Mr. Michael Raleigh reports

EPSILON REPORTS FIRST QUARTER 2014 RESULTS

Epsilon Energy Ltd. has released first quarter 2014 financial and operating results. Highlights for the first quarter and material subsequent events following the end of the quarter through the date of this release include:

• Pretax income of $3.9-million and adjusted earnings before interest, taxes, depreciation and amortization of $11.4-million;
• Upstream earnings before interest, taxes, depreciation and amortization of $8.7-million and mid-stream earnings before interest, taxes, depreciation and amortization of $2.7-million;
• Increased Marcellus working interest gas production exit rate from 47 million cubic feet per day (average in December, 2013) to 52 million cubic feet per day (average in March, 2014) and reached up to 60 million cubic feet per day at March 31, 2014;
• Gathered and delivered 28 billion cubic feet equivalent gross (9.8 billion cubic feet equivalent net to Epsilon's interest) during the quarter, or 311 million cubic feet equivalent gross per day with the Auburn gas-gathering system;
• Repurchased 70,500 common shares at an average price of $3.60.

                 FINANCIAL AND OPERATING RESULTS
                                                           Three months ended
                                                                 March 31,
                                                             2014        2013
Revenue by product -- total period ($000)
Natural gas revenue ($000)                             $   14,102  $   11,262
Volume (MMcfe)                                              4,096       3,198
Avg. price ($/Mcfe)                                    $     3.44  $     3.52
Exit rate (MMcfepd)                                          59.7        36.0
Oil revenue ($000)                                     $      196  $      132
Volume (MBO)                                                    2           2
Avg. price ($/bbl)                                     $    80.66  $    78.11
Mid-stream gathering system revenue ($000)             $    3,327  $    2,578
Total                                                  $   17,625  $   13,972

Management comments

Michael Raleigh, chief executive officer, commented: "The value of Epsilon's mid-stream asset is apparent from this quarter's operating results. Throughput increased 28 per cent quarter over quarter, primarily as the result of a 57-per-cent increase of imported gas from adjacent gathering systems (crossflow) that require additional compression capacity to reach the Tennessee gas pipeline system. Revenues for our mid-stream asset increased 29 per cent to $3.3-million resulting in $2.7-million in EBITDA net to Epsilon's interest. We expect continued growth in imported crossflow gas volumes over the next several years.

"Our upstream segment also experienced robust growth during the first quarter. Average daily gas net (of royalty) sales of 45.5 million cubic feet per day during the quarter (working interest produced gas of 52 million cubic feet per day) increased 6.5 per cent compared to the fourth quarter of 2013. We are especially pleased to note that production growth accelerated into the end of the first quarter, with Epsilon exiting the quarter producing working interest gas of approximately 60 million cubic feet per day. This exit rate represents an increase of more than 15 per cent over the quarter's average working interest production.

"Previously, we noted that our upstream operating partner had begun implementing a new design for Lower Marcellus completions, which should materially enhance the recovery of Epsilon's proved undeveloped reserves. Five recently completed wells had average frack spacing intervals of 288 feet versus 522 feet for the older design. Furthermore, early indications are that completion costs for these wells are comparable to the older design despite having almost twice the number of stages. Based on the results of an independent engineering study commissioned by Epsilon on our well data, it is our expectation that these and future wells will have higher initial production rates and commensurately higher EURs than our previous well completions.

"In aggregate, we are very pleased with the financial and operating performance of the company."

Capital expenditures

Epsilon's total capital expenditures were $4.2-million for the three months ended March 31, 2014. A total of $2.6-million was allocated to drilling ($500,000) and completing ($2.1-million) Marcellus wells, and a total of $1.6-million was allocated to the continuing expansion of the Auburn gas-gathering system.

Epsilon's 2014 capital budget reflects the company's singular focus on the development and optimization of its Marcellus assets. The company anticipates net capital expenditures of approximately $15-million for the rest of 2014, the majority ($13.4-million) of which will be allocated to the expansion of the Auburn gas-gathering system and includes capital for the expansion of the Auburn compression facility ($5.2-million). Epsilon has not yet received the updated reservoir forecast from the upstream operator, which will enable it to commit the capital required to expand the compression facility for maximum throughput. The remaining $8.2-million in mid-stream capital is primarily for the extension of existing trunk lines and the construction of new gathering lines, including a project to connect the first third party pad directly to the system.

Marcellus operational guidance

During the first quarter, Epsilon turned five gross (one net) new wells in line and returned two wells (0.5 net) to production that had been shut in for adjacent fracking operations. The attached well development table details Epsilon's well development status at March 31, 2014.

                            WELL DEVELOPMENT
                                                 Dec. 31, 2013  March 31, 2014
                                                  Gross    Net    Gross    Net  

Producing                                            71  22.23       78  23.70
Shut-in for adjacent frack                            2   0.49        0   0.00
Waiting on pipeline                                   1   0.00        2   0.14
Waiting on completion                                 4   0.16        9   0.19
Drilling                                              3   0.06        1   0.01
Completing                                            4   0.98        0   0.00

Subsequent to quarter-end, Epsilon turned two gross (0.14 net) new wells in line.

Near term, northeastern Marcellus gas pricing is being pressured by strong local supply growth, which has outpaced infrastructure and takeaway capacity. This infrastructure bottleneck is driving pricing differentials to benchmark indexes, which in turn incentivizes the construction of new pipelines and the reversal of existing pipelines bringing gas into the region. Longer term, the company expects pipeline capacity expansions to provide additional northeast Marcellus takeaway capacity to be realized by mid-2015. Such capacity expansion should reduce the long-term Marcellus transportation costs and pricing differentials.

Epsilon hedges portions of its expected production volumes to increase the predictability of its cash flow and to help maintain a strong financial position. For the rest of 2014, Epsilon has entered into Nymex natural gas swaps for 30 billion British thermal units per day at an average price of $4.02.

First quarter results

Epsilon generated revenues of $17.6-million for the three months ended March 31, 2014, compared with $11.4-million for the three months ended March 31, 2013. Marcellus natural gas production levels increased as compression operations at the Auburn facility reduced back pressure on the wells. In addition, two gross (0.5 net) shut-in wells and five gross (one net) new wells were turned in line during the quarter. The company's upstream Marcellus working interest production was 4.7 billion cubic feet equivalent net in the first quarter.

Realized natural gas prices averaged $3.44 per thousand cubic feet in the first quarter of 2014. Although the realized natural gas price was negatively impacted by a differential to Nymex that averaged ($1.49) during the quarter, this differential, while volatile, has narrowed considerably (less than $1) thus far in the second quarter. Operating expenses for Marcellus upstream operations in the first quarter were $2.5-million.

Increased production levels and increased crossflow gas from an adjacent gathering system resulted in historically high levels of throughput, revenue, and earnings before interest, taxes, depreciation and amortization for the Auburn gas-gathering system. The mid-stream system delivered 28.0 billion cubic feet equivalent gross of natural gas during the quarter as compared with 21.8 billion cubic feet equivalent during the fourth quarter of 2013. Primary gathering volumes increased 14.4 per cent quarter over quarter to 17.0 billion cubic feet equivalent, and imported crossflow volumes increased 57.7 per cent to 11.0 billion cubic feet equivalent. Revenues increased 29.1 per cent quarter over quarter to $3.3-million from $2.6-million. Mid-stream earnings before interest, taxes, depreciation and amortization increased to $2.7-million.

Epsilon reported net after-tax income of $2.0-million attributable to common shareholders or four cents per basic and diluted common share outstanding for the three months ended March 31, 2014, compared with a net income of $1.7-million, or three cents per basic and diluted common share outstanding for the three months ended March 31, 2013.

For the three months ended March 31, 2014, Epsilon's adjusted earnings before interest, income taxes, depreciation, amortization were $11.4-million as compared with $10.8-million for the three months ended March 31, 2013. The increase in adjusted earnings before interest, taxes, depreciation and amortization was primarily due to increased production, increased crossflow gas, and decreased general and administrative costs.

Adjusted earnings before interest, taxes, depreciation and amortization

Epsilon defines adjusted EBITDA as earnings before: (1) net interest expense, (2) depreciation, depletion and amortization expense, (3) recovery of prior impairments of oil and gas properties, (4) non-cash stock compensation expense, (5) unrealized gain on derivatives, and (6) other income. Adjusted earnings before interest, taxes, depreciation and amortization are not a measure of net income or cash flows as determined by international financial reporting standards.

Management believes these non-international financial reporting standards financial measures facilitate evaluation of the company's business on a normalized or recurring basis and without giving effect to certain non-cash expenses and other items, thereby providing 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. 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, and the reconciliations to the closest corresponding IFRS measure should be reviewed carefully.

          INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (all amounts stated in U.S.$)
                                                          Three months ended
                                                              March 31,
                                                          2014          2013
Revenues
Oil and gas revenue                               $ 14,298,067  $ 11,393,759
Gas-gathering and compression revenue                3,327,079     2,577,931
Total revenue                                       17,625,146    13,971,690
Operating costs and expenses
Project operating costs                              3,228,875     3,305,712
Depletion, depreciation, amortization and
decomissioning accretion                             4,431,514     3,277,200
Impairment recovery                                   (420,634)     (384,068)
Stock-based compensation                                22,888        56,055
General and administrative                             419,356       880,894
Total operating costs and expenses                   7,681,999     7,135,793
Operating income                                     9,943,147     6,835,897
Other income and expense
Interest income                                          9,409            66
Finance expense                                     (1,244,786)   (1,089,587)
Realized gain (loss) on commodity contracts         (2,584,130)    1,015,904
Net change in unrealized loss on commodity
contracts                                           (2,206,905)   (2,912,840)
(Loss) on sale of fixed assets                            (460)           --
Other (loss)                                            (3,899)           --
Net other expense                                   (6,030,771)   (2,986,457)
Income tax recovery -- current                              --            --
Income tax expense -- deferred                       1,911,857     2,173,009
Net income                                        $  2,000,519  $  1,676,431
Net income per share, basic                       $       0.04  $       0.03
Net income per share, diluted                     $       0.04  $       0.03

We seek Safe Harbor.