Epsilon Energy (NASDAQ: EPSN) lifts H1 2026 revenue 58% with stronger cash flow
Epsilon Energy Ltd. reported significantly stronger results for the six months ended June 30, 2026. Total revenue was $43.9 million, up 58% from $27.8 million a year earlier, driven mainly by higher oil and NGL volumes and prices following the Peak acquisition in Wyoming.
Net income rose to $7.9 million (basic EPS $0.26) from $5.6 million (basic EPS $0.25). Operating income increased to $19.2 million from $8.0 million, despite much higher lease operating expenses of $13.5 million versus $5.2 million, reflecting added Wyoming operations and taxes. There was no impairment in 2026, compared with $2.7 million in 2025.
Cash from operating activities was strong at $22.4 million, compared with $16.9 million a year earlier. The company reduced its credit facility balance to $40.5 million from $50.5 million while maintaining a $90 million borrowing base and paying $3.8 million in dividends. However, Epsilon recorded a $6.7 million loss on derivative contracts year to date and interest expense increased to $1.8 million.
Positive
- Revenue grew 58% year over year to $43.9 million for the six months ended June 30, 2026, reflecting higher oil and NGL volumes and pricing.
- Net income increased to $7.9 million from $5.6 million, with operating income more than doubling to $19.2 million from $8.0 million.
- Operating cash flow rose to $22.4 million from $16.9 million, supporting dividends of $3.8 million and $10 million of credit facility repayment.
- No impairment expense was recorded in 2026, compared with $2.7 million of impairments in the prior-year period.
Negative
- Lease operating costs rose 159% to $13.5 million for the six months, increasing upstream operating cost per Mcfe to $2.04 from $0.85.
- The company recorded a $6.7 million loss on derivative contracts year to date, versus a $1.1 million gain in the prior-year period.
- Interest expense increased sharply to $1.8 million for the six months ended June 30, 2026 from $32,117 in the prior-year period.
Filing Explained
As of August 11, 2026, Epsilon had 30,283,779 shares outstanding, while its $15 million ATM facility had produced no sales.
The Form 10-Q is an unaudited quarterly report updating Epsilon’s interim financial statements, risks, and liquidity through
The arrangement is an at-the-market program, allowing the company to sell new common shares gradually at prevailing prices, with an aggregate offering amount of up to
Separately, shareholders approved an amended equity plan authorizing up to 2,140,637 common shares, while no restricted common shares were awarded during the six months ended
Key Figures
Key Terms
Adjusted EBITDA financial
borrowing base financial
asset retirement obligations financial
NYMEX WTI CMA swaps financial
Normal Course Issuer Bid financial
Earnings Snapshot
AI-generated analysis. How Rhea-AI works. Not financial advice.
FAQ
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from to
Commission file number:
(Exact name of registrant as specified in its charter)
| | |
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(State or other jurisdiction of incorporation or organization) | | (I.R.S Employer Identification No.) |
(
(Address of principal executive offices including zip code and
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ◻ | Accelerated filer ◻ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes ☐ No ⌧
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
As of August 11, 2026, there were
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Table of Contents
| | ||
Contents | | | |
| | | |
FORWARD-LOOKING STATEMENTS | | 4 | |
PART I-FINANCIAL INFORMATION | | 5 | |
ITEM 1. FINANCIAL STATEMENTS | | 5 | |
Unaudited Condensed Consolidated Balance Sheets | | 5 | |
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income | | 6 | |
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity | | 7 | |
Unaudited Condensed Consolidated Statements of Cash Flows | | 8 | |
Notes to the Unaudited Condensed Consolidated Financial Statements | | | |
1. | Description of Business | | 9 |
2. | Basis of Preparation | | 9 |
| Interim Financial Statements | | 9 |
| Principles of Consolidation | | 9 |
| Use of Estimates | | 9 |
| Recently Issued Accounting Standards | | 9 |
3. | Cash, Cash Equivalents, and Restricted Cash | | 10 |
4. | Property and Equipment | | 10 |
| Property Impairment | | 11 |
5. | Revolving Line of Credit | | 11 |
6. | Shareholders’ Equity | | 12 |
7. | Revenue Recognition | | 13 |
8. | Accumulated Other Comprehensive Income | | 15 |
9. | Income Taxes | | 15 |
10. | Commitments and Contingencies | | 15 |
11. | Leases | | 17 |
12. | Net Income Per Share | | 18 |
13. | Operating Segments | | 18 |
14. | Commodity Risk Management Activities | | 22 |
| Commodity Price Risks | | 22 |
| Commodity Derivative Contracts | | 23 |
15. | Asset Retirement Obligations | | 24 |
16. | Fair Value Measurements | | 24 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | | 26 | |
| Overview | | 26 |
| Business Strategy | | 26 |
| Operational Highlights | | 27 |
| Non-GAAP Financial Measures-Adjusted EBITDA | | 28 |
| Net Operating Revenues | | 29 |
| Operating Costs | | 30 |
| Depletion, Depreciation, Amortization and Accretion | | 31 |
| General and Administrative | | 32 |
| Interest Income | | 32 |
| Interest Expense | | 32 |
| Gain (Loss) on Derivative Contracts | | 33 |
| Capital Resources and Liquidity | | 33 |
Table of Contents
| Cash Flow | | 33 |
| Credit Agreement | | 34 |
| Repurchase Transactions | | 34 |
| Derivative Transactions | | 35 |
| Contractual Obligations | | 35 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | | 36 | |
| Gathering System Revenue Risk | | 36 |
| Interest Rate Risk | | 36 |
| Derivative Contracts | | 36 |
ITEM 4. CONTROLS AND PROCEDURES | | 36 | |
| Disclosure Controls and Procedures | | 36 |
| Changes in Internal Control Over Financial Reporting | | 37 |
| Inherent Limitations on Effectiveness of Controls | | 37 |
PART II OTHER INFORMATION | | 37 | |
ITEM 1. LEGAL PROCEEDINGS | | 37 | |
ITEM 1A. RISK FACTORS | | 38 | |
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS | | 38 | |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES | | 38 | |
ITEM 4. MINE SAFETY DISCLOSURES | | 38 | |
ITEM 5. OTHER INFORMATION | | 38 | |
ITEM 6. EXHIBITS | | 39 | |
SIGNATURES | | 40 | |
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FORWARD-LOOKING STATEMENTS
Certain statements contained in this report constitute forward-looking statements. The use of any of the words ‘‘anticipate,’’ ‘‘continue,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘may,’’ ‘‘will,’’ ‘‘project,’’ ‘‘should,’’ ‘‘believe,’’ and similar expressions and statements relating to matters that are not historical facts constitute ‘‘forward looking information’’ within the meaning of applicable securities laws. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated. Such 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 report should not be unduly relied upon. These statements are made only as of the date of this report. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to natural gas and oil production rates, commodity prices for crude oil or natural gas, supply and demand for natural gas and oil; the estimated quantity of natural gas and oil reserves, including reserve life; future development and production costs, and statements expressing general views about future operating results — are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in our Annual Report on Form 10-K for the year ended December 31, 2025, and those described from time to time in our future reports filed with the Securities and Exchange Commission. You should consider carefully the statements under Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2025. Our Annual Report on Form 10-K for the year ended December 31, 2025 is available on our website at www.epsilonenergyltd.com.
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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EPSILON ENERGY LTD.
Unaudited Condensed Consolidated Balance Sheets
| | | | | | |
| | June 30, | | December 31, | ||
| | 2026 | | 2025 | ||
ASSETS | | | | | | |
Current assets | | | | | | |
Cash and cash equivalents | | $ | | | $ | |
Accounts receivable | | | | | | |
Fair value of derivatives | | | | | | |
Prepaid income taxes | | | | | | |
Other current assets | | | | | | |
Total current assets | | | | | | |
Non-current assets | | | | | | |
Property and equipment: | | | | | | |
Oil and gas properties, successful efforts method | | | | | | |
Proved properties | | | | | | |
Unproved properties | | | | | | |
Accumulated depletion, depreciation, amortization and impairment | | | ( | | | ( |
Total oil and gas properties, net | | | | | | |
Gathering system | | | | | | |
Accumulated depletion, depreciation, amortization and impairment | | | ( | | | ( |
Total gathering system, net | | | | | | |
Land | | | | | | |
Buildings and other property and equipment, net | | | | | | |
Total property and equipment, net | | | | | | |
Other assets: | | | | | | |
Operating lease right-of-use assets, long term | | | | | | |
Restricted cash | | | | | | |
Fair value of derivatives, long term | | | | | | |
Deferred financing costs | | | | | | |
Prepaid drilling costs | | | | | | |
Total non-current assets | | | | | | |
Total assets | | $ | | | $ | |
| | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | |
Current liabilities | | | | | | |
Accounts payable trade | | $ | | | $ | |
Gathering fees payable | | | | | | |
Royalties payable | | | | | | |
Accrued capital expenditures | | | | | | |
Accrued compensation | | | | | | |
Other accrued liabilities | | | | | | |
Fair value of derivatives | | | | | | |
Operating lease liabilities | | | | | | |
Total current liabilities | | | | | | |
Non-current liabilities | | | | | | |
Credit facility payable | | | | | | |
Ad valorem taxes, long term | | | | | | |
Asset retirement obligations | | | | | | |
Fair value of derivatives, long term | | | | | | |
Deferred income taxes | | | | | | |
Operating lease liabilities, long term | | | | | | |
Total non-current liabilities | | | | | | |
Total liabilities | | | | | | |
Commitments and contingencies (Note 10) | | | | | | |
Shareholders' equity | | | | | | |
Preferred shares, | | | | | | |
Common shares, | | | | | | |
Additional paid-in capital | | | | | | |
Accumulated deficit | | | ( | | | ( |
Accumulated other comprehensive income | | | | | | |
Total shareholders' equity | | | | | | |
Total liabilities and shareholders' equity | | $ | | | $ | |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
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EPSILON ENERGY LTD.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
Revenues from contracts with customers: | | | | | | | | | | | | |
Gas, oil, NGL, and condensate revenue | | $ | | | $ | | | $ | | | $ | |
Gas gathering and compression revenue | | | | | | | | | | | | |
Total revenue | | | | | | | | | | | | |
| | | | | | | | | | | | |
Operating costs and expenses: | | | | | | | | | | | | |
Lease operating expenses | | | | | | | | | | | | |
Gathering system operating expenses | | | | | | | | | | | | |
Depletion, depreciation, amortization, and accretion | | | | | | | | | | | | |
Impairment expense | | | | | | | | | | | | |
Gain on sale of oil and gas properties | | | ( | | | | | | ( | | | |
Transaction costs | | | | | | | | | | | | |
General and administrative expenses: | | | | | | | | | | | | |
Stock based compensation expense | | | | | | | | | | | | |
Other general and administrative expenses | | | | | | | | | | | | |
Total operating costs and expenses | | | | | | | | | | | | |
Operating income | | | | | | | | | | | | |
| | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | |
Interest income | | | | | | | | | | | | |
Interest expense | | | ( | | | ( | | | ( | | | ( |
Gain (loss) on derivative contracts, net | | | | | | | | | ( | | | |
Other expense, net | | | ( | | | ( | | | ( | | | ( |
Other income (expense), net | | | | | | | | | ( | | | |
| | | | | | | | | | | | |
Net income before income tax expense | | | | | | | | | | | | |
Income tax expense | | | | | | | | | | | | |
NET INCOME | | $ | | | $ | | | $ | | | $ | |
Currency translation adjustments | | | ( | | | ( | | | ( | | | ( |
NET COMPREHENSIVE INCOME | | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | | |
Net income per share, basic | | $ | | | $ | | | $ | | | $ | |
Net income per share, diluted | | $ | | | $ | | | $ | | | $ | |
Weighted average number of shares outstanding, basic | | | | | | | | | | | | |
Weighted average number of shares outstanding, diluted | | | | | | | | | | | | |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
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EPSILON ENERGY LTD.
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Accumulated | | | | | ||||||
| | | | | | | | | | | | Other | | | | Total | ||||||
| | Common Shares Issued | | Treasury Shares | | Additional | | Comprehensive | | Accumulated | | Shareholders' | ||||||||||
| | Shares | | Amount | | Shares | | Amount | | paid-in Capital | | Income | | Deficit | | Equity | ||||||
Balance at January 1, 2026 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | ( | | $ | |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | | | | |
Dividends paid | | — | | | — | | — | | | — | | | — | | | — | | | ( | | | ( |
Stock-based compensation expense | | — | | | — | | — | | | — | | | | | | — | | | — | | | |
Other comprehensive loss | | — | | | — | | — | | | — | | | — | | | ( | | | — | | | ( |
Balance at March 31, 2026 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | ( | | $ | |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | | | | |
Dividends paid | | — | | | — | | — | | | — | | | — | | | — | | | ( | | | ( |
Stock-based compensation expense | | — | | | — | | — | | | — | | | | | | — | | | — | | | |
Buyback of common shares | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Retirement of treasury shares | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Vesting of shares of restricted stock | | | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Other comprehensive loss | | — | | | — | | — | | | — | | | — | | | ( | | | — | | | ( |
Balance at June 30, 2026 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | ( | | $ | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Accumulated | | | | | ||||||
| | | | | | | | | | | | Other | | | | Total | ||||||
| | Common Shares Issued | | Treasury Shares | | Additional | | Comprehensive | | Accumulated | | Shareholders' | ||||||||||
| | Shares | | Amount | | Shares | | Amount | | paid-in Capital | | Income | | Deficit | | Equity | ||||||
Balance at January 1, 2025 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | ( | | $ | |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | | | | |
Dividends paid | | — | | | — | | — | | | — | | | — | | | — | | | ( | | | ( |
Stock-based compensation expense | | — | | | — | | — | | | — | | | | | | — | | | — | | | |
Other comprehensive loss | | — | | | — | | — | | | — | | | — | | | ( | | | — | | | ( |
Balance at March 31, 2025 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | ( | | $ | |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | | | | |
Dividends paid | | — | | | — | | — | | | — | | | — | | | — | | | ( | | | ( |
Stock-based compensation expense | | — | | | — | | — | | | — | | | | | | — | | | — | | | |
Buyback of common shares | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Retirement of treasury shares | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Vesting of shares of restricted stock | | | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | ( | | | — | | | ( |
Balance at June 30, 2025 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | ( | | $ | |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
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EPSILON ENERGY LTD.
Unaudited Condensed Consolidated Statements of Cash Flows
| | | | | | |
| | Six months ended June 30, | ||||
| | 2026 | | 2025 | ||
Cash flows from operating activities: | | | | | | |
Net income | | $ | | | $ | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depletion, depreciation, amortization, and accretion | | | | | | |
Impairment expense | | | | | | |
Amortization on deferred financing costs | | | | | | |
Gain on sale of oil and gas properties | | | ( | | | |
Loss (gain) on derivative contracts | | | | | | ( |
Settlement paid on derivative contracts | | | ( | | | ( |
Settlement of asset retirement obligation | | | | | | ( |
Stock-based compensation expense | | | | | | |
Deferred income tax expense (benefit) | | | | | | ( |
Changes in assets and liabilities: | | | | | | |
Accounts receivable | | | ( | | | |
Prepaid income taxes | | | ( | | | |
Other assets and liabilities | | | | | | |
Accounts payable, royalties payable, gathering fees payable, and other accrued liabilities | | | | | | ( |
Income taxes payable | | | | | | |
Net cash provided by operating activities | | | | | | |
Cash flows from investing activities: | | | | | | |
Additions to unproved oil and gas properties | | | ( | | | ( |
Additions to proved oil and gas properties | | | ( | | | ( |
Deductions (additions) to gathering system properties | | | | | | ( |
Deductions to land, buildings and property and equipment | | | ( | | | ( |
Proceeds from sale of oil and gas properties | | | | | | |
Prepaid drilling costs | | | ( | | | |
Net cash used in investing activities | | | ( | | | ( |
Cash flows from financing activities: | | | | | | |
Payment on credit facility | | | ( | | | |
Dividends paid | | | ( | | | ( |
Net cash used in financing activities | | | ( | | | ( |
Effect of currency rates on cash, cash equivalents, and restricted cash | | | ( | | | ( |
Increase in cash, cash equivalents, and restricted cash | | | | | | |
Cash, cash equivalents, and restricted cash, beginning of period | | | | | | |
Cash, cash equivalents, and restricted cash, end of period | | $ | | | $ | |
| | | | | | |
Supplemental cash flow disclosures: | | | | | | |
Income tax paid - federal | | $ | | | $ | |
Income tax paid - state (PA) | | $ | | | $ | |
Income tax paid - state (other) | | $ | | | $ | |
Interest paid | | $ | | | $ | |
| | | | | | |
Non-cash investing activities: | | | | | | |
Change in proved properties accrued in accounts payable | | $ | | | $ | ( |
Change in gathering system accrued in accounts payable | | $ | ( | | $ | |
Asset retirement obligation asset additions and adjustments | | $ | | | $ | |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
1. Description of Business
Epsilon Energy Ltd. (the “Company” or “Epsilon” or “we”) was incorporated under the laws of the Province of Alberta, Canada on
2. Basis of Preparation
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the appropriate rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. All adjustments which are, in the opinion of management, necessary for a fair statement of the financial position and results of operations for the interim periods presented have been included. The interim financial information and notes hereto should be read in conjunction with the Company’s consolidated financial statements as of and for the year ended December 31, 2025. The results of operations for interim periods are not necessarily indicative of results to be expected for a full fiscal year.
Principles of Consolidation
The Company’s consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Epsilon Energy USA, Inc. and its wholly owned subsidiaries, Epsilon Midstream, LLC, Epsilon Operating, LLC, Dewey Energy GP, LLC, Peak Exploration & Production LLC, Peak BLM Lease LLC, Peak Powder River Resources, LLC, Peak Energy Operating #2, LLC, Willow Springs Development, LLC, Peak Powder River Acquisition, LLC and Altolisa Holdings, LLC. With regard to the gathering system, in which Epsilon owns an undivided interest in the asset, proportionate consolidation accounting is used. All inter-company transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved natural gas and oil reserves, asset retirement obligations, accrued natural gas and oil revenues and operating expenses, accrued gathering system revenues and operating expenses, as well as the valuation of commodity derivative instruments. Actual results could differ from those estimates.
Recently Issued Accounting Standards
In November 2024, the FASB issued ASU 2024-3 "Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures." The ASU will improve the decision usefulness for investors by requiring public business entities to disclose more detailed information about their expenses such as (a) inventory and manufacturing expense, (b) employee compensation, (c) depreciation, (d) intangible asset amortization, etc. The amendments will be effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The amendments will be applied prospectively with an option for a retrospective application. The Company is evaluating the impact of this new standard and believes that the adoption will result in additional disclosures, but will not have any other impact on its consolidated financial statements.
In July 2025, the FASB issued ASU 2025-05, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit losses for Accounts Receivable and Contract Assets. The amendments in this update provide (1) all entities with
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
a practical expedient to assume that current conditions as of the balance sheet date do not change for the remaining life of the assets and (2) entities other than public business entities with an accounting policy election to consider collection activity after the balance sheet date when estimating expected credit losses for current accounts receivable and current contract assets arising from transactions accounted for under Topic 606. The amendments will be effective for fiscal years beginning after December 15, 2025, with early adoption permitted. The Company has adopted ASU 2025-05 with no material impact on its consolidated financial statements.
3. Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents include cash on hand and short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Restricted cash consists of amounts deposited to back bonds or letters of credit for potential well liabilities. The Company presents restricted cash with cash and cash equivalents in the Consolidated Statements of Cash Flows.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the Consolidated Balance Sheets to the total of the amounts in the Consolidated Statements of Cash Flows as of June 30, 2026 and December 31, 2025:
| | | | | | |
| | June 30, | | December 31, | ||
| | 2026 | | 2025 | ||
Cash and cash equivalents | | $ | | | $ | |
Restricted cash included in other assets | | | | | | |
Cash, cash equivalents, and restricted cash in the statement of cash flows | | $ | | | $ | |
4. Property and Equipment
The following table summarizes the Company’s property and equipment as of June 30, 2026 and December 31, 2025:
| | | | | | |
| | June 30, | | December 31, | ||
| | 2026 | | 2025 | ||
Property and equipment: | | | | | | |
Oil and gas properties, successful efforts method | | | | | | |
Proved properties | | $ | | | $ | |
Unproved properties | | | | | | |
Accumulated depletion, depreciation, amortization and impairment | | | ( | | | ( |
Total oil and gas properties, net | | | | | | |
Gathering system | | | | | | |
Accumulated depletion, depreciation, amortization and impairment | | | ( | | | ( |
Total gathering system, net | | | | | | |
Land | | | | | | |
Buildings and other property and equipment, net | | | | | | |
Total property and equipment, net | | $ | | | $ | |
Asset Sales
On May 4, 2026, the Company divested certain overriding royalty interests (ORRIs) in Susquehanna Co, Pennsylvania to an undisclosed private buyer for $
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
Because the Company had
During the three and six months ended June 30, 2025, the Company had
Property Impairment
We perform a quantitative impairment test whenever events or changes in circumstances indicate that an asset group's carrying amount may not be recoverable, over proved properties using the published NYMEX forward prices, basis differentials, timing, methods and other assumptions consistent with historical periods. When indicators of impairment are present, GAAP requires that the Company first compare expected future undiscounted cash flows by asset group to their respective carrying values. If the carrying amount exceeds the estimated undiscounted future cash flows, a reduction of the carrying amount of the properties to their estimated fair value is required. Additionally, if an exploratory well is determined not to have found proved reserves, the costs incurred, net of any salvage value, should be charged to expense.
During the three and six months ended June 30, 2026,
During the three months and six months ended June 30, 2025, Epsilon recorded an impairment of $
5. Revolving Line of Credit
The Company closed a new senior secured reserve based revolving credit facility on October 10, 2025 with Frost Bank as administrative agent and Frost Bank and Texas Capital Bank as lenders. As of June 30, 2026, the borrowing base was $
Under the terms of the facility, the Company must adhere to the following financial covenants:
| ● | Current ratio of |
| ● | Leverage ratio of less than |
Additionally, the Company is required to hedge
We were in compliance with the financial covenants of the agreement as of June 30, 2026.
| | | | | | | | | | | | |
| | Balance at | | Balance at | | | | | ||||
| | June 30, | | December 31, | | | | | ||||
| | 2026 | | 2025 | | Borrowing Base | | Interest Rate | ||||
Credit facility payable | | $ | | | $ | | | $ | | | | SOFR + |
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
6. Shareholders’ Equity
(a)Authorized Shares
The Company is authorized to issue an unlimited number of Common Shares with
(b)Purchases of Equity Shares
Normal Course Issuer Bid
On February 18, 2026, the Board authorized a new share repurchase program of up to
On February 12, 2025, the Board authorized a new share repurchase program of up to
During the three and six months ended June 30, 2026 and 2025,
(c)Issuance of Equity Shares
On June 18, 2026, Epsilon Energy Ltd. (the “Company”) entered into a Sales Agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (the “Agent”), under which the Company may, from time to time, sell common shares of the Company,
(d)Equity Incentive Plan
The Board adopted the amended 2020 Equity Incentive Plan (the “2020 Plan”) on April 8, 2026 subject to approval by Epsilon’s shareholders at Epsilon’s 2026 Annual General and Special Meeting of shareholders, which occurred on May 20, 2026 (the “Meeting”). Shareholders approved the 2020 Plan, as amended, at the Meeting.
The amended 2020 Plan provides for incentive compensation in the form of stock options, stock appreciation rights, restricted stock and stock units, performance shares and units, other stock-based awards and cash-based awards. Under the amended 2020 Plan, Epsilon is authorized to issue up to
Restricted Stock
For the six months ended June 30, 2026,
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
The following table summarizes restricted stock activity for the six months ended June 30, 2026, and the year ended December 31, 2025:
| | | | | | | | | | | | | | |
| | Six months ended | | Year ended | ||||||||||
| | June 30, 2026 | | December 31, 2025 | ||||||||||
| | Number of | | Weighted | | Weighted | | Number of | | Weighted | | Weighted | ||
| | Restricted | | Average | | Average | | Restricted | | Average | | Average | ||
| | Shares | | Remaining Life | | Grant Date | | Shares | | Remaining Life | | Grant Date | ||
| | Outstanding | | (years) | | Fair Value | | Outstanding | | (years) | | Fair Value | ||
Balance non-vested Restricted Stock at beginning of period | | | | | $ | | | | | | $ | | ||
Granted | | | | — | | | | | | | | | | |
Vested | | ( | | — | | | | | ( | | — | | | |
Balance non-vested Restricted Stock at end of period | | | | | $ | | | | | | $ | | ||
Stock compensation expense for the granted Restricted Stock is recognized over the vesting period. Stock compensation expense recognized during the three and six months ended June 30, 2026 was $
As of June 30, 2026, the Company had unrecognized stock-based compensation related to these shares of $
(e)Dividends
On
7. Revenue Recognition
Revenues are comprised of sales of natural gas, oil and natural gas liquids (“NGLs”), along with the revenue generated from the Company’s ownership interest in the gas gathering system in the Auburn field in Northeastern Pennsylvania.
Overall, product sales revenue generally is recorded in the month when contractual delivery obligations are satisfied, which occurs when control is transferred to the Company’s customers at delivery points based on contractual terms and conditions. In addition, gathering and compression revenue generally is recorded in the month when contractual service obligations are satisfied, which occurs as control of those services is transferred to the Company’s customers. Gathering System revenues derived from Epsilon’s production, which have been eliminated from total gathering system revenues (“elimination entry”), amounted to $
The following table details revenue for the three and six months ended June 30, 2026 and 2025.
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six Months Ended June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
Revenue | | | | | | | | | | | | |
Natural gas | | $ | | | $ | | | $ | | | $ | |
Natural gas liquids | | | | | | | | | | | | |
Oil and condensate | | | | | | | | | | | | |
Gathering and compression fees (1) | | | | | | | | | | | | |
Total revenue | | $ | | | $ | | | $ | | | $ | |
| (1) | Net of the elimination entry |
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
Product Sales Revenue
The Company enters into contracts with third-party purchasers to sell its natural gas, oil, NGLs and condensate production. Under these product sales arrangements, the sale of each unit of product represents a distinct performance obligation. Product sales revenue is recognized at the point in time that control of the product transfers to the purchaser based on contractual terms which reflect prevailing commodity market prices. To the extent that marketing costs are incurred by the Company prior to the transfer of control of the product, those costs are included in lease operating expenses on the Company’s consolidated statements of operations and comprehensive income.
Settlement statements for product sales, and the related cash consideration, are generally received from the purchaser within 30 days. For operated production in Wyoming, cash consideration is typically received within 30 days after the end of a production month for oil, while natural gas and NGLs cash consideration is typically received within 60 days after the end of a production month. As a result, the Company must estimate the amount of production delivered to the customer and the consideration that will ultimately be received for sale of the natural gas, oil, NGLs, or condensate. Estimated revenue due to the Company is recorded within the receivables line item on the accompanying consolidated balance sheets until payment is received.
Gas Gathering and Compression Revenue
The Company also provides natural gas gathering and compression services through its ownership interest in the Auburn GGS in Pennsylvania. For the provision of gas gathering and compression services, the Company collects its share of the gathering and compression fees per unit of gas serviced and recognizes gathering revenue over time using an output method based on units of gas gathered.
The settlement statement from the operator of the Auburn GGS is received two months after transmission and compression has occurred. As a result, the Company must estimate the amount of production that was transmitted and compressed within the system. Estimated revenue due to the Company is recorded within the receivables line item on the accompanying consolidated balance sheets until payment is received.
Current Expected Credit Losses
Under ASU 326, Financial Instruments – Credit Losses, estimated losses on financial assets are provided through an allowance for credit losses. The majority of our financial assets are held in cash and cash equivalents and accounts receivable. The accounts receivable are primarily from purchasers of oil and natural gas, counterparties to our financial instruments, and revenues earned for compression and gathering services. Our oil, gas, and natural gas liquids accounts receivable are generally collected within 30 days after the end of the month. Compression and gathering receivables are generally collected within 60 days after the end of the month. We assess collectability through various procedures, including review of our trade receivable balances by counterparty, assessing economic events and conditions, our historical experience with counterparties, the counterparty’s financial condition and the amount and age of past due accounts. As of June 30, 2026 and December 31, 2025, we determined that our allowance for credit loss was
| | | | | | | | | |
| | June 30, | | December 31, | | December 31, | |||
| | 2026 | | 2025 | | 2024 | |||
Accounts receivable | | | | | | | | | |
Natural gas and oil sales | | $ | | | $ | | | $ | |
Joint interest billing | | | | | | | | | |
Gathering and compression fees | | | | | | | | | |
Commodity contract | | | | | | | | | |
Other receivables | | | | | | | | | |
Total accounts receivable | | $ | | | $ | | | $ | |
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
8. Accumulated Other Comprehensive Income
Accumulated other comprehensive income includes certain transactions that have generally been reported in the Consolidated Statements of Changes in Shareholders’ Equity. The activity in accumulated other comprehensive income during the three and six months ended June 30, 2026 and 2025 consisted of the following:
| | | | | | | | | | | | | |
| | Three months ended June 30, | | Six Months Ended June 30, | | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | | ||||
Balance at beginning of period | | $ | | | $ | | | $ | | | $ | | |
Translation loss | | | ( | | | ( | | | ( | | | ( | |
Balance at end of period | | $ | | | $ | | | $ | | | $ | | |
9. Income Taxes
Income tax provisions for the three and six months ended June 30, 2026 and 2025 are as follows:
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
Current: | | | | | | | | | | | | |
Federal | | $ | | | $ | | | $ | | | $ | |
State | | | | | | | | | | | | |
Total current income tax expense | | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | |
Federal | | | | | | ( | | | | | | ( |
State | | | | | | ( | | | | | | ( |
Total deferred tax expense | | | | | | ( | | | | | | ( |
Income tax expense | | $ | | | $ | | | $ | | | $ | |
The Company files federal income tax returns in the United States and Canada, and various returns in state and local jurisdictions.
The Company believes it has appropriate support for the income tax positions taken and to be taken on our tax returns and that the accruals for tax liabilities are adequate for all open years based on our assessment of various factors including past experience and interpretations of tax law applied to the facts of each matter. The Company's tax returns are open to audit under the statute of limitations for the years ending December 31, 2022 through December 31, 2025. To the extent we utilize net operating losses generated in earlier years, such earlier years may also be subject to audit.
From 2023-2025, distributions of Epsilon Energy USA Inc. earnings to Epsilon Energy Ltd. incurred a 5% U.S. dividend withholding tax, provided the Company was eligible for benefits under the U.S. / Canada income treaty.
Our effective tax rate will typically differ from the statutory federal rate primarily as a result of state income taxes and the valuation allowance against the Canadian net operating loss. The effective tax rate for the six months ended June 30, 2026 was higher than the statutory federal rate as a result of state income taxes partially offset by the valuation allowance against the Canadian net operating loss.
10. Commitments and Contingencies
The Company enters into commitments for capital expenditures in advance of the expenditures being made. As of June 30, 2026, the Company had commitments of $
Litigation
In 2025, the Company filed a lawsuit against a contractor regarding alleged non-performance while running casing in a well. The Company is seeking damages due to its inability to complete the Leavitt Fed 2-9-4MH well. On June
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
8, 2026, the Company reached a settlement agreement with the contractor, and the case has been subsequently dismissed with prejudice.
The Company has intervened as a defendant-intervenor in litigation challenging BLM’s issuance of federal oil and gas leases acquired by the Company in 2017, 2018, and 2020. Plaintiffs allege deficiencies in BLM’s environmental review under NEPA. The Company intervened to protect its leasehold interests. Management does not believe the outcome will have a material adverse effect on the Company’s financial position.
Between September 30, 2025 and October 28, 2025, we received multiple demand letters on behalf of purported Epsilon stockholders (the “Demands”). The Demands primarily alleged that the Preliminary Proxy Statement filed on September 19, 2025 or the Definitive Proxy Statement filed on October 10, 2025, as applicable, failed to disclose certain material information with respect to the acquisition of Peak Exploration and Production, LLC, and Peak BLM Lease LLC.
On October 16, 2025, we received a copy of a complaint filed against Epsilon and certain members of Epsilon’s Board of Directors in the Supreme Court of the State of New York, County of New York, on behalf of purported Epsilon stockholder Anthony Morgan (the “Morgan Complaint”). On October 17, 2025, we received a copy of a complaint filed against Epsilon and certain members of Epsilon’s Board of Directors in the Supreme Court of the State of New York, County of New York, on behalf of purported Epsilon stockholder Richard Lawrence (the “Lawrence Complaint,” and together with the Morgan Complaint, the “Complaints”).
The Complaints allege, among other things, that Epsilon and the other named defendants (the “Epsilon Defendants”) violated New York common law based on claims of negligence, negligent misrepresentation and concealment. Specifically, the Complaints allege that the Preliminary Proxy Statement or the Definitive Proxy Statement, as applicable, failed to disclose, among other things, certain details regarding the background of the Transactions. Among other remedies, the Complaints sought an injunction against consummating the Transactions, rescission or actual and punitive damages if the Transactions are consummated, costs and attorneys’ fees. To date, we have not been served with the Complaints, and the Plaintiffs have not taken any additional steps in furtherance of prosecuting the Complaints.
While we believe that the disclosures set forth in the Preliminary Proxy Statement and the Definitive Proxy Statement comply fully with applicable law, to moot certain of the claims made in the Demands and Complaints, to avoid nuisance and potential expense and delay, we voluntarily supplemented the Definitive Proxy Statement with certain disclosures in our Supplemental Disclosures to Definitive Proxy Statement filed on October 31, 2025. Nothing in our Supplemental Disclosures was an admission of the legal necessity or materiality under applicable law of any of the disclosures set forth in the Preliminary Proxy Statement or the Definitive Proxy Statement. To the contrary, we deny all allegations in the Demands and Complaints that any additional disclosure was required.
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
11. Leases
Under ASC 842, Leases, the Company recognized an operating lease related to its corporate office as of June 30, 2026 and December 31, 2025 as summarized in the following table:
| | | | | | |
| | June 30, | | December 31, | ||
| | 2026 | | 2025 | ||
Asset | | | | | | |
Operating lease right-of-use assets, long term | | $ | | | $ | |
Total operating lease right-of-use assets | | $ | | | $ | |
| | | | | | |
Liabilities | | | | | | |
Operating lease liabilities | | $ | | | $ | |
Operating lease liabilities, long term | | | | | | |
Total operating lease liabilities | | $ | | | $ | |
| | | | | | |
Operating lease costs | | $ | | | $ | |
| | | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | | | | | |
Operating cash flows from operating leases | | $ | | | $ | |
Weighted average remaining lease term (years) - operating lease | | | | | ||
Weighted average discount rate (annualized) - operating lease | | | | | ||
On March 1, 2023, the Company commenced a new office lease in Houston, TX with a
Lease expense for operating leases was $
Future minimum lease payments as of June 30, 2026 are as follows:
| | | |
| | Operating Leases | |
2026 | | $ | |
2027 | | | |
2028 | | | |
Total minimum lease payments | | | |
Less: imputed interest | | | ( |
Present value of future minimum lease payments | | | |
Less: current obligations under leases | | | ( |
Long-term lease obligations | | $ | |
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
12. Net Income Per Share
Basic net income per share is computed on the basis of the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed based upon the weighted-average number of common shares outstanding during the period plus the assumed issuance of common shares for all potentially dilutive securities.
The net income used in the calculation of basic and diluted net income per share is as follows:
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
Net income | | $ | | | $ | | | $ | | | $ | |
In calculating the net income per share, basic and diluted, the following weighted-average shares were used:
| | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||
| | 2026 | | 2025 | | 2026 | | 2025 |
Basic weighted-average number of shares outstanding | | | | | | | | |
Unvested time-based restricted shares |
| |
| |
| |
| |
Diluted weighted-average shares outstanding |
| |
| |
| |
| |
The Company excluded the following shares from the diluted EPS because their inclusion would have been anti-dilutive.
| | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||
| | 2026 | | 2025 | | 2026 | | 2025 |
Anti-dilutive unvested time-based restricted shares | | | | | | | | |
13. Operating Segments
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (CODM). The CODM, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as executive management consisting of the Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer. The CODM uses the Company’s consolidated financial results, including operating income or loss by segment, to make key operating decisions, assess performance, and to allocate resources. Segment performance is evaluated based on operating income or loss as shown in the table below. Interest income and income taxes are managed separately on a group basis.
The Company’s
| a. | The Upstream segment activities include acquisition, development and production of natural gas and oil reserves on properties within the United States and Canada; and |
| b. | The Gas Gathering segment partners with |
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
Segment activity for the six months ended June 30, 2026 and 2025 is as follows:
| | | | | | | | | |
| | Upstream | | Gas Gathering | | Total | |||
As of and for the six months ended June 30, 2026 | | | | | | | | | |
Operating revenue | | | | | | | | | |
Natural gas | | $ | | | $ | | | $ | |
Natural gas liquids | | | | | | | | | |
Oil and condensate | | | | | | | | | |
Gathering and compression fees | | | | | | | | | |
Intersegment gathering and compression fees | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Reconciliation of operating revenue | | | | | | | | | |
Elimination of intersegment revenues | | | | | | | | | ( |
Total consolidated operating revenue(1)(3) | | | | | | | | | |
| | | | | | | | | |
Operating costs and expenses | | | | | | | | | |
Gathering, transportation, and compression | | | | | | | | | |
Other lease operating expense | | | | | | | | | |
Gathering system operating expenses | | | | | | | | | |
Intersegment other lease operating expense | | | | | | | | | |
Gain on sale of oil and gas properties | | | ( | | | — | | | ( |
Depletion, depreciation, amortization and accretion | | | | | | | | | |
Segment operating income | | $ | | | $ | | | $ | |
| | | | | | | | | |
Reconciliation of segment operating income | | | | | | | | | |
Salary expense | | | | | | | | | ( |
Stock based compensation | | | | | | | | | ( |
Transaction costs | | | | | | | | | ( |
Other general and administrative | | | | | | | | | ( |
Elimination of intersegment other lease operating expenses | | | | | | | | | |
Interest income | | | | | | | | | |
Interest expense | | | | | | | | | ( |
Gain on derivative contracts | | | | | | | | | ( |
Other income | | | | | | | | | ( |
Net income before income tax expense | | | | | | | | $ | |
| | | | | | | | | |
Capital expenditures (2) | | $ | | | $ | ( | | $ | |
Segment assets (3) | | $ | | | $ | | | $ | |
| | | | | | | | | |
Total segment assets reconciled to consolidated amounts are as follows: | | | | | | | | | |
Total segment assets | | | | | | | | $ | |
Current assets, net | | | | | | | | | |
Fair value of derivatives, long term | | | | | | | | | |
Other property and equipment | | | | | | | | | |
Operating lease right-of-use asset | | | | | | | | | |
Credit facility fees | | | | | | | | | |
Restricted cash | | | | | | | | | |
Total assets | | | | | | | | $ | |
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
| | | | | | | | | |
| | Upstream | | Gas Gathering | | Total | |||
As of and for the six months ended June 30, 2025 | | | | | | | | | |
Operating revenue | | | | | | | | | |
Natural gas | | $ | | | $ | | | $ | |
Natural gas liquids | | | | | | | | | |
Oil and condensate | | | | | | | | | |
Gathering and compression fees | | | | | | | | | |
Intersegment gathering and compression fees | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Reconciliation of operating revenue | | | | | | | | | |
Elimination of intersegment revenues | | | | | | | | | ( |
Total consolidated operating revenue(1)(3) | | | | | | | | | |
| | | | | | | | | |
Operating costs and expenses | | | | | | | | | |
Gathering, transportation, and compression | | | | | | | | | |
Other lease operating expense | | | | | | | | | |
Gathering system operating expenses | | | | | | | | | |
Intersegment other lease operating expense | | | | | | | | | |
Impairment | | | | | | — | | | |
Depletion, depreciation, amortization and accretion | | | | | | | | | |
Segment operating income | | $ | | | $ | | | $ | |
| | | | | | | | | |
Reconciliation of segment operating income | | | | | | | | | |
Salary expense | | | | | | | | | ( |
Stock based compensation | | | | | | | | | ( |
Other general and administrative | | | | | | | | | ( |
Elimination of intersegment other lease operating expenses | | | | | | | | | |
Interest income | | | | | | | | | |
Interest expense | | | | | | | | | ( |
Loss on derivative contracts | | | | | | | | | |
Other income | | | | | | | | | ( |
Net income before income tax expense | | | | | | | | $ | |
| | | | | | | | | |
Capital expenditures (2) | | $ | | | $ | | | $ | |
Segment assets (3) | | $ | | | $ | | | $ | |
| | | | | | | | | |
Total segment assets reconciled to consolidated amounts are as follows: | | | | | | | | | |
Total segment assets | | | | | | | | $ | |
Current assets, net | | | | | | | | | |
Other property and equipment | | | | | | | | | |
Operating lease right-of-use asset | | | | | | | | | |
Restricted cash | | | | | | | | | |
Total assets | | | | | | | | $ | |
| (1) | Segment operating revenue represents revenues generated from the operations of the segment. Inter-segment sales during the six months ended June 30, 2026 and 2025 have been eliminated upon consolidation. For the six months ended June 30, 2026, two purchasers each accounted for 10% or more of our total revenue: HF Sinclair ( |
| (2) | Capital expenditures for the Upstream segment consist primarily of the acquisition of properties, and the equipping, drilling, and completing of wells while Gas Gathering consists of expenditures relating to the expansion and completion of the gathering and compression facility. |
| (3) | Our upstream segment includes Canadian revenue and assets for the six months ended June 30, 2026 of $ |
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
| | | | | | | | | |
| | Upstream | | Gas Gathering | | Total | |||
As of and for the three months ended June 30, 2026 | | | | | | | | | |
Operating revenue | | | | | | | | | |
Natural gas | | $ | | | $ | | | $ | |
Natural gas liquids | | | | | | | | | |
Oil and condensate | | | | | | | | | |
Gathering and compression fees | | | | | | | | | |
Intersegment gathering and compression fees | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Reconciliation of operating revenue | | | | | | | | | |
Elimination of intersegment revenues | | | | | | | | | ( |
Total consolidated operating revenue(1)(3) | | | | | | | | | |
| | | | | | | | | |
Operating costs and expenses | | | | | | | | | |
Gathering, transportation, and compression | | | | | | | | | |
Other lease operating expense | | | | | | | | | |
Gathering system operating expenses | | | | | | | | | |
Intersegment other lease operating expense | | | | | | | | | |
Gain on sale of oil and gas properties | | | ( | | | — | | | ( |
Depletion, depreciation, amortization and accretion | | | | | | | | | |
Segment operating income | | $ | | | $ | | | $ | |
| | | | | | | | | |
Reconciliation of segment operating income | | | | | | | | | |
Salary expense | | | | | | | | | ( |
Stock based compensation | | | | | | | | | ( |
Transaction costs | | | | | | | | | ( |
Other general and administrative | | | | | | | | | ( |
Elimination of intersegment other lease operating expenses | | | | | | | | | |
Interest income | | | | | | | | | |
Interest expense | | | | | | | | | ( |
Gain on derivative contracts | | | | | | | | | |
Other expense | | | | | | | | | ( |
Net income before income tax expense | | | | | | | | $ | |
| | | | | | | | | |
Capital expenditures (2) | | $ | | | $ | ( | | $ | |
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
| | | | | | | | | |
| | Upstream | | Gas Gathering | | Total | |||
As of and for the three months ended June 30, 2025 | | | | | | | | | |
Operating revenue | | | | | | | | | |
Natural gas | | $ | | | $ | | | $ | |
Natural gas liquids | | | | | | | | | |
Oil and condensate | | | | | | | | | |
Gathering and compression fees | | | | | | | | | |
Intersegment gathering and compression fees | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Reconciliation of operating revenue | | | | | | | | | |
Elimination of intersegment revenues | | | | | | | | | ( |
Total consolidated operating revenue(1)(3) | | | | | | | | | |
| | | | | | | | | |
Operating costs and expenses | | | | | | | | | |
Gathering, transportation, and compression | | | | | | | | | |
Other lease operating expense | | | | | | | | | |
Gathering system operating expenses | | | | | | | | | |
Intersegment other lease operating expense | | | | | | | | | |
Impairment | | | | | | | | | |
Depletion, depreciation, amortization and accretion | | | | | | | | | |
Segment operating income | | $ | | | $ | | | $ | |
| | | | | | | | | |
Reconciliation of segment operating income | | | | | | | | | |
Salary expense | | | | | | | | | ( |
Stock based compensation | | | | | | | | | ( |
Other general and administrative | | | | | | | | | ( |
Elimination of intersegment other lease operating expenses | | | | | | | | | |
Interest income | | | | | | | | | |
Interest expense | | | | | | | | | ( |
Gain on derivative contracts | | | | | | | | | |
Other expense | | | | | | | | | ( |
Net income before income tax expense | | | | | | | | $ | |
| | | | | | | | | |
Capital expenditures (2) | | $ | | | $ | | | $ | |
| (1) | Segment operating revenue represents revenues generated from the operations of the segment. Inter-segment sales during the three months ended June 30, 2026 and 2025 have been eliminated upon consolidation. For the three months ended June 30, 2026, five purchasers each accounted for 10% or more of our total revenue: HF Sinclair ( |
| (2) | Capital expenditures for the Upstream segment consist primarily of the acquisition of properties, and the equipping, drilling, and completing of wells while Gas Gathering consists of expenditures relating to the expansion and completion of the gathering and compression facility. |
| (3) | Our upstream segment includes Canadian revenue for the three months ended June 30, 2026 of $ |
14. Commodity Risk Management Activities
Commodity Price Risks
Epsilon engages in price risk management activities from time to time. These activities are intended to manage Epsilon’s exposure to fluctuations in commodity prices for natural gas and oil by securing derivative contracts for a portion of expected sales volumes.
Inherent in the Company’s fixed price contracts, are certain business risks, including market risk and credit risk. Market risk is the risk that the price of oil and natural gas will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by the Company’s counterparty to a
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
contract. The Company does not currently require collateral from any of its counterparties nor do its counterparties currently require collateral from the Company.
The Company enters into certain commodity derivative instruments to mitigate commodity price risk associated with a portion of its future natural gas and oil production and related cash flows. The natural gas and oil revenues and cash flows are affected by changes in commodity product prices, which are volatile and cannot be accurately predicted. The objective for holding these commodity derivatives is to protect the operating revenues and cash flows related to a portion of the future natural gas and oil sales from the risk of significant declines in commodity prices, which helps ensure the Company’s ability to fund the capital budget.
Epsilon has historically elected not to designate any of its financial commodity derivative contracts as accounting hedges and, accordingly, accounts for these financial commodity derivative contracts using the mark-to-market accounting method. Under this accounting method, changes in the fair value of outstanding financial instruments are recognized as gains or losses in the period of change and are recorded as Gain (loss) on derivative contracts on the Condensed Consolidated Statements of Operations and Comprehensive Income. The related cash flow impact is reflected in cash flows from operating activities. During the three months ended June 30, 2026, Epsilon recognized gains on commodity derivative contracts of $
Commodity Derivative Contracts
At June 30, 2026, the Company had outstanding NYMEX HH swaps totaling
| | | | | | |
| | Fair Value of Derivative | ||||
| | June 30, | | December 31, | ||
| | 2026 | | 2025 | ||
Current |
| | |
| | |
NYMEX Henry Hub (LD) Options Put |
| $ | | | $ | |
NYMEX Henry Hub (LD) Swaps | | | | | | |
NYMEX WTI CMA Options Put | | | | | | |
NYMEX WTI CMA Swaps | | | | | | |
Long-term |
|
| | | | |
NYMEX Henry Hub (LD) Options Put | | | | | | |
NYMEX Henry Hub (LD) Swaps | | | | | | |
NYMEX WTI CMA Options Put |
| | | | | |
NYMEX WTI CMA Swaps |
| | | | | |
|
| $ | | | $ | |
| | | | | | |
| | Fair Value of Derivative | ||||
| | June 30, | | December 31, | ||
| | 2026 | | 2025 | ||
Current |
| | |
| | |
NYMEX Henry Hub (LD) Options Call |
| $ | ( | | $ | ( |
NYMEX Henry Hub (LD) Swaps | | | ( | | | ( |
NYMEX WTI CMA Options Call | | | ( | | | ( |
NYMEX WTI CMA Swaps |
| | ( | | | |
Long-term | | | | | | |
NYMEX Henry Hub (LD) Options Call | | | ( | | | ( |
NYMEX Henry Hub (LD) Swaps |
| | ( | | | ( |
NYMEX WTI CMA Options Call | | | ( | | | ( |
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
NYMEX WTI CMA Swaps |
| | ( | | | |
|
| $ | ( | | $ | ( |
| | | | | | |
Net Fair Value of Derivatives |
| $ | ( | | $ | |
| | | | | | |
Net Current | | $ | | | $ | |
Net Long-Term |
| $ | ( | | $ | ( |
The following table presents the changes in the fair value of Epsilon’s commodity derivatives for the periods indicated:
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
Fair value of asset (liability), beginning of the period | | $ | ( | | $ | ( | | $ | | | $ | ( |
Loss on derivative contracts included in earnings | |
| | |
| | |
| ( | |
| |
Settlement of commodity derivative contracts | |
| | |
| ( | |
| | |
| |
Fair value of asset (liability), end of the period | | $ | ( | | $ | | | $ | ( | | $ | |
15. Asset Retirement Obligations
Asset retirement obligations are estimated by management based on Epsilon’s net ownership interest in all wells and the gathering system, estimated costs to reclaim and abandon such assets and the estimated timing of the costs to be incurred in future periods, and the forecast risk free cost of capital. Each year we review, and to the extent necessary, revise our asset retirement obligations estimates in accordance with recent activity and current service costs.
The following tables summarize the changes in asset retirement obligations for the periods indicated:
| | | | | | |
| | Six Months Ended | | Year ended | ||
| | | June 30, | | | December 31, |
| | 2026 | | 2025 | ||
Balance beginning of period | | $ | | | $ | |
Liabilities acquired | | | | | | |
Liabilities disposed of | | | | | | ( |
Wells plugged and abandoned | | | | | | ( |
Accretion | | | | | | |
Balance end of period | | $ | | | $ | |
16. Fair Value Measurements
The methodologies used to determine the fair value of our financial assets and liabilities at June 30, 2026 were the same as those used at December 31, 2025.
Cash and cash equivalents, restricted cash, accounts receivable, and accounts payable are carried at cost, which approximates their fair value because of the short-term maturity of these instruments. The Company’s revolving line of credit has a recorded value that approximates its fair value since its variable interest rate is tied to current market rates and the applicable margins represent market rates. The revolving line of credit is classified within Level 2 of the fair value hierarchy.
Commodity derivative instruments consist of NYMEX HH swap, NYMEX HH option, and Tennessee Z4 basis swap contracts for natural gas, and NYMEX WTI CMA swap contracts for crude oil. The Company’s derivative contracts are valued based on a marked to market approach. These assumptions are observable in the marketplace throughout the full term of the contract, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace, and are therefore designated as Level 2 within the valuation hierarchy. The Company utilizes its counterparties’ valuations to assess the reasonableness of its own valuations.
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
| | | | | | | | | | | | | | | |
| | June 30, 2026 | |||||||||||||
| | Level 1 | | Level 2 | | Level 3 | | Effect of Netting | | Net Fair Value | |||||
Assets | | | | | | | | | | | | | | | |
Derivative contracts | | $ | | | $ | | | $ | | | $ | ( | | $ | |
Cash equivalents | | $ | | | $ | | | $ | | | $ | | | $ | |
Liabilities | | | | | | | | | | | | | | | |
Derivative contracts | | $ | | | $ | | | $ | | | $ | ( | | $ | |
| | | | | | | | | | | | | | | |
| | December 31, 2025 | |||||||||||||
| | Level 1 | | Level 2 | | Level 3 | | Effect of Netting | | Net Fair Value | |||||
Assets | | | | | | | | | | | | | | | |
Derivative contracts | | $ | | | $ | | | $ | | | $ | ( | | $ | |
Cash equivalents | | $ | | | $ | | | $ | | | $ | | | $ | |
Liabilities | | | | | | | | | | | | | | | |
Derivative contracts | | $ | | | $ | | | $ | | | $ | ( | | $ | |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in the understanding of trends and significant changes in our results of operations and the financial condition of Epsilon Energy Ltd. and its subsidiaries for the periods presented. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto presented in this report, including the unaudited condensed consolidated financial statements as of June 30, 2026 and 2025 together with accompanying notes, as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2025. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs, and expected performance. Actual results and the timing of events may differ materially from those contained in these forward- looking statements due to a number of factors. See “Part II. Item 1A. Risk Factors” and “Forward-Looking Statements.”
Overview
Epsilon Energy Ltd. (the “Company”) is a North American onshore focused independent natural gas and oil company engaged in the acquisition, development, gathering and production of natural gas and oil reserves. Our areas of operations are the Appalachian Basin in Pennsylvania, the Powder River Basin in Wyoming, the Permian Basin in Texas and New Mexico, and the Western Canadian Sedimentary Basin in Alberta, Canada.
At June 30, 2026 we held leasehold rights to 52,290 net acres. We have natural gas production from our non-operated wells in Pennsylvania and natural gas, natural gas liquids, and oil production from our operated and non-operated wells in the Permian, Powder River, and Western Canadian Sedimentary Basins.
At December 31, 2025 our total estimated net proved reserves were 86.4 Bcf of natural gas reserves, 9.3 MMBbls of oil reserves, and 2.4 MMBbls of NGL reserves.
Our Pennsylvania (“PA”) assets are supported by our 35% ownership in the Auburn GGS.
Our common shares trade on the NASDAQ Global Market under the ticker symbol “EPSN.”
Business Strategy
We are committed to disciplined capital allocation which could include shareholder returns in the form of dividends and/or share buybacks. We plan to maintain a strong balance sheet and liquidity position to allow us to opportunistically invest in both our existing project areas and potential new projects.
On November 14, 2025, Epsilon acquired Peak Exploration and Production LLC and Peak BLM Lease LLC and their subsidiaries (together, "Peak") through a business combination. The acquisition added 284 gross (60 net) wells, including 105 gross (45 net) operated wells, and 60,945 gross (39,566 net) acres located in Campbell, Converse and Johnson Counties, Wyoming.
On December 11, 2025, Epsilon divested Dewey Energy Holdings, LLC, a wholly owned subsidiary of the Company to an undisclosed private buyer. The assets sold included approximately 964 Mcfe/d (60% natural gas) of production and approximately 6,400 net deep acres and 2,200 net shallow acres of leasehold, all located in Dewey County, Oklahoma.
On May 4, 2026, the Company divested certain overriding royalty interests (ORRIs) in Susquehanna Co, Pennsylvania to an undisclosed private buyer for $3.9 million. The assets covered 940 gross acres and 90 producing Marcellus wells with an average net revenue interest of 0.25% per well.
We have a substantial remaining drillable location inventory within our existing leaseholds in Pennsylvania, Wyoming, and Texas.
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Three and six months ended June 30, 2026 Highlights
Operational Highlights
Marcellus Shale – Pennsylvania
| ● | During the three months ended June 30, 2026, Epsilon's realized natural gas price was $2.01 per Mcf, a 21% decrease over the three months ended June 30, 2025. During the six months ended June 30, 2026, Epsilon's realized natural gas price was $4.06 per Mcf, a 26% increase over the six months ended June 30, 2025. |
| ● | During the three months ended June 30, 2026, Epsilon’s net revenue interest natural gas production was 1.8 Bcf, a 32% decrease over the three months ended June 30, 2025. During the six months ended June 30, 2026, Epsilon’s net revenue interest natural gas production was 3.9 Bcf, a 26% decrease over the six months ended June 30, 2025. |
| ● | Gathered and delivered 7.7 Bcf gross (2.7 net to Epsilon's interest) during the three months ended June 30, 2026, or 85 MMcf/d through the Auburn Gas Gathering System. Gathered and delivered 17.3 Bcf gross (6.1 net to Epsilon's interest) during the six months ended June 30, 2026, or 95.6 MMcf/d through the Auburn Gas Gathering System. |
Powder River Basin – Wyoming
| ● | During the three months ended June 30, 2026, Epsilon's realized price for all Powder River Basin production was $61.28 per Boe (75% liquids). During the six months ended June 30, 2026, Epsilon's realized price for all Powder River Basin production was $55.20 per Boe (74% liquids). |
| ● | Total net revenue interest production for the three months ended June 30, 2026, which included oil, natural gas liquids, and natural gas, was 158.4 Mboe. Total net revenue interest production for the six months ended June 30, 2026, which included oil, natural gas liquids, and natural gas, was 338.1 Mboe. |
Permian Basin – Texas and New Mexico
| ● | During the three months ended June 30, 2026, Epsilon's realized price for all Permian Basin production was $66.13 per Boe (87% liquids), a 28% increase over the three months ended June 30, 2025. During the six months ended June 30, 2026, Epsilon's realized price for all Permian Basin production was $57.23 per Boe (86% liquids), a 7% increase over the six months ended June 30, 2025. |
| ● | Total net revenue interest production for the three months ended June 30, 2026, which included oil, natural gas liquids, and natural gas, was 52.0 Mboe compared to 42.9 Mboe during the same period in 2025, a 21% increase. Total net revenue interest production for the six months ended June 30, 2026, which included oil, natural gas liquids, and natural gas, was 103.7 Mboe compared to 104.9 Mboe during the same period in 2025, a 1% decrease. |
| ● | During the three and six months ended June 30, 2026, the Company had 1 gross (.25 net) well completed and turned in line. |
Western Canadian Sedimentary Basin—Alberta, Canada
| ● | During the three months ended June 30, 2026, Epsilon's realized price for all Canada production was $31.02 per Boe (51% liquids). During the six months ended June 30, 2026, Epsilon's realized price for all Canada production was $29.49 per Boe (50% liquids). |
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| ● | Total net revenue interest production for the three months ended June 30, 2026, which included oil, natural gas liquids, and natural gas, was 5.6 Mboe. Total net revenue interest production for the six months ended June 30, 2026, which included oil, natural gas liquids, and natural gas, was 11.3 Mboe. |
Non-GAAP Financial Measures-Adjusted EBITDA
Epsilon defines Adjusted EBITDA as earnings before (1) net interest expense, (2) taxes, (3) depreciation, depletion, amortization and accretion expense, (4) impairments of natural gas and oil properties, (5) non-cash stock compensation expense, (6) transaction costs, (7) gain or loss on derivative contracts net of cash received or paid on settlement, (8) gain or lss on sale of assets, and (9) gain or loss on foreign currency traslations. Adjusted EBITDA is not a measure of financial performance as determined under U.S. GAAP and should not be considered in isolation from or as a substitute for net income or cash flow measures prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity.
Additionally, Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. Epsilon has included Adjusted EBITDA as a supplemental disclosure because its management believes that Adjusted EBITDA provides useful information regarding its ability to service debt and to fund capital expenditures. It further provides investors a helpful measure for comparing operating performance on a normalized or recurring basis with the performance of other companies, without giving effect to certain non-cash expenses and other items. This provides management, investors and analysts with comparative information for evaluating the Company in relation to other natural gas and oil companies providing corresponding non-U.S. GAAP financial measures or that have different financing and capital structures or tax rates. These non-U.S. GAAP financial measures should be considered in addition to, but not as a substitute for, measures for financial performance prepared in accordance with U.S. GAAP.
The table below sets forth a reconciliation of net income to Adjusted EBITDA for the three and six months ended June 30, 2026 and 2025, which is the most directly comparable measure of financial performance calculated under U.S. GAAP and should be reviewed carefully.
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2026 |
| 2025 |
| 2026 |
| 2025 | ||||
Net income | | $ | 7,133,471 | | $ | 1,551,461 | | $ | 7,862,896 | | $ | 5,567,495 |
Add Back: | | | | | | | | | | | | |
Interest expense (income), net | | | 852,482 | | | 2,659 | | | 1,748,521 | | | (429) |
Income tax expense | | | 2,429,235 | | | 1,837,687 | | | 2,696,971 | | | 3,507,881 |
Depreciation, depletion, amortization, and accretion | | | 2,804,107 | | | 3,201,654 | | | 5,806,446 | | | 6,677,511 |
Impairment expense | | | — | | | 2,670,000 | | | — | | | 2,676,669 |
Stock based compensation expense | | | 547,527 | | | 385,838 | | | 1,095,054 | | | 771,676 |
Gain on sale of oil and gas properties | | | (4,174,368) | | | — | | | (4,174,368) | | | — |
Transaction costs | | | 202,532 | | | — | | | 273,952 | | | — |
(Gain)/loss on derivative contracts net of cash received or paid on settlement | | | (3,976,251) | | | (2,267,203) | | | 3,905,742 | | | (1,220,076) |
Foreign currency translation (gain) loss | | | (1,201) | | | 14,021 | | | (3,076) | | | 24,310 |
Adjusted EBITDA | | $ | 5,817,534 | | $ | 7,396,117 | | $ | 19,212,138 | | $ | 18,005,037 |
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Results of Operations
Net Operating Revenues
For the six months ended June 30, 2026, revenues increased $16.1 million, or 58%, to $43.9 million from $27.8 million during the same period of 2025.
Revenue and volume statistics for the six months ended June 30, 2026 and 2025 were as follows:
| | | | | | | | | | | | |
| | Three months ended | | Six months ended | ||||||||
| | June 30, | | June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
Revenues | | | | | | | | | | | | |
Pennsylvania | | | | | | | | | | | | |
Natural gas revenue | | $ | 3,602,852 | | $ | 6,702,131 | | $ | 15,915,420 | | $ | 17,030,025 |
Volume (MMcf) | |
| 1,792 | |
| 2,653 | |
| 3,924 | |
| 5,290 |
Avg. Price ($/Mcf) | | $ | 2.01 | | $ | 2.53 | | $ | 4.06 | | $ | 3.22 |
Gathering system revenue (net of elimination) | | $ | 1,336,740 | | $ | 1,845,005 | | $ | 2,994,517 | | $ | 3,737,355 |
Total PA Revenues | | $ | 4,939,592 | | $ | 8,547,136 | | $ | 18,909,937 | | $ | 20,767,380 |
Permian Basin | | | | | | | | | | | | |
Natural gas revenue | | $ | (167,957) | | $ | 17,189 | | $ | (187,576) | | $ | 95,528 |
Volume (MMcf) | |
| 39 | |
| 30 | |
| 87 | |
| 80 |
Avg. Price ($/Mcf) | | $ | (4.27) | | $ | 0.56 | | $ | (2.16) | | $ | 1.19 |
Natural gas liquids revenue | | $ | 237,859 | | $ | 41,837 | | $ | 423,191 | | $ | 326,798 |
Volume (MBoe) | |
| 10.4 | |
| 3.2 | |
| 21.1 | |
| 15.3 |
Avg. Price ($/Bbl) | | $ | 22.94 | | $ | 13.06 | | $ | 20.02 | | $ | 21.36 |
Oil and condensate revenue | | $ | 3,368,045 | | $ | 2,163,481 | | $ | 5,700,682 | | $ | 5,182,976 |
Volume (MBbl) | |
| 35.1 | |
| 34.6 | |
| 68.1 | |
| 76.2 |
Avg. Price ($/Bbl) | | $ | 96.06 | | $ | 62.47 | | $ | 83.67 | | $ | 68.06 |
Total Permian Basin Revenues | | $ | 3,437,947 | | $ | 2,222,507 | | $ | 5,936,297 | | $ | 5,605,302 |
Oklahoma | | | | | | | | | | | | |
Natural gas revenue | | $ | 17 | | $ | 166,635 | | $ | 10,092 | | $ | 373,975 |
Volume (MMcf) | |
| (0) | |
| 52 | |
| 1 | |
| 105 |
Avg. Price ($/Mcf) | | $ | (17.00) | | $ | 3.20 | | $ | 10.44 | | $ | 3.57 |
Natural gas liquids revenue | | $ | 429 | | $ | 79,789 | | $ | 3,183 | | $ | 182,078 |
Volume (MBoe) | |
| 0.0 | |
| 3.7 | |
| 0.1 | |
| 7.4 |
Avg. Price ($/Bbl) | | $ | 22.14 | | $ | 21.61 | | $ | 30.65 | | $ | 24.64 |
Oil and condensate revenue | | $ | — | | $ | 133,446 | | $ | 384 | | $ | 291,383 |
Volume (MBbl) | |
| (0.0) | |
| 2.0 | |
| (0.5) | |
| 4.3 |
Avg. Price ($/Bbl) | | $ | — | | $ | 66.00 | | $ | (0.82) | | $ | 68.29 |
Total OK Revenues | | $ | 446 | | $ | 379,870 | | $ | 13,659 | | $ | 847,436 |
Wyoming | | | | | | | | | | | | |
Natural gas revenue | | $ | 315,269 | | $ | — | | $ | 1,383,572 | | $ | — |
Volume (MMcf) | |
| 235 | |
| — | |
| 518 | |
| — |
Avg. Price ($/Mcf) | | $ | 1.34 | | $ | — | | $ | 2.67 | | $ | — |
Natural gas liquids revenue | | $ | 1,118,839 | | $ | — | | $ | 1,978,807 | | $ | — |
Volume (MBoe) | |
| 30.6 | |
| — | |
| 61.0 | |
| — |
Avg. Price ($/Bbl) | | $ | 36.54 | | $ | — | | $ | 32.45 | | $ | — |
Oil and condensate revenue | | $ | 8,275,408 | | $ | — | | $ | 15,300,705 | | $ | — |
Volume (MBbl) | |
| 88.7 | |
| — | |
| 190.8 | |
| — |
Avg. Price ($/Bbl) | | $ | 93.27 | | $ | — | | $ | 80.18 | | $ | — |
Total WY Revenues | | $ | 9,709,516 | | $ | — | | $ | 18,663,084 | | $ | — |
Canada | | | | | | | | | | | | |
Natural gas revenue | | $ | 17,316 | | $ | 24,389 | | $ | 48,511 | | $ | 24,389 |
Volume (MMcf) | |
| 16 | |
| 17 | |
| 34 | |
| 16.98 |
Avg. Price ($/Mcf) | | $ | 1.06 | | $ | — | | $ | 1.44 | | $ | — |
Natural gas liquids revenue | | $ | 29,762 | | $ | 23,394 | | $ | 55,009 | | $ | 23,394 |
Volume (MBoe) | |
| 1.1 | |
| 39.4 | |
| 2.3 | |
| 39.45 |
Avg. Price ($/Bbl) | | $ | 27.34 | | $ | — | | $ | 24.23 | | $ | — |
Oil and condensate revenue | | $ | 127,077 | | $ | 427,437 | | $ | 230,946 | | $ | 519,972 |
Volume (MBbl) | |
| 1.8 | |
| 7.5 | |
| 3.4 | |
| 9.3 |
Avg. Price ($/Bbl) | | $ | 70.72 | | $ | 57.11 | | $ | 67.02 | | $ | 55.98 |
Total Canada Revenues | | $ | 174,155 | | $ | 475,220 | | $ | 334,466 | | $ | 567,755 |
Total Revenues | | $ | 18,261,656 | | $ | 11,624,733 | | $ | 43,857,443 | | $ | 27,787,873 |
Upstream natural gas revenue for the six months ended June 30, 2026 decreased by $0.4 million, or 2%, over the same period in 2025. An increase of $2.6 million was due to higher natural gas prices and a decrease of $3.0 million was a result of decrease in volume due to the natural decline in the producing wells and the sale of the Oklahoma assets partially offset due to increased volumes as a result of the Peak acquisition. Upstream natural gas revenue for the three months ended June 30, 2026 decreased by $3.1 million, or 45%, over the same period in 2025. A decrease of $1.4 million was due
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to lower natural gas prices and a decrease of $1.7 million was a result of decrease in volume due to the natural decline in the producing wells and the sale of the Oklahoma assets partially offset due to increased volumes as a result of the Peak acquisition.
Upstream natural gas liquids revenue for the six months ended June 30, 2026 increased by $1.9 million, or 362%, over the same period in 2025. This increase was primarily due to increased volumes as a result of the Peak acquisition. Upstream natural gas liquids revenue for the three months ended June 30, 2026 increased by $1.2 million, or 856%, over the same period in 2025. This increase was primarily due to increased volumes as a result of the Peak acquisition.
Upstream oil and condensate revenue for the six months ended June 30, 2026 increased by $15.2 million, or 254% over the same period in 2025. An increase of $11.5 million was due to higher volumes as a result of the Peak acquisition and an increase of $3.7 million was due to an increase in prices for oil in the Permian Basin. Upstream oil and condensate revenue for the three months ended June 30, 2026 increased by $9.0 million, or 332% over the same period in 2025. An increase of $5.0 million was due to higher volumes as a result of the Peak acquisition and an increase of $4.0 million was due to an increase in prices for oil in the Permian Basin.
Gathering system revenue for the six months ended June 30, 2026 decreased by $0.7 million, or 20%, compared with the same period in 2025 due to lower throughput volumes partially offset due to higher contractual rates for gathering and compression. Revenues derived from transporting and compressing our production, which have been eliminated from gathering system revenues amounted to $0.8 million and $1.9 million, respectively, for the six months ended June 30, 2026 and 2025. Gathering system revenue for the three months ended June 30, 2026 decreased by $0.5 million, or 28%, compared with the same period in 2025 due to lower throughput volumes partially offset due to higher contractual rates for gathering and compression. Revenues derived from transporting and compressing our production, which have been eliminated from gathering system revenues amounted to $0.4 million and $0.5 million, respectively, for the three months ended June 30, 2026 and 2025.
Operating Costs
The following table presents total cost and cost per unit of production (Mcfe), including ad valorem, severance, and production taxes for the three and six months ended June 30, 2026 and 2025:
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
Lease operating costs (net of elimination) | | $ | 6,330,193 | | $ | 2,462,785 | | $ | 13,525,506 | | $ | 5,218,683 |
Gathering system operating costs | | | 508,475 | | | 613,795 | | | 1,102,921 | | | 1,166,446 |
| | $ | 6,838,668 | | $ | 3,076,580 | | $ | 14,628,427 | | $ | 6,385,129 |
| | | | | | | | | | | | |
Upstream operating costs—Total $/Mcfe | | $ | 2.05 | | $ | 0.80 | | $ | 2.04 | | $ | 0.85 |
Gathering system operating costs $/Mcf | | $ | 0.18 | | $ | 0.15 | | $ | 0.18 | | $ | 0.14 |
Operating costs include the effects of elimination entries to remove the gathering fees paid to Epsilon’s ownership in the gathering system.
Upstream operating costs consist of lease operating expenses necessary to extract natural gas and oil, including gathering and treating the natural gas and oil in preparation for sale. For the six months ended June 30, 2026 these costs increased by $8.3 million, or 159%, over the same period in 2025. The increase is primarily due to the Wyoming assets inclusion following the Peak acquisition (higher operating costs per unit relative to the other asset areas), workover expenses in Pennsylvania, and Ad Valorem taxes in Texas. For the three months ended June 30, 2026 these costs increased by $3.9 million, or 157%, over the same period in 2025. The increase is primarily due to the Wyoming assets inclusion following the Peak acquisition (higher operating costs per unit relative to the other asset areas).
Gathering system operating costs consist primarily of rental payments for the natural gas fueled compression units and overhead fees due to the system’s operator. For the three and six months ended June 30, 2026, gathering system operating costs were constant compared to the same period in 2025.
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Depletion, Depreciation, Amortization and Accretion (“DD&A”)
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
Depletion, depreciation, amortization and accretion | | $ | 2,804,107 | | $ | 3,201,654 | | $ | 5,806,446 | | $ | 6,677,511 |
Natural gas and oil and gathering system assets are depleted and depreciated using the units of production method aggregating properties on a field basis. For leasehold acquisition costs and the cost to acquire proved and unproved properties, the reserve base used to calculate depreciation and depletion is total proved reserves. For natural gas and oil development and gathering system costs, the reserve base used to calculate depletion and depreciation is proved developed reserves.
Depreciation expense includes amounts pertaining to our office furniture and fixtures, leasehold improvements, and computer hardware. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 7 years. Also included in depreciation expense is an amount pertaining to buildings owned by the Company. Depreciation for the buildings is calculated using the straight-line method over an estimated useful life of 30 years.
Accretion expense is related to the asset retirement costs.
DD&A expense for the three and six months ended June 30, 2026 decreased by $0.4 million, or 12%, and $0.9 million, or 13%, respectively, from the same period in 2025. This decrease was a result of higher reserves and lower production in Pennsylvania and Texas and the sale of the Oklahoma assets (offset by the addition of the Wyoming assets).
Impairment
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
Impairment | | $ | — | | $ | 2,670,000 | | $ | — | | $ | 2,676,669 |
We perform a quantitative impairment test whenever events or changes in circumstances indicate that an asset group's carrying amount may not be recoverable, over proved properties using the market forward prices, timing, methods and other assumptions consistent with historical periods. When indicators of impairment are present, GAAP requires that the Company first compare expected future undiscounted cash flows by asset group to their respective carrying values. If the carrying amount exceeds the estimated undiscounted future cash flows, a reduction of the carrying amount of the properties to their estimated fair value is required. Additionally, GAAP requires that if an exploratory well is determined not to have found proved reserves, the costs incurred, net of any salvage value, should be charged to expense.
For the three and six months ended June 30, 2026, there was no impairment. For the three and six months ended June 30, 2025, the Company recorded an impairment of $2.7 million for two wells drilled in Alberta, Canada. The impairment was a result of a decrease in estimated reserves due to early production coming in below expectations, cost overruns and lower forward commodity prices.
Gain on sales of oil and gas properties
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
Gain on sale of oil and gas properties | | $ | (4,174,368) | | $ | — | | $ | (4,174,368) | | $ | — |
For the three and six months ended June 30, 2026, the Company sold its overriding royalty interests (ORRIs) in Susquehanna Co, Pennsylvania for $3.9 million and a wellbore interest in Texas for $0.3 million. There were no property sales for the three and six months ended June 30, 2025.
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Transaction Costs
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
Transaction Costs | | $ | 202,532 | | $ | — | | $ | 273,952 | | $ | — |
For the three and six months ended June 30, 2026, the Company had transaction costs related to the Peak acquisition of $0.2 million and $0.3 million, respectively, for advisory and legal services incurred by the Company. For the three and six months ended June 30, 2025, there were no transaction costs.
General and Administrative (“G&A”)
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
General and administrative expenses | | | | | | | | | | | | |
Stock based compensation expense | | $ | 547,527 | | $ | 385,838 | | $ | 1,095,054 | | $ | 771,676 |
Other general and administrative expense | | | 3,664,814 | | | 1,461,878 | | | 7,042,956 | | | 3,280,296 |
Total general and administrative expenses | | $ | 4,212,341 | | $ | 1,847,716 | | $ | 8,138,010 | | $ | 4,051,972 |
G&A expenses consist of general corporate expenses such as compensation, legal, accounting and professional fees, consulting services, travel and other related corporate costs such as restricted stock granted.
G&A expenses for the three and six months ended June 30, 2026 increased by $2.4 million, or 128%, and $4.1 million, or 101%, respectively, from the same period in 2025. This was primarily due to increased compensation expenses related to the addition of 17 full-time employees as a result of the Peak acquisition and 6 former Peak employees on transition services contracts. As of June 1, 2026, the transition services contracts ended for 5 former Peak employees.
Interest Income
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
Interest income | | $ | 24,785 | | $ | 17,247 | | $ | 70,327 | | $ | 32,546 |
Interest income for the six months ended June 30, 2026 increased by $0.04 million, or 116%, from the same period in 2025. This was primarily due to an increase in the balance of interest-bearing investments.
Interest Expense
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
Interest expense | | $ | 877,267 | | $ | 19,906 | | $ | 1,818,848 | | $ | 32,117 |
Interest expense is related to the interest paid and amortization of debt issuance costs for the revolving credit facility.
Interest expense during the three and six months ended June 30, 2026 increased by $0.9 million, or 4,307%, and $1.8 million, or 5,563%, respectively, from the same period in 2025. This increase is related to the interest paid on the outstanding balance on the revolving credit facility.
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Gain (Loss) on Derivative Contracts
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
Gain (loss) on derivative contracts, net | | $ | 2,245,470 | | $ | 2,573,863 | | $ | (6,684,358) | | $ | 1,111,693 |
During the six months ended June 30, 2026, the Company had NYMEX Henry Hub (“HH”) Natural Gas Futures swaps, NYMEX HH options, crude oil NYMEX WTI CMA swaps, and crude oil NYMEX WTI CMA options derivative contracts for the purpose of hedging a portion of its physical natural gas and oil sales revenue.
For the six months ended June 30, 2025, Epsilon had NYMEX HH Natural Gas futures swaps, Tennessee Gas Pipeline Zone 4 basis swaps, and crude oil NYMEX WTI CMA swaps derivative contracts for the purpose of hedging a portion of its physical natural gas and oil sales revenue. The amounts recorded represent the fair value changes on our derivative instruments during the year.
During the three and six months ended June 30, 2026, we paid net cash settlements of $1,730,781 and $2,778,616, respectively. During the three months ended June 30, 2025, we received net cash settlements of $306,660. During the six months ended June 30, 2025, we paid net cash settlements of $108,383.
For the three and six months ended June 30, 2026, realized losses on derivative contracts increased by $0.3 million and $7.8 million, respectively. This increase was primarily the result of a significant increase in crude oil prices during the quarter and its impact on the Peak hedge book assumed in the acquisition.
Other Income (Expense)
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2026 | | 2025 | | 2026 | | 2025 | ||||
Other expense, net | | $ | (208,658) | | $ | (10,839) | | $ | (192,230) | | $ | (33,338) |
During the three and six months ended June 30, 2026, the Company had water facility expenses of $0.2 million in Wyoming.
Capital Resources and Liquidity
Cash Flow
The primary source of cash for Epsilon during the three and six months ended June 30, 2026 and 2025 was funds generated from operations. The primary uses of cash for the three and six months ended June 30, 2026 were the development of upstream properties, the reduction of the outstanding credit facility balance, and the distribution of dividends. The primary uses of cash for the three and six months ended June 30, 2025 were the development of upstream properties and the distribution of dividends.
At June 30, 2026, we had a working capital deficit of $1.3 million, a decrease of $8.9 million from the $7.6 million surplus at December 31, 2025. The Company anticipates its current cash balance, available borrowings, and cash flows from operations to be sufficient to meet its cash requirements for at least the next twelve months.
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Six months ended June 30, 2026 compared to 2025
During the six months ended June 30, 2026, $22.4 million was provided by the Company’s operating activities, compared to $16.9 million during the same period in 2025, representing an 32% increase. The increase was primarily due to produced oil volumes from the acquired Wyoming assets and higher realized gas prices in Pennsylvania.
The Company used $6.4 million and $10.7 million of cash for investing activities during the six months ended June 30, 2026 and 2025, respectively. During the six months ended June 30, 2026, the Company had $net investments primarily in well and facilities costs and leasehold in Pennsylvania, Texas, and Wyoming offset by the ORRI sale in Pennsylvania. During the six months ended June 30, 2025, the Company had net investments primarily in well costs in Pennsylvania, Texas, and Canada.
The Company used $13.8 million and $2.8 million of cash for financing activities during the six months ended June 30, 2026 and 2025, respectively. During the six months ended June 30, 2026, this was spent on the repayment of the outstanding balance on the credit facility and dividend payments. During the six months ended June 30, 2025, this was spent on dividend payments.
Credit Agreement
The Company closed a new senior secured reserve based revolving credit facility on October 10, 2025 with Frost Bank as administrative agent and Frost Bank and Texas Capital Bank as lenders. This replaced the Company’s previous credit facility. As of June 30, 2026, the borrowing base was $90 million, supported by the Company’s producing reserves and is subject to semi-annual redeterminations with a maturity date of October 10, 2029. Interest will be charged at the 3-month Term SOFR rate plus a margin of 3-4% (depending on facility utilization), payable quarterly. The facility is secured by the assets of the Company’s Epsilon Energy USA subsidiary. During the six months ended June 30, 2026, the Company made repayments of $10 million on the outstanding credit facility. The current balance as of August 12, 2026 is $40.5 million.
Under the terms of the facility, the Company must adhere to the following financial covenants:
| ● | Current ratio of 1.0 to 1.0 (current assets + revolver availability / current liabilities) |
| ● | Leverage ratio of less than 2.5 to 1.0 (total debt / income adjusted for interest, taxes and non-cash amounts) |
Additionally, the Company is required to hedge 50% of its forecasted Proved Developed Producing production over a rolling 18-month period. If the facility utilization drops below 50%, then the required hedging drops to 25% of Proved Developed Producing production for the last 6 months of the 18-month period.
Repurchase Transactions
On February 18, 2026, the Board authorized a new share repurchase program of up to 3,014,986 common shares, representing 10% of the current outstanding common shares of Epsilon, for an aggregate purchase price of not more than US $15.0 million. The program is pursuant to a normal course issuer bid and will be conducted in accordance with Rule 10b-18 under the Exchange Act. The program commenced on February 19, 2026 and will end on February 18, 2027, unless the maximum amount of common shares is purchased before then or the Board approves earlier termination.
On February 12, 2025, the Board authorized a new share repurchase program of up to 2,200,876 common shares, representing 10% of the outstanding common shares of the Company at such time, for an aggregate purchase price of not more than US $13.0 million. The program is pursuant to a normal course issuer bid and conducted in accordance with Rule 10b-18 under the Exchange Act. The program commenced on February 12, 2025 and expired on February 11, 2026.
During the six months ended June 30, 2026, no shares were repurchased under the new or previous program.
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Derivative Transactions
The Company has entered into hedging arrangements to reduce the impact of commodity price volatility on operations. By reducing the price volatility from a portion of natural gas and crude oil production, the potential effects of changing prices on operating cash flows have been partially mitigated but not eliminated. While mitigating the negative effects of falling commodity prices, these derivative contracts also limit the benefits we might otherwise receive from increases in commodity prices.
At June 30, 2026, Epsilon’s outstanding natural gas and crude oil commodity contracts consisted of the following:
| | | | | | | | | | | | | | |
| | | | Weighted Average Price ($/Mmbtu) | | | | |||||||
| | | | | | | | | | | | | Fair Value of | |
| | Volume | | | | | Ceiling | | Floor | | Asset (Liability) | |||
Derivative Type | | (MMbtu) | | Swaps | | Price | | Price | | June 30, 2026 | ||||
2026 | | | | | | | | | | | | | | |
NYMEX Henry Hub (LD) Options Call |
| (1,144,794) | | $ | — | | $ | 5.05 | | $ | — |
| $ | (58,232) |
NYMEX Henry Hub (LD) Options Put |
| — | | $ | — | | $ | — | | $ | 3.35 |
| $ | 306,434 |
NYMEX Henry Hub (LD) Swaps |
| (476,613) | | $ | 3.91 | | $ | — | | $ | — |
| $ | 298,496 |
2027 |
| | | | | | | | | | | | | |
NYMEX Henry Hub (LD) Options Call |
| (2,835,516) | | $ | — | | $ | 4.71 | | $ | — |
| $ | (529,236) |
NYMEX Henry Hub (LD) Options Put |
| — | | $ | — | | $ | — | | $ | 3.19 |
| $ | 1,142,995 |
NYMEX Henry Hub (LD) Swaps |
| (312,297) | | $ | 3.76 | | $ | — | | $ | — |
| $ | 101,034 |
2028 |
| | | | | | | | | | | | | |
NYMEX Henry Hub (LD) Options Call |
| (27,978) | | $ | — | | $ | 4.70 | | $ | — |
| $ | (21,669) |
NYMEX Henry Hub (LD) Options Put |
| — | | $ | — | | $ | — | | $ | 3.65 |
| $ | 8,013 |
NYMEX Henry Hub (LD) Swaps |
| (27,978) | | $ | 4.46 | | $ | — | | $ | — |
| $ | (6,707) |
|
| (4,825,176) | | | | | | | | | |
| $ | 1,241,128 |
| | | | | | | | | | | | | | |
| | | | Weighted Average Price ($/Bbl) | | | ||||||||
| | | | | | | | | | | | | Fair Value of | |
| | Volume | | | | | Ceiling | | Floor | | Asset (Liability) | |||
Derivative Type | | (Bbl) | | Swaps | | Price | | Price | | June 30, 2026 | ||||
2026 | | | | | | | | | | | | | | |
NYMEX WTI CMA Options Call | | (28,109) | | $ | — | | $ | 69.01 | | $ | — |
| $ | (151,085) |
NYMEX WTI CMA Options Put | | — | | $ | — | | $ | — | | $ | 59.01 |
| $ | 59,721 |
NYMEX WTI CMA Swaps | | (119,179) | | $ | 64.36 | | $ | — | | $ | — |
| $ | (536,868) |
2027 | | | | | | | | | | | | | | |
NYMEX WTI CMA Options Call | | (118,096) | | $ | — | | $ | 67.82 | | $ | — |
| $ | (808,558) |
NYMEX WTI CMA Options Put | | — | | $ | — | | $ | — | | $ | 57.60 |
| $ | 471,814 |
NYMEX WTI CMA Swaps | | (105,986) | | $ | 63.76 | | $ | — | | $ | — |
| $ | (293,495) |
2028 | | | | | | | | | | | | | | |
NYMEX WTI CMA Options Call | | (8,308) | | $ | — | | $ | 67.96 | | $ | — |
| $ | (57,075) |
NYMEX WTI CMA Options Put | | — | | $ | — | | $ | — | | $ | 57.57 |
| $ | 38,757 |
NYMEX WTI CMA Swaps | | (8,308) | | $ | 62.97 | | $ | — | | $ | — |
| $ | (20,805) |
|
| (387,986) | | | | | | | | | | | $ | (1,297,594) |
Contractual Obligations
The following table summarizes our contractual obligations at June 30, 2026.
| | | | | | | | | | | | |
| | Payments Due by Period | ||||||||||
| | | | | Less than | | 1 – 3 | | Greater than | |||
| | Total | | 1 Year | | Years | | 3 Years | ||||
Derivative liabilities | | $ | 2,549,588 | | $ | 1,689,463 | | $ | 860,125 | | $ | — |
Asset retirement obligations, undiscounted | | | 19,033,067 | | | — | | | — | | | 19,033,067 |
Capital expenditure commitments | |
| 18,033,916 | |
| 18,033,916 | |
| — | |
| — |
Total future commitments | | $ | 39,616,571 | | $ | 19,723,379 | | $ | 860,125 | | $ | 19,033,067 |
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The Company enters into commitments for capital expenditures in advance of the expenditures being made. As of June 30, 2026, our commitments for capital expenditures were $18 million related to the drilling and completion of 5 gross (0.37 net) wells in Pennsylvania and the completion of 6 gross (3.58 net) wells in Wyoming.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings and cash flow are significantly affected by changes in the market price of commodities. The prices of natural gas and oil can fluctuate widely and are influenced by numerous factors such as demand, production levels, world political and economic events, and the strength of the US dollar relative to other currencies. Should the price of natural gas and oil decline substantially, the value of our assets could fall dramatically, impacting our future operations and exploration and development activities, along with our gas gathering system revenues. In addition, our operations are exposed to market risks in the ordinary course of our business, including interest rate and certain exposure as well as risks relating to changes in the general economic conditions in the United States.
Gathering System Revenue Risk
The Auburn Gas Gathering System lies within the Marcellus Basin with historically high levels of recoverable reserves and low cost of production. We believe that a short-term low commodity price environment will not significantly impact the reserves produced and thus the revenue of our gas gathering system.
Interest Rate Risk
Market risk is estimated as the change in fair value resulting from a hypothetical 100 basis point change in the interest rate on the outstanding balance under our credit agreement. The credit agreement allows us to fix the interest rate.
At June 30, 2026 and 2025, the outstanding principal balance under the credit agreement was $40.5 million and nil, respectively.
Derivative Contracts
The Company’s financial results and condition depend on the prices received for production. Natural gas, natural gas liquids, and crude oil prices have fluctuated widely and are determined by economic and political factors. Supply and demand factors, including weather, general economic conditions, the ability to transport to other regions, as well as conditions in other regions, impact prices. Epsilon has established a hedging strategy and may manage the risk associated with changes in commodity prices by entering into various derivative financial instrument agreements and physical contracts. Although these commodity price risk management activities could expose Epsilon to losses or gains, entering into these contracts helps to stabilize cash flows and support the Company’s capital spending program.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our chief executive officer and chief financial officer have concluded that our current disclosure controls and procedures were not effective as of June 30, 2026 because of the material weakness in internal control over financial reporting discussed below.
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As a result, we performed additional analysis as deemed necessary to ensure that our condensed consolidated financial statements were prepared in accordance with GAAP. Accordingly, management believes that the condensed consolidated financial statements included in this 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented
Material Weakness in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
In Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2025, management identified a material weakness related to the accounting for significant and non-standard transactions. In response to the material weakness, we are in the process of developing and implementing a plan to strengthen review and approval procedures related to the accounting for significant and non-standard transactions. We will continue to assess, implement, and enhance our remediation efforts until the material weakness identified above is fully remediated.
Changes in Internal Control over Financial Reporting
While we have initiated remediation efforts with respect to the material weakness described above, there were no changes in our internal control over financial reporting occurred during the quarter ended June 30, 2026 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that of limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, the risk.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 2025, the Company filed a lawsuit against a contractor regarding alleged non-performance while running casing in a well. The Company is seeking damages due to its inability to complete the Leavitt Fed 2-9-4MH well. On June 8, 2026, the Company reached a settlement agreement with the contractor, and the case has been subsequently dismissed with prejudice.
The Company has intervened as a defendant-intervenor in litigation challenging BLM’s issuance of federal oil and gas leases acquired by the Company in 2017, 2018, and 2020. Plaintiffs allege deficiencies in BLM’s environmental review under NEPA. The Company intervened to protect its leasehold interests. Management does not believe the outcome will have a material adverse effect on the Company’s financial position.
Between September 30, 2025 and October 28, 2025, we received multiple demand letters on behalf of purported Epsilon stockholders (the “Demands”). The Demands primarily alleged that the Preliminary Proxy Statement filed on September 19, 2025 or the Definitive Proxy Statement filed on October 10, 2025, as applicable, failed to disclose certain material information with respect to the acquisition of Peak Exploration and Production, LLC, and Peak BLM Lease LLC.
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On October 16, 2025, we received a copy of a complaint filed against Epsilon and certain members of Epsilon’s Board of Directors in the Supreme Court of the State of New York, County of New York, on behalf of purported Epsilon stockholder Anthony Morgan (the “Morgan Complaint”). On October 17, 2025, we received a copy of a complaint filed against Epsilon and certain members of Epsilon’s Board of Directors in the Supreme Court of the State of New York, County of New York, on behalf of purported Epsilon stockholder Richard Lawrence (the “Lawrence Complaint,” and together with the Morgan Complaint, the “Complaints”).
The Complaints allege, among other things, that Epsilon and the other named defendants (the “Epsilon Defendants”) violated New York common law based on claims of negligence, negligent misrepresentation and concealment. Specifically, the Complaints allege that the Preliminary Proxy Statement or the Definitive Proxy Statement, as applicable, failed to disclose, among other things, certain details regarding the background of the Transactions. Among other remedies, the Complaints sought an injunction against consummating the Transactions, rescission or actual and punitive damages if the Transactions are consummated, costs and attorneys’ fees. To date, we have not been served with the Complaints, and the Plaintiffs have not taken any additional steps in furtherance of prosecuting the Complaints.
While we believe that the disclosures set forth in the Preliminary Proxy Statement and the Definitive Proxy Statement comply fully with applicable law, to moot certain of the claims made in the Demands and Complaints, to avoid nuisance and potential expense and delay, we voluntarily supplemented the Definitive Proxy Statement with certain disclosures in our Supplemental Disclosures to Definitive Proxy Statement filed on October 31, 2025. Nothing in our Supplemental Disclosures was an admission of the legal necessity or materiality under applicable law of any of the disclosures set forth in the Preliminary Proxy Statement or the Definitive Proxy Statement. To the contrary, we deny all allegations in the Demands and Complaints that any additional disclosure was required.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2025.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Purchases of Equity Securities by Epsilon Energy Ltd.
For the six months ended June 30, 2026, no shares had been repurchased.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
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ITEM 6. —EXHIBITS
Exhibit No. |
| Description of Exhibit |
| | |
31.1 |
| Sarbanes-Oxley Section 302 certification of Principal Executive Officer. |
|
| |
31.2 |
| Sarbanes-Oxley Section 302 certification of Principal Financial Officer. |
|
| |
32.1 |
| Sarbanes-Oxley Section 906 certification of Principal Executive Officer. |
|
| |
32.2 |
| Sarbanes-Oxley Section 906 certification of Principal Financial Officer. |
| | |
101.INS |
| Inline XBRL Instance Document. |
|
| |
101.SCH |
| Inline XBRL Schema Document. |
|
| |
101.CAL |
| Inline XBRL Calculation Linkbase Document. |
|
| |
101.DEF |
| Inline XBRL Definition Linkbase Document. |
|
| |
101.LAB |
| Inline XBRL Labels Linkbase Document. |
|
| |
101.PRE |
| Inline XBRL Presentation Linkbase Document. |
| | |
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | |
Epsilon Energy Ltd. | | | |
(Registrant) | | | |
| | | |
Date: August 12, 2026 | | By: | /s/ J. Andrew Williamson |
| | | J. Andrew Williamson |
| | | Chief Financial Officer |
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