77/Mcf vs $3.92/Mcf).
- Net Income Decline: Despite revenue growth, Net Income dropped 82% to $0.73 million. This was primarily caused by a $8.93 million loss on derivative contracts (mark-to-market), compared to a $1.46 million loss in Q1 2025. The derivative loss was driven by rising crude oil prices impacting the hedge book assumed in the Peak acquisition.
- Operating Costs: Lease operating expenses increased 161% to $7.20 million, largely due to the inclusion of Wyoming assets and workover expenses in Pennsylvania.
- Debt Reduction: The company repaid $5.0 million on its revolving credit facility during the quarter, reducing the outstanding balance to $45.5 million.
Guidance, Outlook, and Risks
- Capital Allocation: Management maintains a disciplined capital allocation strategy. A quarterly dividend of $0.0625 per share was paid in March 2026. A new share repurchase program of up to $15.0 million was authorized in February 2026, though no shares were repurchased in Q1.
- Liquidity: The company holds a $80 million borrowing base credit facility maturing in October 2029. Management anticipates sufficient cash flow and borrowings to meet requirements for the next 12 months.
- Internal Controls: Management disclosed that disclosure controls and procedures were not effective as of March 31, 2026, due to a material weakness in accounting for significant and non-standard transactions. Remediation efforts are underway.
- Legal Proceedings: The company is involved in litigation regarding a contractor non-performance in Wyoming and shareholder complaints regarding disclosures related to the Peak acquisition. Management does not believe these will have a material adverse effect.
- Subsequent Event: On May 4, 2026, the company sold certain overriding royalty interests in Pennsylvania for $3.9 million.
Investor Verification Checklist
- Verify the impact of the material weakness in internal controls on future financial reporting reliability.
- Monitor the derivative hedge book performance, as mark-to-market losses significantly impacted net income despite strong operational cash flow.
- Confirm the integration and production performance of the Peak acquisition assets in Wyoming, which drove volume growth but also increased operating costs.
- Review the status of shareholder litigation regarding the Peak acquisition disclosures.
- Track the utilization of the $15 million share repurchase program authorized in February 2026.