HOUSTON, May 06, 2021 (GLOBE NEWSWIRE) -- Epsilon Energy Ltd. (“Epsilon” or the “Company”) (NASDAQ: EPSN) today reported first quarter 2021 financial and operating results and material subsequent events following the end of the quarter through the date of this release. Net cash provided by operations of $5.6 million for the three months ended March 31, 2021, with free cash flow (FCF) of $5.1 million for the same period.Realized gas prices of $2.57/Mcf, (excluding hedges) and $2.61/Mcf (including hedges) for the three months ended March 31, 2021.During the first three months of 2021 the company returned a total of $0.5 million to shareholders through share repurchases representing a reduction of 0.5% of outstanding shares from December 31, 2020.Marcellus net revenue interest (NRI) gas production averaged 26.8 MMcf/d (Working Interest of 30.9 MMcf/d) for the first quarter. Working interest exit rate for the first quarter was 30.8 MMcf/d.Auburn System gathered and delivered 17.5 Bcf gross (6.1 Bcf net to Epsilon’s interest) during the three months ended March 31, 2021 through the Auburn GGS which represents approximately 87% of maximum throughput as currently configured.Total revenues of $8.4 million; net income of $2.7 million; and EBITDA of $5.4 million for the quarter.Cash at quarter end of $17.9 million.Net income before tax of $3.9 million for the quarter.Operating expenses including SG&A was $1.26/Mcfe. Michael Raleigh, CEO, commented, “Despite having some production curtailed in the first quarter for adjacent drilling operations, Epsilon achieved its internal upstream revenue expectations as a result of very constructive prices for natural gas, particularly in February. Current natural gas prices in the Northeast, however, are somewhat challenged as the normal maintenance cycle for pipelines in the spring reduces capacity out of the basin. We expect this maintenance, and the associated relatively weaker local prices, to continue through the end of May. Natural gas production levels in Appalachia peaked above 34 Bcf/d in early January 2021 but have since declined and remained flat near the 33.5 Bcf. We do not expect growth in natural gas production in Appalachia or the total US market this year; however, we do expect strong demand to continue from LNG and Mexican export markets. It is likely that the market will price natural gas higher this summer in an effort to balance the market and build a comfortable inventory level prior to next winter. Epsilon participated with its 22% interest in the drilling of an extended lateral targeting both the upper and lower Marcellus in May. This well is currently being completed and is expected to turn-in-line in early July.” Financial and Operating Results Three months ended March 31, 2021 2020 Revenues Natural gas revenue $6,332,099 $4,019,764 Volume (MMcf) 2,466 2,727 Avg. Price ($/Mcf) $2.57 $1.47 PA Exit Rate (MMcfpd) 32.8 33.1 Oil and other liquids revenue $107,056 $91,380 Volume (MBO) 3.7 3.1 Avg. Price ($/Bbl) $28.58 $29.22 Gathering system revenue $2,002,157 $2,316,702 Total Revenues $8,441,312 $6,427,846 Capital Expenditures Epsilon’s capital expenditures were $0.9 million for the three months ended March 31, 2021. This capital was mainly related to the completion of one gross (0.03 net to EPSN) well and the drilling of one gross (.22 net to EPSN) well during the 1st quarter of 2021, as well as expenditures for the Auburn Gas Gathering system. Marcellus Operational Guidance During the first quarter of 2021, the operator completed and turned in line one gross (0.03 net to EPSN). Additionally, the operator spud and drilled one gross (0.22 net to EPSN) wells. It is expected that this well will be completed in May and turned to production early July. First Quarter Results Epsilon generated revenues of $8.4 million for the three months ended March 31, 2021 compared to $6.4 million for the three months ended March 31, 2020. Realized natural gas prices averaged $2.56/Mcf (excluding hedges) for Marcellus Upstream operations in the first quarter of 2021. Operating expenses for Marcellus Upstream operations in the first quarter were $1.4 million. Auburn System gathered and delivered 17.5 Bcf gross of natural gas during the quarter as compared to 15.3 Bcfe during the fourth quarter of 2020. Primary gathering volumes declined 7.3% quarter over quarter to 12.2 Bcfe. Imported cross-flow volumes increased 15.3% to 5.3 Bcfe. Epsilon reported net after tax income of $2.7 million attributable to common shareholders or $0.11 per basic and diluted common share outstanding for the three months ended March 31, 2021, compared to net income of $0.3 million, and $0.01 per basic and diluted common share outstanding for the three months ended March 31, 2020. For the three months ended March 31, 2021, Epsilon's Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $5.4 million as compared to $4.6 million for the three months ended March 31, 2020. About Epsilon Epsilon Energy Ltd. is a North American onshore natural gas production and midstream company with a current focus on the Marcellus Shale of Pennsylvania. Forward-Looking Statements Certain statements contained in this news release constitute forward looking statements. The use of any of the words “anticipate”, “continue”, “estimate”, “expect”, ‘may”, “will”, “project”, “should”, ‘believe”, and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated. Forward-looking statements are based on reasonable assumptions, but no assurance can be given that these expectations will prove to be correct and the forward-looking statements included in this news release should not be unduly relied upon. The reserves and associated future net revenue information set forth in this news release are estimates only. In general, estimates of oil and natural gas reserves and the future net revenue therefrom are based upon a number of variable factors and assumptions, such as production rates, ultimate reserves recovery, timing and amount of capital expenditures, ability to transport production, marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary materially from actual results. For those reasons, estimates of the oil and natural gas reserves attributable to any particular group of properties, as well as the classification of such reserves and estimates of future net revenues associated with such reserves prepared by different engineers (or by the same engineers at different times) may vary. The actual reserves of the Company may be greater or less than those calculated. In addition, the Company's actual production, revenues, development and operating expenditures will vary from estimates thereof and such variations could be material. Statements relating to "reserves" are deemed to be forward-looking statements as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated and can be profitably produced in the future. There is no assurance that forecast price and cost assumptions will be attained and variances could be material. Proved reserves are those reserves which are most certain to be recovered. There is at least a 90% probability that the quantities actually recovered will equal or exceed the estimated proved reserves. Undeveloped reserves are those reserves expected to be recovered from known accumulations where a significant expenditure (for example, when compared to the cost of drilling a well) is required to render them capable of production. They must fully meet the requirements of the reserves classification (proved, probable) to which they are assigned. Proved undeveloped reserves are those reserves that can be estimated with a high degree of certainty and are expected to be recovered from known accumulations where a significant expenditure is required to render them capable of production. The estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties due to the effects of aggregation. The estimated future net revenues contained in this news release do not necessarily represent the fair market value of the Company's reserves. Contact Information: 281-670-0002 Michael RaleighChief Executive OfficerMichael.Raleigh@EpsilonEnergyLTD.com Special note for news distribution in the United States The securities described in the news release have not been registered under the United Stated Securities Act of 1933, as amended, (the “1933 Act”) or state securities laws. Any holder of these securities, by purchasing such securities, agrees for the benefit of Epsilon Energy Ltd. (the “Corporation”) that such securities may not be offered, sold, or otherwise transferred only (A) to the Corporation or its affiliates; (B) outside the United States in accordance with applicable state laws and either (1) Rule 144(as) under the 1933 Act or (2) Rule 144 under the 1933 Act, if applicable. EPSILON ENERGY LTD.Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (All amounts stated in US$) Three months ended March 31, 2021 2020Revenues from contracts with customers: Gas, oil, NGLs and condensate revenue $6,439,155 $4,111,144 Gas gathering and compression revenue 2,002,157 2,316,702 Total revenue 8,441,312 6,427,846 Operating costs and expenses: Lease operating expenses 1,594,188 2,047,767 Gathering system operating expenses 190,947 97,778 Development geological and geophysical expenses 11,539 2,629 Depletion, depreciation, amortization, and accretion 1,682,860 2,414,376 Impairment of proved properties — 1,760,000 General and administrative expenses: Stock based compensation expense 202,499 173,919 Other general and administrative expenses 1,327,161 1,008,113 Total operating costs and expenses 5,009,194 7,504,582 Operating income (loss) 3,432,118 (1,076,736) Other income (expense): Interest income 7,813 21,529 Interest expense (27,073) (28,006)Gain on derivative contracts 465,341 1,721,018 Other income (expense) 1,941 (2,225)Other income, net 448,022 1,712,316 Net income before income tax expense 3,880,140 635,580 Income tax expense 1,144,573 325,281 NET INCOME $2,735,567 $310,299 Currency translation adjustments 242 (114)NET COMPREHENSIVE INCOME $2,735,809 $310,185 Net income per share, basic $0.11 $0.01 Net income per share, diluted $0.11 $0.01 Weighted average number of shares outstanding, basic 23,947,222 26,565,084 Weighted average number of shares outstanding, diluted 24,030,104 26,565,084 EPSILON ENERGY LTD.Unaudited Condensed Consolidated Balance Sheets (All amounts stated in US$) March 31, December 31, 2021 2020ASSETS Current assets Cash and cash equivalents $17,851,587 $13,270,913 Accounts receivable 3,462,548 3,917,288 Fair value of derivatives 401,141 — Prepaid income taxes — 89,285 Other current assets 339,209 500,583 Total current assets 22,054,485 17,778,069 Non-current assets Property and equipment: Oil and gas properties, successful efforts method Proved properties 134,831,162 133,902,723 Unproved properties 21,510,765 21,552,063 Accumulated depletion, depreciation, amortization and impairment (99,469,225) (98,200,111)Total oil and gas properties, net 56,872,702 57,254,675 Gathering system 42,215,928 42,202,644 Accumulated depletion, depreciation, amortization and impairment (32,480,738) (32,101,624)Total gathering system, net 9,735,190 10,101,020 Land 637,764 637,764 Buildings and other property and equipment, net 335,455 338,419 Total property and equipment, net 67,581,111 68,331,878 Other assets: Restricted cash 566,540 565,858 Prepaid drilling costs 223 379 Total non-current assets 68,147,874 68,898,115 Total assets $90,202,359 $86,676,184 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable trade $725,168 $1,195,479 Gathering fees payable 780,096 909,768 Royalties payable 1,414,126 1,155,698 Income taxes payable 247,513 — Accrued capital expenditures 724,714 139,766 Other accrued liabilities 786,130 1,002,935 Asset retirement obligations 108,258 106,734 Total current liabilities 4,786,005 4,510,380 Non-current liabilities Asset retirement obligations 3,042,871 3,043,509 Deferred income taxes 10,908,211 10,102,852 Total non-current liabilities 13,951,082 13,146,361 Total liabilities 18,737,087 17,656,741 Commitments and contingencies (Note 9) Shareholders' equity Common shares, no par value, unlimited shares authorized and 23,985,799 issued and 23,862,599 outstanding at March 31, 2021 and 23,985,799 shares issued and outstanding at December 31, 2020. 131,730,401 131,730,401 Treasury shares, 123,200 at March 31, 2021 (492,479) — Additional paid-in capital 8,081,618 7,879,119 Accumulated deficit (77,675,157) (80,410,724)Accumulated other comprehensive income 9,820,889 9,820,647 Total shareholders' equity 71,465,272 69,019,443 Total liabilities and shareholders' equity $90,202,359 $86,676,184 EPSILON ENERGY LTD.Unaudited Condensed Consolidated Statements of Cash Flows (All amounts stated in US$) Three months ended March 31, 2021 2020Cash flows from operating activities: Net income $2,735,567 $310,299 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation, amortization, and accretion 1,682,860 2,414,376 Impairment of proved properties — 1,760,000 Gain on derivative contracts (465,341) (1,721,018)Cash received from settlements of derivative contracts 64,200 1,345,942 Settlement of asset retirement obligation (3,483) — Stock-based compensation expense 202,499 173,919 Deferred income tax expense (benefit) 805,359 (69,478)Changes in assets and liabilities: Accounts receivable 454,740 530,156 Prepaid income taxes and other current assets 161,374 478,540 Accounts payable, royalties payable and other accrued liabilities (349,705) (9,215)Income taxes payable 336,798 — Net cash provided by operating activities 5,624,868 5,213,521 Cash flows from investing activities: Additions to unproved oil and gas properties (23,702) (61,978)Additions to proved oil and gas properties (481,021) (2,045,439)Additions to gathering system properties (40,963) (101,473)Additions to land, buildings and property and equipment (5,745) (145,640)Prepaid drilling costs 156 244 Net cash used in investing activities (551,275) (2,354,286)Cash flows from financing activities: Buyback of common shares (492,479) (1,499,586)Net cash used in financing activities (492,479) (1,499,586)Effect of currency rates on cash, cash equivalents and restricted cash 242 (114)Increase in cash, cash equivalents and restricted cash 4,581,356 1,359,535 Cash, cash equivalents and restricted cash, beginning of period 13,836,771 14,613,711 Cash, cash equivalents and restricted cash, end of period $18,418,127 $15,973,246 Supplemental cash flow disclosures: Income taxes paid $— $— Interest paid $29,562 $28,006 Non-cash investing activities: Change in unproved properties accrued in accounts payable and accrued liabilities $(65,000) $— Change in proved properties accrued in accounts payable and accrued liabilities $468,972 $(903,544)Change in gathering system accrued in accounts payable and accrued liabilities $(27,679) $(21,026)Asset retirement obligation asset additions and adjustments $(21,554) $3,937 EPSILON ENERGY LTD.Adjusted EBITDA Reconciliation (All amounts stated in US$) MDA_Adjusted_EBITDA Three months ended March 31, 2021 2020 Net income $2,735,567 $310,299 Add Back: Net interest expense 19,260 6,477 Income tax expense 1,144,573 325,281 Depreciation, depletion, amortization, and accretion 1,682,860 2,414,376 Impairment expense — 1,760,000 Stock based compensation expense 202,499 173,919 Gain on derivative contracts net of cash received or paid on settlement (401,141) (375,076) Foreign currency translation loss 332 2,225 Adjusted EBITDA $5,383,950 $4,617,501 Epsilon defines Adjusted EBITDA as earnings before (1) net interest expense, (2) taxes, (3) depreciation, depletion, amortization and accretion expense, (4) impairments of natural gas and oil properties, (5) non-cash stock compensation expense, (6) gain or loss on derivative contracts net of cash received or paid on settlement, and (7) other income. Adjusted EBITDA is not a measure of financial performance as determined under U.S. GAAP and should not be considered in isolation from or as a substitute for net income or cash flow measures prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity. Additionally, Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. Epsilon has included Adjusted EBITDA as a supplemental disclosure because its management believes that EBITDA provides useful information regarding its ability to service debt and to fund capital expenditures. It further provides investors a helpful measure for comparing operating performance on a "normalized" or recurring basis with the performance of other companies, without giving effect to certain non-cash expenses and other items. This provides management, investors and analysts with comparative information for evaluating the Company in relation to other natural gas and oil companies providing corresponding non-U.S. GAAP financial measures or that have different financing and capital structures or tax rates. These non-U.S. GAAP financial measures should be considered in addition to, but not as a substitute for, measures for financial performance prepared in accordance with U.S. GAAP. EPSILON ENERGY LTD.Free Cash Flow Reconciliation (All amounts stated in US$) Three months ended March 31 2021 2020Net cash provided by operating activities $5,624,868 $5,213,521 Less: Net cash used in investing activities (Capital Expenditures) (551,275) (2,354,286)Free cash flow $5,073,593 $2,859,235 Epsilon defines Free cash flow (“FCF”) as net cash provided by operating activities in the period minus payments for property and equipment made in the period. FCF is considered a non-GAAP financial measure under the SEC’s rules. Management believes, however, that FCF is an important financial measure for use in evaluating the Company’s financial performance, as it measures our ability to generate additional cash from our business operations. FCF should be considered in addition to, rather than as a substitute for, net income as a measure of our performance or net cash provided by operating activities as a measure of our liquidity. Additionally, our definition of FCF is limited and does not represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other obligations, payments made for business acquisitions, or amounts spent to buys back shares. Therefore, we believe it is important to view FCF as supplemental to our entire statement of cash flows.