Mr. Michael Raleigh reports

Epsilon Energy Ltd. has provided the results of its Dec. 31, 2014, independent reserves appraisal report, and earnings before interest, taxes, depreciation and amortization forecast for 2014, as well as a capital budget forecast for 2015. Additionally, a new corporate presentation and a technical paper co-authored by the company will be posted to the website of the company.

Highlights:

• December, 2014, reserves appraisal:
• • NI 51-101 December, 2014, proven and probable (2P) reserves of 196.0 billion cubic feet;
  • U.S. format December, 2014, proven and probable (2P) reserves of 197.5 billion cubic feet;
  • Full-year 2014 net production of 14.8 billion cubic feet;
  • A 13-per-cent year-over-year growth in reserves;
  • A 250-per-cent production replacement;
• Upper Marcellus evaluation:
• • Engineering analysis of Epsilon's leasehold suggesting that the Upper Marcellus reservoir properties compare favourably with those in the Lower Marcellus;
• Corporate capex guidance of up to $20-million for 2015:
• • $8.6-million budgeted for continuing development of mid-stream system;
  • $1.0-million allocated to completing 14 gross (.14 net) drilled wells;
  • Remaining capital considered discretionary budget to add additional wells;
• Forecast 2014 EBITDA range of $36-million to $38-million.

Reserves

During the last quarter of 2014, Epsilon requested that the company's independent reserves engineering firm perform an appraisal of the estimated ultimate recoverable (EUR) gas volumes on a per-well basis, including proven and probable categories for producing wells. This was closely followed by an appraisal of Epsilon's natural gas reserves conducted pursuant to both U.S. standards and to National Instrument 51-101 (standards of disclosure for oil and gas activities) and the Canadian oil and gas evaluation handbook reserves definitions.

Management comment

Since assuming control of Epsilon in July, 2013, the management team, employees and board of directors have accomplished many goals. First, the company has narrowed its focus to its core upstream and mid-stream assets in the Marcellus shale and has divested all non-core properties. Second, the organization has been downsized and high-graded with annual general and administrative costs declining from roughly $3.6-million to a current rate of $1.9-million. Third, and most importantly, the company's balance sheet and liquidity have improved significantly, which is proving to be very constructive in today's environment. In mid-2013, the company had minimal cash, was free cash flow negative, had a negative working capital balance and had no access to a revolving line of credit. Epsilon now has $16-million in cash, generates significant free cash flow even under the current challenging price regime and has $30-million available on its revolver (with the ability to increase the facility if management desires). This is an impressive transformation and was accomplished concurrently with a stock repurchase program, which retired $12.6-million of the company's stock (3.5 million shares). Fourth, the company has implemented a number of initiatives operationally that have enhanced the value of core assets in the Marcellus. These initiatives include working with the operator of the company's upstream asset to encourage improvements in completion productivity. In addition, it has developed an active dialogue with its mid-stream partners with a view toward maximizing the long-term value of the company's gathering assets.

With Epsilon now on much stronger footing, its future strategy will have two key tenets: maximize the value of its integrated Marcellus asset and return capital to shareholders. In the area of asset maximization, its most important initiative is the development of the Upper Marcellus reservoir. It believes the Upper Marcellus has the potential to meaningfully increase the company's current reserves value, and it is in the relatively early stages of exploring options to prove up this resource. Turning to the operating environment, it remains very challenging. The Marcellus shale has proven to be the most attractive source of gas in the lower United States. Over the last several years, productivity and wellhead deliverability have increased much faster than the required processing and take-away infrastructure, resulting in abnormally wide differentials to posted Nymex Henry Hub gas prices. The company's preference is to produce less rather than more gas in this environment, given that the company's acreage is largely held by production. Fortunately, its operating partner shares this sentiment, which will allow the company to focus its capital toward incremental resource development, primarily in the Upper Marcellus. The company's expectation is that production will decline over the course of the year, but its reserves value and reserves potential will increase.