[10-Q] Epsilon Energy Ltd. Quarterly Earnings Report
Epsilon Energy Ltd. reported stronger operating results for the quarter and first half of 2025 driven by higher commodity sales and gathering fees. Total revenue rose to $11.62 million for the three months ended June 30, 2025 from $7.31 million a year earlier and to $27.79 million for the six months versus $15.29 million in 2024. Net income was $1.55 million for the quarter and $5.57 million for the six months, up from $0.82 million and $2.32 million, respectively. Cash and cash equivalents increased to $9.91 million at June 30, 2025. Property, equipment, and gathering system net book value totaled $106.04 million and total assets were $123.61 million.
The period included a $2.67 million impairment for two Alberta wells and income tax expense of $3.51 million for the six months. The company paid approximately $2.8 million of dividends in the period, had no borrowings under its $45.0 million revolving credit facility at period end, and reported compliance with credit covenants.
Epsilon Energy Ltd. ha registrato risultati operativi più robusti nel trimestre e nel primo semestre 2025, sostenuti da maggiori vendite di commodity e da incrementi nelle commissioni di gathering. I ricavi totali sono saliti a 11,62 milioni di dollari nei tre mesi terminati il 30 giugno 2025, rispetto a 7,31 milioni dell'anno precedente, e a 27,79 milioni nei sei mesi rispetto a 15,29 milioni nel 2024. L'utile netto è stato di 1,55 milioni per il trimestre e di 5,57 milioni per i sei mesi, in aumento rispetto a 0,82 milioni e 2,32 milioni, rispettivamente. La liquidità e gli equivalenti di cassa sono aumentati a 9,91 milioni al 30 giugno 2025. Il valore netto di immobili, impianti e del sistema di gathering era pari a 106,04 milioni e il totale attivo a 123,61 milioni.
Il periodo ha incluso una svalutazione di 2,67 milioni relativa a due pozzi in Alberta e un onere fiscale di 3,51 milioni per i sei mesi. La società ha distribuito circa 2,8 milioni di dividendi nel periodo, non aveva utilizzi sulla sua linea di credito revolving da 45,0 milioni alla chiusura del periodo e ha dichiarato il rispetto dei covenant creditizi.
Epsilon Energy Ltd. registró resultados operativos más sólidos en el trimestre y en el primer semestre de 2025, impulsados por mayores ventas de commodities y por un aumento en las tarifas de gathering. Los ingresos totales subieron a 11,62 millones de dólares en los tres meses cerrados el 30 de junio de 2025, desde 7,31 millones un año antes, y a 27,79 millones en los seis meses frente a 15,29 millones en 2024. El beneficio neto fue de 1,55 millones en el trimestre y de 5,57 millones en los seis meses, por encima de 0,82 millones y 2,32 millones, respectivamente. El efectivo y equivalentes de efectivo aumentaron a 9,91 millones al 30 de junio de 2025. El valor neto contable de propiedades, equipos y del sistema de gathering ascendió a 106,04 millones y el total de activos fue de 123,61 millones.
El periodo incluyó un deterioro de 2,67 millones por dos pozos en Alberta y un gasto por impuesto sobre la renta de 3,51 millones en los seis meses. La compañía pagó aproximadamente 2,8 millones en dividendos durante el periodo, no tenía saldos pendientes en su línea de crédito revolvente de 45,0 millones al cierre del periodo y declaró el cumplimiento de sus convenios crediticios.
Epsilon Energy Ltd.는 상품 판매 증가와 집하(gathering) 수수료 상승에 힘입어 2025년 분기 및 상반기에 더 강한 영업실적을 보고했습니다. 총수익은 2025년 6월 30일로 종료된 3개월 동안 $11.62 million으로 전년 동기 $7.31 million에서 증가했으며, 상반기 누계는 $27.79 million으로 2024년의 $15.29 million에서 늘었습니다. 순이익은 분기 기준 $1.55 million, 상반기 기준 $5.57 million으로 각각 $0.82 million 및 $2.32 million에서 증가했습니다. 현금 및 현금성자산은 2025년 6월 30일 현재 $9.91 million로 늘었습니다. 유형자산, 장비 및 집하 시스템의 순장부가는 $106.04 million였고 총자산은 $123.61 million였습니다.
해당 기간에는 알버타(Alberta)에 있는 두 개의 유정에 대한 $2.67 million의 손상차손과 상반기 법인세 비용 $3.51 million이 포함되었습니다. 회사는 해당 기간에 약 $2.8 million의 배당금을 지급했으며, 기간 말 현재 $45.0 million의 회전 신용한도에서 차입금이 없었고 신용 약정(covenants)을 준수하고 있다고 보고했습니다.
Epsilon Energy Ltd. a publié des résultats opérationnels plus solides pour le trimestre et le premier semestre 2025, soutenus par des ventes de matières premières plus élevées et des frais de collecte plus élevés. Le chiffre d'affaires total a augmenté pour atteindre 11,62 millions de dollars pour les trois mois clos le 30 juin 2025, contre 7,31 millions un an auparavant, et à 27,79 millions pour les six mois contre 15,29 millions en 2024. Le bénéfice net s'est établi à 1,55 million pour le trimestre et à 5,57 millions pour les six mois, contre 0,82 million et 2,32 millions respectivement. Les liquidités et équivalents de trésorerie ont augmenté à 9,91 millions au 30 juin 2025. La valeur nette comptable des immobilisations, des équipements et du système de collecte s'élevait à 106,04 millions et le total des actifs à 123,61 millions.
La période comprend une dépréciation de 2,67 millions liée à deux puits en Alberta et une charge d'impôt sur les revenus de 3,51 millions pour les six mois. La société a versé environ 2,8 millions de dividendes au cours de la période, n'avait aucune utilisation de sa facilité de crédit renouvelable de 45,0 millions à la clôture et a déclaré être en conformité avec ses engagements de crédit.
Epsilon Energy Ltd. meldete für das Quartal und das erste Halbjahr 2025 stärkere operative Ergebnisse, angetrieben durch höhere Rohstoffverkäufe und steigende Gathering-Gebühren. Die Umsatzerlöse stiegen auf 11,62 Millionen US-Dollar für die drei Monate zum 30. Juni 2025 gegenüber 7,31 Millionen im Vorjahr und auf 27,79 Millionen für die sechs Monate gegenüber 15,29 Millionen im Jahr 2024. Der Nettogewinn belief sich auf 1,55 Millionen im Quartal und 5,57 Millionen im Halbjahr, gegenüber 0,82 Millionen bzw. 2,32 Millionen. Zahlungsmittel und Zahlungsmitteläquivalente erhöhten sich zum 30. Juni 2025 auf 9,91 Millionen. Der Buchwert von Grundstücken, Anlagen und dem Gathering-System betrug 106,04 Millionen und die Gesamtaktiva 123,61 Millionen.
Der Zeitraum enthielt eine Wertminderung von 2,67 Millionen für zwei Bohrungen in Alberta sowie eine Ertragsteueraufwendung von 3,51 Millionen für das Halbjahr. Das Unternehmen zahlte in dem Zeitraum rund 2,8 Millionen an Dividenden, hatte zum Periodenende keine Inanspruchnahme seiner revolvierenden Kreditlinie über 45,0 Millionen und berichtete die Einhaltung der Kreditvereinbarungen.
- Total revenue increased to $11.62 million for the quarter and $27.79 million for the six months ended June 30, 2025, up from $7.31 million and $15.29 million in 2024
- Net income improved to $1.55 million for the quarter and $5.57 million for six months versus $0.82 million and $2.32 million a year earlier
- Cash and cash equivalents rose to $9,907,653 at June 30, 2025 from $6,519,793 at December 31, 2024
- No borrowings under the $45.0 million revolving credit facility at period end and management reported compliance with financial covenants
- Derivative gains contributed positively: $2,573,863 gain in the quarter and $1,111,693 for the six months
- Impairment expense of $2.67 million recorded for two wells drilled in Alberta due to lower-than-expected early production, cost overruns and lower forward commodity prices
- Income tax expense was substantial totaling $3,507,881 for the six months ended June 30, 2025
- Asset retirement obligations of $3.76 million are recorded on the balance sheet
- Commitments for capital expenditures of $1.9 million remain outstanding as of June 30, 2025
- Potential hedging requirement exists under the credit agreement if leverage or borrowing base utilization thresholds are exceeded (contractual condition disclosed)
Insights
TL;DR: Revenue and net income rose materially year-over-year, cash strengthened, but taxes and a small impairment affected results.
Revenue increased sharply both quarter-over-quarter and year-over-year driven by higher natural gas, oil, and gathering revenue, lifting consolidated operating income to $0.83 million for the quarter and $7.99 million for the first half. Net income benefitted from favorable derivative contract results of $2.57 million in the quarter and $1.11 million for six months. Cash and cash equivalents improved to $9.91 million and shareholders' equity increased to $100.19 million. Offsetting positives, the company recorded a $2.67 million impairment on two Alberta wells and recognized $3.51 million of income tax expense for the six months. The credit facility remains undrawn with a $45.0 million borrowing base and covenants in compliance as of June 30, 2025.
TL;DR: Operating performance strengthened from higher volumes and prices, but the impairment and asset retirement obligations are notable operational items.
Upstream production and pricing drove natural gas revenue to $17.52 million for the six months, with gathering operations adding $3.74 million. The company incurred a $2.67 million impairment for two drilled wells in Alberta due to lower-than-expected early production, cost overruns and lower forward prices — an operational setback that reduced proved-property carrying values. Asset retirement obligations of $3.76 million and capital commitments of $1.9 million remain on the balance sheet. The company reports no allowance for credit losses on receivables. Overall the operating trends are positive but the impairment and ARO reflect localized execution and decommissioning cost risks.
Epsilon Energy Ltd. ha registrato risultati operativi più robusti nel trimestre e nel primo semestre 2025, sostenuti da maggiori vendite di commodity e da incrementi nelle commissioni di gathering. I ricavi totali sono saliti a 11,62 milioni di dollari nei tre mesi terminati il 30 giugno 2025, rispetto a 7,31 milioni dell'anno precedente, e a 27,79 milioni nei sei mesi rispetto a 15,29 milioni nel 2024. L'utile netto è stato di 1,55 milioni per il trimestre e di 5,57 milioni per i sei mesi, in aumento rispetto a 0,82 milioni e 2,32 milioni, rispettivamente. La liquidità e gli equivalenti di cassa sono aumentati a 9,91 milioni al 30 giugno 2025. Il valore netto di immobili, impianti e del sistema di gathering era pari a 106,04 milioni e il totale attivo a 123,61 milioni.
Il periodo ha incluso una svalutazione di 2,67 milioni relativa a due pozzi in Alberta e un onere fiscale di 3,51 milioni per i sei mesi. La società ha distribuito circa 2,8 milioni di dividendi nel periodo, non aveva utilizzi sulla sua linea di credito revolving da 45,0 milioni alla chiusura del periodo e ha dichiarato il rispetto dei covenant creditizi.
Epsilon Energy Ltd. registró resultados operativos más sólidos en el trimestre y en el primer semestre de 2025, impulsados por mayores ventas de commodities y por un aumento en las tarifas de gathering. Los ingresos totales subieron a 11,62 millones de dólares en los tres meses cerrados el 30 de junio de 2025, desde 7,31 millones un año antes, y a 27,79 millones en los seis meses frente a 15,29 millones en 2024. El beneficio neto fue de 1,55 millones en el trimestre y de 5,57 millones en los seis meses, por encima de 0,82 millones y 2,32 millones, respectivamente. El efectivo y equivalentes de efectivo aumentaron a 9,91 millones al 30 de junio de 2025. El valor neto contable de propiedades, equipos y del sistema de gathering ascendió a 106,04 millones y el total de activos fue de 123,61 millones.
El periodo incluyó un deterioro de 2,67 millones por dos pozos en Alberta y un gasto por impuesto sobre la renta de 3,51 millones en los seis meses. La compañía pagó aproximadamente 2,8 millones en dividendos durante el periodo, no tenía saldos pendientes en su línea de crédito revolvente de 45,0 millones al cierre del periodo y declaró el cumplimiento de sus convenios crediticios.
Epsilon Energy Ltd.는 상품 판매 증가와 집하(gathering) 수수료 상승에 힘입어 2025년 분기 및 상반기에 더 강한 영업실적을 보고했습니다. 총수익은 2025년 6월 30일로 종료된 3개월 동안 $11.62 million으로 전년 동기 $7.31 million에서 증가했으며, 상반기 누계는 $27.79 million으로 2024년의 $15.29 million에서 늘었습니다. 순이익은 분기 기준 $1.55 million, 상반기 기준 $5.57 million으로 각각 $0.82 million 및 $2.32 million에서 증가했습니다. 현금 및 현금성자산은 2025년 6월 30일 현재 $9.91 million로 늘었습니다. 유형자산, 장비 및 집하 시스템의 순장부가는 $106.04 million였고 총자산은 $123.61 million였습니다.
해당 기간에는 알버타(Alberta)에 있는 두 개의 유정에 대한 $2.67 million의 손상차손과 상반기 법인세 비용 $3.51 million이 포함되었습니다. 회사는 해당 기간에 약 $2.8 million의 배당금을 지급했으며, 기간 말 현재 $45.0 million의 회전 신용한도에서 차입금이 없었고 신용 약정(covenants)을 준수하고 있다고 보고했습니다.
Epsilon Energy Ltd. a publié des résultats opérationnels plus solides pour le trimestre et le premier semestre 2025, soutenus par des ventes de matières premières plus élevées et des frais de collecte plus élevés. Le chiffre d'affaires total a augmenté pour atteindre 11,62 millions de dollars pour les trois mois clos le 30 juin 2025, contre 7,31 millions un an auparavant, et à 27,79 millions pour les six mois contre 15,29 millions en 2024. Le bénéfice net s'est établi à 1,55 million pour le trimestre et à 5,57 millions pour les six mois, contre 0,82 million et 2,32 millions respectivement. Les liquidités et équivalents de trésorerie ont augmenté à 9,91 millions au 30 juin 2025. La valeur nette comptable des immobilisations, des équipements et du système de collecte s'élevait à 106,04 millions et le total des actifs à 123,61 millions.
La période comprend une dépréciation de 2,67 millions liée à deux puits en Alberta et une charge d'impôt sur les revenus de 3,51 millions pour les six mois. La société a versé environ 2,8 millions de dividendes au cours de la période, n'avait aucune utilisation de sa facilité de crédit renouvelable de 45,0 millions à la clôture et a déclaré être en conformité avec ses engagements de crédit.
Epsilon Energy Ltd. meldete für das Quartal und das erste Halbjahr 2025 stärkere operative Ergebnisse, angetrieben durch höhere Rohstoffverkäufe und steigende Gathering-Gebühren. Die Umsatzerlöse stiegen auf 11,62 Millionen US-Dollar für die drei Monate zum 30. Juni 2025 gegenüber 7,31 Millionen im Vorjahr und auf 27,79 Millionen für die sechs Monate gegenüber 15,29 Millionen im Jahr 2024. Der Nettogewinn belief sich auf 1,55 Millionen im Quartal und 5,57 Millionen im Halbjahr, gegenüber 0,82 Millionen bzw. 2,32 Millionen. Zahlungsmittel und Zahlungsmitteläquivalente erhöhten sich zum 30. Juni 2025 auf 9,91 Millionen. Der Buchwert von Grundstücken, Anlagen und dem Gathering-System betrug 106,04 Millionen und die Gesamtaktiva 123,61 Millionen.
Der Zeitraum enthielt eine Wertminderung von 2,67 Millionen für zwei Bohrungen in Alberta sowie eine Ertragsteueraufwendung von 3,51 Millionen für das Halbjahr. Das Unternehmen zahlte in dem Zeitraum rund 2,8 Millionen an Dividenden, hatte zum Periodenende keine Inanspruchnahme seiner revolvierenden Kreditlinie über 45,0 Millionen und berichtete die Einhaltung der Kreditvereinbarungen.
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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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Alberta, Canada | | |
(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:
| | |
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.
| | | | |
| | | | |
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 12, 2025, there were
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Table of Contents
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Contents |
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| | | |
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. | Short Term Investments | | 10 |
5. | Property and Equipment | | 11 |
| Property Impairment | | 11 |
6. | Revolving Line of Credit | | 12 |
7. | Shareholders’ Equity | | 12 |
8. | Revenue Recognition | | 13 |
9. | Accumulated Other Comprehensive Income | | 15 |
10. | Income Taxes | | 15 |
11. | Commitments and Contingencies | | 16 |
12. | Leases | | 16 |
13. | Net Income Per Share | | 17 |
14. | Operating Segments | | 17 |
15. | Commodity Risk Management Activities | | 21 |
| Commodity Price Risks | | 21 |
| Commodity Derivative Contracts | | 22 |
16. | Asset Retirement Obligations | | 23 |
17. | Fair Value Measurements | | 23 |
18. | Subsequent Events | | 24 |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | | 25 | |
| Overview | | 25 |
| Business Strategy | | 25 |
| Operational Highlights | | 26 |
| Non-GAAP Financial Measures-Adjusted EBITDA | | 27 |
| Net Operating Revenues | | 28 |
| Operating Costs | | 29 |
| Depletion, Depreciation, Amortization and Accretion | | 30 |
| General and Administrative | | 30 |
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| Interest Income | | 31 |
| Interest Expense | | 31 |
| Gain (Loss) on Derivative Contracts | | 31 |
| Capital Resources and Liquidity | | 31 |
| Cash Flow | | 31 |
| Credit Agreement | | 32 |
| Repurchase Transactions | | 32 |
| Derivative Transactions | | 33 |
| Contractual Obligations | | 33 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | | 33 | |
| Gathering System Revenue Risk | | 34 |
| Interest Rate Risk | | 34 |
| Derivative Contracts | | 34 |
ITEM 4. CONTROLS AND PROCEDURES | | 34 | |
| Disclosure Controls and Procedures | | 34 |
| Changes in Internal Control Over Financial Reporting | | 34 |
| Inherent Limitations on Effectiveness of Controls | | 34 |
PART II OTHER INFORMATION | | 35 | |
ITEM 1. LEGAL PROCEEDINGS | | 35 | |
ITEM 1A. RISK FACTORS | | 35 | |
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS | | 35 | |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES | | 35 | |
ITEM 4. MINE SAFETY DISCLOSURES | | 35 | |
ITEM 5. OTHER INFORMATION | | 35 | |
ITEM 6. EXHIBITS | | 36 | |
SIGNATURES | | 37 | |
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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, 2024, 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, 2024. Our Annual Report on Form 10-K for the year ended December 31, 2024 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
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|
| June 30, |
| December 31, | ||
| | 2025 | | 2024 | ||
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 | | | | | | |
Prepaid drilling costs | | | | | | |
Total non-current assets | | | | | | |
Total assets | | $ | | | $ | |
| | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | |
Current liabilities | | | | | | |
Accounts payable trade | | $ | | | $ | |
Gathering fees payable | | | | | | |
Royalties payable | | | | | | |
Income taxes payable | | | | | | |
Accrued capital expenditures | | | | | | |
Accrued compensation | | | | | | |
Other accrued liabilities | | | | | | |
Fair value of derivatives | | | | | | |
Operating lease liabilities | | | | | | |
Total current liabilities | | | | | | |
Non-current liabilities | | | | | | |
Asset retirement obligations | | | | | | |
Deferred income taxes | | | | | | |
Operating lease liabilities, long term | | | | | | |
Total non-current liabilities | | | | | | |
Total liabilities | | | | | | |
Commitments and contingencies (Note 11) | | | | | | |
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, | ||||||||
|
| 2025 |
| 2024 |
| 2025 |
| 2024 | ||||
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 | | | | | | | | | | | | |
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 | | | | | | ( | | | | | | ( |
Other (expense) income | | | ( | | | | | | ( | | | |
Other income, net | | | | | | | | | | | | |
| | | | | | | | | | | | |
Net income before income tax expense | | | | | | | | | | | | |
Income tax expense | | | | | | | | | | | | |
NET INCOME | | $ | | | $ | | | $ | | | $ | |
Currency translation adjustments | | | ( | | | | | | ( | | | |
Unrealized gain (loss) on securities | | | | | | | | | | | | ( |
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
| | | | | | | | | | | | | | | | | | | | | | |
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| |
| Accumulated |
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| | ||||||
| | | | | | | | | | | | 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 | | — | | | — | | — | | | — | | | | | | — | | | — | | | |
Vesting of shares of restricted stock | | | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Other comprehensive loss | | — | | | — | | — | | | — | | | — | | | ( | | | — | | | ( |
Balance at June 30, 2025 | | | | $ | | | — | | $ | — | | | | | $ | | | $ | ( | | $ | |
| | | | | | | | | | | | | | | | | | | | | | |
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| |
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| |
| Accumulated |
| |
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| | | | | | | | | | | | 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, 2024 | | | | $ | | | ( | | $ | ( | | $ | | | $ | | | $ | ( | | $ | |
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 March 31, 2024 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | ( | | $ | |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | | | | |
Dividends paid | | — | | | — | | — | | | — | | | — | | | — | | | ( | | | ( |
Stock-based compensation expense | | — | | | — | | — | | | — | | | | | | — | | | — | | | |
Vesting of shares of restricted stock | | | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | | | | — | | | |
Balance at June 30, 2024 | | | | $ | | | — | | $ | — | | $ | | | $ | | | $ | ( | | $ | |
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, | ||||
|
| 2025 |
| 2024 | ||
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 | | | | | | |
Accretion of discount on available for sale securities | | | | | | ( |
(Gain) loss on derivative contracts | | | ( | | | |
Settlement (paid) received on derivative contracts | | | ( | | | |
Settlement of asset retirement obligation | | | ( | | | ( |
Stock-based compensation expense | | | | | | |
Deferred income tax 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 | | | ( | | | ( |
Additions to gathering system properties | | | ( | | | ( |
Additions to land, buildings and property and equipment | | | ( | | | ( |
Purchases of short term investments - available for sale | | | | | | ( |
Proceeds from short term investments - held to maturity | | | | | | |
Prepaid drilling costs | | | | | | |
Net cash used in investing activities | | | ( | | | ( |
Cash flows from financing activities: | | | | | | |
Buyback of common shares | | | | | | ( |
Dividends paid | | | ( | | | ( |
Net cash used in financing activities | | | ( | | | ( |
Effect of currency rates on cash, cash equivalents, and restricted cash | | | ( | | | |
Decrease 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 (refund) - 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, 2024. 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 unaudited condensed 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, Dewey Energy GP, LLC, Dewey Energy Holdings, LLC, Epsilon Operating, 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 and related cash flow estimates used in impairment tests of natural gas and oil, and gathering system properties, 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.
Reclassification
The consolidated financial statements for the prior periods include certain reclassifications that were made to conform to the current period presentation. Such reclassifications have no impact on previously reported consolidated financial position, results of operations or cash flows.
Recently Issued Accounting Standards
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to disclose disaggregated information about a reporting entity’s effective tax rate reconciliation, using both percentages and reporting currency amounts for specific standardized categories, as well as disclosure of income taxes paid disaggregated by jurisdiction. The amendments will be effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is evaluating the impact of
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
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 March 2024, the FASB issued ASU No. 2024-01, Compensation – Stock Compensation (Topic 718): Scope Applications of Profits Interest and Similar Awards (“ASU 2024-01”). The amendments in ASU 2024-01 improve its overall clarity and operability without changing the guidance and adding illustrative examples to determine whether profits interest award should be accounted for in accordance with Topic 718. The Company has adopted ASU No. 2024-01 as of January 1, 2025. There was no impact as a result of the adoption of this ASU.
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 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 is evaluating the impact of this new standard and believes that the adoption may result in additional disclosures, but will not have any other 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, 2025 and December 31, 2024:
| | | | | | |
|
| June 30, |
| December 31, | ||
| | 2025 | | 2024 | ||
Cash and cash equivalents | | $ | | | $ | |
Restricted cash included in other assets | | | | | | |
Cash, cash equivalents, and restricted cash in the statement of cash flows | | $ | | | $ | |
4. Short Term Investments
Short term investments are highly liquid investments with original maturities between three and twelve months. The Company’s short term investments consist of US Treasury Bills. These investments are classified as available-for-sale. Available-for-sale short term investments are reported at fair value in the Consolidated Balance Sheets. Unrealized gains and losses are excluded from earnings and are reported in Accumulated other comprehensive income in the Consolidated Statements of Operations and Comprehensive Income.
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
As of June 30, 2025 and December 31, 2024, the Company had
During the six months ended June 30, 2024, the Company sold securities with a carrying amount of $
for total proceeds of $
5. Property and Equipment
The following table summarizes the Company’s property and equipment as of June 30, 2025 and December 31, 2024:
| | | | | | |
|
| June 30, |
| December 31, | ||
| | 2025 | | 2024 | ||
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 Acquisitions
During the six months ended June 30, 2025, Epsilon had
During the six months ended June 30, 2024, Epsilon acquired assets that included the following:
| ● | a |
| ● | a |
| ● | a |
Management determined that substantially all the fair value of the assets acquired was concentrated in a group of similar identifiable assets. Based on this determination, the acquisition was accounted for as an asset acquisition.
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.
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
During the three and six months ended June 30, 2025, Epsilon recorded an impairment of $
During the three and six months ended June 30, 2024,
6. Revolving Line of Credit
The Company closed a senior secured reserve based revolving credit facility on June 28, 2023, with Frost Bank as issuing bank and sole lender. The current borrowing base is $
Under the terms of the facility, the Company must adhere to the following financial covenants:
| ● | Current ratio of |
| ● | Leverage ratio of less than |
Additionally, if the Leverage ratio is greater than
We were in compliance with the financial covenants of the agreement as of June 30, 2025.
| | | | | | | | | | | | |
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| Balance at |
| Balance at |
| |
| | ||||
| | June 30, |
| December 31, | | Current | | | ||||
|
| 2025 | | 2024 |
| Borrowing Base |
| Interest Rate | ||||
Revolving line of credit | | $ | | | $ | | | $ | | | | SOFR + |
7. 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 12, 2025, Epsilon’s board of directors (the “Board”) authorized a new share repurchase program of up to
The previous share repurchase program commenced on March 19, 2024. During the year ended December 31, 2024, we repurchased
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
During the six months ended June 30, 2025,
(c)Equity Incentive Plan
The Board adopted the 2020 Equity Incentive Plan (the “2020 Plan”) on July 22, 2020 subject to approval by Epsilon’s shareholders at Epsilon’s 2020 Annual General and Special Meeting of shareholders, which occurred on September 1, 2020 (the “Meeting”). Shareholders approved the 2020 Plan at the Meeting.
The 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 2020 Plan, Epsilon is authorized to issue up to
Restricted Stock
For the six months ended June 30, 2025,
The following table summarizes restricted stock activity for the six months ended June 30, 2025, and the year ended December 31, 2024:
| | | | | | | | | | | | | | |
| | Six months ended | | Year ended | ||||||||||
| | June 30, 2025 | | December 31, 2024 | ||||||||||
| | 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, 2025 was $
As of June 30, 2025, the Company had unrecognized stock-based compensation related to these shares of $
(d)Dividends
On
8. 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.
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
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, 2025 and 2024.
| | | | | | | | | | | | |
|
| Three months ended June 30, | | Six Months Ended June 30, | ||||||||
| | 2025 |
| 2024 |
| 2025 |
| 2024 | ||||
Operating revenue | | | | | | | | | | | | |
Natural gas | | $ | | | $ | | | $ | | | $ | |
Natural gas liquids | | | | | | | | | | | | |
Oil and condensate | | | | | | | | | | | | |
Gathering and compression fees (1) | | | | | | | | | | | | |
Total operating revenue | | $ | | | $ | | | $ | | | $ | |
| (1) | Net of the elimination entry |
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
Gas Gathering and Compression Revenue
The Company also provides natural gas gathering and compression services through its ownership interest in the Auburn gas gathering system 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
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,
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
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, 2025 and December 31, 2024, we determined that our allowance for credit loss was
| | | | | | | | | |
|
| June 30, |
| December 31, |
| December 31, | |||
| | 2025 | | 2024 | | 2023 | |||
Accounts receivable | | | | | | | | | |
Natural gas and oil sales | | $ | | | $ | | | $ | |
Joint interest billing | | | | | | | | | |
Gathering and compression fees | | | | | | | | | |
Commodity contract | | | | | | | | | |
Interest | | | | | | | | | |
Total accounts receivable | | $ | | | $ | | | $ | |
9. 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, 2025 and 2024 consisted of the following:
| | | | | | | | | | | | | |
|
| Three months ended June 30, | | Six Months Ended June 30, | | ||||||||
| | 2025 |
| 2024 |
| 2025 |
| 2024 | | ||||
Balance at beginning of period | | $ | | | $ | | | $ | | | $ | | |
Translation (loss)/gain | | | ( | | | | | | ( | | | | |
Unrealized gain/(loss) on securities | | | | | | | | | | | | ( | |
Balance at end of period | | $ | | | $ | | | $ | | | $ | | |
10. Income Taxes
Income tax provisions for the three and six months ended June 30, 2025 and 2024 are as follows:
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2025 |
| 2024 |
| 2025 |
| 2024 | ||||
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
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
open to audit under the statute of limitations for the years ending December 31, 2021 through December 31, 2024. To the extent we utilize net operating losses generated in earlier years, such earlier years may also be subject to audit.
Starting in 2023, distributions of Epsilon Energy USA Inc. earnings to Epsilon Energy Ltd. incur a 5% U.S. dividend withholding tax, provided the Company is 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, 2025 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.
On July 4, 2025, Public Law No. 119-21, commonly referred to as the One Big Beautiful Bill Act (the “Act”), was enacted by the U.S. government. While the enactment of the Act does not have an impact on the historical financial data, the Company’s future tax liabilities may be impacted. Among other changes, the Act: (i) allows for 100% expensing of the costs of certain qualified property acquired after January 19, 2025; (ii) allows election to immediately deduct R&D costs incurred; and (iii) modifies the provision related to the limitations on deduction of interest expense.
The Company expects to realize net benefits from U.S. tax reform, primarily driven by the accelerated depreciation of qualified assets for tax purposes. However, the Company continues to evaluate the impacts of the Act and further understand its implications, as well as the related, and yet to be issued, regulations and interpretations which could impact this outlook.
11. Commitments and Contingencies
The Company enters into commitments for capital expenditures in advance of the expenditures being made. As of June 30, 2025, the Company had commitments of $
12. Leases
Under ASC 842, Leases, the Company recognized an operating lease related to its corporate office as of June 30, 2025 and December 31, 2024 as summarized in the following table:
| | | | | | |
|
| June 30, |
| December 31, | ||
| | 2025 | | 2024 | ||
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 with a
Lease expense for operating leases was $
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
the year ended December 31, 2024, respectively. This lease expense is presented in other general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income.
Future minimum lease payments as of June 30, 2025 are as follows:
| | | |
| | Operating Leases | |
2025 | | $ | |
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 | | $ | |
13. 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, | ||||||||
|
| 2025 |
| 2024 |
| 2025 |
| 2024 | ||||
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, | ||||
|
| 2025 |
| 2024 |
| 2025 |
| 2024 |
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, | ||||
|
| 2025 |
| 2024 |
| 2025 |
| 2024 |
Anti-dilutive unvested time-based restricted shares | | | | | | | | |
14. 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.
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
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 reportable segments are as follows:
| 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 |
Segment activity for the six months ended June 30, 2025 and 2024 is as follows:
| | | | | | | | | |
|
| Upstream |
| Gas Gathering |
| Consolidated | |||
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) | | | | | | | | | |
| | | | | | | | | |
Operating costs | | | | | | | | | |
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 | | | | | | | | | ( |
Total consolidated operating income | | | | | | | | | |
| | | | | | | | | |
Other income (expense) | | | | | | | | | |
Interest income | | | | | | | | | |
Interest expense | | | | | | | | | ( |
Loss on derivative contracts | | | | | | | | | |
Other expense | | | | | | | | | ( |
Other expense, net | | | | | | | | | |
Net income before income tax expense | | | | | | | | $ | |
| | | | | | | | | |
Capital expenditures (2) | | $ | | | $ | | | $ | |
Segment assets | | $ | | | $ | | | $ | |
| | | | | | | | | |
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 | | | | | | | | | |
| | | | | | | | $ | |
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
| | | | | | | | | |
|
| Upstream |
| Gas Gathering |
| Consolidated | |||
As of and for the six months ended June 30, 2024 | | | | | | | | | |
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) | | | | | | | | | |
| | | | | | | | | |
Operating costs | | | | | | | | | |
Gathering, transportation, and compression | | | | | | — | | | |
Other lease operating expense | | | | | | — | | | |
Gathering system operating expenses | | | — | | | | | | |
Intersegment other lease operating expense | | | | | | — | | | |
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 | | | | | | | | | ( |
Total consolidated operating income | | | | | | | | | |
| | | | | | | | | |
Other income (expense) | | | | | | | | | |
Interest income | | | | | | | | | |
Interest expense | | | | | | | | | ( |
Gain on derivative contracts | | | | | | | | | ( |
Other expense | | | | | | | | | |
Other income, net | | | | | | | | | |
Net income before income tax expense | | | | | | | | $ | |
| | | | | | | | | |
Capital expenditures (2) | | $ | | | $ | | | $ | |
Segment assets | | $ | | | $ | | | $ | |
| | | | | | | | | |
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 | | | | | | | | | |
| | | | | | | | $ | |
| (1) | Segment operating revenue represents revenues generated from the operations of the segment. Inter-segment sales during the six months ended June 30, 2025 and 2024 have been eliminated upon consolidation. For the six months ended June 30, 2025, Epsilon sold natural gas to |
| (2) | Capital expenditures for the Upstream segment consist primarily of the acquisition of properties, and the drilling and completing of wells while Gas Gathering consists of expenditures relating to the expansion, completion, and maintenance of the gathering and compression facility. |
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
Segment activity for the three months ended June 30, 2025 and 2024 is as follows:
| | | | | | | | | |
| | Upstream |
| Gas Gathering |
| Consolidated | |||
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) | | | | | | | | | |
| | | | | | | | | |
Operating costs | | | | | | | | | |
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 | | | | | | | | | ( |
Total consolidated operating income | | | | | | | | | |
| | | | | | | | | |
Other income (expense) | | | | | | | | | |
Interest income | | | | | | | | | |
Interest expense | | | | | | | | | ( |
Gain on derivative contracts | | | | | | | | | |
Other expense | | | | | | | | | ( |
Other expense, net | | | | | | | | | |
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 |
| Consolidated | |||
As of and for the three months ended June 30, 2024 | | | | | | | | | |
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) | | | | | | | | | |
| | | | | | | | | |
Operating costs | | | | | | | | | |
Gathering, transportation, and compression | | | | | | | | | |
Other lease operating expense | | | | | | | | | |
Gathering system operating expenses | | | | | | | | | |
Intersegment other lease operating expense | | | | | | | | | |
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 | | | | | | | | | ( |
Total consolidated operating income | | | | | | | | | |
| | | | | | | | | |
Other income (expense) | | | | | | | | | |
Interest income | | | | | | | | | |
Interest expense | | | | | | | | | ( |
Gain on derivative contracts | | | | | | | | | ( |
Other expense | | | | | | | | | |
Other income, net | | | | | | | | | |
Net income before income tax expense | | | | | | | | $ | |
| | | | | | | | | |
Capital expenditures (2) | | $ | | | $ | | | $ | |
| (3) | Segment operating revenue represents revenues generated from the operations of the segment. Inter-segment sales during the three months ended June 30, 2025 and 2024 have been eliminated upon consolidation. For the three months ended June 30, 2025, Epsilon sold natural gas to |
| (4) | Capital expenditures for the Upstream segment consist primarily of the acquisition of properties, and the drilling and completing of wells while Gas Gathering consists of expenditures relating to the expansion, completion, and maintenance of the gathering and compression facility. |
15. 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 contract. The Company does not currently require collateral from any of its counterparties nor do its counterparties currently require collateral from the Company.
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
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 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 and six months ended June 30, 2025, Epsilon recognized gains on commodity derivative contracts of $
Commodity Derivative Contracts
At June 30, 2025, the Company had outstanding natural gas NYMEX Henry Hub (“HH”) swaps totaling
| | | | | | |
| | Fair Value of Derivative | ||||
|
| June 30, |
| December 31, | ||
| | 2025 | | 2024 | ||
Current |
| |
|
| |
|
Henry Hub Nymex Swap |
| $ | | | $ | |
Tennessee Z4 Basis swap |
| | | | | |
Henry Hub Nymex Option - Put |
| | | | | |
Crude Oil NYMEX WTI CMA | | | | | | |
Long-term |
|
| | | | |
Henry Hub Nymex Swap | | | | | | |
Henry Hub Nymex Option - Put |
| | | | | |
|
| $ | | | $ | |
| | | | | | |
| | Fair Value of Derivative | ||||
|
| June 30, |
| December 31, | ||
| | 2025 | | 2024 | ||
Current |
| |
|
| |
|
Henry Hub Nymex Swap |
| $ | ( | | $ | ( |
Tennessee Z4 Basis swap |
| | | | | ( |
Henry Hub Nymex Option - Call | | | ( | | | |
Long-term |
|
| | | | |
Henry Hub Nymex Swap |
| | ( | | | |
Henry Hub Nymex Option - Call |
| | ( | | | |
|
| $ | ( | | $ | ( |
| | | | | | |
Net Fair Value of Derivatives |
| $ | | | $ | ( |
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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
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, | ||||||||
|
| 2025 |
| 2024 |
| 2025 |
| 2024 | ||||
Fair value of (liability) asset, beginning of the period | | $ | ( | | $ | | | $ | ( | | $ | |
Gain/(loss) on derivative contracts included in earnings | |
| | |
| ( | |
| | |
| ( |
Settlement of commodity derivative contracts | |
| ( | |
| ( | |
| | |
| ( |
Fair value of asset, end of the period | | $ | | | $ | | | $ | | | $ | |
16. 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, |
| | 2025 |
| 2024 | ||
Balance beginning of period | | $ | | | $ | |
Liabilities acquired | | | | | | |
Wells plugged and abandoned | | | ( | | | ( |
Change in estimates | | | | | | |
Accretion | | | | | | |
Balance end of period | | $ | | | $ | |
17. Fair Value Measurements
The methodologies used to determine the fair value of our financial assets and liabilities at June 30, 2025 were the same as those used at December 31, 2024.
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.
| | | | | | | | | | | | | | | |
|
| June 30, 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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Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
| | | | | | | | | | | | | | | |
| | December 31, 2024 | |||||||||||||
| | Level 1 | | Level 2 |
| Level 3 |
| Effect of Netting |
| Net Fair Value | |||||
Assets |
| | |
| | |
| | |
| | |
| | |
Derivative contracts | | $ | | | $ | | | $ | | | $ | ( | | $ | |
Cash equivalents | | $ | | | $ | | | $ | | | $ | | | $ | |
Liabilities | | | | | | | | | | | | | | | |
Derivative contracts | | $ | | | $ | | | $ | | | $ | ( | | $ | |
Non-Recurring Fair Value Measurements
The Company performed an impairment test on our oil and gas properties and it was determined that the carrying amount of the Canada asset exceeded the estimated undiscounted future cash flows resulting in a reduction of the carrying amount of the properties to their estimated fair values by $
The table below summarizes the fair value of the impaired assets at June 30, 2025.
| | | | | | | | | | | | |
|
| | | Quoted Prices | | Significant | | | ||||
| | | | in Active | | Other | | Significant | ||||
| | | | Markets for | | Observable | | Unobservable | ||||
| | June 30, | | Identical Assets | | Inputs | | Inputs | ||||
| | 2025 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Nonrecurring fair value measurement | | | | | | | | | | | | |
Long-lived assets held and used | | $ | | | $ | — | | $ | — | | $ | |
Total Nonrecurring fair value measurement | | $ | | | $ | — | | $ | — | | $ | |
The table below summarizes the fair value of the impaired assets at December 31, 2024.
| | | | | | | | | | | | |
|
| | | Quoted Prices | | Significant | | | ||||
| | | | in Active | | Other | | Significant | ||||
| | | | Markets for | | Observable | | Unobservable | ||||
| | December 31, | | Identical Assets | | Inputs | | Inputs | ||||
| | 2024 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Nonrecurring fair value measurement | | | | | | | | | | | | |
Long-lived assets held and used | | $ | | | $ | — | | $ | — | | $ | |
Total Nonrecurring fair value measurement | | $ | | | $ | — | | $ | — | | $ | |
18. Subsequent Events
On August 11, 2025, Epsilon signed definitive agreements to acquire
The acquired assets include an operated position of
The transaction is subject to a shareholder vote; the associated proxy process will run in the interim period between signing and closing. If approved, the transaction is expected to close in the fourth quarter of 2025.
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Table of Contents
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, 2025 and 2024 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, 2024. 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 primary areas of operations are the Marcellus shale section of the Appalachian basin in Pennsylvania, the Permian Basin in Texas and New Mexico, the NW Anadarko Basin in Oklahoma, and the Western Canadian Sedimentary Basin in Alberta, Canada.
At June 30, 2025 we held leasehold rights to 24,316 net acres. We have natural gas production from our non-operated wells in Pennsylvania, and oil, natural gas liquids, and natural gas production from our non-operated wells in Texas, New Mexico, Oklahoma, and Alberta, Canada.
At December 31, 2024 our total estimated net proved reserves were 69,401 MMcf of natural gas, 876,808 Bbls of NGLs, and 1,572,465 Bbls of oil and condensate.
In Pennsylvania, the Company owns a 35% interest in the 45-mile Auburn Gas Gathering System (“Auburn GGS") which is operated by a subsidiary of Williams Partners, LP.
Our common shares trade on the NASDAQ Global Market under the ticker symbol “EPSN.”
Business Strategy
We are committed to disciplined capital allocation including shareholder returns in the form of dividends and 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.
Historically, our investments have been focused on our position in the Marcellus unconventional reservoir in Pennsylvania (“PA”). Our PA assets are supported by our 35% ownership in the Auburn GGS and we have a substantial remaining drillable location inventory within our existing leaseholds.
More recently, our investments have been focused in the Permian Basin in Texas and the Western Canadian Sedimentary Basin in Alberta, Canada.
On February 26, 2024, Epsilon acquired a 25% interest in three producing wells and 3,620 gross undeveloped acres in Ector County, Texas from a private operator. The Company participated in the drilling and completion of 2 gross (0.5 net) wells during 2024 which were put on production in May 2024 and July 2024. Together with the transaction completed in 2023, the Company holds a 25% working interest in 16,592 gross acres and 7 producing wells in Texas. Total capital expenditures (net to Epsilon) through June 30, 2025 in the project (including undeveloped leasehold) are $40 million.
On April 11, 2024, Epsilon acquired a 50% working interest in 14,243 gross undeveloped acres in Alberta, Canada. The Company participated in the drilling and completion of 2 gross (0.5 net) wells. One well was put on production in September 2024. One well was deemed non-commercial. Total capital expenditures (net to Epsilon) through June 30, 2025 in the project (including undeveloped leasehold) are $3.5 million (pre-impairment).
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In October 2024, Epsilon formed a joint venture with a private operator covering approximately 130,000 gross acres in Garrington and Harmattan areas in Alberta, Canada. The Company provided a $7 million drilling carry in favor of the operator in exchange for a 25% working interest in the leasehold. To date, the Company participated in the drilling and completion of 2 gross (0.5 net) wells. Total capital expenditures (net to Epsilon) through June 30, 2025 are $8.9 million (pre-impairment).
We continue to evaluate new opportunities in numerous onshore North American basins.
Three and six months ended June 30, 2025 Highlights
Operational Highlights
Marcellus Shale – Pennsylvania
| ● | During the three months ended June 30, 2025, Epsilon's realized natural gas price was $2.53 per Mcf, a 76% increase over the three months ended June 30, 2024. During the six months ended June 30, 2025, Epsilon's realized natural gas price was $3.22 per Mcf, a 99% increase over the six months ended June 30, 2024. |
| ● | During the three months ended June 30, 2025, Epsilon’s net revenue interest natural gas production was 2.7 Bcf, a 107% increase over the three months ended June 30, 2024. During the six months ended June 30, 2025, Epsilon’s net revenue interest natural gas production was 5.3 Bcf, an 86% increase over the six months ended June 30, 2024. |
| ● | Gathered and delivered 11.2 Bcf gross (3.9 net to Epsilon's interest) during the three months ended June 30, 2025, or 123 MMcf/d through the Auburn Gas Gathering System. Gathered and delivered 22.8 Bcf gross (8.0 net to Epsilon's interest) during the six months ended June 30, 2025, or 126 MMcf/d through the Auburn Gas Gathering System. |
Permian Basin – Texas and New Mexico
| ● | During the three months ended June 30, 2025, Epsilon's realized price for all Permian Basin production was $51.79 per Boe (88% liquids), a 4% decrease over the three months ended June 30, 2024. During the six months ended June 30, 2025, Epsilon's realized price for all Permian Basin production was $53.46 per Boe (87% liquids), a 0.02% decrease over the six months ended June 30, 2024. |
| ● | Total net revenue interest production for the three months ended June 30, 2025, which included oil, natural gas liquids, and natural gas, was 42.9 Mboe compared to 65.9 Mboe during the same period in 2024, an 35% decrease. Total net revenue interest production for the six months ended June 30, 2025, which included oil, natural gas liquids, and natural gas, was 104.9 Mboe compared to 118.2 Mboe during the same period in 2024, an 11% decrease. |
| ● | At June 30, 2025, the Company had 1 gross (.25 net) well drilled and awaiting completion in Texas. |
Anadarko, NW Stack Trend – Oklahoma
| ● | During the three months ended June 30, 2025, Epsilon's realized price for all Oklahoma production was $4.40 per Mcfe (60% natural gas), a 3% increase from the three months ended June 30, 2024. During the six months ended June 30, 2025, Epsilon's realized price for all Oklahoma production was $4.85 per Mcfe (60% natural gas), a 10% increase from the six months ended June 30, 2024. |
| ● | Total net revenue interest production for the three months ended June 30, 2025 included natural gas, oil and other liquids and was 0.09 Bcfe, a 22% decrease from the same period in 2024. Total net revenue interest production for the six months ended June 30, 2025 included natural gas, oil and other liquids and was 0.2 Bcfe, a 10% decrease from the same period in 2024. |
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Western Canadian Sedimentary Basin—Alberta, Canada
| ● | During the three months ended June 30, 2025, Epsilon's realized price for all Canada production was $42.23 per Boe (75% liquids). During the six months ended June 30, 2025, Epsilon's realized price for all Canada production was $43.48 per Boe (78% liquids). The Company had no Canada production in 2024. |
| ● | Total net revenue interest production for the three months ended June 30, 2025, which included oil, natural gas liquids, and natural gas, was 11.3 Mboe. Total net revenue interest production for the six months ended June 30, 2025, which included oil, natural gas liquids, and natural gas, was 13.1 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) gain or loss on sale of assets, (7) gain or loss on derivative contracts net of cash received or paid on settlement, and (8) net other income(expense). 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, 2025 and 2024, 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, | ||||||||
|
| 2025 |
| 2024 |
| 2025 |
| 2024 | ||||
Net income | | $ | 1,551,461 | | $ | 815,660 | | $ | 5,567,495 | | $ | 2,322,556 |
Add Back: | | | | | | | | | | | | |
Interest expense (income), net | | | 2,659 | | | (100,184) | | | (429) | | | (357,696) |
Income tax expense | | | 1,837,687 | | | 459,016 | | | 3,507,881 | | | 513,066 |
Depreciation, depletion, amortization, and accretion | | | 3,201,654 | | | 2,048,403 | | | 6,677,511 | | | 4,428,829 |
Impairment expense | | | 2,670,000 | | | — | | | 2,676,669 | | | — |
Stock based compensation expense | | | 385,838 | | | 313,589 | | | 771,676 | | | 635,158 |
(Gain) loss on derivative contracts net of cash received or paid on settlement | | | (2,267,203) | | | 367,148 | | | (1,220,076) | | | 956,159 |
Foreign currency translation loss | | | 14,021 | | | — | | | 24,310 | | | 570 |
Adjusted EBITDA | | $ | 7,396,117 | | $ | 3,903,632 | | $ | 18,005,037 | | $ | 8,498,642 |
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Results of Operations
Net Operating Revenues
For the six months ended June 30, 2025 revenues increased $12.5 million, or 82%, to $27.8 million from $15.3 million during the same period of 2024.
Revenue and volume statistics for the three and six months ended June 30, 2025 and 2024 were as follows:
| | | | | | | | | | | | |
| | Three months ended | | Six months ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2025 |
| 2024 |
| 2025 |
| 2024 | ||||
Revenues | | | | | | | | | | | | |
Pennsylvania | | | | | | | | | | | | |
Natural gas revenue | | $ | 6,702,131 | | $ | 1,843,548 | | $ | 17,030,025 | | $ | 4,601,656 |
Volume (MMcf) | |
| 2,653 | |
| 1,285 | |
| 5,290 | |
| 2,841 |
Avg. Price ($/Mcf) | | $ | 2.53 | | $ | 1.44 | | $ | 3.22 | | $ | 1.62 |
Gathering system revenue (net of elimination) | | $ | 1,845,005 | | $ | 1,444,448 | | $ | 3,737,355 | | $ | 3,380,146 |
Total PA Revenues | | $ | 8,547,136 | | $ | 3,287,996 | | $ | 20,767,380 | | $ | 7,981,802 |
Permian Basin | | | | | | | | | | | | |
Natural gas revenue | | $ | 17,189 | | $ | (2,757) | | $ | 95,528 | | $ | 38,821 |
Volume (MMcf) | |
| 30 | |
| 58 | |
| 80 | |
| 101 |
Avg. Price ($/Mcf) | | $ | 0.56 | | $ | (0.05) | | $ | 1.19 | | $ | 0.38 |
Natural gas liquids revenue | | $ | 41,837 | | $ | 281,770 | | $ | 326,798 | | $ | 541,684 |
Volume (MBOE) | |
| 3.2 | |
| 14.5 | |
| 15.3 | |
| 26.0 |
Avg. Price ($/Bbl) | | $ | 13.06 | | $ | 19.38 | | $ | 21.36 | | $ | 20.85 |
Oil and condensate revenue | | $ | 2,163,481 | | $ | 3,266,693 | | $ | 5,182,976 | | $ | 5,753,206 |
Volume (MBbl) | |
| 34.6 | |
| 41.7 | |
| 76.2 | |
| 75.4 |
Avg. Price ($/Bbl) | | $ | 62.47 | | $ | 78.35 | | $ | 68.06 | | $ | 76.35 |
Total Permian Basin Revenues | | $ | 2,222,507 | | $ | 3,545,706 | | $ | 5,605,302 | | $ | 6,333,711 |
Oklahoma | | | | | | | | | | | | |
Natural gas revenue | | $ | 166,635 | | $ | 120,439 | | $ | 373,975 | | $ | 283,732 |
Volume (MMcf) | |
| 52 | |
| 65 | |
| 105 | |
| 131 |
Avg. Price ($/Mcf) | | $ | 3.20 | | $ | 1.86 | | $ | 3.57 | | $ | 2.17 |
Natural gas liquids revenue | | $ | 79,789 | | $ | 106,653 | | $ | 182,078 | | $ | 219,723 |
Volume (MBOE) | |
| 3.7 | |
| 4.7 | |
| 7.4 | |
| 9.3 |
Avg. Price ($/Bbl) | | $ | 21.61 | | $ | 22.78 | | $ | 24.64 | | $ | 23.52 |
Oil and condensate revenue | | $ | 133,446 | | $ | 247,024 | | $ | 291,383 | | $ | 475,593 |
Volume (MBbl) | |
| 2.0 | |
| 3.1 | |
| 4.3 | |
| 6.1 |
Avg. Price ($/Bbl) | | $ | 66.00 | | $ | 79.66 | | $ | 68.29 | | $ | 78.38 |
Total OK Revenues | | $ | 379,870 | | $ | 474,116 | | $ | 847,436 | | $ | 979,048 |
Canada | | | | | | | | | | | | |
Natural gas revenue | | $ | 24,389 | | $ | — | | $ | 24,389 | | $ | — |
Volume (MMcf) | |
| 17 | |
| — | |
| 17 | |
| — |
Avg. Price ($/Mcf) | | $ | 1.44 | | $ | — | | $ | 1.44 | | $ | — |
Natural gas liquids revenue | | $ | 23,394 | | $ | — | | $ | 23,394 | | $ | — |
Volume (MBOE) | |
| 0.9 | |
| — | |
| 0.9 | |
| — |
Avg. Price ($/Bbl) | | $ | 24.91 | | $ | — | | $ | 24.91 | | $ | — |
Oil and condensate revenue | | $ | 427,437 | | $ | — | | $ | 519,972 | | $ | — |
Volume (MBbl) | |
| 7.5 | |
| — | |
| 9.3 | |
| — |
Avg. Price ($/Bbl) | | $ | 57.11 | | $ | — | | $ | 55.98 | | $ | — |
Total Canada Revenues | | $ | 475,220 | | $ | — | | $ | 567,755 | | $ | — |
Total Revenues | | $ | 11,624,733 | | $ | 7,307,818 | | $ | 27,787,873 | | $ | 15,294,561 |
Upstream natural gas revenue for the six months ended June 30, 2025 increased by $12.6 million, or 256%, over the same period in 2024. An increase of $8.7 million was due to higher natural gas prices and an increase of $3.9 million was a result of previously delayed turn in line wells coming online in Pennsylvania and the end of operator-elected well
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shut-ins in Pennsylvania. Upstream natural gas revenue for the three months ended June 30, 2025 increased by $5.0 million, or 252%, over the same period in 2024. An increase of $3.1 million was due to higher natural gas prices and an increase of $1.9 million was a result of previously delayed turn in line wells coming online in Pennsylvania and the end of operator-elected well shut-ins in Pennsylvania.
Upstream natural gas liquids revenue for the six months ended June 30, 2025 decreased by $0.2 million, or 30%, over the same period in 2024. This decrease was mostly due to lower volumes in the Permian Basin as a result of processing disruptions at the Goldsmith plant in Texas in the second quarter. Upstream natural gas liquids revenue for the three months ended June 30, 2025 decreased by $0.2 million, or 63%, over the same period in 2024. This decrease was mostly due to lower volumes in the Permian Basin as a result of the aforementioned processing disruption.
Upstream oil and condensate revenue for the six months ended June 30, 2025 decreased by $0.2 million, or 4% over the same period in 2024. An increase of $0.6 million was due to additional sales volumes from new wells drilled and acquired in the Permian Basin and Canada partially offset by a decrease of $0.9 million due to lower prices. Upstream oil and condensate revenue for the three months ended June 30, 2025 decreased by $0.8 million, or 22% over the same period in 2024. A decrease of $0.05 million was due to constant sales volumes and a decrease of $0.75 million was due to lower prices.
Gathering system revenue for the six months ended June 30, 2025 increased by $0.4 million, or 11%, compared with the same period in 2024 as a result of crossflow gas being displaced with Anchor Shipper gas which is charged a higher gathering fee. Gathering system revenue for the three months ended June 30, 2025 increased by $0.4 million, or 28%, compared with the same period in 2024 due to higher volumes and a higher percentage of Anchor Shipper gas. Revenues derived from transporting and compressing our production, which have been eliminated from gathering system revenues amounted to $0.5 million and $1.1 million, respectively, for the three and six months ended June 30, 2025, and $0.3 million and $0.6 million, respectively, for the three and six months ended June 30, 2024.
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, 2025 and 2024:
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2025 |
| 2024 |
| 2025 |
| 2024 | ||||
Lease operating costs (net of elimination) | | $ | 2,462,785 | | $ | 1,649,867 | | $ | 5,218,683 | | $ | 3,418,329 |
Gathering system operating costs | | | 613,795 | | | 649,967 | | | 1,166,446 | | | 1,202,537 |
| | $ | 3,076,580 | | $ | 2,299,834 | | $ | 6,385,129 | | $ | 4,620,866 |
| | | | | | | | | | | | |
Upstream operating costs—Total $/Mcfe | | | 0.80 | | | 0.92 | | $ | 0.85 | | $ | 0.91 |
Gathering system operating costs $/Mcf | | | 0.15 | | | 0.20 | | $ | 0.14 | | $ | 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 to ready it for sale. For the six months ended June 30, 2025 these costs increased by $1.8 million, or 53%, over the same period in 2024. The increase is primarily due to higher volumes. For the three months ended June 30, 2025 these costs increased by $0.8 million, or 49%, over the same period in 2024. The increase is primarily due to higher volumes.
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, 2025, gathering system operating costs were constant compared to the same period in 2024.
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Depletion, Depreciation, Amortization and Accretion (“DD&A”)
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2025 |
| 2024 |
| 2025 |
| 2024 | ||||
Depletion, depreciation, amortization and accretion | | $ | 3,201,654 | | $ | 2,048,403 | | $ | 6,677,511 | | $ | 4,428,829 |
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, 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, 2025 increased by $1.2 million, or 56%, and $2.2 million, or 51%, respectively, from the same period in 2024. This increase was a result of higher produced volumes in Pennsylvania and the Permian Basin.
Impairment
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2025 |
| 2024 |
| 2025 |
| 2024 | ||||
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 natural gas 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, 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. For the three and six months ended June 30, 2024, there was no impairment.
General and Administrative (“G&A”)
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2025 |
| 2024 |
| 2025 |
| 2024 | ||||
General and administrative | | $ | 1,847,716 | | $ | 1,791,804 | | $ | 4,051,972 | | $ | 3,672,396 |
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.
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G&A expenses for the six months ended June 30, 2025 increased by $0.4 million, or 10% from the same period in 2024. This was primarily due to higher compensation expenses. G&A expenses for the three months ended June 30, 2025 was constant from the same period in 2024.
Interest Income
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2025 |
| 2024 |
| 2025 |
| 2024 | ||||
Interest income | | $ | 17,247 | | $ | 108,943 | | $ | 32,546 | | $ | 375,215 |
Interest income for the three and six months ended June 30, 2025 decreased by $0.1 million, or 84%, and $0.3 million, or 91%, respectively, from the same period in 2024. This was primarily due to a reduction in the balance of cash and short term investments.
Interest Expense
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2025 |
| 2024 |
| 2025 |
| 2024 | ||||
Interest expense | | $ | 19,906 | | $ | 8,759 | | $ | 32,117 | | $ | 17,519 |
Interest expense is related to the fees paid on the revolving credit facility.
Interest expense during the three and six months ended June 30, 2025 and 2024 was relatively flat.
Gain (Loss) on Derivative Contracts
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2025 |
| 2024 |
| 2025 |
| 2024 | ||||
Gain (Loss) on derivative contracts | | $ | 2,573,863 | | $ | (94,891) | | $ | 1,111,693 | | $ | (195,617) |
For the six months ended June 30, 2025, Epsilon had NYMEX HH Natural Gas futures swaps, Tennessee Gas Pipeline Zone 4 basis swaps, NYMEX HH options, 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 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. During the three and six months ended June 30, 2024, we received net cash settlements of $272,257 and $760,542, respectively.
For the three and six months ended June 30, 2025, realized gains on derivative contracts increased by $2.7 million and $1.3 million, respectively. This increase was primarily the result of a significant decrease in Henry Hub natural gas prices during the quarter.
Capital Resources and Liquidity
Cash Flow
The primary source of cash for Epsilon during the three and six months ended June 30, 2025 and 2024 was funds generated from operations. 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. The primary uses of cash for the three months ended
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June 30, 2024 were the development of upstream properties, investment in U.S. Treasury Bills, the repurchase of shares of common stock, and the distribution of dividends.
At June 30, 2025, we had a working capital surplus of $9.1 million, an increase of $1.9 million from the $7.2 million surplus at December 31, 2024. 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.
Six months ended June 30, 2025 compared to 2024
During the six months ended June 30, 2025, $16.9 million was provided by the Company’s operating activities, compared to $9.1 million during the same period in 2024, representing an 87% increase. The increase was primarily due to higher produced volumes and realized prices in Pennsylvania.
The Company used $10.7 million and $9.5 million of cash for investing activities during the six months ended June 30, 2025 and 2024, respectively. During the six months ended June 30, 2025, the Company had net investments of $10.7 million primarily in well costs and leasehold in Pennsylvania, Texas, and Canada. During the six months ended June 30, 2024, the Company had net investments of $28.6 million in leasehold and well costs in Pennsylvania and Texas offset by net proceeds of $19.1 million in U.S. Treasury Bills.
The Company used $2.8 million and $3.9 million of cash for financing activities during the six months ended June 30, 2025 and 2024, respectively. During the six months ended June 30, 2025, this was spent on dividend payments. During the six months ended June 30, 2024, this was spent on dividend payments and the repurchase of shares of common stock.
Credit Agreement
The Company closed a senior secured reserve based revolving credit facility on June 28, 2023 with Frost Bank as issuing bank and sole lender. The current borrowing base is $45 million (redetermined as of February 10, 2025), supported by the Company’s upstream assets in Pennsylvania and subject to semi-annual redeterminations with a maturity date of June 28, 2027. Interest will be charged at the Daily Simple SOFR rate plus a margin of 3.25%. The facility is secured by the assets of the Company’s Epsilon Energy USA subsidiary (Borrower). There are currently no borrowings under the facility.
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 / current liabilities) |
| ● | Leverage ratio of less than 2.5 to 1.0 (total debt / income adjusted for interest, taxes and non-cash amounts) |
Additionally, if the Leverage ratio is greater than 1.0 to 1.0, or the borrowing base utilization is greater than 50%, the Company is required to hedge 50% of the anticipated production from PDP reserves for a rolling 24 month period.
Repurchase Transactions
On February 12, 2025, Epsilon’s board of directors (the “Board”) authorized a new share repurchase program of up to 2,200,876 common shares, representing 10% of the current outstanding common shares of Epsilon, for an aggregate purchase price of not more than US $13.0 million. The program commenced on February 12, 2025 and ends on February 11, 2026, unless the maximum amount of common shares is purchased before then or the Board approves earlier termination.
The previous share repurchase program commenced on March 19, 2024. During the year ended December 31, 2024, we repurchased 125,000 common shares and spent $627,500 at an average price of $5.00 per share (excluding commissions) under the plan. On February 12, 2025, the Board terminated and revoked authority under the program.
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During the six months ended June 30, 2025, no shares were repurchased under the new or previous program.
Derivative Transactions
The Company has entered into hedging arrangements to reduce the impact of commodity price volatility on operations. By reducing the price volatility from a portion of natural gas and crude oil production, the potential effects of changing prices on operating cash flows have been partially mitigated, but not eliminated. While mitigating the negative effects of falling commodity prices, these derivative contracts also limit the benefits we might otherwise receive from increases in commodity prices.
At June 30, 2025, Epsilon’s outstanding natural gas and crude oil commodity contracts consisted of the following:
| | | | | | | | | | | | | | | | | |
| | | | Weighted Average Price ($/Mmbtu) | | | | ||||||||||
| | Volume | | | | | Ceiling | | Floor | | Basis | | Fair Value of Asset | ||||
Derivative Type |
| (MMbtu) |
| Swaps |
| Price |
| Price |
| Differential |
| June 30, 2025 | |||||
2025 | | | | | | | | | | | | | | | | | |
Henry Hub Nymex Swap |
| 1,026,000 | | $ | 3.65 | | $ | — | | $ | — | | $ | — |
| $ | (144,265) |
Tennessee Z4 Basis swap |
| 782,000 | | $ | — | | $ | — | | $ | — | | $ | (0.95) |
| $ | 351,769 |
Henry Hub Nymex Option - Put |
| 122,000 | | $ | — | | $ | — | | $ | 4.00 | | $ | — |
| $ | 48,138 |
Henry Hub Nymex Option - Call |
| — | | $ | — | | $ | 6.17 | | $ | — | | $ | — |
| $ | (15,996) |
2026 |
| | | | | | | | | | | | | | | | |
Henry Hub Nymex Swap |
| 1,644,000 | | $ | 4.24 | | $ | — | | $ | — | | $ | — |
| $ | 157,504 |
Henry Hub Nymex Option - Put |
| 623,000 | | $ | — | | $ | — | | $ | 4.72 | | $ | — |
| $ | 250,131 |
Henry Hub Nymex Option - Call |
| — | | $ | — | | $ | 4.79 | | $ | — | | $ | — |
| $ | (191,398) |
2027 |
| | | | | | | | | | | | | | | | |
Henry Hub Nymex Option - Put |
| 180,000 | | $ | — | | $ | — | | $ | 4.00 | | $ | — |
| $ | 105,184 |
Henry Hub Nymex Option - Call |
| — | | $ | — | | $ | 6.18 | | $ | — | | $ | — |
| $ | (92,002) |
|
| 4,377,000 | | | | | | | | | | | | |
| $ | 469,065 |
| | | | | | | | |
| | | | | | Fair Value | ||
| | Volume | | Weighted Average | | June 30, | ||
Derivative Type |
| (Bbl) |
| Price ($/Bbl) |
| 2025 | ||
2025 | | | | | | | | |
Crude Oil NYMEX WTI CMA |
| 39,600 | | $ | 69.19 |
| $ | 263,462 |
|
| 39,600 | | | | | $ | 263,462 |
Contractual Obligations
The Company enters into commitments for capital expenditures in advance of the expenditures being made. As of June 30, 2025, the Company has commitments of $1.9 million for capital expenditures and has undiscounted long term commitments of $15.7 million for asset retirement obligations.
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.
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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, 2025 and 2024, the outstanding principal balance under the credit agreement was nil.
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 effective as of June 30, 2025 at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during the quarter ended June 30, 2025 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.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
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, 2024.
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, 2025, 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 13, 2025 | | By: | /s/ J. Andrew Williamson |
| | | J. Andrew Williamson |
| | | Chief Financial Officer |
37
FAQ
What revenue did Epsilon Energy (EPSN) report for Q2 2025?
How much net income did EPSN record in the first six months of 2025?
What cash and liquidity did Epsilon have at June 30, 2025?
Did EPSN record any impairments in the period?
What dividends did Epsilon pay in the six months ended June 30, 2025?
Is EPSN in compliance with its credit facility covenants?
