HOUSTON, April 25, 2024 (GLOBE NEWSWIRE) -- Epsilon Energy Ltd. ("Epsilon" or the "Company") (NASDAQ:EPSN) today announced that it will issue its first quarter 2024 earnings release on Wednesday, May 8, 2024 after the market close and host a conference call to discuss its financial and operating results on Thursday, May 9, 2024 at 9:30 a.m. Central Time (10:30 a.m. Eastern Time). Interested parties in the United States and Canada may participate toll-free by dialing (833) 816-1385. International parties may ...

HOUSTON, April 25, 2024 (GLOBE NEWSWIRE) -- Epsilon Energy Ltd. (“Epsilon” or the “Company”) (NASDAQ: EPSN) today announced that it will issue its first quarter 2024 earnings release on Wednesday, May 8, 2024 after the market close and host a conference call to discuss its financial and operating results on Thursday, May 9, 2024 at 9:30 a.m. Central Time (10:30 a.m. Eastern Time). Interested parties in the United States and Canada may participate toll-free by dialing (833) 816-1385. International parties ma ...

HOUSTON, March 20, 2024 (GLOBE NEWSWIRE) -- Epsilon Energy Ltd. ("Epsilon" or the "Company") (NASDAQ:EPSN) today reported its financial results for the fourth quarter and full-year ended December 31, 2023.          Epsilon's highlights for full-year 2023 include: Net revenue interest (NRI) total production of 9.0 Bcfe (24.6 MMcfe per day) for the year ended December 31, 2023. 8.3 Bcf net revenue interest (NRI) natural gas production, a decrease of 12% compared to 202265.3 MBbls net revenue interest (NRI) o ...

[FORM 10-K](index=1&type=section&id=FORM%2010-K) [PART I](index=2&type=section&id=PART%20I) [FORWARD LOOKING STATEMENTS](index=2&type=section&id=FORWARD%20LOOKING%20STATEMENTS) This report contains forward-looking statements regarding future operating performance, oil and gas production rates, commodity prices, reserves, and development costs, based on reasonable assumptions but subject to significant risks and uncertainties, with no obligation for public updates unless legally required - Forward-looking statements cover oil and gas production rates, commodity prices, reserves, and development costs, based on reasonable assumptions but subject to known and unknown risks and uncertainties[8](index=8&type=chunk) - The company assumes no obligation to publicly update or revise any forward-looking statements unless legally required[8](index=8&type=chunk) [DEFINED TERMS](index=2&type=section&id=DEFINED%20TERMS) This section defines key terms used in the report, primarily professional vocabulary from the oil and natural gas industry, ensuring clear understanding of the content - This section defines professional terms in the oil and natural gas industry, including 3-D seismic, BOE, completion, development well, exploratory well, free cash flow, gross/net acres, lease operating expenses, proved reserves (developed and undeveloped), PV-10, reasonable certainty, reservoir, royalty, and standardized measure[9](index=9&type=chunk)[10](index=10&type=chunk)[11](index=11&type=chunk)[12](index=12&type=chunk)[13](index=13&type=chunk)[15](index=15&type=chunk)[16](index=16&type=chunk)[17](index=17&type=chunk)[18](index=18&type=chunk)[19](index=19&type=chunk)[20](index=20&type=chunk)[21](index=21&type=chunk)[22](index=22&type=chunk)[25](index=25&type=chunk)[26](index=26&type=chunk)[27](index=27&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk)[30](index=30&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk)[33](index=33&type=chunk)[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk)[37](index=37&type=chunk)[38](index=38&type=chunk)[39](index=39&type=chunk) [ITEM 1. BUSINESS](index=6&type=section&id=ITEM%201.%20BUSINESS) [Summary](index=6&type=section&id=Summary) Epsilon Energy Ltd. is a North American onshore independent natural gas and oil company focused on the acquisition, development, gathering, and production of natural gas and oil reserves across key basins - Epsilon Energy Ltd. is a North American onshore independent natural gas and oil company, focused on the acquisition, development, gathering, and production of natural gas and oil reserves[41](index=41&type=chunk) | Metric | December 31, 2023 | | :--- | :--- | | Net Proved Natural Gas Reserves | 65,916 MMcf | | Net NGL Reserves | 383,174 Bbls | | Net Oil and Other Liquid Reserves | 341,286 Bbls | | Total Leased Acreage (Gross/Net) | 84,684 / 15,463 Acres | - The company produces in the Marcellus Shale in Pennsylvania, the Permian Basin in Texas and New Mexico, and the Anadarko Basin in Oklahoma[41](index=41&type=chunk) [Business highlights of 2023](index=6&type=section&id=Business%20highlights%20of%202023) In 2023, Epsilon experienced a significant decline in Marcellus Shale natural gas sales prices and volumes, while expanding into the Permian Basin and facing price drops in Anadarko [Operational Highlights](index=6&type=section&id=Operational%20Highlights) [Properties](index=7&type=section&id=Properties) | Region | 2023 Natural Gas Sales Price (Excl. Hedges) | 2022 Natural Gas Sales Price (Excl. Hedges) | Year-over-Year Change | | :--- | :--- | :--- | :--- | | Marcellus Shale (Pennsylvania) | $1.74 / Mcf | $5.96 / Mcf | -71% | | Anadarko (Oklahoma) | $5.35 / Mcfe | $8.68 / Mcfe | -38% | | Region | 2023 Gross Natural Gas Sales Volume | 2022 Gross Natural Gas Sales Volume | Year-over-Year Change | | :--- | :--- | :--- | :--- | | Marcellus Shale (Pennsylvania) | 7.9 Bcf | 9.0 Bcf | -12.2% | | Anadarko (Oklahoma) | 0.60 Bcfe | 0.93 Bcfe | -35.5% | - In 2023, the company participated in drilling 7 gross wells (0.74 net wells) and completing 2 gross wells (0.02 net wells) in Pennsylvania[47](index=47&type=chunk) - In 2023, the company acquired 12,373 gross acres (3,093 net acres) of undeveloped leases in the Permian Basin and participated in drilling and completing 4 gross wells (0.7 net wells)[53](index=53&type=chunk) [Business Segments](index=8&type=section&id=Business%20Segments) Epsilon's operations are divided into three segments: Upstream (acquisition, exploration, development, production), Gathering System (natural gas gathering operations), and Corporate (corporate and governance functions) - The company's operations are divided into three segments: Upstream (acquisition, exploration, development, and production of oil and natural gas reserves), Gathering System (operating natural gas gathering systems in partnership with two companies), and Corporate (corporate and governance functions)[56](index=56&type=chunk)[57](index=57&type=chunk)[58](index=58&type=chunk) [Oil and Natural Gas Production and Revenues and Gathering System Revenues](index=8&type=section&id=Oil%20and%20Natural%20Gas%20Production%20and%20Revenues%20and%20Gathering%20System%20Revenues) Total revenue in 2023 decreased by 56% to $30.7 million, primarily due to a 71% drop in Pennsylvania natural gas prices, partially offset by a 21% increase in gathering system revenue and new Permian Basin contributions | Metric | 2023 | 2022 | Year-over-Year Change | | :--- | :--- | :--- | :--- | | **Total Revenue** | **$30,729,752** | **$69,962,709** | **-56%** | | Pennsylvania Natural Gas Revenue | $13,733,052 | $53,759,354 | -74.4% | | Pennsylvania Average Natural Gas Price ($/Mcf) | $1.74 | $5.96 | -70.8% | | Gathering System Revenue (Net) | $9,790,531 | $8,085,512 | +21.1% | | Permian Basin Total Revenue | $3,971,822 | $0 | New | | Oklahoma Total Revenue | $3,234,347 | $8,117,843 | -60.2% | | Region | 2023 Production (MMcf/MBOE/MBbl) | 2022 Production (MMcf/MBOE/MBbl) | Year-over-Year Change | | :--- | :--- | :--- | :--- | | Pennsylvania Natural Gas | 7,906 MMcf | 9,026 MMcf | -12.4% | | Oklahoma Natural Gas | 354 MMcf | 477 MMcf | -25.8% | | Oklahoma NGL | 21 MBOE | 44 MBOE | -52.3% | | Oklahoma Oil and Other Liquids | 21 MBbl | 32 MBbl | -34.4% | | Permian Basin Natural Gas | 80 MMcf | - | New | | Permian Basin NGL | 18 MBOE | - | New | | Permian Basin Oil and Other Liquids | 44 MBbl | - | New | [Gathering System Operations](index=9&type=section&id=Gathering%20System%20Operations) Epsilon Midstream holds a 35% interest in the Auburn natural gas gathering system, operating on a cost-of-service model with a contracted 18% return on invested capital for anchor shippers - Epsilon Midstream owns a 35% interest in the Auburn natural gas gathering system, located in Pennsylvania, providing services to anchor shippers[62](index=62&type=chunk) - The gathering system operates on a cost-of-service model, with anchor shippers committed to an 18% return on invested capital over a 15-year period (2012-2026)[63](index=63&type=chunk) | Metric | 2023 | 2018 | Change | | :--- | :--- | :--- | :--- | | Auburn CF Total Throughput | 6.62 Bcf | 10.01 Bcf | -34% | | Anchor Shipper Gas as % of Total Throughput | 74% | 57% | +17% | | Gathering System Revenue (2018-2023) | - | - | -2% | - The current system capacity of Auburn CF is approximately 220,000 Mcf/day, with potential for expansion by adding compression units or increasing design suction pressure[66](index=66&type=chunk) [Proved Reserves](index=10&type=section&id=Proved%20Reserves) As of December 31, 2023, Epsilon's total net proved reserves decreased by 25% to 70,262 MMcfe, primarily due to commodity price revisions, despite an increase in undeveloped proved reserves | Reserve Type | December 31, 2023 | December 31, 2022 | Year-over-Year Change | | :--- | :--- | :--- | :--- | | Total Proved Reserves (MMcfe) | 70,262 | 94,255 | -25.5% | | Developed Proved Reserves (MMcfe) | 50,681 | 80,796 | -37.3% | | Undeveloped Proved Reserves (MMcfe) | 19,581 | 13,459 | +45.5% | - The decrease in developed proved reserves is primarily attributed to commodity price revisions[70](index=70&type=chunk)[229](index=229&type=chunk) - In 2023, 7 gross wells (0.74 net wells) were drilled and 2 gross wells (0.02 net wells) were completed in Pennsylvania, with net development capital expenditures of **$2.5 million**[71](index=71&type=chunk) - In Oklahoma, 1 gross well (0.11 net well) was completed, with net development capital expenditures of **$0.7 million**[72](index=72&type=chunk) [Internal Controls Over Reserves Estimation Process and Qualifications of Technical Persons with Oversight for the Company's Overall Reserve Estimation Process](index=11&type=section&id=Internal%20Controls%20Over%20Reserves%20Estimation%20Process%20and%20Qualifications%20of%20Technical%20Persons%20with%20Oversight%20for%20the%20Company%27s%20Overall%20Reserve%20Estimation%20Process) Epsilon's reserve estimates are prepared by independent consultants and overseen by the COO, ensuring compliance with SEC regulations and industry standards, with qualified personnel involved - Reserve estimates are prepared by the independent engineering firm DeGolyer and MacNaughton and overseen by the company's Chief Operating Officer, ensuring compliance with SEC regulations and industry standards[73](index=73&type=chunk)[74](index=74&type=chunk) - The company's Chief Operating Officer holds a Bachelor of Science in Petroleum Engineering and an MBA, with over 30 years of upstream exploration and production experience[73](index=73&type=chunk) - Independent consultant Dilhan Ilk is a registered professional engineer with over 13 years of experience in oil and gas reservoir studies and reserve evaluations[76](index=76&type=chunk) [Marketing and Major Customers](index=11&type=section&id=Marketing%20and%20Major%20Customers) Epsilon faces intense competition in Pennsylvania natural gas marketing due to limited interstate capacity and ample supply, relying on third-party services, with two major customers accounting for over 10% of 2023 total revenue - Natural gas marketing in northeastern Pennsylvania is highly competitive, primarily due to limited interstate transportation capacity and abundant natural gas supply[77](index=77&type=chunk) - The company markets natural gas through a third-party service, ARM Energy Management LLC[78](index=78&type=chunk) - In 2023, Direct Energy Business Marketing, LLC and EQT Energy, LLC each accounted for 10% or more of the company's total revenue[80](index=80&type=chunk) [Geographic Locations of Operations](index=12&type=section&id=Geographic%20Locations%20of%20Operations) Epsilon's revenue is highly concentrated in Pennsylvania, but the company is strategically reallocating capital to upstream opportunities outside the Marcellus Shale, particularly the Permian Basin, to enhance market flexibility | Region | 2023 Revenue Contribution | 2022 Revenue Contribution | | :--- | :--- | :--- | | Pennsylvania | 77% | 88% | - Company management is actively reallocating capital to upstream opportunities outside the Marcellus Shale, particularly the Permian Basin, to enhance flexibility in responding to changing market conditions[81](index=81&type=chunk) [Competition](index=12&type=section&id=Competition) The oil and gas industry is highly competitive, potentially leading to shortages of drilling and completion equipment, services, and personnel, which could increase costs and delay development activities - The oil and gas industry is highly competitive, which may lead to shortages of drilling and completion equipment, services, and personnel, thereby increasing costs and delaying development activities[83](index=83&type=chunk) [Our Status as an Emerging Growth Company](index=12&type=section&id=Our%20Status%20as%20an%20Emerging%20Growth%20Company) Epsilon operates as an 'Emerging Growth Company' under the JOBS Act, benefiting from simplified reporting and regulatory requirements, and has opted to delay new accounting standards adoption until its status ends by December 31, 2024 - The company is an "Emerging Growth Company," enjoying simplified reporting and regulatory requirements, including exemptions from auditor attestation on internal controls, delayed adoption of new accounting standards, exemption from new PCAOB requirements, and reduced executive compensation disclosure[84](index=84&type=chunk)[86](index=86&type=chunk) - The company has elected to delay the adoption of new accounting standards and will cease to be an Emerging Growth Company no later than December 31, 2024[84](index=84&type=chunk)[85](index=85&type=chunk) [Employees](index=12&type=section&id=Employees) As of December 31, 2023, Epsilon employed 10 full-time staff in Houston, Texas, none subject to collective bargaining, fostering a values-driven culture to attract and retain high-performing talent - As of December 31, 2023, the company had 10 full-time employees in Houston, Texas, none of whom were subject to collective bargaining agreements[86](index=86&type=chunk)[87](index=87&type=chunk) - The company is committed to building a values-driven culture that prioritizes safety, ethics, inclusion, and diversity to attract and retain high-performing talent[88](index=88&type=chunk)[89](index=89&type=chunk) [Legal Proceedings](index=13&type=section&id=Legal%20Proceedings) Epsilon filed a lawsuit against Chesapeake Appalachia, LLC in March 2021 for breach of settlement and operating agreements, but the case was voluntarily dismissed without prejudice in September 2023 - Epsilon filed a lawsuit against Chesapeake Appalachia, LLC on March 10, 2021, alleging breach of settlement and operating agreements for failing to cooperate in developing resources in the Auburn development area[90](index=90&type=chunk) - After an unsuccessful preliminary injunction and the court dismissing some claims, Epsilon obtained court approval to dismiss the case without prejudice in September 2023[91](index=91&type=chunk)[92](index=92&type=chunk) [Regulation](index=13&type=section&id=Regulation) Epsilon's operations are subject to federal, state, and local environmental regulations that may increase costs and restrict activities, with potential future impacts from climate change and hydraulic fracturing regulations [Environmental Regulation](index=13&type=section&id=Environmental%20Regulation) [Climate Change](index=14&type=section&id=Climate%20Change) [Hydraulic Fracturing](index=15&type=section&id=Hydraulic%20Fracturing) [Gathering System Regulation](index=15&type=section&id=Gathering%20System%20Regulation) - Epsilon's operations are subject to federal, state, and local environmental regulations, which may increase costs, restrict activities, and require remedial measures[93](index=93&type=chunk)[96](index=96&type=chunk) - The company currently complies with regulations and does not anticipate significant environmental expenditures in the near term, but future regulatory changes could have unpredictable impacts[94](index=94&type=chunk)[97](index=97&type=chunk) - Regulations related to climate change and hydraulic fracturing could significantly impact the company's business, including reduced demand and increased compliance costs[98](index=98&type=chunk)[106](index=106&type=chunk)[109](index=109&type=chunk)[110](index=110&type=chunk) [Market for Our Common Equity and Related Stockholder Matters](index=15&type=section&id=Market%20for%20Our%20Common%20Equity%20and%20Related%20Stockholder%20Matters) Epsilon's common stock trades on Nasdaq under 'EPSN' since February 2019, with approximately 975 registered shareholders as of March 2024, and the company paid $5.6 million in quarterly dividends in 2023 [Market Information](index=15&type=section&id=Market%20Information) [Shareholders](index=15&type=section&id=Shareholders) [Dividends](index=15&type=section&id=Dividends) [Securities Authorized for Issuance under Equity Incentive Plans](index=16&type=section&id=Securities%20Authorized%20for%20Issuance%20under%20Equity%20Incentive%20Plans) - Epsilon common stock has traded on the Nasdaq Global Market under the symbol "EPSN" since February 19, 2019[113](index=113&type=chunk) - As of March 19, 2024, the last reported sales price of the common stock was **$5.01 per share**[113](index=113&type=chunk) - As of March 1, 2024, the company had approximately **975 registered shareholders**[114](index=114&type=chunk) | Metric | December 31, 2023 | | :--- | :--- | | Total Quarterly Dividends | $5.6 Million | | Dividend Per Share | $0.25 | | Stock Options Outstanding | 57,500 | | Common Stock Outstanding Under 2020 Equity Incentive Plan | 491,536 | - The company plans to maintain its quarterly dividend[114](index=114&type=chunk) [Recent Developments](index=17&type=section&id=Recent%20Developments) On January 30, 2024, the company repurchased 248,700 shares of its common stock at $4.82 per share under its existing stock repurchase program - On January 30, 2024, the company repurchased **248,700 shares** of its common stock at **$4.82 per share** (excluding commissions) under its existing stock repurchase program[120](index=120&type=chunk) [ITEM 1A. RISK FACTORS](index=17&type=section&id=ITEM%201A.%20RISK%20FACTORS) [Risks Related to Oil and Natural Gas Reserves](index=17&type=section&id=Risks%20Related%20to%20Oil%20and%20Natural%20Gas%20Reserves) Company success is highly dependent on volatile oil and gas prices, which can impact financial performance and reserve values, while exploration and production inherently carry significant operational and estimation uncertainties - The company's revenue, profitability, liquidity, financing capabilities, and future growth prospects are highly dependent on oil and natural gas prices, and price volatility or declines could severely impact operating results and financial condition[122](index=122&type=chunk) - Oil and natural gas exploration, development, and production involve inherent risks, including dry wells, insufficient production, increased operating costs, and environmental damage, and the company is not fully insured against all risks[126](index=126&type=chunk)[127](index=127&type=chunk) - Reserve estimates involve inherent uncertainties, and actual production, revenue, taxes, and development expenditures may differ significantly from estimates, with future reserve and production growth highly dependent on the successful discovery and development of new reserves[128](index=128&type=chunk)[131](index=131&type=chunk) [Risks Related to Stage of Development, Structure and Capital Resources](index=19&type=section&id=Risks%20Related%20to%20Stage%20of%20Development%2C%20Structure%20and%20Capital%20Resources) Economic downturns and capital intensity pose significant risks, potentially limiting financing, reducing borrowing capacity, and exposing the company to operational and market concentration risks due to its reliance on third-party operators and Pennsylvania operations - An economic downturn or recession could lead to lower oil and natural gas prices, severely impacting the company's operating results, and the company may not be able to obtain the additional capital needed to implement its business plan[132](index=132&type=chunk)[133](index=133&type=chunk)[134](index=134&type=chunk) - The borrowing base under the credit facility may be reduced due to declining commodity prices, potentially forcing the company to immediately repay a portion of its debt[137](index=137&type=chunk) - The company's operations are concentrated in Pennsylvania, potentially exposing it to regional supply and demand factors, government regulations, transportation capacity limitations, market restrictions, weather events, or production disruptions[152](index=152&type=chunk)[153](index=153&type=chunk) - Approximately 99% of the company's oil and natural gas assets are operated by third-party operators, limiting its control over their activities, and operator failures could reduce production and revenue or increase costs[156](index=156&type=chunk) [Risks Related to Commodity Prices, Hedging and Marketing](index=23&type=section&id=Risks%20Related%20to%20Commodity%20Prices%2C%20Hedging%20and%20Marketing) Volatile oil and gas prices, potential limitations or losses from hedging activities, market access challenges, and negative investor sentiment regarding fossil fuels all pose significant risks to Epsilon's business and financial health - Oil and natural gas prices are highly volatile, and prolonged low prices could have a significant adverse impact on the company's business, including reserve values, borrowing capacity, revenue, and cash flow[163](index=163&type=chunk)[165](index=165&type=chunk)[166](index=166&type=chunk)[167](index=167&type=chunk) - Hedging transactions may limit potential gains or result in losses, and the company faces credit risk from counterparties failing to perform on hedging transactions[168](index=168&type=chunk)[169](index=169&type=chunk)[170](index=170&type=chunk) - Investor sentiment regarding climate change, fossil fuels, and sustainability could negatively impact the company's business and stock price, and may limit access to financing[172](index=172&type=chunk)[173](index=173&type=chunk) [Risks Related to Cybersecurity](index=25&type=section&id=Risks%20Related%20to%20Cybersecurity) Reliance on complex IT systems exposes the company to cybersecurity threats, which could lead to operational disruptions, data breaches, financial losses, and reputational damage, with potentially insufficient insurance coverage - The company relies on complex IT systems and is vulnerable to events such as fire, flood, power outages, telecommunications failures, human error, computer viruses, and cyberattacks, which could lead to operational disruptions and harm revenue and profitability[177](index=177&type=chunk) - Cyber incidents could result in information theft, data corruption, operational disruptions, and financial losses, incurring remediation costs, increased cybersecurity protection costs, lost revenue, litigation, and reputational damage[178](index=178&type=chunk)[180](index=180&type=chunk) - The company's insurance may not be sufficient to cover all losses caused by cyberattacks[180](index=180&type=chunk) [Risks Related to Internal Controls](index=26&type=section&id=Risks%20Related%20to%20Internal%20Controls) As an emerging growth company, Epsilon benefits from simplified reporting, but these exemptions may reduce investor appeal and increase stock volatility, while failure to maintain adequate internal controls could impair financial reporting accuracy - As an emerging growth company, the company enjoys simplified reporting requirements, including exemptions from certain internal control audits and delayed adoption of new accounting standards[181](index=181&type=chunk)[182](index=182&type=chunk) - These exemptions may make the company's common stock less attractive to some investors, leading to an inactive trading market and stock price volatility[183](index=183&type=chunk) - If the company fails to establish and maintain appropriate disclosure or internal controls, it could affect its ability to prepare accurate financial statements and comply with applicable regulations[184](index=184&type=chunk)[185](index=185&type=chunk)[187](index=187&type=chunk) [Risks Related to Gathering System](index=27&type=section&id=Risks%20Related%20to%20Gathering%20System) The gathering system's success depends on anchor shipper development in the Marcellus Shale, facing risks from declining volumes, fluctuating cost-of-service rates, regional price volatility, competition, aging assets, and operational hazards - The success of the gathering system depends on the economic development of Marcellus Shale reserves by anchor shippers, and throughput will decline if new supply is not secured due to natural decline rates of existing wells[188](index=188&type=chunk) - Auburn GGS gathering rates are influenced by a cost-of-service model, and if throughput is lower than expected, rates may increase, leading to reduced development activity[189](index=189&type=chunk)[190](index=190&type=chunk) - Natural gas prices in northeastern Pennsylvania are volatile and subject to significant discounts relative to Henry Hub, which could impact the company's financial performance, cash flow, and financing capabilities[191](index=191&type=chunk)[196](index=196&type=chunk) - The company faces credit risk from customers and counterparties, and non-performance could result in losses, while gathering business operations are subject to various operational risks and unforeseen disruptions, and insurance may not cover all losses[195](index=195&type=chunk)[199](index=199&type=chunk) [ITEM 1B. UNRESOLVED STAFF COMMENTS](index=29&type=section&id=ITEM%201B.%20UNRESOLVED%20STAFF%20COMMENTS) The company has no unresolved staff comments - The company has no unresolved staff comments[200](index=200&type=chunk) [ITEM 1C. CYBERSECURITY](index=30&type=section&id=ITEM%201C.%20CYBERSECURITY) [Risk Management and Strategy](index=30&type=section&id=Risk%20Management%20and%20Strategy) Epsilon integrates cybersecurity into its overall risk management, collaborating with IT consultants and auditors for mitigation, continuously monitoring third-party compliance, and has not experienced significant threats to date - The company integrates cybersecurity risks into its overall risk management process, working closely with IT consultants and auditors to mitigate potential risks[202](index=202&type=chunk) - The company engages a third-party IT consulting firm and conducts annual IT audits, continuously monitoring the compliance of third-party service providers[202](index=202&type=chunk)[203](index=203&type=chunk) - To date, the company has not encountered any cybersecurity threats that have had a material impact on its business or operations[204](index=204&type=chunk) [Governance](index=30&type=section&id=Governance) The Board of Directors, with the Audit Committee as the primary governance body, actively oversees cybersecurity threat mitigation, reviewing annual IT audits, and ensuring management communication on potential threats - The company's Board of Directors focuses on potential cybersecurity threats and maintains close contact with management[205](index=205&type=chunk) - The Audit Committee is the primary governance body for evaluating and confirming the company's cybersecurity threat mitigation processes, responsible for reviewing annual IT audits and discussing potential threats[205](index=205&type=chunk) - The Chief Financial Officer, Chief Operating Officer, Controller, and Treasurer all participate in communications with IT consultants and auditors, with the Chief Financial Officer responsible for reporting any cybersecurity threats to the Audit Committee and Chief Executive Officer[206](index=206&type=chunk) [ITEM 2. PROPERTIES](index=30&type=section&id=ITEM%202.%20PROPERTIES) The information required for this section is included in 'Item 1. Business – Properties' - The information required for this section is included in "Item 1. Business – Properties"[207](index=207&type=chunk) [ITEM 3. LEGAL PROCEEDINGS](index=30&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) This section reiterates the legal proceedings between the company and Chesapeake Appalachia, LLC, where Epsilon's lawsuit for breach of agreement was voluntarily dismissed without prejudice in September 2023 - Epsilon filed a lawsuit against Chesapeake Appalachia, LLC on March 10, 2021, alleging breach of agreement for failing to cooperate in developing resources in the Auburn development area[207](index=207&type=chunk) - After an unsuccessful preliminary injunction and the court dismissing some claims, Epsilon obtained court approval to dismiss the case without prejudice in September 2023[208](index=208&type=chunk)[209](index=209&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=31&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) Not applicable - Not applicable[211](index=211&type=chunk) [PART II](index=32&type=section&id=PART%20II) [ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES](index=32&type=section&id=ITEM%205.%20MARKET%20FOR%20REGISTRANT%27S%20COMMON%20EQUITY%2C%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) This section supplements 'Item 1. Business' by detailing equity awards granted to executives and directors in 2023 and the board-authorized stock repurchase program, under which 70,874 shares were repurchased by December 2023 - On July 1, 2023, the Board of Directors granted **79,589 shares** of common stock to the CEO and CFO, vesting in equal installments over three years[213](index=213&type=chunk) - On July 3, 2023, the Board of Directors granted **64,975 shares** of common stock to directors, vesting in equal installments over three years[214](index=214&type=chunk) - On March 9, 2023, the Board of Directors authorized a new stock repurchase program, allowing for the repurchase of up to **2,292,644 shares** of common stock (10% of outstanding shares at the time), with a total value not exceeding **$15 million**, commencing on March 27, 2023, and ending on March 26, 2024[216](index=216&type=chunk) | Period | Total Shares Purchased | Average Price Per Share | | :--- | :--- | :--- | | December 2023 | 70,874 | $5.06 | | Total | 70,874 | $5.06 | [ITEM 6. [RESERVED.]](index=32&type=section&id=ITEM%206.%20%5BRESERVED.%5D) This section is reserved - This section is reserved[219](index=219&type=chunk) [ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=32&type=section&id=ITEM%207.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) [Overview](index=33&type=section&id=Overview) Epsilon Energy Ltd., an independent North American oil and gas company, saw its net proved reserves and net income significantly decline in 2023 due to commodity price revisions, prompting a strategic shift in investment focus to the Permian Basin - Epsilon Energy Ltd. is a North American onshore independent oil and gas company, focused on the acquisition, development, gathering, and production of oil and gas[221](index=221&type=chunk) | Metric | December 31, 2023 | December 31, 2022 | Year-over-Year Change | | :--- | :--- | :--- | :--- | | Net Proved Reserves (MMcfe) | 70,262 | 94,255 | -25% | | Net Developed Proved Reserves (MMcfe) | 50,681 | 80,796 | -37% | | Net Income | $7.9 Million | $35.4 Million | -77.7% | - The company is committed to prudent capital allocation, including dividends and stock repurchases, and plans to maintain a strong balance sheet and liquidity to invest in existing and potential new projects[223](index=223&type=chunk) - The company is shifting its investment focus from the Marcellus Shale in Pennsylvania to the Permian Basin, having acquired several assets in New Mexico and Texas in 2023[224](index=224&type=chunk)[225](index=225&type=chunk)[226](index=226&type=chunk)[227](index=227&type=chunk) [Results of Operations](index=33&type=section&id=Results%20of%20Operations) In 2023, total revenue decreased by 56% to $30.7 million, driven by a 71% drop in Pennsylvania natural gas prices, while operating costs decreased, DD&A increased, and interest income significantly grew [Revenues](index=34&type=section&id=Revenues) [Operating Costs](index=35&type=section&id=Operating%20Costs) [Depletion, Depreciation, Amortization and Accretion (DD&A)](index=35&type=section&id=Depletion%2C%20Depreciation%2C%20Amortization%20and%20Accretion%20%28DD%26A%29) [Loss (gain) on Sale of Assets](index=36&type=section&id=Loss%20%28gain%29%20on%20Sale%20of%20Assets) [General and Administrative ("G&A")](index=36&type=section&id=General%20and%20Administrative%20%28%22G%26A%22%29) [Interest Income](index=36&type=section&id=Interest%20Income) [Interest Expense](index=36&type=section&id=Interest%20Expense) [Net gain (loss) on commodity contracts](index=36&type=section&id=Net%20gain%20%28loss%29%20on%20commodity%20contracts) [Income Tax Expense](index=37&type=section&id=Income%20Tax%20Expense) [Net Income Compared to Adjusted EBITDA](index=37&type=section&id=Net%20Income%20Compared%20to%20Adjusted%20EBITDA) | Metric | 2023 | 2022 | Year-over-Year Change | | :--- | :--- | :--- | :--- | | Total Revenue | $30,729,752 | $69,962,709 | -56% | | Pennsylvania Natural Gas Average Price ($/Mcf) | $1.74 | $5.96 | -71% | | Gathering System Revenue (Net) | $9,790,531 | $8,085,512 | +21% | | Total Operating Costs | $8,864,975 | $9,416,394 | -5.9% | | DD&A Expense | $7,685,084 | $6,438,511 | +19% | | Loss (gain) on Sale of Assets | ($1,449,871) (Loss) | $221,642 (Gain) | Change | | Interest Income | $1,673,241 | $452,877 | +269% | | Net Commodity Contracts Gain (Loss) | $3,130,055 (Gain) | $236,077 (Gain) | +1226% | | Income Tax Expense | $3,200,447 | $12,157,487 | -74% | | Adjusted EBITDA | $18,827,512 | $52,885,202 | -64.4% | - The increase in DD&A expense was primarily due to a higher depletion rate resulting from reduced reserves and the addition of four new producing wells in the Permian Basin[244](index=244&type=chunk) - The significant increase in interest income was primarily due to the utilization of additional financial instruments with higher prevailing interest rates in 2023[249](index=249&type=chunk) - The decrease in income tax expense was primarily due to reduced taxable income, driven by lower commodity prices[257](index=257&type=chunk) [Capital Resources and Liquidity](index=38&type=section&id=Capital%20Resources%20and%20Liquidity) In 2023, operating cash flow decreased by 54% to $17.5 million, while investment cash outflows surged due to treasury bill investments and capital expenditures, and financing activities included stock repurchases and dividends, with no outstanding borrowings [Cash Flow](index=38&type=section&id=Cash%20Flow) [Credit Agreement](index=38&type=section&id=Credit%20Agreement) [Repurchase Transactions](index=39&type=section&id=Repurchase%20Transactions) [Derivative Transactions](index=39&type=section&id=Derivative%20Transactions) [Contractual Obligations](index=39&type=section&id=Contractual%20Obligations) | Cash Flow Type | 2023 | 2022 | Year-over-Year Change | | :--- | :--- | :--- | :--- | | Operating Activities Cash Flow | $17.5 Million | $38.0 Million | -54% | | Investing Activities Cash Flow | ($37.7 Million) | ($7.9 Million) | +379% | | Financing Activities Cash Flow | ($11.7 Million) | ($12.0 Million) | -2.5% | - The company closed a **$35 million** senior secured reserve-based revolving credit facility on June 28, 2023, and currently has no outstanding borrowings[266](index=266&type=chunk) - In 2023, the company repurchased **1,158,849 shares** of common stock for **$6.05 million**, at an average price of **$5.20 per share**[272](index=272&type=chunk) - The company hedges natural gas price risk through commodity swap contracts, with **1.905 Bcf** of NYMEX Henry Hub swaps and Tennessee Zone 4 basis swaps outstanding as of December 31, 2023[274](index=274&type=chunk)[275](index=275&type=chunk) - As of December 31, 2023, the company had no capital expenditure commitments[277](index=277&type=chunk) [Summary of Critical Accounting Estimates](index=40&type=section&id=Summary%20of%20Critical%20Accounting%20Estimates) This section outlines Epsilon's critical accounting estimates, including proved reserves, asset impairments, asset retirement obligations, and income taxes, which involve significant judgment and assumptions about future events, subject to periodic review and adjustment [Proved Natural Gas and Oil Reserves](index=40&type=section&id=Proved%20Natural%20Gas%20and%20Oil%20Reserves) [Impairments](index=40&type=section&id=Impairments) [Asset Retirement Obligations ("ARO")](index=41&type=section&id=Asset%20Retirement%20Obligations%20%28%22ARO%22%29) [Income Taxes](index=41&type=section&id=Income%20Taxes) [Recently Issued Accounting Standards](index=41&type=section&id=Recently%20Issued%20Accounting%20Standards) - Critical accounting estimates include proved natural gas and oil reserves, asset impairments, asset retirement obligations (ARO), and income taxes[279](index=279&type=chunk)[280](index=280&type=chunk)[286](index=286&type=chunk)[287](index=287&type=chunk) - These estimates involve significant judgment and assumptions about future events, such as commodity prices, production levels, development costs, and discount rates, and actual results may differ materially from estimates[279](index=279&type=chunk)[281](index=281&type=chunk)[283](index=283&type=chunk)[286](index=286&type=chunk) - The company regularly reviews and adjusts these estimates based on the latest activities and costs[279](index=279&type=chunk)[284](index=284&type=chunk)[285](index=285&type=chunk)[286](index=286&type=chunk) [ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=42&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) Epsilon's earnings and cash flows are significantly exposed to volatile commodity prices, influenced by supply, demand, and geopolitical events, but gathering system revenue risk is lower, and the company uses derivatives to hedge price risk [Gathering System Revenue Risk](index=42&type=section&id=Gathering%20System%20Revenue%20Risk) [Derivative Contracts](index=42&type=section&id=Derivative%20Contracts) - Epsilon's earnings and cash flows are significantly affected by changes in commodity market prices, with oil and natural gas price volatility influenced by supply and demand, global political and economic events, and the U.S. dollar exchange rate[291](index=291&type=chunk) - The company's gathering system revenue risk is lower due to high Marcellus Shale reserves and low production costs[292](index=292&type=chunk) - The company uses derivative financial instruments to hedge commodity price risk, aiming to stabilize cash flows and support capital expenditure plans, but these contracts also limit potential gains when commodity prices rise[293](index=293&type=chunk) [ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA](index=42&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) This section presents Epsilon Energy Ltd.'s consolidated financial statements for 2023 and 2022, prepared under U.S. GAAP, including balance sheets, income statements, cash flow statements, and notes, along with an independent auditor's report and unaudited oil and gas supplementary information [Report of Independent Registered Public Accounting Firm](index=43&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) [Consolidated Balance Sheets](index=44&type=section&id=Consolidated%20Balance%20Sheets) [Consolidated Statements of Operations and Comprehensive Income](index=45&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) [Consolidated Statements of Changes in Shareholders' Equity](index=46&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders%27%20Equity) [Consolidated Statements of Cash Flows](index=47&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) [Notes to the Consolidated Financial Statements](index=48&type=section&id=Notes%20to%20the%20Consolidated%20Financial%20Statements) This section provides detailed notes to Epsilon Energy Ltd.'s consolidated financial statements, covering business description, basis of preparation, significant accounting policies, and specific financial statement items, offering comprehensive explanations and supporting information [1. Description of Business](index=48&type=section&id=1.%20Description%20of%20Business) [2. Basis of Preparation](index=48&type=section&id=2.%20Basis%20of%20Preparation) [3. Summary of Significant Accounting Policies](index=48&type=section&id=3.%20Summary%20of%20Significant%20Accounting%20Policies) [4. Short Term Investments](index=55&type=section&id=4.%20Short%20Term%20Investments) [5. Property and Equipment](index=56&type=section&id=5.%20Property%20and%20Equipment) [6. Revolving Line of Credit](index=57&type=section&id=6.%20Revolving%20Line%20of%20Credit) [7. Shareholders' Equity](index=57&type=section&id=7.%20Shareholders%27%20Equity) [8. Revenue Recognition](index=60&type=section&id=8.%20Revenue%20Recognition) [9. Accumulated Other Comprehensive Income](index=62&type=section&id=9.%20Accumulated%20Other%20Comprehensive%20Income) [10. Income Taxes](index=62&type=section&id=10.%20Income%20Taxes) [11. Commitments and Contingencies](index=64&type=section&id=11.%20Commitments%20and%20Contingencies) [12. Leases](index=65&type=section&id=12.%20Leases) [13. Net Income Per Share](index=65&type=section&id=13.%20Net%20Income%20Per%20Share) [14. Operating Segments](index=66&type=section&id=14.%20Operating%20Segments) [15. Commodity Risk Management Activities](index=68&type=section&id=15.%20Commodity%20Risk%20Management%20Activities) [16. Asset Retirement Obligations](index=69&type=section&id=16.%20Asset%20Retirement%20Obligations) [17. Fair Value Measurements](index=70&type=section&id=17.%20Fair%20Value%20Measurements) [18. Current Expected Credit Loss](index=71&type=section&id=18.%20Current%20Expected%20Credit%20Loss) [19. Subsequent Events](index=71&type=section&id=19.%20Subsequent%20Events) - The notes detail the company's business description, basis of preparation, and significant accounting policies, including oil and gas properties, gathering systems, revenue recognition, financial instruments, derivatives, asset retirement obligations, concentrations of credit risk, income taxes, equity incentive plans, and leases[313](index=313&type=chunk)[314](index=314&type=chunk)[315](index=315&type=chunk)[316](index=316&type=chunk)[320](index=320&type=chunk)[325](index=325&type=chunk)[327](index=327&type=chunk)[338](index=338&type=chunk)[339](index=339&type=chunk)[346](index=346&type=chunk)[349](index=349&type=chunk)[350](index=350&type=chunk)[353](index=353&type=chunk)[358](index=358&type=chunk)[359](index=359&type=chunk)[360](index=360&type=chunk)[362](index=362&type=chunk)[367](index=367&type=chunk)[368](index=368&type=chunk) - The notes also cover short-term investments, property and equipment, revolving line of credit, shareholders' equity, revenue recognition, accumulated other comprehensive income, income taxes, commitments and contingencies, leases, net income per share, operating segments, commodity risk management activities, asset retirement obligations, fair value measurements, current expected credit loss, and subsequent events[377](index=377&type=chunk)[383](index=383&type=chunk)[389](index=389&type=chunk)[392](index=392&type=chunk)[413](index=413&type=chunk)[425](index=425&type=chunk)[426](index=426&type=chunk)[438](index=438&type=chunk)[439](index=439&type=chunk)[444](index=444&type=chunk)[446](index=446&type=chunk)[451](index=451&type=chunk)[456](index=456&type=chunk)[464](index=464&type=chunk)[467](index=467&type=chunk)[474](index=474&type=chunk)[475](index=475&type=chunk)[476](index=476&type=chunk) [SUPPLEMENTAL NATURAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED)](index=72&type=section&id=SUPPLEMENTAL%20NATURAL%20GAS%20AND%20OIL%20PRODUCING%20ACTIVITIES%20%28UNAUDITED%29) This section provides unaudited supplemental information on natural gas and oil producing activities, including complex reserve estimation, proved reserve changes, capitalized costs, operating results, and the standardized measure of discounted future net cash flows, which significantly declined in 2023 - The reserve estimation process is complex, involving significant subjective judgments and uncertainties, and actual results may differ materially from estimates[479](index=479&type=chunk)[480](index=480&type=chunk) | Metric | December 31, 2023 | December 31, 2022 | Year-over-Year Change | | :--- | :--- | :--- | :--- | | Total Proved Reserves (MMcfe) | 70,262 | 94,255 | -25.5% | | Developed Proved Reserves (MMcfe) | 50,681 | 80,796 | -37.3% | | Undeveloped Proved Reserves (MMcfe) | 19,581 | 13,459 | +45.5% | | Standardized Measure (Millions of USD) | $33.0 | $145.8 | -77.4% | | Cost Type | 2023 | 2022 | | :--- | :--- | :--- | | Unproved Acquisition Costs | $7,335,716 | $310,211 | | Development Costs | $11,994,374 | $6,426,037 | | Gathering System Development Costs | $99,272 | $163,915 | | Total Revenue from Oil and Gas Producing Activities | $20,939,221 | $61,877,197 | | Operating Results from Oil and Gas Producing Activities | $5,325,333 | $37,215,854 | - The decrease in the standardized measure in 2023 was primarily due to changes in commodity prices (a decrease of **$156 million**) and net changes in future development costs (a decrease of **$5.08 million**)[507](index=507&type=chunk) - This section contains Epsilon Energy Ltd.'s consolidated financial statements as of December 31, 2023, and 2022, including consolidated balance sheets, consolidated statements of operations and comprehensive income, consolidated statements of changes in shareholders' equity, consolidated statements of cash flows, and notes thereto, all prepared in accordance with U.S. GAAP[294](index=294&type=chunk) - The independent registered public accounting firm BDO USA, P.C. issued an unqualified opinion on the consolidated financial statements[296](index=296&type=chunk) - This section also includes unaudited supplemental information on natural gas and oil producing activities, covering reserves, capitalized costs, exploration and development costs, operating results, and the standardized measure of discounted future net cash flows[478](index=478&type=chunk)[479](index=479&type=chunk)[485](index=485&type=chunk)[493](index=493&type=chunk)[494](index=494&type=chunk)[496](index=496&type=chunk)[499](index=499&type=chunk)[503](index=503&type=chunk)[507](index=507&type=chunk) [ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE](index=78&type=section&id=ITEM%209.%20CHANGES%20IN%20AND%20DISAGREEMENTS%20WITH%20ACCOUNTANTS%20ON%20ACCOUNTING%20AND%20FINANCIAL%20DISCLOSURE) The company has no changes in or disagreements with accountants on accounting and financial disclosure - The company has no changes in or disagreements with accountants on accounting and financial disclosure[508](index=508&type=chunk) [ITEM 9A. CONTROLS AND PROCEDURES](index=78&type=section&id=ITEM%209A.%20CONTROLS%20AND%20PROCEDURES) [Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures](index=78&type=section&id=Conclusion%20Regarding%20the%20Effectiveness%20of%20Disclosure%20Controls%20and%20Procedures) As of December 31, 2023, company management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level - As of December 31, 2023, the company's management assessed and concluded that its disclosure controls and procedures were effective at a reasonable assurance level[509](index=509&type=chunk) [Management's Report on Internal Control Over Financial Reporting](index=78&type=section&id=Management%27s%20Report%20on%20Internal%20Control%20Over%20Financial%20Reporting) Management is responsible for establishing and maintaining effective internal control over financial reporting, which was deemed effective as of December 31, 2023, based on the COSO 2013 framework, with no independent auditor attestation due to emerging growth company status - Management is responsible for establishing and maintaining effective internal control over financial reporting, and based on the COSO 2013 framework assessment, internal controls were effective as of December 31, 2023[510](index=510&type=chunk)[511](index=511&type=chunk) - This annual report does not include an attestation report of the independent registered public accounting firm regarding the effectiveness of internal control, as the company is exempt as an emerging growth company[512](index=512&type=chunk) [Changes in Internal Control Over Financial Reporting](index=78&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) There were no material changes in the company's internal control over financial reporting during the quarter ended December 31, 2023, that materially affected or are reasonably likely to materially affect internal control - There were no material changes in the company's internal control over financial reporting during the quarter ended December 31, 2023, that materially affected or are reasonably likely to materially affect internal control[513](index=513&type=chunk) [ITEM 9B. OTHER INFORMATION](index=78&type=section&id=ITEM%209B.%20OTHER%20INFORMATION) No 'Rule 10b5-1 trading arrangements' or 'non-Rule 10b5-1 trading arrangements' were adopted or terminated by company directors or officers during the quarter ended December 31, 2023 - No "Rule 10b5-1 trading arrangements" or "non-Rule 10b5-1 trading arrangements" were adopted or terminated by company directors or officers during the quarter ended December 31, 2023[514](index=514&type=chunk) [ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS](index=78&type=section&id=ITEM%209C.%20DISCLOSURE%20REGARDING%20FOREIGN%20JURISDICTIONS%20THAT%20PREVENT%20INSPECTIONS) None - None[515](index=515&type=chunk) [PART III](index=79&type=section&id=PART%20III) [ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE](index=79&type=section&id=ITEM%2010.%20DIRECTORS%2C%20EXECUTIVE%20OFFICERS%20AND%20CORPORATE%20GOVERNANCE) This section lists Epsilon Energy Ltd.'s directors and executive officers as of December 31, 2023, detailing their roles and biographies, and outlines the company's commitment to high corporate governance standards, including board composition, ethical conduct, and diversity [Biographies of Corporate Directors and Executive Officers](index=79&type=section&id=Biographies%20of%20Corporate%20Directors%20and%20Executive%20Officers) [Corporate Governance Practices and Policies](index=80&type=section&id=Corporate%20Governance%20Practices%20and%20Policies) | Name | Age | Position | | :--- | :--- | :--- | | Jason Stabell | 49 | Chief Executive Officer and Director | | Henry N. Clanton | 61 | Chief Operating Officer | | Andrew Williamson | 35 | Chief Financial Officer | | John Lovoi | 63 | Chairman of the Board and Director | | Tracy Stephens | 63 | Director | | Jason Stankowski | 53 | Director | | David Winn | 61 | Director | | Nicola Maddox | 68 | Director | - The company's Board of Directors consists of six members, committed to high standards of corporate governance practices, and has an Audit Committee and a Compensation, Nominating and Corporate Governance Committee[518](index=518&type=chunk)[530](index=530&type=chunk)[544](index=544&type=chunk) - The Board regularly holds meetings to review strategic plans, financial performance, and risk management, and has established a Code of Ethics and a whistleblower policy, encouraging directors to disclose conflicts of interest[532](index=532&type=chunk)[534](index=534&type=chunk)[539](index=539&type=chunk) - The Board values diversity and selects directors based on individual and professional integrity, experience in corporate management, financial experience, expertise, and background[542](index=542&type=chunk)[543](index=543&type=chunk) - All executive officers have employment agreements[553](index=553&type=chunk) [ITEM 11. EXECUTIVE COMPENSATION](index=84&type=section&id=ITEM%2011.%20EXECUTIVE%20COMPENSATION) This section details Epsilon Energy Ltd.'s executive compensation for 2023 and 2022, including salaries, bonuses, equity awards, and other compensation for the CEO, COO, and CFO, along with information on the 2020 Equity Incentive Plan and director compensation [Summary Compensation Table](index=84&type=section&id=Summary%20Compensation%20Table) [Description of the 2020 Equity Incentive Plan](index=85&type=section&id=Description%20of%20the%202020%20Equity%20Incentive%20Plan) [Incentive Plan Awards for Named Executive Officers](index=86&type=section&id=Incentive%20Plan%20Awards%20for%20Named%20Executive%20Officers) [Incentive Plan Awards—Value Vested or Earned for Named Executive Officers](index=86&type=section&id=Incentive%20Plan%20Awards%E2%80%94Value%20Vested%20or%20Earned%20for%20Named%20Executive%20Officers) [DIRECTOR COMPENSATION](index=86&type=section&id=DIRECTOR%20COMPENSATION) [Incentive Plan Awards—Value Vested or Earned During the Year for Directors (Other Than Named Executive Officers)](index=87&type=section&id=Incentive%20Plan%20Awards%E2%80%94Value%20Vested%20or%20Earned%20During%20the%20Year%20for%20Directors%20%28Other%20Than%20Named%20Executive%20Officers%29) [Directors and Officers Liability Insurance](index=87&type=section&id=Directors%20and%20Officers%20Liability%20Insurance) | Name | Position | Year | Salary | Bonus | Equity Awards | Other Compensation | Total Compensation | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Jason Stabell | CEO | 2023 | $311,000 | $184,000 | $851,003 | $7,350 | $1,353,353 | | | | 2022 | $150,000 | $100,000 | $600,000 | $4,346 | $854,346 | | Henry N. Clanton | COO | 2023 | $272,000 | $92,000 | $92,004 | $15,752 | $471,756 | | | | 2022 | $262,500 | $117,000 | $173,187 | $15,250 | $567,937 | | Andrew Williamson | CFO | 2023 | $239,000 | $138,000 | $355,006 | $12,448 | $744,454 | | | | 2022 | $115,000 | $75,000 | $250,000 | $3,981 | $443,981 | - The company adopted an Equity Incentive Plan in 2020, authorizing the issuance of up to **2,000,000 shares** of common stock, with **957,489 shares** available for future issuance as of December 31, 2023[569](index=569&type=chunk)[572](index=572&type=chunk) | Name | 2023 Value of Equity Awards Vested | | :--- | :--- | | Jason Stabell | $162,806 | | Henry N. Clanton | $80,985 | | Andrew Williamson | $67,834 | - Board members receive annual cash fees and equity awards, with additional cash fees for the Chairman, Audit Committee Chair, and Compensation Committee Chair[576](index=576&type=chunk)[577](index=577&type=chunk) - The company has purchased Directors and Officers liability insurance with an aggregate limit of **$35 million**[580](index=580&type=chunk) [ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS](index=87&type=section&id=ITEM%2012.%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDER%20MATTERS) This section discloses beneficial ownership of Epsilon Energy Ltd. common stock as of March 20, 2024, including major shareholders Palo Duro Energy Fund, LP (6.67%) and Solas Capital Management LLC (17.20%), with all executive officers and directors collectively holding 5.44% [Securities Authorized For Issuance under Equity Compensation Plans](index=88&type=section&id=Securities%20Authorized%20For%20Issuance%20under%20Equity%20Compensation%20Plans) | Name/Entity | Number of Common Shares | Percentage of Common Share Ownership | | :--- | :--- | :--- | | Palo Duro Energy Fund, LP | 1,461,558 | 6.67% | | Solas Capital Management LLC | 3,768,467 | 17.20% | | All Executive Officers and Directors (8 individuals) | 1,194,495 | 5.44% | - The company is not aware of any arrangements that could result in a change of control[585](index=585&type=chunk) [ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE](index=89&type=section&id=ITEM%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS%2C%20AND%20DIRECTOR%20INDEPENDENCE) Since the start of fiscal year 2023, Epsilon has had no material related-party transactions beyond compensation arrangements, and the board has affirmed the independence of five directors in compliance with Nasdaq requirements, while also providing indemnification and liability insurance for officers and directors [Certain Relationships and Related Transactions](index=89&type=section&id=Certain%20Relationships%20and%20Related%20Transactions) [Independence of the Board of Directors](index=89&type=section&id=Independence%20of%20the%20Board%20of%20Directors) [Indemnification of Officers and Directors](index=89&type=section&id=Indemnification%20of%20Officers%20and%20Directors) - Since the beginning of fiscal year 2023, the company has not engaged in or proposed any material related-party transactions involving directors, executive officers, or 5% or more shareholders and their immediate family members, other than compensation arrangements[587](index=587&type=chunk) - The Board of Directors has determined that John Lovoi, Tracy Stephens, Jason Stankowski, David Winn, and Nicola Maddox are independent directors, meeting Nasdaq Global Market listing requirements[589](index=589&type=chunk) - The company's articles of incorporation and bylaws provide for indemnification of officers and directors, and the company has purchased liability insurance to protect them from liability incurred while performing their duties[590](index=590&type=chunk)[591](index=591&type=chunk)[592](index=592&type=chunk)[593](index=593&type=chunk)[595](index=595&type=chunk)[596](index=596&type=chunk) [ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES](index=90&type=section&id=ITEM%2014.%20PRINCIPAL%20ACCOUNTING%20FEES%20AND%20SERVICES) This section summarizes the audit fees paid by Epsilon Energy Ltd. to its principal auditor, BDO USA, P.C., for the fiscal years 2023 and 2022, totaling $374,970 and $395,634 respectively | Fee Type | December 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Audit Fees | $374,970 | $395,634 | [PART IV](index=91&type=section&id=PART%20IV) [ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES](index=91&type=section&id=ITEM%2015.%20EXHIBITS%2C%20FINANCIAL%20STATEMENT%20SCHEDULES) This section lists the financial statements, schedules, and exhibits included in Epsilon Energy Ltd.'s annual report, encompassing audited consolidated financial statements and various corporate documents - Financial statements include the report of independent registered public accounting firm, consolidated balance sheets, consolidated statements of operations and comprehensive income, consolidated statements of changes in shareholders' equity, consolidated statements of cash flows, and notes thereto[599](index=599&type=chunk) - Exhibits cover the company's articles of incorporation, bylaws, equity incentive plans, employment agreements, credit agreements, list of subsidiaries, auditor consent letter, and XBRL documents[599](index=599&type=chunk)[600](index=600&type=chunk) [SIGNATURES](index=93&type=section&id=SIGNATURES) This section contains the signatures of Epsilon Energy Ltd.'s authorized representatives, including the CEO, CFO, and Board Chairman, for the report filed on March 20, 2024, as required by the Securities Exchange Act of 1934 - The report was signed by authorized representatives of Epsilon Energy Ltd. on March 20, 2024[602](index=602&type=chunk) - Signatories include Chief Executive Officer Jason Stabell, Chief Financial Officer J. Andrew Williamson, and Chairman of the Board John Lovoi, among other directors[604](index=604&type=chunk)

Board declares dividend of $0.0625 per common shareCompany announces the timing of its 2023 year end earnings release and conference call HOUSTON, March 01, 2024 (GLOBE NEWSWIRE) -- Epsilon Energy Ltd. ("Epsilon" or the "Company") (NASDAQ:EPSN) today announced that its Board of Directors has declared a dividend of $0.0625 per share of common stock (annualized $0.25/sh) to the stock holders of record at the close of business on March 15th 2024, payable on March 29th 2024. All dividends paid by the Company ar ...

PART I - FINANCIAL INFORMATION [ITEM 1. FINANCIAL STATEMENTS](index=5&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents Epsilon Energy Ltd.'s unaudited condensed consolidated financial statements, highlighting decreased revenue and net income due to lower natural gas prices, alongside asset acquisitions and share repurchases [Unaudited Condensed Consolidated Balance Sheets](index=5&type=section&id=Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) Consolidated Balance Sheet Highlights (as of September 30, 2023 vs. December 31, 2022) | Account | Sep 30, 2023 ($) | Dec 31, 2022 ($) | Change | | :--- | :--- | :--- | :--- | | **Assets** | | | | | Cash and cash equivalents | $12,498,051 | $45,236,584 | -72.4% | | Short term investments | $18,870,468 | $0 | N/A | | Total current assets | $38,249,809 | $55,463,691 | -31.0% | | Total property and equipment, net | $77,627,673 | $67,828,189 | +14.5% | | Total assets | $119,774,570 | $123,862,243 | -3.3% | | **Liabilities & Equity** | | | | | Total current liabilities | $5,220,102 | $6,219,407 | -16.1% | | Total liabilities | $20,318,453 | $19,617,038 | +3.6% | | Total shareholders' equity | $99,456,117 | $104,245,205 | -4.6% | [Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)](index=6&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income%20(Loss)) Statement of Operations Summary | Metric | Three Months Ended Sep 30, 2023 ($) | Three Months Ended Sep 30, 2022 ($) | Nine Months Ended Sep 30, 2023 ($) | Nine Months Ended Sep 30, 2022 ($) | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $6,310,527 | $21,243,927 | $22,166,939 | $54,747,029 | | Operating income | $746,802 | $14,394,740 | $3,717,639 | $37,226,017 | | Net income | $388,775 | $9,608,453 | $4,349,191 | $25,997,329 | | Net income per share, diluted | $0.02 | $0.41 | $0.19 | $1.11 | - Total revenue for the nine months ended September 30, 2023, decreased by approximately **60%** year-over-year, from **$54.7 million** to **$22.2 million** - Net income saw a corresponding decrease of **83%**, from **$26.0 million** to **$4.3 million**[15](index=15&type=chunk) [Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity](index=7&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) - For the nine months ended September 30, 2023, key changes to shareholders' equity included net income of **$4.35 million**, payment of dividends totaling **$4.22 million**, and common share buybacks amounting to **$5.70 million**[16](index=16&type=chunk)[18](index=18&type=chunk) [Unaudited Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash Flow Summary (Nine Months Ended September 30) | Cash Flow Activity | 2023 ($) | 2022 ($) | | :--- | :--- | :--- | | Net cash provided by operating activities | $14,357,160 | $29,415,667 | | Net cash used in investing activities | ($37,115,993) | ($5,697,719) | | Net cash used in financing activities | ($10,052,746) | ($9,910,487) | | **(Decrease) increase in cash** | **($32,813,896)** | **$13,759,189** | - The significant increase in cash used for investing activities in 2023 was driven by the purchase of **$32.8 million** in short-term investments and increased additions to oil and gas properties, totaling **$15.9 million**[18](index=18&type=chunk) [Notes to the Unaudited Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20the%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) - During the nine months ended September 30, 2023, Epsilon made three acquisitions: a **10% interest** in two wellbores in New Mexico for **$2.1 million**, and two separate working interests in Ector County, Texas for **$3.7 million** and **$6.3 million** respectively[37](index=37&type=chunk)[38](index=38&type=chunk) - The company closed a new senior secured reserve-based revolving credit facility on June 28, 2023, with an initial commitment and borrowing base of **$35 million**; as of September 30, 2023, there were no borrowings under the facility[42](index=42&type=chunk) - Under its share repurchase programs, the company repurchased **1,087,975 shares** at an average price of **$5.21 per share** during the nine months ended September 30, 2023[51](index=51&type=chunk) - The company's reportable segments are Upstream, Gas Gathering, and Corporate; for the nine months ended September 30, 2023, the Upstream segment generated **$3.6 million** in operating income, while the Gas Gathering segment generated **$6.1 million**[95](index=95&type=chunk)[96](index=96&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=27&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Management discusses the 60% revenue decrease from lower natural gas prices, outlining business strategy, operational results, and financial condition [Overview and Business Strategy](index=27&type=section&id=Overview%20and%20Business%20Strategy) - Epsilon is an independent natural gas and oil company with operations in the Marcellus (Pennsylvania), Anadarko (Oklahoma), and Permian (New Mexico and Texas) basins[119](index=119&type=chunk) - The company's strategy focuses on high-return capital investments, disciplined capital allocation, and shareholder returns via dividends and buybacks, including recent acquisitions in Eddy County, NM, and Ector County, TX[121](index=121&type=chunk)[123](index=123&type=chunk)[124](index=124&type=chunk)[125](index=125&type=chunk) [Operational Highlights](index=28&type=section&id=Operational%20Highlights) - Marcellus Shale (PA) realized natural gas price for the nine months ended Sep 30, 2023, was **$1.74/Mcf**, a **72% decrease** year-over-year, with production decreasing **10%** to **6.0 Bcf**[130](index=130&type=chunk) - Anadarko (OK) realized price for all production was **$5.38/Mcfe** for the nine months, a **39% decrease** year-over-year, with production decreasing **32%** to **0.50 Bcfe**[130](index=130&type=chunk) - Permian Basin (NM & TX) realized price in New Mexico was **$47.01/Boe** for the nine months, while two gross wells in Texas are awaiting flowback operations[130](index=130&type=chunk) [Non-GAAP Financial Measures-Adjusted EBITDA](index=28&type=section&id=Non-GAAP%20Financial%20Measures-Adjusted%20EBITDA) Reconciliation of Net Income to Adjusted EBITDA | Metric | Three Months Ended Sep 30, 2023 ($) | Three Months Ended Sep 30, 2022 ($) | Nine Months Ended Sep 30, 2023 ($) | Nine Months Ended Sep 30, 2022 ($) | | :--- | :--- | :--- | :--- | :--- | | Net income | $388,775 | $9,608,453 | $4,349,191 | $25,997,329 | | **Adjusted EBITDA** | **$3,925,127** | **$16,548,087** | **$13,730,636** | **$41,245,235** | - Adjusted EBITDA for the nine months ended September 30, 2023, was **$13.7 million**, a **67% decrease** from **$41.2 million** in the same period of 2022[133](index=133&type=chunk) [Results of Operations](index=30&type=section&id=Results%20of%20Operations) - For the nine months ended Sep 30, 2023, revenues decreased **60%** to **$22.2 million** from **$54.7 million** year-over-year, primarily due to a **75% decrease** in upstream natural gas revenue caused by lower prices and volumes[135](index=135&type=chunk)[136](index=136&type=chunk) - Gathering system revenue increased by **24%** for the nine-month period due to a higher proportion of anchor shipper volumes and a one-time compressor fee adjustment[139](index=139&type=chunk) - Upstream operating costs decreased by **23%** for the nine-month period, as 2022 costs were higher due to greater volumes and extraordinary plugging and abandonment expenses[141](index=141&type=chunk) - General & Administrative (G&A) expenses increased by **9%** for the nine-month period, mainly due to higher compensation and director fees[149](index=149&type=chunk) [Capital Resources and Liquidity](index=33&type=section&id=Capital%20Resources%20and%20Liquidity) - The primary source of cash was funds from operations, with primary uses in the first nine months of 2023 being upstream property development, investment in U.S. Treasury Bills, share repurchases, and dividends[154](index=154&type=chunk) - Working capital surplus decreased to **$32.5 million** at September 30, 2023, from **$49.2 million** at year-end 2022[155](index=155&type=chunk) - Cash from operating activities decreased by **51%** to **$14.4 million** for the nine months ended Sep 30, 2023, compared to **$29.4 million** in the prior-year period[156](index=156&type=chunk) - As of September 30, 2023, the company had outstanding natural gas commodity swap contracts covering **2.9 million MMBtu** for the remainder of 2023 and 2024[165](index=165&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=35&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company's earnings and cash flow are significantly affected by commodity price volatility, with minimal interest rate risk and derivatives used for mitigation - The company's primary market risk is the fluctuation in natural gas and oil prices, which impacts earnings, cash flow, and asset values[167](index=167&type=chunk) - Interest rate risk is minimal as there was no outstanding balance under the credit agreement as of September 30, 2023[169](index=169&type=chunk)[170](index=170&type=chunk) - Epsilon utilizes derivative financial instruments (hedging) to manage commodity price risk and stabilize cash flows[172](index=172&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=36&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Management concluded the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal controls - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[173](index=173&type=chunk) - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[174](index=174&type=chunk) PART II - OTHER INFORMATION [ITEM 1. LEGAL PROCEEDINGS](index=36&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) This section details Epsilon's legal proceedings against Chesapeake Appalachia, LLC, regarding a breach of contract, which was dismissed without prejudice in September 2023 - Epsilon filed a complaint against Chesapeake Appalachia, LLC on March 10, 2021, alleging breach of contract related to resource development in the Auburn Development in Pennsylvania[177](index=177&type=chunk) - Following an appeal, the Third Circuit remanded the case back to the District Court, and in September 2023, Epsilon was granted a dismissal of the case without prejudice[180](index=180&type=chunk) [ITEM 1A. RISK FACTORS](index=37&type=section&id=ITEM%201A.%20RISK%20FACTORS) No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes from the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022, have been reported[181](index=181&type=chunk) [ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS](index=37&type=section&id=ITEM%202.%20UNREGISTERED%20SALE%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This section details the company's share repurchase activities during the nine months ended September 30, 2023, totaling 1,087,975 shares, with 1,395,369 shares remaining Share Repurchase Activity (Nine Months Ended Sep 30, 2023) | Program | Shares Purchased | Average Price Paid ($) | | :--- | :--- | :--- | | 2022-2023 Program (Jan-Mar 2023) | 190,700 | $5.82 | | 2023-2024 Program (Mar-Sep 2023) | 897,275 | $5.08 | | **Total** | **1,087,975** | **$5.21 (Blended)** | [ITEM 6. EXHIBITS](index=39&type=section&id=ITEM%206.%20EXHIBITS) This section lists the exhibits filed with the Form 10-Q, including Sarbanes-Oxley certifications and Inline XBRL data files - The exhibits filed with this report include certifications required by the Sarbanes-Oxley Act and various Inline XBRL documents[189](index=189&type=chunk)

Financial Data and Key Metrics Changes - The company reported no free cash flow in the quarter for the first time during the CEO's tenure, attributed to depressed natural gas pricing and significant capital investments in the Permian [26] - The company expanded its liquidity by $5 million under a new $35 million credit facility, enhancing financial flexibility [25][30] Business Line Data and Key Metrics Changes - The company closed investments in two areas in the Permian Basin, which added geographic operator and commodity diversity to its business [25] - The New Mexico wells began contributing to revenue, partially offsetting declines in Pennsylvania due to lower natural gas prices [31] Market Data and Key Metrics Changes - The average netback in the Marcellus for the second quarter was reported at approximately $1.35 per Mcf, indicating a challenging pricing environment [11] - The company noted that the lack of in-basin demand in the Marcellus has led to significant pricing pressure during the summer months [11] Company Strategy and Development Direction - The company is focused on deploying resources to create durable growth in per share equity value, with a disciplined approach to new investments [27] - The company plans to continue its appraisal program in Ector County, with expectations for additional wells in 2024 [34] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about potential price improvements as production moderates and weather conditions normalize [13] - The next 90 days are deemed critical for determining future pricing trends in the natural gas market [13] Other Important Information - The company has been active in pursuing new investments, with some opportunities expected to be accretive from day one [27] - A buyback of 0.5 million shares was executed in July, indicating a proactive approach to managing capital [17][18] Q&A Session Summary Question: Comments on natural gas pricing strategies - Management acknowledged concerns about inventory overbuilds and noted that they currently have no additional hedges beyond October, but are monitoring the situation closely [7][8] Question: Future pricing expectations - Management indicated that if prices align with current strip forecasts, it would represent a substantial uptick compared to the previous year [11] Question: Expansion opportunities in the Permian - Management confirmed ongoing activity in Ector County and plans for additional wells, with more updates expected in the next call [15][34]

[FORWARD-LOOKING STATEMENTS](index=4&type=section&id=FORWARD-LOOKING%20STATEMENTS) This section cautions that forward-looking statements are subject to risks and uncertainties, and actual results may vary - The report contains forward-looking statements based on reasonable assumptions, but actual results may differ due to known and unknown risks and uncertainties. These statements are made as of the report date, and the company undertakes no obligation to update them, except as required by law[13](index=13&type=chunk) [PART I - FINANCIAL INFORMATION](index=5&type=section&id=PART%20I-FINANCIAL%20INFORMATION) This section provides Epsilon Energy Ltd.'s unaudited condensed consolidated financial statements and management's analysis for the period ended June 30, 2023 [ITEM 1. FINANCIAL STATEMENTS](index=5&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents the unaudited condensed consolidated financial statements of Epsilon Energy Ltd. for the period ended June 30, 2023, including balance sheets, statements of operations, changes in shareholders' equity, and cash flows, along with detailed notes explaining the company's business, accounting policies, and significant financial activities [Unaudited Condensed Consolidated Balance Sheets](index=5&type=section&id=Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) This section presents the company's financial position, detailing assets, liabilities, and equity at specific reporting dates Condensed Consolidated Balance Sheet Highlights | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :-------------- | :------------------ | | Total current assets | $43,558,398 | $55,463,691 | | Total non-current assets | $77,595,506 | $68,398,552 | | **Total assets** | **$121,153,904**| **$123,862,243** | | Total current liabilities | $4,375,421 | $6,219,407 | | Total non-current liabilities | $14,145,220 | $13,397,631 | | **Total liabilities** | **$18,520,641** | **$19,617,038** | | Total shareholders' equity | $102,633,263 | $104,245,205 | - Total assets decreased by approximately **$2.7 million** from December 31, 2022, to June 30, 2023, primarily driven by a significant reduction in cash and cash equivalents, partially offset by an increase in short-term investments and property and equipment[17](index=17&type=chunk) [Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)](index=6&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income%20%28Loss%29) This section details the company's financial performance, including revenues, expenses, and net income over specific periods Condensed Consolidated Statements of Operations Highlights | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total revenue | $6,500,136 | $19,903,004 | $15,856,412 | $33,503,102 | | Operating income (loss) | $(353,292) | $13,866,083 | $2,970,837 | $22,831,277 | | Net income | $430,589 | $10,582,988 | $3,960,416 | $16,388,876 | | Net income per share, basic | $0.02 | $0.45 | $0.17 | $0.69 | | Net income per share, diluted | $0.02 | $0.44 | $0.17 | $0.69 | - Total revenue for the six months ended June 30, 2023, decreased by **53%** year-over-year, primarily due to lower natural gas, oil, and NGL prices. Net income for the six months ended June 30, 2023, also saw a significant decline of **75.8%** compared to the same period in 2022[18](index=18&type=chunk) [Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity](index=7&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Shareholders%27%20Equity) This section outlines the movements in the company's equity accounts, reflecting net income, dividends, and share transactions Changes in Shareholders' Equity (Six Months Ended June 30, 2023) | Item | Balance at Jan 1, 2023 | Net Income | Dividends Paid | Stock-based Comp. | Buyback of Shares | Retirement of Shares | Other Comp. Loss | Balance at Jun 30, 2023 | | :----------------------- | :--------------------- | :--------- | :------------- | :---------------- | :---------------- | :------------------- | :--------------- | :---------------------- | | Common Shares (Amount) | $123,904,965 | — | — | — | — | $(2,556,961) | — | $121,348,004 | | Treasury Shares (Amount) | — | — | — | — | $(3,054,775) | $2,556,961 | — | $(497,814) | | Additional Paid-in Capital | $9,856,229 | — | — | $359,496 | — | — | — | $10,215,725 | | Accumulated Deficit | $(39,290,540) | $3,960,416 | $(2,828,602) | — | — | — | — | $(38,158,726) | | Total Shareholders' Equity | $104,245,205 | $3,960,416 | $(2,828,602) | $359,496 | $(3,054,775) | — | $(48,477) | $102,633,263 | - Total shareholders' equity decreased by approximately **$1.6 million** from January 1, 2023, to June 30, 2023, primarily due to dividends paid and share buybacks, partially offset by net income and stock-based compensation[21](index=21&type=chunk) [Unaudited Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section summarizes the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30) | Cash Flow Activity | 2023 | 2022 | | :----------------- | :------------ | :------------ | | Operating activities | $10,201,727 | $15,762,534 | | Investing activities | $(40,000,732) | $(4,981,904) | | Financing activities | $(6,023,377) | $(6,317,293) | | **End of period cash, cash equivalents, and restricted cash** | **$9,983,094**| **$31,515,012** | - Net cash provided by operating activities decreased by **35%** in the first six months of 2023 compared to 2022. Cash used in investing activities significantly increased to **$40.0 million** in 2023, primarily due to substantial investments in U.S. Treasury Bills and leasehold/development costs[25](index=25&type=chunk) [Notes to the Unaudited Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20the%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations of the company's accounting policies, significant transactions, and financial statement line items [1. Description of Business](index=10&type=section&id=1.%20Description%20of%20Business) This note describes Epsilon Energy Ltd.'s core operations as an independent natural gas and oil company in North America - Epsilon Energy Ltd. 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. The company trades on the NASDAQ Global Market under the symbol "EPSN"[28](index=28&type=chunk) [2. Basis of Preparation](index=10&type=section&id=2.%20Basis%20of%20Preparation) This note details the accounting principles, consolidation methods, significant estimates, and new accounting standards adopted for the financial statements - The financial statements are prepared in accordance with GAAP for interim financial information and SEC rules, with certain information condensed or omitted. The company consolidates its wholly-owned subsidiaries and uses proportionate consolidation for its undivided interest in the gathering system[29](index=29&type=chunk)[30](index=30&type=chunk) - Significant estimates include proved natural gas and oil reserves, asset retirement obligations, and valuation of commodity derivative instruments. Epsilon, as an emerging growth company, has elected to defer adoption of certain new accounting standards[31](index=31&type=chunk)[33](index=33&type=chunk) - The company adopted ASU 2016-13 (Credit Losses) and ASU 2020-04 (Reference Rate Reform) as of January 1, 2023, with no impact from their adoption[35](index=35&type=chunk)[36](index=36&type=chunk) [3. Cash, Cash Equivalents, and Restricted Cash](index=11&type=section&id=3.%20Cash%2C%20Cash%20Equivalents%2C%20and%20Restricted%20Cash) This note provides a breakdown of the company's cash, cash equivalents, and restricted cash balances Cash, Cash Equivalents, and Restricted Cash | Category | June 30, 2023 | December 31, 2022 | | :-------------------------------------------------- | :-------------- | :------------------ | | Cash and cash equivalents | $9,488,094 | $45,236,584 | | Restricted cash included in other assets | $495,000 | $570,363 | | **Total cash, cash equivalents, and restricted cash** | **$9,983,094** | **$45,806,947** | - Restricted cash is for potential well liabilities and is presented with cash and cash equivalents in the Consolidated Statements of Cash Flows[38](index=38&type=chunk) [4. Short Term Investments](index=11&type=section&id=4.%20Short%20Term%20Investments) This note details the composition and reclassification of short-term investments, primarily US Treasury Bills, and related gains - Short-term investments consist of US Treasury Bills. In May 2023, the company reclassified all held-to-maturity short-term investments to available-for-sale due to a change in business strategy, resulting in an unrealized loss of **$5,666** recorded in accumulated other comprehensive income[39](index=39&type=chunk) Available-for-Sale Short Term Investments (June 30, 2023) | Investment | Amortized Cost | Unrealized Losses | Fair Value | | :----------------- | :------------- | :---------------- | :--------- | | U.S. Treasury Bills | $26,851,488 | $(47,006) | $26,804,482| - During the three and six months ended June 30, 2023, the company sold securities with a carrying amount of **$6,304,814** for total proceeds of **$6,352,473**, realizing gains of **$47,659** to fund capital expenditures[42](index=42&type=chunk) [5. Property and Equipment](index=12&type=section&id=5.%20Property%20and%20Equipment) This note details the company's property and equipment, including oil and gas properties, gathering systems, and recent acquisitions and dispositions Property and Equipment, Net | Category | June 30, 2023 | December 31, 2022 | | :------------------------------------ | :-------------- | :------------------ | | Total oil and gas properties, net | $68,007,294 | $58,766,129 | | Total gathering system, net | $7,646,776 | $8,138,261 | | Land | $637,764 | $637,764 | | Buildings and other property and equipment, net | $312,830 | $286,035 | | **Total property and equipment, net** | **$76,604,664** | **$67,828,189** | - During Q2 2023, Epsilon made three acquisitions totaling **$12.1 million**: a **10%** interest in two New Mexico wellbores (**$2.1 million**), a **25%** working interest in 1,297 gross acres in Ector County, Texas (**$3.7 million** with **$1.6 million** completion commitment), and a **25%** working interest in 11,067 gross acres in Ector County, Texas (**$6.3 million**)[44](index=44&type=chunk)[45](index=45&type=chunk) - The company sold two Oklahoma wellbore-only assets for **$12,498** during Q2 2023, resulting in a **$1.45 million** loss, compared to a **$0.22 million** gain from a similar sale in Q2 2022[45](index=45&type=chunk) [6. Revolving Line of Credit](index=13&type=section&id=6.%20Revolving%20Line%20of%20Credit) This note describes the new revolving credit facility, its terms, security, and financial covenants - Epsilon closed a new senior secured reserve-based revolving credit facility with Frost Bank on June 28, 2023, replacing its previous facility. The initial commitment and borrowing base is **$35 million**, with interest at Daily Simple SOFR plus **3.25%**[48](index=48&type=chunk)[51](index=51&type=chunk) - The facility is secured by assets of Epsilon Energy USA and requires adherence to financial covenants: a current ratio of **1.0 to 1.0** and a leverage ratio of less than **2.5 to 1.0**. The company was in compliance as of June 30, 2023, with no current borrowings[49](index=49&type=chunk)[50](index=50&type=chunk) [7. Shareholders' Equity](index=13&type=section&id=7.%20Shareholders%27%20Equity) This note details share repurchase programs, stock-based compensation expenses, and dividend declarations impacting shareholders' equity - The Board authorized a new share repurchase program on March 9, 2023, to buy back up to **2,292,644** common shares (**10%** of outstanding) for up to **$15.0 million**. As of June 30, 2023, **372,275** shares were repurchased under this new plan at an average price of **$5.19** per share[53](index=53&type=chunk)[54](index=54&type=chunk) - For the six months ended June 30, 2023, Epsilon repurchased a total of **562,975** shares at an average price of **$5.40** per share under two consecutive repurchase programs[56](index=56&type=chunk) Stock-Based Compensation Expense (Six Months Ended June 30) | Award Type | 2023 | 2022 | | :-------------------- | :---------- | :---------- | | Restricted Stock | $330,128 | $241,972 | | Performance Share Units | $29,368 | $94,380 | | **Total** | **$359,496**| **$336,352**| - The company declared quarterly dividends of **$0.0625** per common share (annualized **$0.25**) on March 3, 2023, and June 6, 2023, totaling approximately **$2.8 million** for the six months ended June 30, 2023[71](index=71&type=chunk) [8. Revenue Recognition](index=17&type=section&id=8.%20Revenue%20Recognition) This note explains the company's revenue sources and recognition policies for product sales and gathering services - Revenues are derived from sales of natural gas, oil, and NGLs, and from the company's ownership interest in the Auburn gas gathering system. Product sales revenue is recognized when control transfers to the purchaser, while gathering and compression revenue is recognized over time using an output method[72](index=72&type=chunk)[73](index=73&type=chunk)[76](index=76&type=chunk)[78](index=78&type=chunk) Operating Revenue Breakdown (Six Months Ended June 30) | Revenue Source | 2023 | 2022 | | :--------------------- | :------------ | :------------ | | Natural gas | $9,262,873 | $26,687,432 | | Natural gas liquids | $441,283 | $1,002,825 | | Oil and condensate | $1,563,497 | $1,704,904 | | Gathering and compression fees | $4,588,759 | $4,107,941 | | **Total operating revenue** | **$15,856,412** | **$33,503,102** | Accounts Receivable Breakdown (June 30, 2023 vs. December 31, 2022) | Category | June 30, 2023 | December 31, 2022 | | :-------------------------- | :-------------- | :------------------ | | Natural gas and oil sales | $2,238,717 | $5,696,419 | | Gathering and compression fees | $1,604,093 | $1,483,956 | | **Total accounts receivable** | **$4,355,076** | **$7,201,386** | [9. Income Taxes](index=18&type=section&id=9.%20Income%20Taxes) This note details the company's income tax expense, effective tax rate, and potential dividend withholding tax implications Income Tax Expense (Six Months Ended June 30) | Category | 2023 | 2022 | | :-------------------- | :------------ | :------------ | | Total current income tax expense | $1,342,737 | $5,882,148 | | Total deferred tax expense | $230,327 | $319,326 | | **Income tax expense**| **$1,573,064**| **$6,201,474**| - The effective tax rate for the six months ended June 30, 2023, was higher than the statutory federal rate due to state income taxes and a valuation allowance against the Canadian net operating loss[85](index=85&type=chunk) - Starting in 2023, distributions of Epsilon Energy USA Inc. earnings to Epsilon Energy Ltd. are expected to incur a **5%** U.S. dividend withholding tax, subject to treaty eligibility[86](index=86&type=chunk) [10. Commitments and Contingencies](index=18&type=section&id=10.%20Commitments%20and%20Contingencies) This note outlines the company's capital expenditure commitments and ongoing legal proceedings - As of June 30, 2023, the company had commitments of **$1.6 million** for capital expenditures[87](index=87&type=chunk) - Epsilon is involved in ongoing litigation against Chesapeake Appalachia, LLC, alleging breach of settlement and operating agreements related to the Auburn Development. The matter is currently stayed pending a decision on appeal from the Third Circuit[88](index=88&type=chunk)[91](index=91&type=chunk) [11. Leases](index=19&type=section&id=11.%20Leases) This note details the company's operating lease assets, liabilities, costs, and future minimum lease payment obligations Operating Lease Assets and Liabilities | Category | June 30, 2023 | December 31, 2022 | | :------------------------------------ | :-------------- | :------------------ | | Total operating lease right-of-use assets | $495,842 | $31,383 | | Total operating lease liabilities | $544,400 | $35,299 | | Operating lease costs | $71,652 | $32,097 | - The company commenced a new 70-month office lease on March 1, 2023, with estimated future lease payments of approximately **$0.85 million**[93](index=93&type=chunk) Future Minimum Lease Payments (as of June 30, 2023) | Year | Operating Leases | | :--- | :--------------- | | 2023 | $0 | | 2024 | $134,750 | | 2025 | $173,550 | | 2026 | $177,021 | | 2027 | $180,492 | | Thereafter | $183,963 | | **Total minimum lease payments** | **$849,776** | [12. Net Income Per Share](index=20&type=section&id=12.%20Net%20Income%20Per%20Share) This note provides the calculation of basic and diluted net income per share, including weighted-average shares and anti-dilutive exclusions Net Income and Weighted-Average Shares (Six Months Ended June 30) | Metric | 2023 | 2022 | | :------------------------------------ | :------------ | :------------ | | Net income | $3,960,416 | $16,388,876 | | Basic weighted-average shares outstanding | 22,869,440 | 23,627,015 | | Diluted weighted average shares outstanding | 22,904,922 | 23,796,166 | Anti-Dilutive Shares Excluded from EPS (Six Months Ended June 30) | Category | 2023 | 2022 | | :------------------------------------ | :------ | :------ | | Anti-dilutive options | 64,606 | 77,870 | | Anti-dilutive unvested time-based restricted shares | 275,872 | 169,127 | | Anti-dilutive unvested performance-based restricted shares | 8,083 | 41,319 | | **Total Anti-dilutive shares** | **348,561** | **288,316** | [13. Operating Segments](index=21&type=section&id=13.%20Operating%20Segments) This note describes the company's three reportable segments and provides their respective operating income and total assets - Epsilon operates through three reportable segments: Upstream (acquisition, development, production of oil/gas), Gas Gathering (operating a natural gas gathering system), and Corporate (G&A, interest income, corporate functions)[99](index=99&type=chunk) Segment Operating Income (Loss) (Six Months Ended June 30) | Segment | 2023 | 2022 | | :-------------- | :------------ | :------------ | | Upstream | $3,373,766 | $22,581,214 | | Gas Gathering | $3,576,936 | $3,222,690 | | Corporate | $(3,979,865) | $(2,972,627) | | **Consolidated**| **$2,970,837**| **$22,831,277** | Segment Total Assets (June 30) | Segment | 2023 | 2022 | | :-------------- | :------------ | :------------ | | Upstream | $68,957,888 | $59,601,665 | | Gas Gathering | $7,646,776 | $8,571,168 | | Corporate | $44,549,240 | $42,627,454 | | **Consolidated**| **$121,153,904**| **$110,800,287**| [14. Commodity Risk Management Activities](index=24&type=section&id=14.%20Commodity%20Risk%20Management%20Activities) This note details the company's use of derivative instruments to manage commodity price risk and their financial impact - Epsilon uses commodity derivative instruments (NYMEX Henry Hub swaps and Tennessee Z4 basis swaps) to manage exposure to natural gas price fluctuations and protect operating revenues and cash flows, without designating them as accounting hedges[103](index=103&type=chunk)[105](index=105&type=chunk)[107](index=107&type=chunk) Gain (Loss) on Derivative Contracts (Six Months Ended June 30) | Metric | 2023 | 2022 | | :------------------------------------ | :------------ | :------------ | | Gain (loss) on derivative contracts | $1,696,838 | $(194,910) | | Cash received (paid) on settlements | $1,632,858 | $(1,375,287) | Net Fair Value of Derivatives | Category | June 30, 2023 | December 31, 2022 | | :-------------------- | :-------------- | :------------------ | | Net Fair Value of Derivatives | $1,286,070 | $1,222,090 | [15. Asset Retirement Obligations](index=25&type=section&id=15.%20Asset%20Retirement%20Obligations) This note provides the estimated asset retirement obligations and the changes in these liabilities during the period - Epsilon's total asset retirement obligations were estimated at **$2.8 million** as of June 30, 2023, consistent with December 31, 2022, based on a net future undiscounted liability of approximately **$7.4 million**[110](index=110&type=chunk) Changes in Asset Retirement Obligations (Six Months Ended June 30, 2023) | Item | Amount | | :-------------------------- | :----- | | Balance beginning of period | $2,780,237 | | Liabilities acquired | $4,640 | | Liabilities disposed of | $(46,961)| | Accretion | $39,931 | | **Balance end of period** | **$2,777,847** | [16. Fair Value Measurements](index=25&type=section&id=16.%20Fair%20Value%20Measurements) This note explains the fair value hierarchy and measurement techniques applied to various financial assets and liabilities - Cash, cash equivalents, restricted cash, accounts receivable, and accounts payable are carried at cost, approximating fair value due to short-term maturity. The revolving line of credit's recorded value approximates fair value due to its variable interest rate[113](index=113&type=chunk) - U.S. Treasury Bills are classified as Level 1 in the fair value hierarchy, while commodity derivative instruments (NYMEX HH swap and basis swap contracts) are valued using a mark-to-market approach and classified as Level 2[114](index=114&type=chunk)[115](index=115&type=chunk) Fair Value of Assets (June 30, 2023) | Asset | Level 1 | Level 2 | Net Fair Value | | :-------------------- | :------ | :------ | :------------- | | Derivative contracts | — | $1,286,070 | $1,286,070 | | Short term investments | $26,804,482 | — | $26,804,482 | [17. Current Expected Credit Loss](index=26&type=section&id=17.%20Current%20Expected%20Credit%20Loss) This note details the company's assessment of credit losses on financial assets, which was determined to be nil - Under ASU 326, Epsilon assesses collectability of financial assets, primarily U.S. Treasury Bills and accounts receivable from oil/gas purchasers and gathering services. As of June 30, 2023, and December 31, 2022, the allowance for credit loss was determined to be nil[118](index=118&type=chunk) [18. Subsequent Events](index=26&type=section&id=18.%20Subsequent%20Events) This note discloses a significant share repurchase transaction that occurred after the reporting period - On July 6, 2023, Epsilon repurchased **525,000** common shares at **$5.00** per share, with **1,395,369** common shares remaining authorized for repurchase under the current program[119](index=119&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=27&type=section&id=ITEM%202.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on Epsilon Energy Ltd.'s financial condition and results of operations, highlighting key trends, business strategies, operational performance, and liquidity for the periods ended June 30, 2023, compared to 2022 [Overview](index=27&type=section&id=Overview) This section provides a high-level description of Epsilon Energy Ltd.'s operations, including its geographic focus and asset ownership - Epsilon Energy Ltd. is a North American onshore independent natural gas and oil company with operations in the Marcellus shale (Pennsylvania), NW Anadarko basin (Oklahoma), and Permian basin (New Mexico and Texas)[122](index=122&type=chunk) Net Acreage and Production by Region | Region | Net Acres | Net Production (as of June 30, 2023) | | :------------- | :-------- | :----------------------------------- | | Pennsylvania | 5,098 | 25 MMcf/d | | Oklahoma | 7,228 | 2.4 MMcfe/d | | Texas | 3,093 | N/A | | New Mexico | N/A | 204 BOE/d | - The company owns a **35%** interest in the 52-mile Auburn Gas Gathering System in Pennsylvania[123](index=123&type=chunk) [Business Strategy](index=27&type=section&id=Business%20Strategy) This section outlines Epsilon's capital allocation strategy, focusing on high-return investments and shareholder returns, including recent acquisitions - Epsilon focuses on high rate of return capital investments in onshore North American natural gas and oil basins, committed to disciplined capital allocation including shareholder returns via dividends and share buybacks[124](index=124&type=chunk) - Recent acquisitions in Q2 2023 include a **10%** interest in two New Mexico wellbores for **$2.1 million**, a **25%** working interest in 1,297 gross acres in Ector County, Texas for **$3.7 million** (with a **$1.6 million** completion commitment), and a **25%** working interest in 11,067 gross acres in Ector County, Texas for **$6.3 million**[126](index=126&type=chunk)[127](index=127&type=chunk)[128](index=128&type=chunk) [Operational Highlights](index=28&type=section&id=Operational%20Highlights) This section presents key operational metrics and production data across the company's primary operating regions Marcellus Shale (Pennsylvania) Operational Highlights (Six Months Ended June 30) | Metric | 2023 | 2022 | Change (YoY) | | :------------------------------------ | :---------- | :---------- | :----------- | | Realized natural gas price ($/Mcf) | $2.01 | $5.68 | -65% | | Net revenue interest natural gas production (Bcf) | 4.5 | 4.6 | -2% | | Gathered and delivered (net to Epsilon, Bcf) | 11.2 | N/A | N/A | Anadarko (Oklahoma) Operational Highlights (Six Months Ended June 30) | Metric | 2023 | 2022 | Change (YoY) | | :------------------------------------ | :---------- | :---------- | :----------- | | Realized price for all production ($/Mcfe) | $5.59 | $8.47 | -34% | | Total net revenue interest production (Bcfe) | 0.35 | 0.49 | -29% | - In the Permian Basin, New Mexico production for the three and six months ended June 30, 2023, was **14.9 Mboe** with a realized price of **$47.45** per Boe. In Texas, the company acquired a **25%** interest in 12,373 acres and drilled 1 gross (**0.25** net) well, with another awaiting completion[132](index=132&type=chunk) [Non-GAAP Financial Measures-Adjusted EBITDA](index=28&type=section&id=Non-GAAP%20Financial%20Measures-Adjusted%20EBITDA) This section defines Adjusted EBITDA, a non-GAAP measure, and provides its reconciliation to net income for performance assessment - Adjusted EBITDA is a non-GAAP measure defined as earnings before net interest expense, taxes, DD&A, impairments, non-cash stock compensation, gain/loss on asset sales, gain/loss on derivative contracts (net of cash settlement), and other income. It is used by management to assess debt servicing ability, fund capital expenditures, and compare operating performance[133](index=133&type=chunk)[135](index=135&type=chunk) Adjusted EBITDA Reconciliation (Six Months Ended June 30) | Metric | 2023 | 2022 | | :------------------------------------ | :------------ | :------------ | | Net income | $3,960,416 | $16,388,876 | | Add Back: | | | | Interest (income) expense, net | $(861,104) | $(21,102) | | Income tax expense | $1,573,064 | $6,201,474 | | Depreciation, depletion, amortization, and accretion | $3,388,734 | $3,192,958 | | Stock based compensation expense | $359,496 | $336,352 | | Loss (gain) on sale of assets | $1,449,871 | $(221,642) | | Loss (gain) on derivative contracts net of cash received or paid on settlement | $(63,980) | $(1,180,377) | | Foreign currency translation loss | $(987) | $4,331 | | **Adjusted EBITDA** | **$9,805,510**| **$24,700,870** | [Net Operating Revenues](index=30&type=section&id=Net%20Operating%20Revenues) This section analyzes the company's total operating revenues, highlighting changes driven by commodity prices and sales volumes - Total revenues for the six months ended June 30, 2023, decreased by **$17.6 million** (**53%**) to **$15.9 million** from **$33.5 million** in the same period of 2022[139](index=139&type=chunk) Revenue and Volume Statistics (Six Months Ended June 30) | Category | 2023 Revenue | 2022 Revenue | 2023 Volume | 2022 Volume | 2023 Avg. Price | 2022 Avg. Price | | :-------------------------- | :----------- | :----------- | :---------- | :---------- | :-------------- | :-------------- | | PA Natural gas | $8,609,038 | $25,220,340 | 4,290 MMcf | 4,439 MMcf | $2.01/Mcf | $5.68/Mcf | | PA Gathering system | $4,588,759 | $4,107,941 | N/A | N/A | N/A | N/A | | NM Total Revenues | $707,058 | — | 14.9 Mboe | — | $47.45/Boe | — | | OK Total Revenues | $1,951,557 | $4,174,821 | 0.35 Bcfe | 0.49 Bcfe | $5.59/Mcfe | $8.47/Mcfe | | **Total Revenues** | **$15,856,412**| **$33,503,102**| | | | | - Upstream natural gas revenue decreased by **$17.4 million** (**65%**) for the six months ended June 30, 2023, primarily due to lower natural gas prices (**$16.4 million** decrease) and lower sales volumes (**$1.0 million** decrease). Gathering system revenue increased by **$0.5 million** (**12%**) due to anchor shipper volumes increasing from **65%** to **85%** of total throughput[140](index=140&type=chunk)[143](index=143&type=chunk) [Operating Costs](index=31&type=section&id=Operating%20Costs) This section examines the company's operating expenses, detailing changes in lease operating costs and gathering system costs Operating Costs (Six Months Ended June 30) | Cost Category | 2023 | 2022 | Change (YoY) | | :-------------------------- | :------------ | :------------ | :----------- | | Lease operating costs | $2,844,800 | $3,657,507 | -22% | | Gathering system operating costs | $1,222,275 | $1,065,603 | +15% | | **Total** | **$4,067,075**| **$4,723,110**| -14% | - Upstream operating costs decreased by **$0.8 million** (**22%**) for the six months ended June 30, 2023, primarily due to extraordinary plugging and abandonment costs in 2022 that were not representative of typical operations[145](index=145&type=chunk) - Gathering system operating costs increased by **$0.2 million** (**15%**) for the six months ended June 30, 2023, driven by a CPI-U adjusted increase to G&A fees and compressor rentals[146](index=146&type=chunk) [Depletion, Depreciation, Amortization and Accretion ("DD&A")](index=31&type=section&id=Depletion%2C%20Depreciation%2C%20Amortization%20and%20Accretion%20%28%22DD%26A%22%29) This section reports the company's DD&A expense, noting its consistency compared to the prior year DD&A Expense (Six Months Ended June 30) | Metric | 2023 | 2022 | | :------------------------------------ | :------------ | :------------ | | Depletion, depreciation, amortization and accretion | $3,388,734 | $3,192,958 | - DD&A expense for the three and six months ended June 30, 2023, remained consistent compared to the same periods in 2022[149](index=149&type=chunk) [Loss (gain) on sale of assets](index=32&type=section&id=Loss%20%28gain%29%20on%20sale%20of%20assets) This section analyzes the loss or gain recognized from the sale of assets, highlighting the increase in losses due to specific asset dispositions Loss (Gain) on Sale of Assets (Six Months Ended June 30) | Metric | 2023 | 2022 | | :-------------------- | :------------ | :------------ | | Loss (gain) on sale of assets | $1,449,871 | $(221,642) | - Loss on sale of assets increased by **$1.7 million** for the six months ended June 30, 2023, compared to 2022, due to the sale of two Oklahoma assets in 2023 with a larger net book value than the one asset sold in 2022[150](index=150&type=chunk) [General and Administrative ("G&A")](index=32&type=section&id=General%20and%20Administrative%20%28%22G%26A%22%29) This section details the increase in G&A expenses, attributing it to higher compensation, management transition costs, and service fees General and Administrative Expenses (Six Months Ended June 30) | Metric | 2023 | 2022 | | :-------------------- | :------------ | :------------ | | General and administrative | $3,979,895 | $2,972,627 | - G&A expenses increased by **$1.0 million** (**35%**) for the six months ended June 30, 2023, primarily due to a **$0.7 million** increase in compensation, **$0.6 million** from management transition, and **$0.1 million** from Board of Directors pay adjustment, along with a **$0.3 million** increase in other service fees[152](index=152&type=chunk) [Interest Expense](index=32&type=section&id=Interest%20Expense) This section reports the increase in interest expense, linked to changes in the revolving credit facility's borrowing base Interest Expense (Six Months Ended June 30) | Metric | 2023 | 2022 | | :------------- | :---------- | :---------- | | Interest expense | $62,859 | $16,064 | - Interest expense increased for the three and six months ended June 30, 2023, compared to 2022, due to changes in the revolving credit facility's borrowing base[153](index=153&type=chunk) [Gain (Loss) on Derivative Contracts](index=33&type=section&id=Gain%20%28Loss%29%20on%20Derivative%20Contracts) This section discusses the gains and losses from derivative contracts, attributing the increase in realized gains to natural gas price movements Gain (Loss) on Derivative Contracts (Six Months Ended June 30) | Metric | 2023 | 2022 | | :------------------------------------ | :------------ | :------------ | | Gain (loss) on derivative contracts | $1,696,838 | $(194,910) | | Cash settlements received (paid) | $1,632,858 | $(1,375,287) | - Realized gains on derivative contracts increased for the six months ended June 30, 2023, primarily due to a decrease in NYMEX HH Natural Gas Futures prices, which increased the value of the NYMEX HH swaps. As of June 30, 2023, the company had no derivative contracts beyond October 2023[155](index=155&type=chunk) [Capital Resources and Liquidity](index=33&type=section&id=Capital%20Resources%20and%20Liquidity) This section analyzes the company's sources and uses of cash, credit facilities, share repurchase activities, and contractual obligations [Cash Flow](index=33&type=section&id=Cash%20Flow) This section details the company's cash flow from operating, investing, and financing activities, highlighting significant changes - The primary source of cash for Epsilon is funds generated from operations. For the six months ended June 30, 2023, cash provided by operating activities decreased by **35%** to **$10.2 million** from **$15.8 million** in 2022[156](index=156&type=chunk)[158](index=158&type=chunk) - Cash used in investing activities significantly increased to **$40.0 million** in 2023 (vs. **$5.0 million** in 2022), driven by a **$26.5 million** net investment in U.S. Treasury Bills and **$13.5 million** in leasehold and development costs[159](index=159&type=chunk) - Cash used in financing activities was **$5.9 million** in 2023 (vs. **$6.3 million** in 2022), primarily for dividend payments and common stock repurchases[160](index=160&type=chunk) [Credit Agreement](index=33&type=section&id=Credit%20Agreement) This section describes the terms and financial covenants of Epsilon's new revolving credit facility - Epsilon's new senior secured reserve-based revolving credit facility, closed June 28, 2023, has an initial commitment and borrowing base of **$35 million**, with interest at Daily Simple SOFR plus **3.25%**. The facility is secured by Pennsylvania upstream assets[161](index=161&type=chunk) - Financial covenants include a current ratio of **1.0 to 1.0** and a leverage ratio of less than **2.5 to 1.0**. If the leverage ratio exceeds **1.0** or borrowing base utilization is over **50%**, the company must hedge **50%** of anticipated PDP production for **24 months**[162](index=162&type=chunk) [Repurchase Transactions](index=34&type=section&id=Repurchase%20Transactions) This section details the company's share repurchase programs, including authorized amounts and shares repurchased - A new share repurchase program authorized on March 9, 2023, allows for the repurchase of up to **2,292,644** common shares (**10%** outstanding) for up to **$15.0 million**. As of June 30, 2023, **372,275** shares were repurchased under this new plan at an average price of **$5.19** per share[163](index=163&type=chunk) - For the six months ended June 30, 2023, a total of **562,975** shares were repurchased at an average price of **$5.40** per share under two consecutive programs[165](index=165&type=chunk) [Derivative Transactions](index=34&type=section&id=Derivative%20Transactions) This section explains the company's use of derivative instruments to manage commodity price risk and lists outstanding contracts - Epsilon uses hedging arrangements, including NYMEX Henry Hub swaps and Tennessee Z4 basis swaps, to reduce natural gas price volatility and stabilize cash flows, supporting its capital spending program[166](index=166&type=chunk)[167](index=167&type=chunk) Outstanding Natural Gas Commodity Contracts (June 30, 2023) | Derivative Type | Volume (MMbtu) | Weighted Average Price ($/MMbtu) | Fair Value of Asset | | :-------------------- | :------------- | :------------------------------- | :------------------ | | NYMEX Henry Hub swap | 460,000 | $5.21 | $1,106,445 | | Tennessee Z4 basis swap | 460,000 | $(1.25) | $179,625 | | **Total** | **920,000** | | **$1,286,070** | [Contractual Obligations](index=34&type=section&id=Contractual%20Obligations) This section summarizes the company's capital expenditure commitments and asset retirement obligations - As of June 30, 2023, the company had short-term capital expenditure commitments of **$1.6 million** and long-term asset retirement obligations of **$7.4 million**[168](index=168&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=35&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section outlines Epsilon's exposure to various market risks, including commodity price fluctuations, risks related to its gas gathering system revenue, and interest rate changes, and how these risks are managed [Gathering System Revenue Risk](index=35&type=section&id=Gathering%20System%20Revenue%20Risk) This section assesses the impact of commodity price fluctuations on the Auburn Gas Gathering System's revenue - The company believes that short-term low commodity prices will not significantly impact the revenue of its Auburn Gas Gathering System due to historically high levels of recoverable reserves and low production costs in the Marcellus Basin[170](index=170&type=chunk) [Interest Rate Risk](index=35&type=section&id=Interest%20Rate%20Risk) This section evaluates the company's exposure to interest rate fluctuations, noting no outstanding principal balance on its credit agreement - Market risk from interest rates is estimated by the change in fair value from a hypothetical **100 basis point** change on the outstanding balance of the credit agreement. As of June 30, 2023, and 2022, the outstanding principal balance under the credit agreement was nil[171](index=171&type=chunk)[172](index=172&type=chunk) [Derivative Contracts](index=35&type=section&id=Derivative%20Contracts) This section explains the company's use of derivative instruments to manage commodity price risk and stabilize cash flows - Epsilon uses derivative financial instruments and physical contracts to manage commodity price risk, which helps stabilize cash flows and support capital spending, although it also limits benefits from price increases[173](index=173&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=35&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) This section details management's evaluation of the effectiveness of the company's disclosure controls and procedures and internal control over financial reporting, including any changes or inherent limitations [Disclosure Controls and Procedures](index=35&type=section&id=Disclosure%20Controls%20and%20Procedures) This section confirms management's assessment of the effectiveness of the company's disclosure controls and procedures - Management, including the principal executive and financial officers, concluded that Epsilon's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2023[174](index=174&type=chunk) [Changes in Internal Control Over Financial Reporting](index=36&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section states that no material changes occurred in the company's internal control over financial reporting during the quarter - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[175](index=175&type=chunk) [Inherent Limitations on Effectiveness of Controls](index=36&type=section&id=Inherent%20Limitations%20on%20Effectiveness%20of%20Controls) This section acknowledges that internal controls have inherent limitations, preventing absolute assurance against material misstatements - Internal control over financial reporting cannot provide absolute assurance due to inherent limitations, including human judgment lapses, failures, collusion, or improper management override, which may lead to material misstatements not being prevented or detected timely[176](index=176&type=chunk) [PART II - OTHER INFORMATION](index=36&type=section&id=PART%20II%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity security sales, and other miscellaneous disclosures [ITEM 1. LEGAL PROCEEDINGS](index=36&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) This section provides an update on the ongoing legal dispute between Epsilon and Chesapeake Appalachia, LLC, concerning alleged breaches of agreements and obstruction of development efforts [Litigation](index=36&type=section&id=Litigation) This section details the ongoing legal dispute with Chesapeake Appalachia, LLC, regarding alleged breaches of agreements - Epsilon filed a complaint against Chesapeake Appalachia, LLC, on March 10, 2021, alleging breach of a settlement agreement and operating agreements related to the Auburn Development. An appeal is pending a decision from the Third Circuit, and a re-filed complaint is stayed[178](index=178&type=chunk)[180](index=180&type=chunk)[181](index=181&type=chunk) [ITEM 1A. RISK FACTORS](index=36&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section states that there have been no new material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - There have been no material changes from the risk factors disclosed in Item 1A. Risk Factors of the Annual Report on Form 10-K for the year ended December 31, 2022[182](index=182&type=chunk) [ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS](index=36&type=section&id=ITEM%202.%20UNREGISTERED%20SALE%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This section provides details on the company's equity security repurchase activities during the six months ended June 30, 2023, under its normal course issuer bid programs [Purchases of Equity Securities by Epsilon Energy Ltd.](index=36&type=section&id=Purchases%20of%20Equity%20Securities%20by%20Epsilon%20Energy%20Ltd.) This section details the company's share repurchase activities under its issuer bid programs, including shares purchased and remaining authorizations Equity Securities Repurchased (Six Months Ended June 30, 2023) | Program | Shares Purchased | Average Price Paid per Share | | :------------------------------------ | :--------------- | :--------------------------- | | 2022-2023 (terminated March 7, 2023) | 190,700 | $5.82 | | 2023-2024 (commenced March 27, 2023) | 372,275 | $5.11 | | **Total as of June 30, 2023** | **562,975** | **$5.40** | - Under the 2023-2024 program, **1,920,369** shares remained to be purchased as of June 30, 2023[184](index=184&type=chunk) [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=37&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) This item is not applicable to the company for the reporting period - Not applicable[185](index=185&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=37&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to the company for the reporting period - Not applicable[186](index=186&type=chunk) [ITEM 5. OTHER INFORMATION](index=37&type=section&id=ITEM%205.%20OTHER%20INFORMATION) This item is not applicable to the company for the reporting period - Not applicable[187](index=187&type=chunk) [ITEM 6. EXHIBITS](index=38&type=section&id=ITEM%206.%20EXHIBITS) This section lists all exhibits filed as part of the Form 10-Q, including certifications and XBRL data files List of 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 | | 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | [SIGNATURES](index=38&type=section&id=SIGNATURES) This section confirms the official authorization and signing of the report by the designated financial officer - The report was duly authorized and signed on August 10, 2023, by J. Andrew Williamson, Chief Financial Officer and Principal Financial Officer[191](index=191&type=chunk)

```markdown [PART I - FINANCIAL INFORMATION](index=5&type=section&id=PART%20I-FINANCIAL%20INFORMATION) [Financial Statements](index=5&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) The unaudited condensed consolidated financial statements for Q1 2023 detail total assets, liabilities, revenue, net income, and key financial activities [Unaudited Condensed Consolidated Balance Sheets](index=5&type=section&id=Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) Total assets reached **$124.8 million** as of March 31, 2023, reflecting a shift from cash to **$30.1 million** in short-term investments Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Items | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $19,110,225 | $45,236,584 | | Short term investments | $30,138,743 | $— | | Total current assets | $56,478,469 | $55,463,691 | | Total property and equipment, net | $67,242,771 | $67,828,189 | | **Total assets** | **$124,824,577** | **$123,862,243** | | **Liabilities & Equity** | | | | Total current liabilities | $5,704,539 | $6,219,407 | | Total liabilities | $19,652,277 | $19,617,038 | | Total shareholders' equity | $105,172,300 | $104,245,205 | | **Total liabilities and shareholders' equity** | **$124,824,577** | **$123,862,243** | [Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)](index=6&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income%20(Loss)) Q1 2023 revenues decreased to **$9.4 million** due to lower natural gas prices, resulting in **$3.5 million** net income despite a **$1.1 million** derivative gain Consolidated Statements of Operations Highlights (Unaudited) | Financial Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :--- | :--- | :--- | | Total revenue | $9,356,276 | $13,600,098 | | Operating income | $3,324,129 | $8,965,194 | | Gain (loss) on derivative contracts | $1,068,660 | $(971,904) | | **Net income** | **$3,529,827** | **$5,805,888** | | Net income per share, basic | $0.15 | $0.25 | | Net income per share, diluted | $0.15 | $0.24 | [Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity](index=7&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) Shareholders' equity increased to **$105.2 million** in Q1 2023, driven by **$3.5 million** net income, offset by **$1.4 million** in dividends and share repurchases - Key changes in shareholders' equity for Q1 2023 include: - Net income increased equity by **$3.5 million** - Dividends paid decreased equity by **$1.4 million** - Common share buybacks reduced equity by **$1.4 million**[21](index=21&type=chunk) [Unaudited Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operations was **$7.6 million** in Q1 2023, with significant investing in **$30.1 million** U.S. Treasury Notes, resulting in a **$26.1 million** net cash decrease Consolidated Statements of Cash Flows Highlights (Unaudited) | Cash Flow Activity | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $7,578,152 | $7,703,470 | | Net cash used in investing activities | $(30,921,070) | $(2,860,913) | | Net cash used in financing activities | $(2,779,880) | $(1,273,715) | | **(Decrease) increase in cash, cash equivalents, and restricted cash** | **$(26,125,398)** | **$3,574,244** | [Notes to the Unaudited Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20the%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) The notes detail accounting policies, revenue recognition, segment performance, shareholder equity activities, commodity hedging, and ongoing litigation with Chesapeake - On March 9, 2023, the Board authorized a new share repurchase program for up to **2,292,644 common shares**, representing **10% of outstanding shares**, for an aggregate price not to exceed **$15.0 million**. The program commenced on March 27, 2023[48](index=48&type=chunk) - The company declared a quarterly dividend of **$0.0625 per common share**, totaling approximately **$1.41 million**, which was paid on March 31, 2023[66](index=66&type=chunk) - Epsilon is engaged in **ongoing litigation with Chesapeake Appalachia, LLC**, claiming Chesapeake has **breached agreements** by failing to cooperate in developing resources in the Auburn Development. The matter is **currently stayed pending an appeal**[84](index=84&type=chunk)[88](index=88&type=chunk) - Subsequent to the quarter end, the company **divested two operated wells and 1,298 net acres** in Oklahoma and entered into an agreement to **acquire a 10% interest** in two wellbores in New Mexico for an **estimated $2.1 million**[119](index=119&type=chunk)[120](index=120&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Management discusses Q1 2023 financial results, highlighting a 31% revenue decrease due to lower natural gas prices, disciplined capital allocation, and a strong balance sheet [Overview and Business Strategy](index=25&type=section&id=Overview) Epsilon is an independent natural gas and oil company focused on onshore North American assets, aiming for high returns, a strong balance sheet, and shareholder returns - The company's business strategy is focused on **high rate of return capital investments** in onshore North American natural gas and oil basins[125](index=125&type=chunk) - Epsilon is committed to **disciplined capital allocation**, including **shareholder returns** through dividends and share buybacks[125](index=125&type=chunk) - The company is actively seeking **new investment opportunities** in several other onshore North American basins beyond its current positions in Pennsylvania and Oklahoma[126](index=126&type=chunk) [Operational Highlights](index=25&type=section&id=Operational%20Highlights) Q1 2023 Marcellus natural gas production slightly increased, but realized prices sharply declined, while Anadarko production remained flat with decreased realized prices Q1 2023 vs Q1 2022 Operational Metrics | Metric | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | **Marcellus (PA)** | | | | | Realized Gas Price ($/Mcf) | $2.56 | $4.47 | -43% | | Gas Production (Bcf) | 2.5 | 2.4 | +0.8% | | **Anadarko (OK)** | | | | | Realized Price ($/Mcfe) | $6.44 | $7.71 | -17% | | Total Production (Bcfe) | 0.17 | 0.17 | 0% | [Non-GAAP Financial Measures-Adjusted EBITDA](index=26&type=section&id=Non-GAAP%20Financial%20Measures-Adjusted%20EBITDA) Adjusted EBITDA for Q1 2023 decreased to **$5.6 million** from **$9.3 million** in Q1 2022, primarily due to lower net income from commodity price drops Adjusted EBITDA Reconciliation | | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :--- | :--- | :--- | | Net income | $3,529,827 | $5,805,888 | | Adjustments | $2,111,008 | $3,479,095 | | **Adjusted EBITDA** | **$5,640,835** | **$9,284,983** | [Results of Operations](index=27&type=section&id=Results%20of%20Operations) Total revenues for Q1 2023 decreased by 31% to **$9.4 million** due to lower natural gas prices, while G&A expenses increased significantly from management transition costs - **Upstream natural gas revenue decreased by $4.4 million (42%)** in Q1 2023 compared to Q1 2022, primarily due to lower natural gas prices[134](index=134&type=chunk) - **Gathering system revenue increased by $0.3 million (13%)** in Q1 2023, as anchor shipper volumes, which pay a full gathering rate, increased their share of total throughput[136](index=136&type=chunk) - **General & Administrative (G&A) expenses increased by $0.9 million (68%)** in Q1 2023, mainly due to **$0.4 million** in compensation for management transition and **$0.1 million** in legal fees related to the Chesapeake litigation[146](index=146&type=chunk) [Capital Resources and Liquidity](index=29&type=section&id=Capital%20Resources%20and%20Liquidity) As of March 31, 2023, Epsilon maintained a strong liquidity position with a **$50.8 million** working capital surplus and no outstanding debt on its credit facility - The company had a **working capital surplus of $50.8 million** as of March 31, 2023, an increase of **$1.6 million** from year-end 2022[150](index=150&type=chunk) - In Q1 2023, the company **invested $30.1 million in U.S. Treasury Notes** and used **$2.8 million** for financing activities, including dividends and share buybacks[149](index=149&type=chunk)[152](index=152&type=chunk)[154](index=154&type=chunk) - The company has a **senior secured credit facility** with a total commitment of up to **$100 million** and an **effective borrowing base of $30 million**, with **no borrowings outstanding**[155](index=155&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=31&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company's earnings and cash flow are primarily exposed to commodity price risk, mitigated by derivative contracts, with minimal interest rate risk due to no outstanding debt - The company's **primary market risk** is the **fluctuation in commodity prices** for natural gas and oil[165](index=165&type=chunk) - Epsilon **manages commodity price risk** by entering into **derivative financial instruments**, such as NYMEX Henry Hub swaps and basis swaps, to hedge a portion of its natural gas production[162](index=162&type=chunk)[170](index=170&type=chunk) - **Interest rate risk is minimal** as of March 31, 2023, because there were **no outstanding balances** under the company's credit agreement[168](index=168&type=chunk)[169](index=169&type=chunk) [Controls and Procedures](index=32&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the company's **disclosure controls and procedures were effective** as of March 31, 2023[171](index=171&type=chunk) - **No material changes** to the company's **internal control over financial reporting occurred** during the first quarter of 2023[172](index=172&type=chunk) [PART II - OTHER INFORMATION](index=33&type=section&id=PART%20II%20OTHER%20INFORMATION) [Legal Proceedings](index=33&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) Epsilon is involved in ongoing litigation with Chesapeake Appalachia, LLC, alleging breach of contract, with the case currently stayed pending an appeal decision - Epsilon filed a **complaint** against Chesapeake Appalachia, LLC, alleging **breach of contract** and **failure to cooperate** in the development of resources in the Auburn Development[176](index=176&type=chunk) - The case is **currently stayed pending a decision** from the Third Circuit Court of Appeals on Epsilon's appeal of a prior dismissal. A decision is **not expected until mid-2023**[178](index=178&type=chunk)[179](index=179&type=chunk) [Risk Factors](index=33&type=section&id=ITEM%201A.%20RISK%20FACTORS) There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - There have been **no material changes** from the risk factors disclosed in the **Annual Report on Form 10-K** for the year ended December 31, 2022[180](index=180&type=chunk) [Unregistered Sale of Equity Securities and Use of Proceeds](index=33&type=section&id=ITEM%202.%20UNREGISTERED%20SALE%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This section details the company's share repurchase activities during Q1 2023, including the termination of the 2022-2023 program and commencement of a new program Share Repurchase Activity - Q1 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | **2022-2023 Program** | | | | January 2023 | 125,200 | $5.96 | | February 2023 | 65,500 | $5.63 | | **Total (Program ended Mar 7)** | **190,700** | **$5.82** | | **2023-2024 Program** | | | | March 2023 (from Mar 27) | 47,220 | $5.32 | [Defaults Upon Senior Securities](index=34&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) Not applicable [Mine Safety Disclosures](index=34&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) Not applicable [Other Information](index=34&type=section&id=ITEM%205.%20OTHER%20INFORMATION) Not applicable [Exhibits](index=35&type=section&id=ITEM%206.%20EXHIBITS) This section lists the exhibits filed with the 10-Q report, including Sarbanes-Oxley certifications and Inline XBRL data files ```

Financial Data and Key Metrics Changes - Free cash flow before changes in working capital increased by 139% year-over-year to $35 million [8] - Cash balance increased by 69% year-over-year to $45.8 million, representing $1.96 per diluted share [8] - Net income for the year was $35.4 million, representing $1.51 per diluted share [12] - Adjusted EBITDA grew 120% year-over-year to $53.1 million [12] Business Line Data and Key Metrics Changes - Net revenue interest production was 27.3 MMcfe per day, down 6% year-over-year [12] - Production in Oklahoma increased to 2.6 MMcfe per day, a 30% increase over last year [16] - Midstream revenues increased by 3% year-over-year, with a 5% increase in throughput in the Auburn Gas Gathering System [17] Market Data and Key Metrics Changes - Average realized price for the year was $6.09 per Mcfe, with natural gas realizations nearly doubling year-over-year [9] - SEC proved reserves reported at year-end 2022 were 94.3 Bcfe, with an increase of 7.2 Bcfe in improved developed producing reserves [20] Company Strategy and Development Direction - The company is focused on maintaining a disciplined approach to capital allocation and is considering opportunities in Appalachia and other basins [33] - A new buyback program was announced, allowing for the repurchase of up to 10% of shares outstanding [44] - The company aims to return capital to shareholders through dividends and share buybacks while pursuing accretive business development opportunities [45] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's position for continued success in various commodity price environments [32] - The recent volatility in commodity prices is seen as an opportunity for attractive acquisitions and farm-out deals [26] - The board is comfortable with the current dividend policy and continues to evaluate it [38] Other Important Information - The company reported a debt-free balance sheet with available liquidity of approximately $75 million [13] - The PV10 value of SEC proved reserves increased by $85 million to $193 million due to higher SEC pricing [24] Q&A Session Summary Question: Thoughts on investing in Marcellus given current natural gas prices - Management acknowledged the challenges in the current investment environment but remains open to opportunities that meet their cost of capital criteria [28][36] Question: Concerns about share buyback effectiveness - Management noted that previous share count issues were due to management transitions and expressed commitment to reducing share count through buybacks [29] Question: Dividend policy outlook - Management confirmed that the board is comfortable with the current dividend level and continues to evaluate it based on earnings from the midstream system [38][52] Question: Investment capacity and deal sizes - Management indicated flexibility in considering both small and large investment opportunities, leveraging their strong balance sheet [74] Question: Hedging strategy updates - Management confirmed that the hedging position established in December remains in place, with no additional hedges implemented since then [75]