Epsilon Energy .(EPSN) - 2025 Q1 - Quarterly Report

Report Details Company and Report Overview Epsilon Energy Ltd. filed its Q1 2025 Form 10-Q, listed as EPSN on NASDAQ, classified as a non-accelerated and smaller reporting company - Epsilon Energy Ltd. filed its Form 10-Q for the quarterly period ended March 31, 2025[2] - Trading Symbol: EPSN on NASDAQ Global Market[3] - Classification: Non-accelerated filer and Smaller reporting company[4][5] Common Shares Outstanding (as of May 13, 2025) | Metric | Value | |---|---| | Common Shares Outstanding (as of May 13, 2025) | 22,017,405 | FORWARD-LOOKING STATEMENTS Forward-Looking Statements Disclaimer This section highlights forward-looking statements, subject to risks and uncertainties, with no obligation for the company to update - Report contains forward-looking statements subject to known and unknown risks and uncertainties[11] - Statements address future operating performance, commodity prices, production rates, and reserve estimates[11] - Company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law[11] PART I-FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This item presents unaudited condensed consolidated financial statements, covering balance sheets, income, equity, cash flows, and notes Unaudited Condensed Consolidated Balance Sheets Total assets increased to $125.5 million as of March 31, 2025, with liabilities and equity also up Total Assets | Date | Amount | |---|---| | March 31, 2025 | $125,505,287 | | December 31, 2024 | $120,454,785 | - Total assets increased by $5,050,502 (4.2%)[15] Total Liabilities | Date | Amount | |---|---| | March 31, 2025 | $25,801,014 | | December 31, 2024 | $23,726,656 | - Total liabilities increased by $2,074,358 (8.7%)[15] Total Shareholders' Equity | Date | Amount | |---|---| | March 31, 2025 | $99,704,273 | | December 31, 2024 | $96,728,129 | - Total shareholders' equity increased by $2,976,144 (3.1%)[15] Key Asset Changes (March 31, 2025 vs. Dec 31, 2024) | Asset Category | March 31, 2025 | Dec 31, 2024 | Change | |---|---|---|---| | Cash and cash equivalents | $6,892,735 | $6,519,793 | +$372,942 | | Accounts receivable | $8,003,517 | $5,843,722 | +$2,159,795 | | Total oil and gas properties, net | $101,866,631 | $96,962,001 | +$4,904,630 | | Total gathering system, net | $6,399,266 | $6,666,860 | -$267,594 | Key Liability Changes (March 31, 2025 vs. Dec 31, 2024) | Liability Category | March 31, 2025 | Dec 31, 2024 | Change | |---|---|---|---| | Accounts payable trade | $2,013,172 | $2,334,732 | -$321,560 | | Gathering fees payable | $1,651,164 | $997,016 | +$654,148 | | Royalties payable | $2,019,819 | $1,400,976 | +$618,843 | | Fair value of derivatives | $1,534,675 | $487,548 | +$1,047,127 | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income Total revenue increased to $16.2 million (102%) for Q1 2025, with net income surging to $4.0 million and EPS up Total Revenue (Three months ended March 31) | Year | Amount | |---|---| | 2025 | $16,163,140 | | 2024 | $7,986,743 | - Total revenue increased by $8,176,397 (102.4%)[17] Net Income (Three months ended March 31) | Year | Amount | |---|---| | 2025 | $4,016,034 | | 2024 | $1,506,896 | - Net income increased by $2,509,138 (166.5%)[17] Net Income Per Share (Basic & Diluted, Three months ended March 31) | Year | Basic EPS | Diluted EPS | |---|---|---| | 2025 | $0.18 | $0.18 | | 2024 | $0.07 | $0.07 | - Basic and Diluted EPS increased by $0.11 (157.1%)[17] Key Operating Figures (Three months ended March 31) | Metric | 2025 | 2024 | Change | |---|---|---|---| | Gas, oil, NGL, and condensate revenue | $14,270,790 | $6,051,045 | +$8,219,745 | | Total operating costs and expenses | $8,995,331 | $6,582,050 | +$2,413,281 | | Operating income | $7,167,809 | $1,404,693 | +$5,763,116 | | Loss on derivative contracts | $(1,462,170) | $(100,726) | -$1,361,444 | | Income tax expense | $1,670,194 | $54,050 | +$1,616,144 | Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased from $96.7 million to $99.7 million in Q1 2025, driven by net income and stock-based compensation Shareholders' Equity (January 1 to March 31, 2025) | Item | Amount | |---|---| | Balance at January 1, 2025 | $96,728,129 | | Net income | $4,016,034 | | Dividends paid | $(1,375,612) | | Stock-based compensation expense | $385,838 | | Other comprehensive loss | $(50,116) | | Balance at March 31, 2025 | $99,704,273 | - Net increase of $2,976,144[21] Unaudited Condensed Consolidated Statements of Cash Flows Net cash from operations significantly increased to $8.6 million in Q1 2025, while investing and financing cash uses decreased Net Cash Provided by Operating Activities (Three months ended March 31) | Year | Amount | |---|---| | 2025 | $8,582,576 | | 2024 | $3,691,428 | - Net cash provided by operating activities increased by $4,891,148 (132.5%)[23] Net Cash Used in Investing Activities (Three months ended March 31) | Year | Amount | |---|---| | 2025 | $(6,783,906) | | 2024 | $(11,782,670) | - Net cash used in investing activities decreased by $4,998,764 (42.4%)[23] Net Cash Used in Financing Activities (Three months ended March 31) | Year | Amount | |---|---| | 2025 | $(1,375,612) | | 2024 | $(2,574,117) | - Net cash used in financing activities decreased by $1,198,505 (46.6%)[23] Cash, Cash Equivalents, and Restricted Cash (End of Period) | Date | Amount | |---|---| | March 31, 2025 | $7,362,735 | | March 31, 2024 | $3,208,633 | - Cash, cash equivalents, and restricted cash increased by $4,154,102 (129.5%)[23] Notes to the Unaudited Condensed Consolidated Financial Statements These notes provide essential details and disclosures supporting the unaudited condensed consolidated financial statements 1. Description of Business - Epsilon Energy Ltd. is a North American on-shore focused independent natural gas and oil company[26] - Engaged in acquisition, development, gathering, and production of natural gas and oil reserves[26] - Incorporated in Alberta, Canada on March 14, 2005, and began trading on NASDAQ Global Market (EPSN) on February 19, 2019[26] 2. Basis of Preparation - Financial statements prepared in accordance with U.S. GAAP for interim financial information and SEC rules[27] - Consolidated financial statements include Epsilon Energy Ltd. and its wholly-owned subsidiaries[28] - Company adopted ASU No. 2024-01 (Compensation – Stock Compensation) as of January 1, 2025, with no impact[33] - Evaluating ASU No. 2023-09 (Income Taxes) and ASU 2024-3 (Expense Disaggregation Disclosures), expecting additional disclosures but no financial statement impact[31][34] 3. Cash, Cash Equivalents, and Restricted Cash - Cash and cash equivalents include highly liquid investments with original maturities of three months or less[35] - Restricted cash is for potential well liabilities (bonds/letters of credit)[36] Cash, Cash Equivalents, and Restricted Cash Reconciliation | Item | March 31, 2025 | December 31, 2024 | |---|---|---| | Cash and cash equivalents | $6,892,735 | $6,519,793 | | Restricted cash | $470,000 | $470,000 | | Total in statement of cash flows | $7,362,735 | $6,989,793 | 4. Short Term Investments - Short term investments are highly liquid, with maturities between three and twelve months, consisting of US Treasury Bills classified as available-for-sale[37] - As of March 31, 2025, and December 31, 2024, the Company had no short term investments[38] - During Q1 2024, the Company sold securities for $7,159,285 (realized gains of $156,162) and had $3,635,000 of securities mature (realized gains of $135,034)[38] 5. Property and Equipment Total Property and Equipment, Net | Date | Amount | |---|---| | March 31, 2025 | $109,150,555 | | December 31, 2024 | $104,525,960 | - Total property and equipment, net, increased by $4,624,595 (4.4%)[39] - During Q1 2025, no asset acquisitions[40] - In Q1 2024, Epsilon acquired a 25% working interest in three producing wells and 3,246 gross undeveloped acres in Ector County, Texas for $14.8 million[41][43] - Impairment of $0.01 million recorded in Q1 2025 for one well deemed non-commercial; no impairment in Q1 2024[43] 6. Revolving Line of Credit - Senior secured reserve-based revolving credit facility with Frost Bank, borrowing base of $45 million, maturing June 28, 2027[45] - Interest rate: Daily Simple SOFR + 3.25%[45] - No borrowings outstanding as of March 31, 2025[45][48] - Company was in compliance with financial covenants (current ratio 1.0:1.0, leverage ratio < 2.5:1.0) as of March 31, 2025[46][47][53] 7. Shareholders' Equity - Authorized to issue unlimited Common Shares and Preferred Shares, no par value[49] - New share repurchase program authorized on Feb 12, 2025, for up to 2,200,876 common shares (10% outstanding) or $13.0 million, ending Feb 11, 2026[50] - No shares repurchased under new or previous program during Q1 2025[52] - 2020 Equity Incentive Plan authorizes up to 2,000,000 Common Shares for various awards[55] - No restricted common shares awarded in Q1 2025[56] - Stock compensation expense recognized was $385,838 in Q1 2025 (vs. $321,569 in Q1 2024)[57] - Unrecognized stock-based compensation of $2,817,243 as of March 31, 2025, to be recognized over 1.19 years[58] - Quarterly dividend of $0.0625 per common share ($0.25 annualized) declared on Feb 26, 2025, totaling $1.38 million, paid March 31, 2025[59] 8. Revenue Recognition - Revenues from natural gas, oil, NGLs, condensate sales, and gas gathering/compression services[60] - Product sales revenue recognized when control transfers to customer[61][63] - Gathering and compression revenue recognized over time based on units of gas serviced[65] Total Operating Revenue (Three Months Ended March 31) | Revenue Type | 2025 | 2024 | |---|---|---| | Natural gas | $10,613,573 | $2,962,979 | | Natural gas liquids | $387,250 | $372,984 | | Oil and condensate | $3,269,967 | $2,715,082 | | Gathering and compression fees | $1,892,350 | $1,935,698 | | Total | $16,163,140 | $7,986,743 | - Total operating revenue increased by 102.4% YoY[63] - Allowance for credit loss was nil as of March 31, 2025, and December 31, 2024[68] 9. Accumulated Other Comprehensive Income Accumulated Other Comprehensive Income (Three Months Ended March 31) | Item | 2025 | 2024 | |---|---|---| | Balance at beginning of period | $10,033,267 | $9,772,277 | | Translation gain/(loss) | $(50,116) | $364 | | Unrealized (loss)/gain on securities | — | $(4,609) | | Balance at end of period | $9,983,151 | $9,768,032 | - Accumulated other comprehensive income decreased by $50,116 in 2025 vs. decrease of $4,245 in 2024[70] 10. Income Taxes Income Tax Expense (Three Months Ended March 31) | Tax Type | 2025 | 2024 | |---|---|---| | Current Federal | $1,564,061 | $66,268 | | Current State | $427,585 | $10,775 | | Deferred Federal | $(290,264) | $377,599 | | Deferred State | $(31,188) | $(400,592) | | Total Income Tax Expense | $1,670,194 | $54,050 | - Total income tax expense increased significantly by $1,616,144 YoY[71] - Effective tax rate for Q1 2025 was higher than the statutory federal rate due to state income taxes, partially offset by valuation allowance against Canadian net operating loss[75] - Distributions of Epsilon Energy USA Inc. earnings to Epsilon Energy Ltd. incur a 5% U.S. dividend withholding tax starting in 2023[74] 11. Commitments and Contingencies - As of March 31, 2025, the Company had no commitments for capital expenditures[76] 12. Leases - Operating lease for corporate office recognized under ASC 842[77] Operating Lease Liabilities | Date | Amount | |---|---| | March 31, 2025 | $447,820 | | December 31, 2024 | $476,911 | - Operating lease liabilities decreased by $29,091 (6.1%)[77] - Weighted average remaining lease term: 2.40 years (March 31, 2025)[77] - Weighted average discount rate: 8.25%[77] - Lease expense for operating leases was $0.06 million for Q1 2025 (vs. $0.24 million for year ended Dec 31, 2024)[79] 13. Net Income Per Share Net Income Per Share (Three Months Ended March 31) | Metric | 2025 | 2024 | |---|---|---| | Net income | $4,016,034 | $1,506,896 | | Basic weighted-average shares outstanding | 22,008,766 | 21,994,207 | | Diluted weighted-average shares outstanding | 22,109,819 | 21,994,207 | | Basic EPS | $0.18 | $0.07 | | Diluted EPS | $0.18 | $0.07 | - Basic and Diluted EPS increased by $0.11 YoY[82] - 459,917 anti-dilutive unvested time-based restricted shares excluded from diluted EPS calculation in Q1 2025[83] 14. Operating Segments - Company has two reportable segments: Upstream (acquisition, development, production of natural gas and oil) and Gas Gathering (operates a natural gas gathering system)[87] Segment Operating Income (Three Months Ended March 31, 2025) | Segment | Operating Income | |---|---| | Upstream | $7,805,059 | | Gas Gathering | $1,567,006 | | Total Consolidated Operating Income | $7,167,809 | - Reconciliation includes G&A expenses and intersegment eliminations[86] Segment Capital Expenditures (Three Months Ended March 31, 2025) | Segment | Capital Expenditures | |---|---| | Upstream | $7,639,767 | | Gas Gathering | $104,275 | | Total | $7,744,042 | - Upstream capex primarily for property acquisition, drilling, and completion[86][88] - Gas Gathering capex for expansion, completion, and maintenance[86][88] - For Q1 2025, one customer comprised 25% of total revenue[89] - For Q1 2024, two customers comprised 25% and 12% of total revenue[89] 15. Commodity Risk Management Activities - Epsilon uses derivative contracts (NYMEX HH swaps, Tennessee Z4 basis swaps, NYMEX WTI CMA swaps) to manage exposure to commodity price fluctuations[90][92][94] - Derivative contracts are not designated as accounting hedges and are accounted for using mark-to-market, with changes in fair value recognized as gains/losses in earnings[93] Loss on Derivative Contracts (Three Months Ended March 31) | Year | Loss | |---|---| | 2025 | $(1,462,170) | | 2024 | $(100,726) | - Loss on derivative contracts increased by $1,361,444 YoY, primarily due to significant increase in Henry Hub prices[93][141] Net Fair Value of Derivatives (March 31) | Year | Net Fair Value | |---|---| | 2025 | $(1,534,675) | | 2024 | $(487,548) | - Net liability from derivatives increased by $1,047,127 YoY[95] 16. Asset Retirement Obligations - Asset retirement obligations are management estimates based on net ownership interest in wells and gathering system, estimated reclamation costs, timing, and risk-free cost of capital[97] Asset Retirement Obligations (March 31) | Item | 2025 | 2024 | |---|---|---| | Balance beginning of period | $3,652,296 | $3,502,952 | | Liabilities acquired | $18,235 | $48,207 | | Wells plugged and abandoned | $(1,600) | $(88,992) | | Accretion | $47,098 | $183,434 | | Balance end of period | $3,716,029 | $3,652,296 | - Asset retirement obligations increased by $63,733 in Q1 2025[98] 17. Fair Value Measurements - Fair value methodologies for financial assets and liabilities remained consistent with December 31, 2024[99] - Cash, cash equivalents, restricted cash, accounts receivable, and accounts payable are carried at cost, approximating fair value (short-term maturity)[100] - Revolving line of credit approximates fair value due to variable interest rate, classified as Level 2[100] - Commodity derivative instruments are valued using a mark-to-market approach based on observable market data, classified as Level 2[101] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis This section provides management's perspective on Epsilon Energy Ltd.'s financial condition and results of operations for Q1 2025 Overview - Epsilon Energy Ltd. is a North American onshore focused independent natural gas and oil company[106] - Primary operations in Marcellus shale (PA), Permian Basin (TX/NM), NW Anadarko Basin (OK), and Western Canadian Sedimentary Basin (Alberta, Canada)[106] - Held leasehold rights to 24,316 net acres at March 31, 2025[107] - Owns a 35% interest in the 45-mile Auburn Gas Gathering System in Pennsylvania[108] - Total estimated net proved reserves at December 31, 2024: 69,401 MMcf natural gas, 876,808 Bbls NGLs, and 1,572,465 Bbls oil and condensate[107] Business Strategy - Committed to disciplined capital allocation, including shareholder returns via dividends and share buybacks[109] - Maintain strong balance sheet and liquidity for opportunistic investments in existing and new project areas[109] - Recent investments focused on Permian Basin (Texas) and Western Canadian Sedimentary Basin (Alberta, Canada), in addition to Marcellus (PA)[110] - Acquired 25% interest in three producing wells and 3,620 gross undeveloped acres in Ector County, Texas in Feb 2024, with total capital expenditures of $38.6 million through March 31, 2025[111] - Acquired 50% working interest in 14,243 gross undeveloped acres in Alberta, Canada in April 2024, with total capital expenditures of $2.9 million through March 31, 2025[112] - Formed a joint venture in Oct 2024 for 130,000 gross acres in Alberta, Canada, providing a $7 million drilling carry for a 25% working interest, with total capital expenditures of $8.3 million through March 31, 2025[113] Operational Highlights Marcellus Shale – Pennsylvania (Q1 2025 vs. Q1 2024) | Metric | 2025 | 2024 | Change | |---|---|---|---| | Realized natural gas price ($/Mcf) | $3.92 | $1.77 | +69% | | Net revenue interest natural gas production (Bcf) | 2.6 | 1.595 | +63% | | Gross gas gathered/delivered (Bcf) | 11.6 | N/A | N/A | | Net gas gathered/delivered (Bcf) | 4.1 | N/A | N/A | Permian Basin – Texas and New Mexico (Q1 2025 vs. Q1 2024) | Metric | 2025 | 2024 | Change | |---|---|---|---| | Realized price for all production ($/Boe) | $54.60 | $53.53 | +2% | | Total net revenue interest production (Mboe) | 61.9 | 52.3 | +18% | - 87% liquids in 2025 Anadarko, NW Stack Trend – Oklahoma (Q1 2025 vs. Q1 2024) | Metric | 2025 | 2024 | Change | |---|---|---|---| | Realized price for all production ($/Mcfe) | $5.29 | $4.52 | +17% | | Total net revenue interest production (Bcfe) | 0.09 | 0.11 | -18% | - 60% natural gas in 2025 Western Canadian Sedimentary Basin—Alberta, Canada (Q1 2025) | Metric | 2025 | |---|---| | Realized price for oil production ($/Bbl) | $51.27 | | Total oil sales (MBbl) | 1.8 | Non-GAAP Financial Measures-Adjusted EBITDA - Adjusted EBITDA is a non-GAAP measure used by management to assess debt servicing ability and capital expenditure funding, and for comparing operating performance[117] - Adjusted EBITDA is 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 net other income/expense[115] Adjusted EBITDA Reconciliation (Three months ended March 31) | Item | 2025 | 2024 | |---|---|---| | Net income | $4,016,034 | $1,506,896 | | Add Back: Interest income, net | $(3,088) | $(257,512) | | Add Back: Income tax expense | $1,670,194 | $54,050 | | Add Back: Depreciation, depletion, amortization, and accretion | $3,475,857 | $2,380,426 | | Add Back: Impairment expense | $6,669 | — | | Add Back: Stock based compensation expense | $385,838 | $321,569 | | Add Back: Loss on derivative contracts net of cash settlement | $1,047,127 | $589,011 | | Add Back: Foreign currency translation loss | $10,289 | $570 | | Adjusted EBITDA | $10,608,920 | $4,595,010 | - Adjusted EBITDA increased by $6,013,910 (130.9%) YoY[119] Net Operating Revenues Total Revenues (Three months ended March 31) | Year | Amount | |---|---| | 2025 | $16,163,140 | | 2024 | $7,986,743 | - Total revenues increased by $8.2 million (102%) YoY[120][121] - Upstream natural gas revenue increased by $7.6 million (258%) due to higher prices and new wells in Pennsylvania[121][122] - Upstream oil and condensate revenue increased by $0.6 million (20%) due to additional sales volumes from new wells in Permian Basin and Canada, partially offset by lower prices[121][123] - Gathering system revenue was relatively flat, decreasing $0.04 million (2%)[121][124] Operating Costs Total Operating Costs (Three months ended March 31) | Cost Type | 2025 | 2024 | |---|---|---| | Lease operating costs (net of elimination) | $2,755,898 | $1,768,462 | | Gathering system operating costs | $552,651 | $552,570 | | Total | $3,308,549 | $2,321,032 | - Total operating costs increased by $987,517 (42.5%) YoY[125] - Upstream operating costs increased by $1.0 million (56%) primarily due to higher volumes[126] - Gathering system operating costs were constant, but unit operating costs increased due to a 17% decrease in throughput volumes[127] Depletion, Depreciation, Amortization and Accretion ("DD&A") DD&A Expense (Three months ended March 31) | Year | Amount | |---|---| | 2025 | $3,475,857 | | 2024 | $2,380,426 | - DD&A expense increased by $1.1 million (46%) YoY, due to higher produced volumes in Pennsylvania and Permian Basin[128][131] - DD&A calculated using units of production method[128][129][130] - Depreciation for office assets uses straight-line method[128][129][130] - Accretion expense relates to asset retirement costs[131] Impairment Impairment Expense (Three months ended March 31) | Year | Amount | |---|---| | 2025 | $6,669 | | 2024 | — | - Impairment recorded in 2025 for a non-commercial well in the Killam project[132][133] - Impairment tests performed when carrying amount may not be recoverable, comparing undiscounted cash flows to carrying values[132] General and Administrative ("G&A") G&A Expenses (Three months ended March 31) | Year | Amount | |---|---| | 2025 | $2,204,256 | | 2024 | $1,880,592 | - G&A expenses increased by $0.3 million (17%) YoY, primarily due to higher compensation expenses[134][135] - G&A includes compensation, legal, accounting, professional fees, consulting, travel, and restricted stock grants[134] Interest Income Interest Income (Three months ended March 31) | Year | Amount | |---|---| | 2025 | $15,299 | | 2024 | $266,272 | - Interest income decreased by $0.3 million (94%) YoY, primarily due to a reduction in cash and short-term investments[136] Interest Expense Interest Expense (Three months ended March 31) | Year | Amount | |---|---| | 2025 | $12,211 | | 2024 | $8,760 | - Interest expense was relatively flat YoY, related to fees on the revolving credit facility[137][138][139] Loss on Derivative Contracts Loss on Derivative Contracts (Three months ended March 31) | Year | Loss | |---|---| | 2025 | $(1,462,170) | | 2024 | $(100,726) | - Loss on derivative contracts increased by $1.4 million YoY, primarily due to a significant increase in Henry Hub prices[140][141] - Company uses NYMEX HH Natural Gas futures swaps, Tennessee Gas Pipeline Zone 4 basis swaps, and crude oil NYMEX WTI CMA swaps for hedging[140] - Net cash settlements paid were $415,043 in Q1 2025, compared to net cash settlements received of $488,285 in Q1 2024[140] Capital Resources and Liquidity Epsilon's liquidity is supported by cash from operations, available borrowings, and current cash balance, anticipated to meet future cash requirements Cash Flow - Primary cash source in Q1 2025 was operations; in Q1 2024, operations and short-term investments[142] - Primary cash uses in Q1 2025 were upstream property development and dividends; in Q1 2024, upstream development, U.S. Treasury Bills, share repurchases, and dividends[142] Working Capital Surplus | Date | Amount | |---|---| | March 31, 2025 | $6.2 million | | December 31, 2024 | $7.1 million | - Working capital surplus decreased by $0.9 million[143] - Net cash provided by operating activities increased 133% to $8.6 million in Q1 2025, due to higher produced volumes and realized prices in Pennsylvania[144] - Net cash used in investing activities decreased to $6.8 million in Q1 2025 (from $11.8 million in Q1 2024), primarily for well costs and leasehold in PA, TX, and Canada[145] - Net cash used in financing activities decreased to $1.4 million in Q1 2025 (from $2.6 million in Q1 2024), for dividend payments and no share repurchases[146] Credit Agreement - Senior secured reserve-based revolving credit facility with a $45 million borrowing base, maturing June 28, 2027[147] - No borrowings outstanding under the facility[147] - Financial covenants include a current ratio of 1.0 to 1.0 and a leverage ratio of less than 2.5 to 1.0[148][153] - If leverage ratio > 1.0:1.0 or borrowing base utilization > 50%, company must hedge 50% of anticipated PDP production for 24 months[148] Repurchase Transactions - New share repurchase program authorized on Feb 12, 2025, for up to 2,200,876 common shares (10% outstanding) or $13.0 million, ending Feb 11, 2026[149] - No shares repurchased under new or previous program during Q1 2025[151] - Previous program (commenced March 19, 2024) repurchased 125,000 shares for $627,500 at an average price of $5.00/share in 2024, terminated Feb 12, 2025[150] Derivative Transactions - Hedging arrangements used to reduce commodity price volatility and stabilize cash flows, but also limit benefits from price increases[152] Outstanding Natural Gas Commodity Contracts (March 31, 2025) | Derivative Type | Volume (MMbtu) | Weighted Average Price ($/MMbtu) | Fair Value | |---|---|---|---| | NYMEX Henry Hub swap | 1,564,000 | $3.21 | $(1,872,793) | | Tennessee Z4 basis swap | 1,564,000 | $(0.95) | $250,785 | | Total | 3,128,000 | | $(1,622,008) | Outstanding Crude Oil Commodity Contracts (March 31, 2025) | Derivative Type | Volume (Bbl) | Weighted Average Price ($/Bbl) | Fair Value | |---|---|---|---| | Crude Oil NYMEX WTI CMA | 47,000 | $71.17 | $87,333 | | Total | 47,000 | | $87,333 | Contractual Obligations - No commitments for capital expenditures as of March 31, 2025[155] - Long-term commitments of $15.7 million for asset retirement obligations[155] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Disclosures This section discusses Epsilon Energy Ltd.'s exposure to market risks, primarily commodity price risk, and its hedging strategy Gathering System Revenue Risk - Auburn Gas Gathering System is in the Marcellus Basin, known for high recoverable reserves and low production costs[157] - Short-term low commodity prices are not expected to significantly impact gathering system revenue[157] Interest Rate Risk - Market risk estimated by hypothetical 100 basis point change in interest rate on credit agreement balance[158] - Credit agreement allows for fixing the interest rate[158] - No outstanding principal balance under the credit agreement at March 31, 2025, or March 31, 2024[159] Derivative Contracts - Company's financial results are dependent on volatile natural gas, NGL, and crude oil prices[160] - Hedging strategy involves derivative financial instruments to manage commodity price risk, stabilizing cash flows and supporting capital spending[160][161] - While mitigating negative effects of falling prices, derivatives also limit benefits from price increases[161] ITEM 4. CONTROLS AND PROCEDURES Controls and Procedures Overview Management concluded disclosure controls were effective as of March 31, 2025, with no material changes in internal control over financial reporting Disclosure Controls and Procedures - Management, including CEO and CFO, concluded disclosure controls and procedures were effective as of March 31, 2025, at a reasonable assurance level[162] - Controls designed to ensure timely accumulation and communication of required information[162] Changes in Internal Control Over Financial Reporting - No material changes in internal control over financial reporting occurred during Q1 2025[163] Inherent Limitations on Effectiveness of Controls - Internal control over financial reporting cannot provide absolute assurance due to inherent limitations like human diligence, judgment lapses, and potential for circumvention by collusion or management override[164] - Risk of material misstatements not being prevented or detected timely exists[164] PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS This section confirms that there are no legal proceedings to report for the period - No legal proceedings to report[166] ITEM 1A. RISK FACTORS This section states that there have been no material changes to the risk factors previously disclosed - No material changes from the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024[167] ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS This section reports that Epsilon Energy Ltd. did not repurchase any shares for the three months ended March 31, 2025 - No shares repurchased by Epsilon Energy Ltd. for the three months ended March 31, 2025[169] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section indicates that there are no defaults upon senior securities to report - Not applicable[170] ITEM 4. MINE SAFETY DISCLOSURES This section states that mine safety disclosures are not applicable to the company - Not applicable[171] ITEM 5. OTHER INFORMATION This section indicates that there is no other information to report - Not applicable[172] ITEM 6. EXHIBITS Exhibits List This section lists the exhibits filed as part of the Form 10-Q, including Sarbanes-Oxley certifications and Inline XBRL documents - Includes Sarbanes-Oxley Section 302 and 906 certifications from Principal Executive Officer and Principal Financial Officer[174] - Includes various Inline XBRL documents (Instance, Schema, Calculation, Definition, Labels, Presentation, Cover Page Interactive Data File)[174] SIGNATURES Report Signatures The report is duly signed on behalf of Epsilon Energy Ltd. by J. Andrew Williamson, Chief Financial Officer, on May 14, 2025 - Report signed by J. Andrew Williamson, Chief Financial Officer, on May 14, 2025[176]