Epsilon Energy Ltd. 2024 First-Quarter 10-Q Summary
Business context and reporting period
Epsilon Energy Ltd. is a North American onshore independent oil and natural gas company engaged in acquisition, development, production, gathering and compression. Operations span Pennsylvania, the Permian Basin in Texas and New Mexico, and the NW Anadarko Basin in Oklahoma. The company also owns a 35% interest in the Auburn Gas Gathering System in Pennsylvania. This unaudited report covers the three months ended March 31, 2024, compared with the same period in 2023.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $8.0 million | $9.4 million | Down 15% |
| Operating income | $1.4 million | $3.3 million | Down 58% |
| Net income | $1.5 million | $3.5 million | Down 57% |
| Net income per diluted share | $0.07 | $0.15 | Down $0.08 |
| Adjusted EBITDA | $4.6 million | $5.6 million | Down 19% |
| Net cash provided by operating activities | $3.7 million | $7.6 million | Down 51% |
| Capital expenditures | $23.3 million | $1.2 million | Up materially |
Operating margin was approximately 17.6%, compared with 35.5% in Q1 2023. Net margin was approximately 18.9%, compared with 37.7%. Adjusted EBITDA margin was approximately 57.5%, compared with 60.3%.
At March 31, 2024, cash and cash equivalents were $2.3 million, short-term U.S. Treasury investments were $12.2 million, and restricted cash was $0.9 million. Working capital was approximately $12.9 million. Total assets were $125.1 million and total liabilities were $25.2 million. There were no borrowings under the $35 million senior secured revolving credit facility, which matures in 2027 and bears interest at Daily Simple SOFR plus 3.25%. The company reported compliance with its financial covenants.
Cash, cash equivalents and restricted cash decreased by $10.7 million during the quarter, ending at $3.2 million. Operating cash flow of $3.7 million was more than offset by $11.8 million of investing outflows and $2.6 million of financing outflows.
Material changes versus the prior comparable period
- Revenue declined $1.4 million, primarily because Pennsylvania natural gas revenue fell 53% as realized prices decreased to $1.77 per Mcf from $2.56 and production declined 32% to 1.6 Bcf. Operator-elected shut-ins and natural well decline affected Pennsylvania volumes.
- Permian Basin revenue contributed $2.8 million in Q1 2024 versus none reported in Q1 2023, including $2.5 million of oil and condensate revenue and $0.3 million of NGL revenue.
- Gathering and compression revenue decreased 19% to $1.9 million, despite a 17% increase in the Auburn gathering rate, due primarily to lower anchor-shipper volumes.
- Lease operating costs increased 26% to $1.8 million because of additional Permian wells. DD&A increased 34% to $2.4 million, also reflecting additional Permian producing wells.
- General and administrative expense decreased 15% to $1.9 million, primarily because of lower compensation, legal, accounting, consulting and office expenses.
- Derivative results shifted from a $1.1 million gain in Q1 2023 to a $0.1 million loss in Q1 2024. The company received $0.5 million of net cash settlements during Q1 2024.
- On February 27, 2024, Epsilon acquired a 25% working interest in three producing Texas wells and 3,246 gross undeveloped acres for total consideration of $14.8 million. The company is participating in drilling and completion of one 13,200-foot lateral well on the position.
- The company repurchased 248,700 shares at $4.82 per share under its prior program. A new program authorizes repurchases of up to 2,191,320 shares, or 10% of outstanding shares, for aggregate consideration of up to $12.0 million through March 26, 2025; no purchases had occurred under the new program by March 31.
- The quarterly dividend was $0.0625 per share, or an annualized $0.25 per share, with approximately $1.4 million paid during the quarter.
Guidance, outlook, commentary and risks
Management did not provide specific production, revenue, earnings or capital-spending guidance in the filing. Management stated that current cash, short-term investments, available borrowings and operating cash flow are expected to meet cash requirements for at least the next twelve months.
Management described its strategy as disciplined capital allocation, including dividends and share repurchases, maintaining liquidity, and selectively investing in existing areas or new North American onshore opportunities. At March 31, 2024, the company had seven gross, or 0.7 net, Pennsylvania wells awaiting turn-in-line and one gross, or 0.25 net, Texas well drilled and awaiting completion.
- Commodity prices, production volumes, transportation constraints, weather, demand and broader economic or political conditions could materially affect revenue and cash flow.
- Derivative contracts reduce exposure to price declines but also limit benefits from price increases and produced a net derivative liability position of approximately $0.8 million on the balance sheet after netting.
- The company had $3.6 million of short-term capital expenditure commitments and reported long-term asset retirement obligations of approximately $14.8 million in the MD&A contractual-obligations discussion.
- Asset retirement obligations recorded on the balance sheet were $3.6 million, and the company had $0.5 million of operating lease liabilities.
- The filing reports no material changes to previously disclosed risk factors and no current legal proceedings. The prior Chesapeake litigation was dismissed without prejudice in September 2023.
- Results depend on reserve estimates, impairment assumptions and other management estimates. No impairment was recorded in either comparable quarter.
Important facts investors should verify
- Whether Pennsylvania production and gathering volumes recover from operator shut-ins and natural decline, and the resulting effect of low natural gas prices.
- The production, capital requirements and returns from the expanded Permian Basin position, including the 13,200-foot lateral under development.
- Available liquidity after the $14.8 million Texas acquisition, $23.3 million of Q1 capital expenditures, dividends and share repurchases.
- The timing and amount of future share repurchases under the newly authorized $12.0 million program.
- Commodity derivative volumes, pricing and mark-to-market exposure, particularly the crude oil swaps and basis swaps.
- The company’s ability to fund the $3.6 million of near-term capital commitments while maintaining dividends and repurchases.
- Future borrowing-base redeterminations, covenant compliance and any potential need to draw on the $35 million revolving facility.