Epsilon Energy .(US:EPSN)2023-05-10 16:00markdown [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