Epsilon Energy - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 revenue was $11.625M, down 28% QoQ and up 59% YoY; diluted EPS was $0.07. Sequential decline was driven by materially lower realized commodity pricing (gas −35%, oil −14%, NGL −25%), partially offset by stable midstream fees.
• The company announced a transformational acquisition of Peak in the Powder River Basin, adding 40,500 net acres, 2.2 MBoepd of Q2 production, and a 150% increase in proved reserves (YE’24 basis), while maintaining dividend and a conservative leverage profile (~1x net debt/Adj. EBITDA pro forma).
• Versus S&P Global consensus, Q2 2025 was a slight miss on revenue ($11.625M actual vs $11.845M est.) and EPS ($0.0785 actual vs $0.08 est.) as weaker realized pricing weighed on results; Q1 2025 had been a notable beat on both metrics, highlighting volatility tied to pricing and timing of volumes.
• Operationally, Q2 capex was $4.0M, including Texas and Alberta activity; the quarter included a $2.7M impairment on the Alberta JV due to cost overruns and early underperformance, with management detailing learnings and a path to improvement.

What Went Well and What Went Wrong

What Went Well

• Strategic expansion via Peak acquisition enhances operated, oil‑weighted inventory with attractive economics (Parkman, Niobrara, Mowry), adds experienced in‑basin team, and maintains dividend capacity; “We think this PRB platform provides the opportunity for both organic and inorganic growth”.
• Strong Adjusted EBITDA of $7.396M despite price headwinds, up 89% YoY; cash + short‑term investments rose 41% QoQ to $10.378M, underscoring balance sheet resilience.
• Midstream revenues remained resilient at $1.845M (−3% QoQ; +28% YoY), providing diversification amid commodity price volatility.

What Went Wrong

• Sequential revenue decline (−28% QoQ) driven by lower realized prices across gas (−35%), oil (−14%), and NGL (−25%); total production was slightly down QoQ (−1%).
• Alberta JV impairment of $2.7M due to drilling/completion cost overruns and early well performance below expectations; management signaled process and planning improvements going forward.
• Oil revenue decreased 17% QoQ and 22% YoY; NGL volumes halved QoQ and fell 59% YoY, pressuring liquids contribution.

Transcript

Speaker 1

To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. I would now like to turn the conference over to Andrew Williamson, Chief Financial Officer. Please go ahead.

Speaker 3

Thank you, Operator. On behalf of the management team, I would like to welcome all of you to today's conference call to review Epsilon Energy Ltd.'s acquisition of the Peak Companies and our second quarter 2025 financial and operational results. Before we begin, I would like to remind you that our comments may include forward-looking statements. It should be noted that a variety of factors could cause Epsilon Energy Ltd.'s actual results to differ materially from the anticipated results or expectations expressed in these forward-looking statements. Today's call may also contain certain non-GAAP financial measures. Please refer to the earnings release that we issued yesterday for disclosures on forward-looking statements and reconciliations of non-GAAP measures. With that, I'd like to turn the call over to Jason Stabell, our Chief Executive Officer.

Speaker 2

Thank you, Andrew. Good morning, and thank you for participating in our 2025 second quarter conference call. Joining me today are Andrew Williamson, our Chief Financial Officer, and Henry Clanton, our Chief Operating Officer. We will be available to answer questions later in the call. Today, along with our earnings release, we announced the acquisition of the Peak Companies with assets in the Powder River Basin, PRB. The deal adds a new core area to the company at an attractive price. The acquisition includes key members of the Peak team that bring over 15 years of in-basin operating experience. It adds oil-weighted production and a massive operated inventory of locations across multiple benches. Importantly, the position is approximately 75% held by production, allowing for returns-driven capital allocation over time as commodity prices dictate. We think this PRB platform provides the opportunity for both organic and inorganic growth.

Our near-term activities post-closing will focus on the Parkman Formation, a semi-conventional reservoir with half-cycle economics that rival anything in our existing portfolio at a significantly lower implied acquisition cost per location compared to available acreage in the Marcellus or the Permian. We estimate 14 net Parkman two-mile laterals on the position with opportunities to add incremental interest via pooling and leasing. In addition, the assets add attractive inventory estimated at 90 net two-mile locations in the Niobrara and Mowry, which offset operators, including EOG and Devon, are currently developing on adjacent acreage. Over time, we expect these intervals to develop into a meaningful percentage of our capital expenditures. They offer a nice balance of oil and gas potential. Approximately 30% of the identified priority inventory is currently affected by a drilling permit moratorium in Converse County, Wyoming.

We've addressed this issue by making a portion of the consideration contingent on our ability to access this inventory. We are optimistic that given the current regulatory environment, the moratorium will be lifted in the near to medium term. Post-close, we think our high-quality asset mix across the Marcellus, Permian Barnet, and PRB is truly unique in the small-cap space. The addition of this operated asset base gives us enhanced capabilities and control to add per share value. We are also excited to add Yorktown as a large shareholder. I've known and worked with the principals of the firm for over 20 years. They are experienced and successful energy investors that will bring tremendous value as we continue to grow the company. I want to thank them and the Peak team led by Jack Vaughan for their partnership.

I'll now turn the call over to Andrew and Henry for some comments on the deal and our second quarter results.

Speaker 3

Thanks, Jason. I'll start by talking through the mechanics of the transactions. Consideration at closing will be the issuance of 6 million Epsilon common shares and the assumption of approximately $49 million of long-term debt. As Jason mentioned, additional contingent consideration of up to 2.5 million Epsilon common shares is payable when we can access the affected acreage in Converse County. The contingent shares consideration will decrease over time if access is delayed beyond year-end 2026. Further details regarding the step-down in consideration can be found in the presentation we released today. We will refinance Peak's term loan with an expanded revolving credit facility at closing, led by our existing lender. The process is underway to add a second bank to the facility with an indicative borrowing base of $95 million at closing.

We will be approximately 50% drawn with a forecasted net debt-to-adjusted EBITDA ratio of approximately 1x, which we believe is a conservatively leveraged pro forma business. Importantly, the transaction and associated leverage profile allow us to comfortably maintain our existing per-share dividend and have sufficient discretionary cash flow to drive growth through a development plan that covers the Marcellus, Permian, and PRB starting next year. At closing, the Peak shareholders will represent approximately 21% of the equity, which can increase to as much as 28% if the maximum contingent shares are issued. In exchange, our year-end 2024 approved reserves increased by over 150% based on Epsilon and Peak's third-party reports, which are subject to change at year-end 2025 based on development assumptions and SEC pricing. Liquids production increased by over 200%, and our priority or premium inventory count increases by over 600%.

We define priority inventory as two-mile net locations that underwrite returns over 25% at $65 WTI and $4 Henry Hub flat price assumptions. Our underwriting has 40% of the acquired PRB inventory here exceeding that threshold. This includes the Parkman and some of the Niobrara. Given we plan to issue over 20% of our pre-deal shares outstanding, closing will be subject to a shareholder vote planned for the fourth quarter. We will file a proxy statement this fall with additional detail on the Peak Companies and assets, transaction background and rationale, and the financial position of the pro forma business. Now to the second quarter, production was roughly flat, driven by the new production in the Marcellus we started to see in the first quarter. Realized pricing was down meaningfully quarter over quarter for gas and oil, so cash flows were down roughly 30% quarter over quarter.

Now to Henry to discuss the PRB assets, the addition of operational control, and our preliminary near-term development plans on our legacy assets and the acquired assets for the remainder of this year and next.

Speaker 0

Thank you, Jason and Andrew. As mentioned by Jason and Andrew, the acquisition of the Peak Companies is a significant addition to our undeveloped inventory, and not only will it have a meaningful impact on our near-term development, but it also adds a highly experienced operating staff who has drilled 100 plus wells in the Powder River Basin. Currently, the company has two two-mile Niobrara ducts, 0.7 net, in inventory that are scheduled for completion in Q4. Initial plans for next year call for the development of three high working interest Parkman wells, approximately 96% working interest in the first quarter, subject to the closing timeline of the transactions. This acquisition adds approximately 2,200 net barrels of oil equivalent of daily production, 56% oil, with greater than 90% of the PDP value held within the operated wells.

This production base has good value diversity spread across 168 well bores in five intervals. The producing wells are relatively early life, with the majority of them less than 10 years old and a forecasted base annual decline rate of approximately 15%. For our Marcellus asset, we are pleased to report that based on communications with the Operator, we expect drilling activity to start up again in 2026. The Operator's plans, which of course are subject to change based on market conditions and other factors, include the drilling of seven gross, 1.2 net wells on two pads. Production from both pads is scheduled to come online in Q4 of 2026. All of these wells will be gathered through the Auburn gas gathering system. On our Permian Barnet project, our operating partner has successfully drilled, completed, and placed on production the eighth well in the project, the Irma unit 1H.

The well has a completed lateral length of 10,966 feet. Preliminary development plans for next year include the drilling of at least two additional gross wells, 0.5 net. I would also like to briefly comment on the impairment taken this quarter on our recent investments in our joint venture in the Gerrington area of Alberta. The impairment was driven by a combination of drilling and completion cost overruns and early well inflow performance below expectations. We have had ongoing technical collaboration with the operating partner, and we feel confident this robust review effort will lead to improved location selection and better drilling and completion planning moving forward. The JV covers a large acreage position that we believe remains valuable. Now back to Jason.

Speaker 3

Thanks, guys. Operator, we can now open the lines for questions.

Speaker 1

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If your question has already been addressed and you'd like to remove yourself from queue, please press star then two. Once again, that's star then one if you have a question. We'll pause for just a moment to assemble our roster. As a reminder, if you'd like to ask a question, please press star then one at this time. That concludes the question and answer session. I'd like to turn the conference back over to Jason Stabell for any closing remarks.

Speaker 3

Thank you, Operator. I want to thank everybody for joining today. I look forward to talking to you guys about our base business and the exciting new acquisition that we have teed up. I think it's a really, really exciting future for the company and appreciate your support. We'll talk to you soon. Everybody, have a great day. Thank you.

Speaker 1

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.