Epsilon Reports First Quarter 2017 Results

HOUSTON, TEXAS--(Marketwired - May 12, 2017) - Epsilon Energy Ltd. ("Epsilon" or the "Company") (TSX:EPS) today reported first quarter 2017 financial and operating results.

Mr. Michael Raleigh, Chief Executive Officer, commented, "Marcellus gas prices continued to strengthen during the first quarter despite a relatively mild winter season further demonstrating sustained underlying demand, local interstate pipeline capacity growth, and limited gas supply growth. During the first quarter, Epsilon's upstream gas revenues were $5.9 million, an 85% increase from the first quarter of 2016. Both increasing gas price and a shrinking basis differential contributed to the revenue increase. Epsilon's effective basis differential on realized natural gas prices decreased by 38% in the first quarter as compared to the first quarter of 2016. This means that even if the gas price remains flat we would experience an improving net realized gas price. We expect this trend to continue. The ongoing development of major transportation additions and expansion in the Northeast will continue to drive this constructive pricing trend.

Epsilon recently announced the successful closing of our over-subscribed Rights Offering. The proceeds from the Rights Offering will enable us to continue building our land position in the Anadarko Basin. We look forward to providing more information on the acquisitions in the near future."

Highlights for the first quarter and material subsequent events following the end of the quarter through the date of this release include:

• Upstream EBITDA of $2.7 million and Midstream EBITDA of $2.6 million for the quarter.

• Marcellus working interest (WI) gas production averaged 31 MMcf/d for the first quarter of 2017. Working interest gas production as of this release is approximately 30 MMcf/d.

• Gathered and delivered 25.8 Bcfe gross (9.0 Bcfe net to Epsilon's interest) during the quarter, or 287 MMcfe/d through the Auburn System which represents approximately 80% of design throughput. Current system throughput is averaging 220 MMcfe/d.

• Auburn Gas gathering and compression services included third party gas of 1.3 Bcfe during the quarter or approximately 14 MMcf/d.

Financial and Operating Results

Capital Expenditures

Epsilon's total capital expenditures were $0.1 million for the three months ended March 31, 2017. The majority of the capital was allocated to the ongoing build-out and maintenance of the Auburn Gas Gathering system. 

Epsilon's 2017 capital forecast for the Marcellus remains unchanged at $1 million for 2017. In regards to Epsilon's strategic entry into the Anadarko Basin, the due diligence process for the first acquisition is ongoing and the transaction is still anticipated to close in the second quarter. Additional announcements, including an updated capital budget, will be provided following the completion of the transaction.

Marcellus Operational Guidance

The Operator did not drill or propose any new wells during the quarter. The table below details Epsilon's Marcellus well development status at March 31, 2017:

Four wells were shut-in at quarter end due to ongoing maintenance operations, and one well was shut-in due to preparation for an adjacent completion operation.

Epsilon has not received any well proposals from the Operator subsequent to quarter end.

First Quarter Results

Epsilon generated revenues of $8.1 million for the three months ended March 31, 2017 compared to $5.6 million for the three months ended March 31, 2016. The Company's Upstream Marcellus net revenue interest production was 2.4 Bcfe in the first quarter.

Realized natural gas prices averaged $2.44 per Mcf in the first quarter of 2017. Realized natural gas prices in Northeast Pennsylvania are rising in response to decelerating production growth coupled with increasing transportation capacity. Operating expenses for Marcellus Upstream operations in the first quarter were $1.4 million.

The Auburn Gas Gathering system delivered 25.8 Bcfe of natural gas during the quarter as compared to 22.7 Bcfe during the fourth quarter of 2016. Primary gathering volumes decreased 11.1% quarter over quarter to 12.0 Bcfe primarily as a result of rotating well shut-ins for maintenance operations inside the Auburn system boundary. Imported cross-flow volumes increased 59.0% to 13.9 Bcfe.

Epsilon reported net after tax income of $0.3 million attributable to common shareholders or $0.01 per basic and diluted common share outstanding for the three months ended March 31, 2017, compared to a net loss of $1.3 million, and ($0.03) per basic and diluted common share outstanding for the three months ended March 31, 2016. 

For the three months ended March 31, 2017, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $5.3 million as compared to $2.8 million for the three months ended March 31, 2016. The increase in Adjusted EBITDA was primarily due to higher natural gas prices.

Adjusted EBITDA

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 EBITDA is not a measure of net income or cash flows as determined by IFRS.

Management believes these non-IFRS 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 that the reconciliations to the closest corresponding IFRS measure should be reviewed carefully.

About Epsilon

Epsilon Energy Ltd. is a North American onshore natural gas production and midstream company with a current focus on the Marcellus Shale of Pennsylvania.

Forward-Looking Statements

Certain statements contained in this news release constitute forward looking statements. The use of any of the words "anticipate", "continue", "estimate", "expect", 'may", "will", "project", "should", 'believe", and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated. Forward-looking statements are based on reasonable assumptions, but no assurance can be given that these expectations will prove to be correct and the forward-looking statements included in this news release should not be unduly relied upon.

The reserves and associated future net revenue information set forth in this news release are estimates only. In general, estimates of oil and natural gas reserves and the future net revenue therefrom are based upon a number of variable factors and assumptions, such as production rates, ultimate reserves recovery, timing and amount of capital expenditures, ability to transport production, marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary materially from actual results. For those reasons, estimates of the oil and natural gas reserves attributable to any particular group of properties, as well as the classification of such reserves and estimates of future net revenues associated with such reserves prepared by different engineers (or by the same engineers at different times) may vary. The actual reserves of the Company may be greater or less than those calculated. In addition, the Company's actual production, revenues, development and operating expenditures will vary from estimates thereof and such variations could be material.

Statements relating to "reserves" are deemed to be forward-looking statements as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated and can be profitably produced in the future. There is no assurance that forecast price and cost assumptions will be attained and variances could be material.

Proved reserves are those reserves which are most certain to be recovered. There is at least a 90% probability that the quantities actually recovered will equal or exceed the estimated proved reserves. Undeveloped reserves are those reserves expected to be recovered from known accumulations where a significant expenditure (for example, when compared to the cost of drilling a well) is required to render them capable of production. They must fully meet the requirements of the reserves classification (proved, probable) to which they are assigned. Proved undeveloped reserves are those reserves that can be estimated with a high degree of certainty and are expected to be recovered from known accumulations where a significant expenditure is required to render them capable of production.

The estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties due to the effects of aggregation. The estimated future net revenues contained in this news release do not necessarily represent the fair market value of the Company's reserves.

Special note for news distribution in the United States

The securities described in the news release have not been registered under the United Stated Securities Act of 1933, as amended, (the "1933 Act") or state securities laws. Any holder of these securities, by purchasing such securities, agrees for the benefit of Epsilon Energy Ltd. (the "Corporation") that such securities may not be offered, sold, or otherwise transferred only (A) to the Corporation or its affiliates; (B) outside the United States in accordance with applicable state laws and either (1) Rule 144(as) under the 1933 Act or (2) Rule 144 under the 1933 Act, if applicable.