Epsilon Energy .(EPSN) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 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 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 | $104,245,205 | -4.6% | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Statement of Operations Summary | Metric | Three Months Ended Sep 30, 2023 ($) | 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] Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity - 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 $5.70 million[16][18] Unaudited Condensed Consolidated Statements of Cash Flows Cash Flow Summary (Nine Months Ended September 30) | Cash Flow Activity | 2023 ($) | 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] Notes to the Unaudited Condensed Consolidated Financial Statements - 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][38] - 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] - 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] - 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][96] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses the 60% revenue decrease from lower natural gas prices, outlining business strategy, operational results, and financial condition Overview and Business Strategy - 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] - 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][123][124][125] Operational Highlights - 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] - 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] - Permian Basin (NM & TX) realized price in New Mexico was $47.01/Boe for the nine months, while two gross wells in Texas are awaiting flowback operations[130] Non-GAAP Financial Measures-Adjusted EBITDA Reconciliation of Net Income to Adjusted EBITDA | Metric | Three Months Ended Sep 30, 2023 ($) | 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] Results of Operations - 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][136] - 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] - 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] - General & Administrative (G&A) expenses increased by 9% for the nine-month period, mainly due to higher compensation and director fees[149] Capital Resources and Liquidity - 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] - Working capital surplus decreased to $32.5 million at September 30, 2023, from $49.2 million at year-end 2022[155] - 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] - 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] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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] - Interest rate risk is minimal as there was no outstanding balance under the credit agreement as of September 30, 2023[169][170] - Epsilon utilizes derivative financial instruments (hedging) to manage commodity price risk and stabilize cash flows[172] ITEM 4. CONTROLS AND PROCEDURES 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] - 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] PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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] - 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] ITEM 1A. RISK FACTORS 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] ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS 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 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]