Epsilon Energy .(US:EPSN)2024-05-08 19:44PART I - FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Q1 2024 financials show total revenue decreased to $8.0 million, net income to $1.5 million, and operating cash flow to $3.7 million Unaudited Condensed Consolidated Balance Sheets Total assets increased to $125.1 million, liabilities to $25.2 million, while cash decreased significantly to $2.3 million Consolidated Balance Sheet Highlights (Unaudited) | Account | March 31, 2024 ($) | December 31, 2023 ($) | | :--- | :--- | :--- | | Current Assets | | | | Cash and cash equivalents | 2,308,633 | 13,403,628 | | Short term investments | 12,238,177 | 18,775,106 | | Total current assets | 22,596,300 | 41,128,796 | | Non-Current Assets | | | | Total property and equipment, net | 101,156,665 | 80,188,022 | | Total Assets | 125,070,233 | 124,042,613 | | Liabilities & Equity | | | | Total current liabilities | 9,667,503 | 7,895,842 | | Total non-current liabilities | 15,539,662 | 15,533,806 | | Total Liabilities | 25,207,165 | 23,429,648 | | Total Shareholders' Equity | 99,863,068 | 100,612,965 | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Q1 2024 total revenues decreased to $8.0 million, operating income to $1.4 million, and net income to $1.5 million Consolidated Statements of Operations Highlights (Unaudited) | Account | Three months ended March 31, 2024 ($) | Three months ended March 31, 2023 ($) | | :--- | :--- | :--- | | Total revenue | 7,986,743 | 9,356,276 | | Total operating costs and expenses | 6,582,050 | 6,032,147 | | Operating income | 1,404,693 | 3,324,129 | | Net income before income tax expense | 1,560,946 | 4,856,749 | | NET INCOME | 1,506,896 | 3,529,827 | | Net income per share, basic | 0.07 | 0.15 | | Net income per share, diluted | 0.07 | 0.15 | Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity decreased to $99.9 million in Q1 2024, primarily due to dividends and share buybacks - Key activities affecting shareholders' equity in Q1 2024 included net income of $1.5 million, dividend payments of $1.37 million, and common share buybacks totaling $1.2 million18 Unaudited Condensed Consolidated Statements of Cash Flows Net cash from operations decreased to $3.7 million, with significant cash used in investing and financing activities Consolidated Statements of Cash Flows Highlights (Unaudited) | Cash Flow Activity | Three months ended March 31, 2024 ($) | Three months ended March 31, 2023 ($) | | :--- | :--- | :--- | | Net cash provided by operating activities | 3,691,428 | 7,578,152 | | Net cash used in investing activities | (11,782,670) | (30,921,070) | | Net cash used in financing activities | (2,574,117) | (2,779,880) | | (Decrease) increase in cash, cash equivalents, and restricted cash | (10,664,995) | (26,125,398) | | Cash, cash equivalents, and restricted cash, end of period | 3,208,633 | 19,681,549 | Notes to the Unaudited Condensed Consolidated Financial Statements Notes detail business, policies, and key disclosures including a $14.8 million asset acquisition and a $35 million undrawn credit facility - Epsilon is a North American on-shore independent natural gas and oil company engaged in acquisition, development, gathering, and production22 - During Q1 2024, Epsilon acquired a 25% working interest in three producing wells and 3,246 gross undeveloped acres in Ector County, Texas, for a total consideration of $14.8 million4246 - The company has a $35 million senior secured revolving credit facility with Frost Bank, which was undrawn as of March 31, 20244550 - On March 20, 2024, the Board authorized a new share repurchase program for up to 2,191,320 common shares, or up to $12.0 million52 - A quarterly dividend of $0.0625 per common share was declared and paid in Q1 2024, totaling approximately $1.4 million67 Revenue Breakdown (Q1 2024 vs Q1 2023) | Revenue Source | Q1 2024 ($) | Q1 2023 ($) | | :--- | :--- | :--- | | Natural gas | 2,962,979 | 6,256,178 | | Natural gas liquids | 372,984 | 196,295 | | Oil and condensate | 2,715,082 | 517,108 | | Gathering and compression fees | 1,935,698 | 2,386,695 | | Total operating revenue | 7,986,743 | 9,356,276 | - The company's operations are divided into three reportable segments: Upstream, Gas Gathering, and Corporate. For Q1 2024, the Upstream segment generated $1.8 million in operating income, and the Gas Gathering segment generated $1.4 million9798 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q1 2024 revenue decline to lower gas prices, with strategy focusing on capital allocation and Permian investments Overview and Business Strategy Epsilon's strategy emphasizes disciplined capital allocation, shareholder returns, and a shift in investment focus to the Permian Basin - The company's business strategy emphasizes disciplined capital allocation, shareholder returns (dividends and buybacks), and maintaining a strong balance sheet120 - Investment focus has recently shifted from the Marcellus in Pennsylvania to the Permian Basin in Ector County, Texas121122 - On February 27, 2024, Epsilon acquired a 25% working interest in three producing wells and undeveloped acreage in Ector County, Texas126 Operational Highlights Q1 2024 saw Marcellus gas prices drop 31%, Permian production at 52.3 Mboe, and Oklahoma production decrease 36% - Marcellus Shale (PA): Realized natural gas price decreased 31% YoY to $1.77 per Mcf. Natural gas production decreased 32% YoY to 1.6 Bcf129 - Permian Basin (TX & NM): Total net production for Q1 2024 was 52.3 Mboe, with a realized price of $53.28 per Boe129 - Anadarko (OK): Total net production for Q1 2024 was 0.11 Bcfe, a 36% decrease from Q1 2023129 Results of Operations Total revenues decreased 15% to $8.0 million due to lower gas revenue, partially offset by increased oil revenue - Total revenues decreased 15% to $8.0 million in Q1 2024 from $9.4 million in Q1 2023134 - Upstream natural gas revenue decreased by 53% due to lower prices and volumes. This was partially offset by a 425% increase in oil and condensate revenue from new Permian Basin production135137 - Gathering system revenue decreased 19% due to lower anchor shipper volumes138 - Upstream operating costs increased by 26% to $1.8 million, primarily due to new wells in the Permian Basin139140 - General & Administrative (G&A) expenses decreased by 15% to $1.9 million, driven by lower compensation, legal, and consulting fees145146 Non-GAAP Financial Measures-Adjusted EBITDA Adjusted EBITDA for Q1 2024 was $4.6 million, a decrease from $5.6 million in Q1 2023, reflecting operational performance Reconciliation of Net Income to Adjusted EBITDA | Account | Three months ended March 31, 2024 ($) | Three months ended March 31, 2023 ($) | | :--- | :--- | :--- | | Net income | 1,506,896 | 3,529,827 | | Interest (income) expense, net | (257,512) | (462,325) | | Income tax expense | 54,050 | 1,326,922 | | Depreciation, depletion, amortization, and accretion | 2,380,426 | 1,773,006 | | Stock based compensation expense | 321,569 | 179,748 | | Loss (gain) on derivative contracts net of cash received or paid on settlement | 589,011 | (705,360) | | Adjusted EBITDA | 4,595,010 | 5,640,835 | Capital Resources and Liquidity Working capital surplus was $12.9 million, with $3.7 million from operations and a $35 million undrawn credit facility - Working capital surplus was $12.9 million at March 31, 2024, a decrease of $20.3 million from December 31, 2023154 - Net cash from operations decreased by 51% to $3.7 million in Q1 2024 compared to $7.6 million in Q1 2023155 - The company has a $35 million senior secured revolving credit facility which remains undrawn158 - In Q1 2024, the company repurchased 248,700 shares for $1.2 million under its previous plan. A new $12.0 million repurchase program was authorized in March 2024162164 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces significant commodity price risk, mitigated by derivatives, and interest rate risk on its undrawn credit facility - The company's earnings are significantly affected by volatile natural gas and oil prices169 - Epsilon uses derivative financial instruments to manage commodity price risk and stabilize cash flows173 - The company has interest rate risk from its variable-rate credit agreement, but the outstanding balance was zero as of March 31, 2024171172 Item 4. Controls and Procedures Disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2024174 - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting176 PART II - OTHER INFORMATION Item 1. Legal Proceedings The company reported no legal proceedings during the period - There are no legal proceedings to report179 Item 1A. Risk Factors No material changes from the risk factors disclosed in the 2023 Annual Report on Form 10-K have occurred - No material changes from the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2023 have occurred180 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds The company repurchased 248,700 shares at $4.82 per share under its 2023-2024 program in Q1 2024 Purchases of Equity Securities (Q1 2024) | Period | Total number of shares purchased | Average price paid per share ($) | | :--- | :--- | :--- | | January 2024 | 248,700 | 4.82 | | Total as of March 31, 2024 | 248,700 | 4.82 | - The shares were repurchased under the 2023-2024 share repurchase program that commenced on March 27, 2023 and terminated on March 26, 2024182 Item 5. Other Information No other information was reported for this item - Not applicable185 Item 6. Exhibits Exhibits filed include Sarbanes-Oxley certifications and Inline XBRL data files - The exhibits filed with this report include Sarbanes-Oxley Section 302 and 906 certifications and various Inline XBRL documents187