# Epsilon Energy Ltd.: Form 10-Q for the period ended Jun 30, 2023

- Company: [Epsilon Energy Ltd.](/companies/epsn.md) (CIK 1726126)
- Form: 10-Q
- Filed: 2023-08-11
- Accepted by EDGAR: Aug 10, 2023, 20:59 ET
- Period: 2023-06-30
- Accession: 0001558370-23-014582
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1726126/000155837023014582/epsn-20230630x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1726126/000155837023014582/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $6.5m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $15.9m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | −$353.3k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | $3.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $34.4k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-01-01 to 2023-06-30 | $62.9k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $246.1k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $1.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $430.6k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $4.0m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.02 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.17 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.02 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.17 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 22,783,987 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 22,904,922 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $10.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Share repurchases | 6 months, 2023-01-01 to 2023-06-30 | $3.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-06-30 | $9.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $43.6m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $121.2m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $4.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $18.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-06-30 | $102.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 28,887 characters.

*The following discussion is intended to assist in the understanding of trends and significant changes in or results of operations and the financial condition of Epsilon Energy Ltd. and its subsidiaries for the periods presented. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto presented in this report, including the unaudited condensed consolidated financial statements as of June 30, 2023 and 2022 and for the six months then ended together with accompanying notes, as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs, and expected performance. Actual results and the timing of events may differ materially from those contained in these forward- looking statements due to a number of factors. See “Part II. Item 1A. Risk Factors” and “Forward-Looking Statements.”*

### Overview

Epsilon Energy Ltd. (the “Company”) is a North American onshore focused independent natural gas and oil company engaged in the acquisition, development, gathering and production of natural gas and oil reserves. Our areas of operations are the Marcellus shale section of the Appalachian basin in Pennsylvania, the NW Anadarko basin in Oklahoma, and the Permian basin in Eddy County, New Mexico and Ector County, Texas. In Pennsylvania, we hold 5,098 net acres producing 25 MMcf/d net to our working interest. In Oklahoma, we hold 7,228 net acres producing 2.4 MMcfe/d net to our working interest. In Texas, we hold 3,093 net acres. In New Mexico, we hold wellbore interests producing 204 BOE/d net to our working interest.

In Pennsylvania, the Company owns a 35% interest in the 52-mile Auburn Gas Gathering System (“Auburn GGS") which is operated by a subsidiary of Williams Partners, LP.

Our common shares trade on the NASDAQ Global Market under the ticker symbol “EPSN.”

### Business Strategy

The Company is focused on high rate of return capital investments in onshore North American natural gas and oil basins. We are committed to disciplined capital allocation which should include shareholder returns in the form of dividends and share buybacks. We expect that our strong balance sheet and liquidity position will allow us to opportunistically invest in both our existing project areas and potential new projects.

To date, our investments have been focused in our position in the prolific Marcellus unconventional reservoir in Pennsylvania (“PA”). Our PA assets are supported by our 35% ownership in the Auburn GGS. We have a substantial remaining drillable location inventory within our existing leaseholds.

On May 9, 2023, Epsilon acquired a 10% interest in two wellbores located in Eddy County, New Mexico from a private operator. The wells are currently on production. Total capital expenditure (net to Epsilon) was $2.1 million.

On May 16, 2023, Epsilon acquired a 25% working interest in 1,297 gross acres on the Central Basin Platform in Ector County, Texas from a private operator. The Company will participate in the drilling and completion of 2 gross wells, both 10,000’ laterals, over the remainder of 2023. The first well is already drilled and first production from both wells is estimated for the fourth quarter of 2023. Total capital expenditure (net to Epsilon) to date was $3.7 million.

On June 20, 2023, Epsilon acquired a 25% working interest in 11,067 gross acres on the Central Basin Platform in Ector County, Texas from a private operator. Initial plans call for 2-4 wells to be drilled on the position in 2024 with plans expected to be finalized by the end of 2023. Total capital expenditure (net to Epsilon) was $6.3 million.

We continue to evaluate new opportunities in numerous onshore North American natural gas and oil basins.

### Three and six months ended June 30, 2023 Highlights

### Operational Highlights

#### Marcellus Shale – Pennsylvania

- During the three months ended June 30, 2023, Epsilon's realized natural gas price was $1.38 per Mcf, an 80% decrease over the three months ended June 30, 2022. During the six months ended June 30, 2023, Epsilon's realized natural gas price was $2.01 per Mcf, a 65% decrease from the six months ended June 30, 2022.
- During the three months ended June 30, 2023, Epsilon’s net revenue interest natural gas production was 2.0 Bcf compared to 2.2 Bcf during the same period in 2022, a 9% decrease. During the six months ended June 30, 2023, Epsilon’s net revenue interest natural gas production was 4.5 Bcf compared to 4.6 Bcf during the same period in 2022, a 2% decrease.
- Gathered and delivered 15.8 Bcf gross (5.5 net to Epsilon's interest) during the three months ended June, 2023, or 174 MMcf/d through the Auburn Gas Gathering System. Gathered and delivered 32.0 Bcf (11.2 net to Epsilon's interest) during the six months ended June 30, 2023, or 177 MMcf/d through the Auburn Gas Gathering System.

#### Anadarko, NW Stack Trend – Oklahoma

- During the three months ended June 30, 2023, Epsilon's realized price for all Oklahoma production was $4.75 per Mcfe, a 47% decline from the three months ended June 30, 2022. During the six months ended June 30, 2023, Epsilon's realized price for all Oklahoma production was $5.59 per Mcfe, a 34% decrease from the six months ended June 30, 2022.
- Total net revenue interest production for the three months ended June 30, 2023 included natural gas, oil and other liquids and was 0.18 Bcfe, a 44% decrease from the same period in 2022. Total net revenue interest production for the six months ended June 30, 2023 included natural gas, oil and other liquids and was 0.35 Bcfe, a 29% decrease over the same period in 2022.
- In the second quarter of 2023, the Company completed 1 gross (.11 net) well. At June 30, 2023, the Company had no further wells awaiting completion.

#### Permian Basin – New Mexico and Texas

- During the three and six months ended June 30, 2023, Epsilon's realized price for all New Mexico production was $47.45 per Boe.
- Total net revenue interest production for the three and six months ended June 30, 2023 included natural gas, oil and other liquids and was 14.9 Mboe.
- In the second quarter of 2023, the Company drilled and completed 2 gross (.20 net) wells in New Mexico.
- In Texas, the Company acquired a 25% undivided interest in 12,373 acres (3,093 net acres) in Ector County and drilled 1 gross (.25 net) well. At June 30, 2023, the Company had 1 gross (.25 net) well awaiting completion.

### Non-GAAP Financial Measures-Adjusted EBITDA

Epsilon defines Adjusted EBITDA as earnings before (1) net interest expense, (2) taxes, (3) depreciation, depletion, amortization and accretion expense, (4) impairments of natural gas and oil properties, (5) non-cash stock compensation expense, (6) gain or loss on sale of assets, (7) gain or loss on derivative contracts net of cash received or paid on settlement, and (8) other income. Adjusted EBITDA is not a measure of financial performance as determined under U.S. GAAP and should not be considered in isolation from or as a substitute for net income or cash flow measures prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity.

Additionally, Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. Epsilon has included Adjusted EBITDA as a supplemental disclosure because its management believes that EBITDA provides useful information regarding its ability to service debt and to fund capital expenditures. It further provides investors a helpful measure for comparing operating performance on a normalized or recurring basis with the performance of other companies, without giving effect to certain non-cash expenses and other items. This provides management, investors and analysts with comparative information for evaluating the Company in relation to other natural gas and oil companies providing corresponding non-U.S. GAAP financial measures or that have different financing and capital structures or tax rates. These non-U.S. GAAP financial measures should be considered in addition to, but not as a substitute for, measures for financial performance prepared in accordance with U.S. GAAP.

The table below sets forth a reconciliation of net income to Adjusted EBITDA for the three and six months ended June 30, 2023 and 2022, which is the most directly comparable measure of financial performance calculated under U.S. GAAP and should be reviewed carefully.

| ​ ​ ​ | ​ ​ | ​ ​ Three months ended June 30, 2023 | ​ | ​ ​ 2022 | ​ ​ | ​ ​ Six months ended June 30, 2023 | ​ | ​ ​ 2022 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| **Net income** | **​** | $430,589 | ​ | $10,582,988 | ​ | $3,960,416 | ​ | $16,388,876 |
| Add Back: | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Interest (income) expense, net | ​ | ​ (398,779) | ​ | ​ (21,200) | ​ | ​ (861,104) | ​ | ​ (21,102) |
| Income tax expense | ​ | ​ 246,142 | ​ | ​ 4,019,576 | ​ | ​ 1,573,064 | ​ | ​ 6,201,474 |
| Depreciation, depletion, amortization, and accretion | **​** | **​** 1,615,728 | ​ | ​ 1,803,739 | **​** | **​** 3,388,734 | ​ | ​ 3,192,958 |
| Stock based compensation expense | ​ | ​ 179,748 | ​ | ​ 194,050 | ​ | ​ 359,496 | ​ | ​ 336,352 |
| Loss (gain) on sale of assets | ​ | ​ 1,449,871 | ​ | ​ (221,642) | ​ | ​ 1,449,871 | ​ | ​ (221,642) |
| Loss (gain) on derivative contracts net of cash received or paid on settlement | ​ | ​ 641,380 | ​ | ​ (940,553) | ​ | ​ (63,980) | ​ | ​ (1,180,377) |
| Foreign currency translation loss | ​ | ​ (5) | ​ | ​ (1,071) | ​ | ​ (987) | ​ | ​ 4,331 |
| **Adjusted EBITDA** | ​ | $4,164,674 | ​ | $15,415,887 | ​ | $9,805,510 | ​ | $24,700,870 |

### Results of Operations

### Net Operating Revenues

For the six months ended June 30, 2023 revenues decreased $17.6 million, or 53%, to $15.9 million from $33.5 million during the same period of 2022.

Revenue and volume statistics for the three and six months ended June 30, 2023 and 2022 were as follows:

| ​ ​ ​ ​ Revenues Pennsylvania | ​ ​ ​ ​ ​ | ​ ​ Three months ended June 30, 2023 ​ ​ ​ ​ | ​ ​ ​ | ​ ​ 2022 ​ ​ ​ ​ | ​ ​ ​ ​ ​ | ​ ​ Six months ended June 30, 2023 ​ ​ ​ ​ | ​ ​ ​ | ​ ​ 2022 ​ ​ ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Natural gas revenue | ​ | $2,756,313 | ​ | $15,089,325 | ​ | $8,609,038 | ​ | $25,220,340 |
| Volume (MMcf) | ​ | 2,004 | ​ | 2,174 | ​ | 4,290 | ​ | 4,439 |
| Avg. Price ($/Mcf) | ​ | $1.38 | ​ | $6.94 | ​ | $2.01 | ​ | $5.68 |
| Gathering system revenue | ​ | $2,202,064 | ​ | $1,987,168 | ​ | $4,588,759 | ​ | $4,107,941 |
| **Total PA Revenues** | **​** | **$4,958,377** | **​** | **$17,076,493** | **​** | **$13,197,797** | **​** | **$29,328,281** |
| New Mexico | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Natural gas revenue | ​ | $34,444 | ​ | $— | ​ | $34,444 | ​ | $— |
| Volume (MMcf) | ​ | 19 | ​ | — | ​ | 19 | ​ | — |
| Avg. Price ($/Mcf) | ​ | $1.78 | ​ | $— | ​ | $1.78 | ​ | $— |
| Natural liquids revenue | ​ | $69,199 | ​ | $— | ​ | $69,199 | ​ | $— |
| Volume (MBO) | ​ | 3.9 | ​ | — | ​ | 3.9 | ​ | — |
| Avg. Price ($/Bbl) | ​ | $17.82 | ​ | $— | ​ | $17.82 | ​ | $— |
| Oil and condensate revenue | ​ | $603,415 | ​ | $— | ​ | $603,415 | ​ | $— |
| Volume (MBO) | ​ | 7.8 | ​ | — | ​ | 7.8 | ​ | — |
| Avg. Price ($/Bbl) | ​ | $77.48 | ​ | $— | ​ | $77.48 | ​ | $— |
| **Total NM Revenues** | **​** | **$707,058** | **​** | **$—** | **​** | **$707,058** | **​** | **$—** |
| Oklahoma | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Natural gas revenue | ​ | $215,939 | ​ | $895,023 | ​ | $619,392 | ​ | $1,467,092 |
| Volume (MMcf) | ​ | 94 | ​ | 150 | ​ | 190 | ​ | 235 |
| Avg. Price ($/Mcf) | ​ | $2.29 | ​ | $5.97 | ​ | $3.25 | ​ | $6.23 |
| Natural liquids revenue | ​ | $175,789 | ​ | $688,397 | ​ | $372,084 | ​ | $1,002,825 |
| Volume (MBO) | ​ | 7.5 | ​ | 16.3 | ​ | 13.6 | ​ | 26.0 |
| Avg. Price ($/Bbl) | ​ | $23.49 | ​ | $42.31 | ​ | $27.44 | ​ | $38.51 |
| Oil and condensate revenue | ​ | $442,973 | ​ | $1,243,091 | ​ | $960,081 | ​ | $1,704,904 |
| Volume (MBO) | ​ | 6.1 | ​ | 11.4 | ​ | 12.9 | ​ | 16.4 |
| Avg. Price ($/Bbl) | ​ | $72.57 | ​ | $109.51 | ​ | $74.45 | ​ | $103.66 |
| **Total OK Revenues** | **​** | **$834,701** | **​** | **$2,826,511** | **​** | **$1,951,557** | **​** | **$4,174,821** |
| **Total Revenues** | **​** | **$6,500,136** | **​** | **$19,903,004** | **​** | **$15,856,412** | **​** | **$33,503,102** |

Upstream natural gas revenue for the six months ended June 30, 2023 decreased by $17.4 million, or 65%, over the same period in 2022. A decrease of $16.4 million was due to lower natural gas prices and a decrease of $1.0 million was due to lower sales volumes as a result of natural decline in the wells. Upstream natural gas revenue for the three months ended June 30, 2023 decreased by $13.0 million, or 81%, over the same period in 2022. A decrease of $11.6 million was due to lower natural gas prices and a decrease of $1.4 million due to lower sales volumes as a result of natural decline in the wells.

Upstream natural gas liquids revenue for the six months ended June 30, 2023 decreased by $0.6 million, or 56% over the same period in 2022. A decrease of $0.3 million was due to lower prices and a decrease of $0.3 million was due to lower sales volumes. Upstream natural gas liquids revenue for the three months ended June 30, 2023 decreased by $0.4 million, or 64% over the same period in 2022. A decrease of $0.2 million was due to lower prices and a decrease of $0.2 million was due to lower sales volumes.

Upstream oil and condensate revenue for the six months ended June 30, 2023 decreased by $0.1 million, or 8% over the same period in 2022. An increase of $0.5 million was due to higher volumes offset by a decrease of $0.6 million due to lower prices. Upstream oil and condensate revenue for the three months ended June 30, 2023 decreased by $0.2 million, or 16% over the same period in 2022. An increase of $0.3 million was due to higher volumes offset by a decrease of $0.5 million due to lower prices.

Gathering system revenue increased $0.5 million, or 12%, six months ended June 30, 2023 over the same period in 2022. This was the result of anchor shipper volumes, which pay the full gathering rate, increasing from 65% to 85% of total throughput. Gathering system revenue increased by $0.2 million, or 11%, for the three months ended June 30, 2023 over the same period in 2022. This was the result of anchor shipper volumes, which pay the full gathering rate, increasing from 68% to 82% of total throughput. Revenues derived from transporting and compressing our production, which have been eliminated from gathering system revenues amounted to $0.4 million for each of the three and six months ended June 30, 2023 and 2022.

### Operating Costs

The following table presents total cost and cost per unit of production (Mcfe), including ad valorem, severance, and production taxes for the three and six months ended June 30, 2023 and 2022:

| ​ ​ ​ | ​ ​ | ​ ​ Three months ended June 30, 2023 | ​ | ​ ​ 2022 | ​ ​ | ​ ​ Six months ended June 30, 2023 | ​ | ​ ​ 2022 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Lease operating costs | ​ | $1,440,521 | ​ | $2,252,017 | ​ | $2,844,800 | ​ | $3,657,507 |
| Gathering system operating costs | ​ | ​ 570,934 | ​ | ​ 541,228 | ​ | ​ 1,222,275 | ​ | ​ 1,065,603 |
| **​** | **​** | **$2,011,455** | **​** | **$2,793,245** | **​** | **$4,067,075** | **​** | **$4,723,110** |
| ​ | ​ | ​ **​** | **​** | **​** **​** | ​ | ​ **​** | **​** | **​** **​** |
| Upstream operating costs—Total $/Mcfe | ​ | ​ 0.63 | ​ | ​ 0.90 | ​ | ​ 0.60 | ​ | ​ 0.74 |
| Gathering system operating costs $/Mcf | ​ | ​ 0.17 | ​ | ​ 0.14 | ​ | ​ 0.17 | ​ | ​ 0.13 |

Operating costs include the effects of elimination entries to remove the gathering fees paid to Epsilon’s ownership in the gathering system.

Upstream operating costs consist of lease operating expenses necessary to extract natural gas and oil, including gathering and treating the natural gas and oil to ready it for sale. For the six months ended June 30, 2023 these costs decreased by $0.8 million, or 22%, over the same period in 2022. For the three months ended June 30, 2023 these costs decreased by $0.8 million, or 36%, over the same period in 2022. Operating costs in 2022 were increased due to extraordinary plugging and abandonment costs related to atypical wellbore conditions in two older vintage wells in Pennsylvania, which is not representative of the other wells.

Gathering system operating costs consist primarily of rental payments for the natural gas fueled compression units and overhead fees due to the system’s operator. For the six months ended June 30, 2023, gathering system operating costs increased by $0.2 million, or 15% from the same period in 2022. For the three months ended June 30, 2023, gathering system operating costs increased by $0.03 million, or 5% from the same period in 2022. This increase is due to a CPI-U adjusted increase to the G&A fee on these volumes and compressor rentals.

### Depletion, Depreciation, Amortization and Accretion (“DD&A”)

| ​ ​ ​ | ​ ​ | ​ ​ Three months ended June 30, 2023 | ​ | ​ ​ 2022 | ​ ​ | ​ ​ Six months ended June 30, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| **Depletion, depreciation, amortization and accretion** | **​** | **$1,615,728** | ​ | **$1,803,739** | **​** | **$3,388,734** | ​ | **$3,192,958** |

Natural gas and oil and gathering system assets are depleted and depreciated using the units of production method aggregating properties on a field basis. For leasehold acquisition costs and the cost to acquire proved and unproved properties, the reserve base used to calculate depreciation and depletion is total proved reserves. For natural gas and oil development and gathering system costs, the reserve base used to calculate depletion and depreciation is proved developed reserves. A reserve report is prepared as of December 31, each year.

Depreciation expense includes amounts pertaining to our office furniture and fixtures, leasehold improvements, computer hardware. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 7 years. Also included in depreciation expense is an amount pertaining to buildings owned by the Company. Depreciation for the buildings is calculated using the straight-line method over an estimated useful life of 30 years.

Accretion expense is related to the asset retirement costs.

DD&A expense for the three and six months ended June 30, 2023 was consistent compared to the same periods in 2022.

### Loss (gain) on sale of assets

| ​ ​ ​ | ​ ​ | ​ ​ Three months ended June 30, 2023 | ​ | ​ ​ 2022 | ​ ​ | ​ ​ Six months ended June 30, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| **Loss (gain) on sale of assets** | **​** | **$1,449,871** | ​ | **$(221,642)** | **​** | **$1,449,871** | ​ | **$(221,642)** |

Epsilon sold two Oklahoma assets in April 2023 and one Oklahoma asset in April 2022. Loss on sale of assets increased by $1.7 million during the three and six months ended June 30, 2023 from 2022 due to the assets sold in 2023 having a larger net book value than the asset sold in 2022.

### General and Administrative (“G&A”)

| ​ ​ ​ | ​ ​ | ​ ​ Three months ended June 30, 2023 | ​ | ​ ​ 2022 | ​ ​ | ​ ​ Six months ended June 30, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| **General and administrative** | **​** | **$1,776,374** | ​ | **$1,659,193** | **​** | **$3,979,895** | ​ | **$2,972,627** |

G&A expenses consist of general corporate expenses such as compensation, legal, accounting and professional fees, consulting services, travel and other related corporate costs such as stock options granted and restricted shares of stock granted and the related non-cash compensation.

G&A expenses increased by $1.0 million, or 35%, during the six months ended June 30, 2023 from 2022. This was primarily due to an increase of $0.7 million in compensation, $0.6 million from management transition and $0.1 million from Board of Directors pay adjustment, and an increase of $0.3 million in other service fees. G&A expenses increased by $0.1 million, or 7%, during the three months ended June 30, 2023 from 2022. This was primarily due to a $0.3 million increase in compensation, $0.2 million from management transition and $0.1 million from Board of Directors pay adjustment, offset by a decrease of $0.2 million in legal fees.

### Interest Expense

| ​ ​ ​ | ​ ​ | ​ ​ Three months ended June 30, 2023 | ​ | ​ ​ 2022 | ​ ​ | ​ ​ Six months ended June 30, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| **Interest expense** | **​** | **$34,422** | ​ | $745 | **​** | **$62,859** | ​ | $16,064 |

Interest expense relates to the fees paid on the revolving credit facility.

Interest expense for the three and six months ended June 30, 2023 and 2022 increased as a result of the reduction in the borrowing base during 2022 and an increase in the borrowing base in 2023.

### Gain (Loss) on Derivative Contracts

| ​ ​ ​ | ​ ​ | ​ ​ Three months ended June 30, 2023 | ​ | ​ ​ 2022 | ​ ​ | ​ ​ Six months ended June 30, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| **Gain (loss) on derivative contracts** | **​** | **$628,178** | **​** | **$776,994** | **​** | **$1,696,838** | **​** | **$(194,910)** |

For the three and six months ended June 30, 2023, Epsilon had NYMEX HH Natural Gas Futures swaps and Tennessee Gas Pipeline Zone 4 basis swap derivative contracts for the purpose of hedging a portion of its physical natural gas sales revenue. For the three and six months ended June 30, 2022, Epsilon had NYMEX HH two-way collars and Tennessee Gas Pipeline Zone 4 basis swap derivative contracts for the same hedging purpose. During the three and six months ended June 30, 2023, we received cash settlements of $1,272,970 and $1,632,858, respectively. During the three and six months ended June 30, 2022, we paid net cash settlements of $163,559 and $1,375,287, respectively.

For the three and six months ended June 30, 2023, realized gains on derivative contracts increased primarily due to the decrease in NYMEX HH Natural Gas Futures prices resulting in an increase in value of the NYMEX HH swaps. As of June 30, 2023, the Company had no derivative contracts beyond October 2023.

### Capital Resources and Liquidity

### Cash Flow

The primary source of cash for Epsilon during the three and six months ended June 30, 2023 and 2022 was funds generated from operations. The primary uses of cash for the three and six months ended June 30, 2023 were development of natural gas properties, investment in U.S. Treasury Bills, the repurchase of shares of common stock, and the distribution of dividends. The primary uses of cash for the three and six months ended June 30, 2022 were development of natural gas properties, the repurchase of shares of common stock, and the distribution of dividends.

At June 30, 2023, we had a working capital surplus of $39.2 million, a decrease of $10.1 million from the $49.2 million surplus at December 31, 2022. The Company anticipates its current cash balance, short term investments, available borrowings, and cash flows from operations to be sufficient to meet its cash requirements for at least the next twelve months.

#### Six months ended June 30, 2023 compared to 2022

During the six months ended June 30, 2023, $10.2 million was provided by the Company’s operating activities, compared to $15.8 million provided during the same period in 2022, a $5.6 million, and 35% decrease.

The Company used $40.0 million of cash for investing activities during the six months ended June 30, 2023. The Company had a $26.5 million net investment in U.S Treasury Bills and $13.5 million on leasehold and development costs targeting increasing production in Pennsylvania, Texas, New Mexico, and Oklahoma. The Company used $5.0 million of cash for investing activities during the six months ended June 30, 2022. This was spent primarily on leasehold and development costs targeting increasing production in Pennsylvania and Oklahoma.

The Company used $5.9 million of cash for financing activities during the six months ended June 30, 2023 compared to $6.3 million during the same period in 2022. This was spent primarily on dividend payments and the repurchase of shares of common stock.

### Credit Agreement

The Company closed a senior secured reserve based revolving credit facility on June 28, 2023 with Frost Bank as issuing bank and sole lender. The new facility replaced the Company’s previous facility. The initial commitment and borrowing base is $35 million, supported by the Company’s upstream assets in Pennsylvania and subject to semi-annual redeterminations with a maturity date of the earlier of June 28, 2027 or the date that the commitments are terminated. Interest will be charged at the Daily Simple SOFR rate plus a margin of 3.25%. The facility is secured by the assets of the Company’s Epsilon Energy USA subsidiary (Borrower). There are currently no borrowings under the facility.

Under the terms of the facility, the Company must adhere to the following financial covenants:

- Current ratio of 1.0 to 1.0 (current assets / current liabilities)
- Leverage ratio of less than 2.5 to 1.0 (total debt / income adjusted for interest, taxes and non-cash amounts)

Additionally, if the Leverage ratio is greater than 1.0 to 1.0, or the borrowing base utilization is greater than 50%, the Company is required to hedge 50% of the anticipated production from PDP reserves for a rolling 24 month period.

### Repurchase Transactions

On March 9, 2023, the Board of Directors authorized a new share repurchase program of up to 2,292,644 common shares, representing 10% of the outstanding common shares of Epsilon, for an aggregate purchase price of not more than US $15.0 million. The program is pursuant to a normal course issuer bid and will be conducted in accordance with Rule 10b-18 under the Exchange Act. The program commenced on March 27, 2023 and will end on March 26, 2024, unless the maximum amount of common shares is purchased before then or Epsilon provides earlier notice of termination. During the six months ended June 30, 2023, we repurchased 372,275 common shares at an average price of $5.19 per share (excluding commissions) under the new plan.

The previous share repurchase program commenced on March 8, 2022. During the year ended December 31, 2022, we repurchased 982,500 common shares of the maximum of 1,183,410 authorized for repurchase and spent $6,234,879 under the plan. The repurchased stock had an average price of $6.32 per share (excluding commissions) and was subsequently retired during the year ended December 31, 2022. In 2023, we repurchased and retired 190,700 common shares at an average price of $5.82 per share (excluding commissions) before the plan terminated on March 7, 2023.

During the six months ended June 30, 2023, the Company repurchased 562,975 shares at an average price of $5.40 per share (excluding commissions) under the two consecutive repurchase programs.

### Derivative Transactions

The Company has entered into hedging arrangements to reduce the impact of natural gas price volatility on operations. By reducing the price volatility from a portion of natural gas production, the potential effects of changing prices on operating cash flows have been partially mitigated, but not eliminated. While mitigating the negative effects of falling commodity prices, these derivative contracts also limit the benefits we might otherwise receive from increases in commodity prices.

At June 30, 2023, Epsilon’s outstanding natural gas commodity contracts consisted of the following:

| ​ ​ ​ ​ ​ ​ Derivative Type 2023 ​ | ​ ​ Volume (MMbtu) ​ | ​ ​ ​ ​ | ​ ​ Weighted Average Price ($/MMbtu) ​ ​ Swaps ​ ​ | ​ ​ ​ | ​ ​ Basis Differential ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ Fair Value of Asset June 30, 2023 ​ ​ |
| --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| NYMEX Henry Hub swap | 460,000 | ​ | $5.21 | ​ | $— |  | $1,106,445 |
| Tennessee Z4 basis swap | 460,000 | ​ | $— | ​ | $(1.25) |  | ​ 179,625 |
| ​ | 920,000 | ​ | ​ ​ | ​ | ​ ​ | ​ | $1,286,070 |

### Contractual Obligations

The Company enters into commitments for capital expenditures in advance of the expenditures being made. As of June 30, 2023, the Company had short term commitments of $1.6 million for capital expenditures and long term commitments of $7.4 million for asset retirement obligations.

## Market risk

As filed, 2,786 characters.

Our earnings and cash flow are significantly affected by changes in the market price of commodities. The prices of natural gas and oil can fluctuate widely and are influenced by numerous factors such as demand, production levels, world political and economic events, and the strength of the US dollar relative to other currencies. Should the price of natural gas and oil decline substantially, the value of our assets could fall dramatically, impacting our future operations and exploration and development activities, along with our gas gathering system revenues. In addition, our operations are exposed to market risks in the ordinary course of our business, including interest rate and certain exposure as well as risks relating to changes in the general economic conditions in the United States.

### Gathering System Revenue Risk

The Auburn Gas Gathering System lies within the Marcellus Basin with historically high levels of recoverable reserves and low cost of production. We believe that a short-term low commodity price environment will not significantly impact the reserves produced and thus the revenue of our gas gathering system.

### Interest Rate Risk

Market risk is estimated as the change in fair value resulting from a hypothetical 100 basis point change in the interest rate on the outstanding balance under our credit agreement. The credit agreement allows us to fix the interest rate for all or a portion of the principal balance for a period up to three months. To the extent that the interest rate is fixed, interest rate changes affect the instrument’s fair market value but do not affect results of operations or cash flows. Conversely, for the portion of the credit agreement that has a floating interest rate, interest rate changes will not affect the fair market value but will affect future results of operations and cash flows.

At June 30, 2023 and 2022, the outstanding principal balance under the credit agreement was nil.

### Derivative Contracts

The Company’s financial results and condition depend on the prices received for natural gas production. Natural gas prices have fluctuated widely and are determined by economic and political factors. Supply and demand factors, including weather, general economic conditions, the ability to transport the gas to other regions, as well as conditions in other natural gas regions, impact prices. Epsilon has established a hedging strategy and may manage the risk associated with changes in commodity prices by entering into various derivative financial instrument agreements and physical contracts. Although these commodity price risk management activities could expose Epsilon to losses or gains, entering into these contracts helps to stabilize cash flows and support the Company’s capital spending program.

## Controls and procedures

As filed, 2,411 characters.

### Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our principal executive officer and principal financial officer have concluded that our current disclosure controls and procedures were effective as of June 30, 2023 at the reasonable assurance level.

### Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### Inherent Limitations on Effectiveness of Controls

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that of limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, the risk.

## Risk factors

As filed, 164 characters.

There have been no material changes from the risk factors disclosed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2022.

Filed Aug 11, 2023.
Source: SEC EDGAR, the filing index for accession 0001558370-23-014582. Last ingested by Listed: Oct 24, 2026, 15:15 ET. No prices; not investment advice.