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Exploration & Production | Quarterly / Earnings Reports | Third Quarter (3Q) Update

Epsilon Sees Lull in Marcellus Well Activity in 3Q

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   |    Thursday,October 30,2014

Epsilon Energy Ltd. reported third quarter 2014 financial and operating results.

Highlights:

  • Pre-tax income of $5.3 million and adjusted EBITDA of $8.0 million for the quarter; $17.8 million and $30.4 million, respectively, year to date.
  • Upstream EBITDA of $5.6 million and Midstream EBITDA of $2.4 million for the quarter; $22.6 million and $7.8 million, respectively, year to date.
  • Marcellus working interest (WI) gas production averaged 49.6 MMcf/d for the third quarter and 51.1 MMcf/d for the nine months ended September30, 2014.
  • Gathered and delivered 29 Bcfe gross (10.3 Bcfe net to Epsilon's interest) during the quarter, or 319 MMcfe gross per day with the Auburn Gas Gathering system.
  • Repurchased 353,210 common shares at an average price of (Cdn) $4.08 during the third quarter. 1,296,710 common shares were repurchased at an average price of (Cdn) $3.73 under the Normal Course Issuer's Bid ("NCIB") that expired in September. The NCIB was renewed in October; and, as of the date of this release, 105,700 additional common shares at an average price of (Cdn) $3.95 have been purchased resulting in a current share count of 49,362,864 issued and outstanding.

Mr. Michael Raleigh, Chief Executive Officer, commented, "Although we continue to experience the headwinds of a challenging natural gas price environment and constrained downstream takeaway capacity, we remain pleased with the significant free cash flow generation for the quarter. We are optimistic that both of these issues are being addressed for the medium term by several major pipeline projects that are scheduled to be in service over the next two years.

"Overall, we remain steadfast in our effort to maximize free cash flow and to return capital opportunistically to shareholders through our share repurchase program."

Capital Expenditures

Epsilon's total capital expenditures were $1.8 million for the three months ended September 30, 2014. $0.5 million was allocated to drilling and completing Marcellus wells, and $2.3 million was allocated to the ongoing build-out of the Auburn Gas Gathering system. Total capital expenditures for the quarter reflect a $1.0 million reversal for an overstated accrual during the prior quarter.

Epsilon's 2014 capital forecast for the remainder of the year is $3 million. Approximately $1 million will be allocated to drilling & completing wells, and $2 million will be allocated to the Auburn Gas Gathering system.

As of the end of the third quarter, the expression of interest to expand the Auburn compression facility from the current capacity of approximately 330 MMcf/d to 550 MMcf/d has not materialized into a firm commitment. Epsilon believes that the significant basis differential experienced by all operators in the NE Marcellus region has a material effect on the business decisions of the surrounding upstream producers. Until sufficient downstream takeaway capacity has materialized, Epsilon does not expect any decision to be forthcoming with regards to the expansion of the facility. Epsilon will continue to add incrementally to the pipeline gathering network. As of quarter end, the first 3rd party pads were tied in to the network and preparing to flow gas.

Marcellus Operational Guidance

During the third quarter, Epsilon did not turn any new wells in line. 2 wells (.02 net) were returned to production, but 3 wells (0.04 net) were shut-in for adjacent fracing operations. The Operator drilled 2 wells (0.04 net) during the quarter. Also during the quarter, Epsilon received two drilling proposals from the Operator and elected to participate in 2 wells (.07 net).

The table below details Epsilon's well development status at September 30, 2014:

Subsequent to September 30th, Epsilon received a drilling proposal and elected to participate in 1 well (.01 net) which will spud during the fourth quarter.

Third Quarter Results

Epsilon generated revenues of $11.0 million for the three months ended September 30, 2014 compared to $10.6 million for the three months ended September 30, 2013. The Company's Upstream Marcellus working interest production was 4.0 Bcfe net in the third quarter.

Realized natural gas prices averaged $1.96 per Mcf in the third quarter of 2014. Realized natural gas prices in Northeast Pennsylvania continue to be negatively impacted by a significant differential to NYMEX Henry Hub prices. Operating expenses for Marcellus Upstream operations in the third quarter were $2.2 million.

The Midstream system delivered 29 Bcfe gross of natural gas during the quarter as compared to 29 Bcfe during the second quarter of 2014. Primary gathering volumes declined 7.6% quarter over quarter to 16.2 Bcfe while imported cross-flow volumes increased 14.7% to 13.1 Bcfe.

Epsilon reported net after tax income of $3.0 million attributable to common shareholders or $0.06 per basic and diluted common shares outstanding for the three months ended September 30, 2014, compared to net income of $0.1 million, or less than $0.01 per basic and diluted common shares outstanding for the three months ended September 30, 2013.

For the three months ended September 30, 2014, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization was $8.0 million as compared to $6.6 million for the three months ended September 30, 2013. The increase in Adjusted EBITDA was primarily due to increased production, increased cross-flow gas and decreased general and administrative costs.