Quarterly / Earnings Reports | Second Quarter (2Q) Update | Financial Results | Capital Markets | Drilling Activity

Epsilon Pauses Drilling Activity in Q2; 34 MMcf/d Marcellus Output

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Epsilon Energy Ltd. reported second quarter 2016 financial and operating results.

Key Points:

• Epsilon did not bring any new wells on line in Q2.

• In response to improved natural gas prices, the Operator did not schedule any temporary well shut-ins during the quarter.

• Marcellus working interest (WI) gas production averaged 34 MMcf/d for the second quarter of 2016.
  

Mr. Michael Raleigh, Chief Executive Officer, commented, "Epsilon's realized natural gas prices in northeast Pennsylvania increased 22% during the second quarter as the result of flat supply coupled with weather related demand for power generation. The relatively high levels of storage resulting from the unseasonably warm winter are declining each week and are dropping toward the five year average. Nevertheless, the absolute price is not yet high enough to attract material industry drilling capital. We therefore expect producer development activity to remain subdued in the region.

"Epsilon's average realized gas price improved from $1.15 per Mcf in the first quarter to $1.40 per Mcf in the second quarter. We believe that most operators are operating at full production capacity. Persistent low levels of producer activity combined with increasing interstate pipeline capacity would be positive for realized prices over the medium to long term."

Highlights for the second quarter and material subsequent events following the end of the quarter through the date of this release include:

• EBITDA of $3.4 million for the quarter of which Upstream contributed $1.5 million and Midstream contributed $1.9 million.

• Marcellus working interest (WI) gas production averaged 34 MMcf/d for the second quarter of 2016. Working interest gas production as of this release averages 30-35 MMcf/d.

• Gathered and delivered 22 Bcfe gross (7.8 Bcfe net to Epsilon's interest) during the quarter, or 244 MMcfe/d through the Auburn System which represents approximately 68% of the maximum throughput. Current system throughput is averaging 200-300 MMcfe/d.

• Auburn Gas gathering and compression services included third party gas of 1.6 Bcfe during the quarter or approximately 17 MMcf/d.

Capital Expenditures

Epsilon's total capital expenditures were $0.1 million for the three months ended June 30, 2016. All capital was allocated to the ongoing build-out and maintenance of the Auburn Gas Gathering system.

Epsilon's 2016 capital forecast for the remainder of the year is $0.2 million allocated to ongoing build-out and maintenance of the Auburn Gas Gathering system. A previously announced acquisition of common gas interests in producing units is contingent on receiving a final consent from certain parties in order to complete the transaction.

Marcellus Operational Guidance

Epsilon did not bring any new wells on line. However, in response to improved natural gas prices, the Operator did not schedule any temporary well shut-ins during the quarter.

The Operator did not drill or propose any new wells during the quarter.

Epsilon has not received any well proposals from the Operator subsequent to quarter end.

Second Quarter Results

Epsilon generated revenues of $6.2 million for the three months ended June 30, 2016 compared to $7.2 million for the three months ended June 30, 2015. The Company's Upstream Marcellus net revenue interest production was 2.7 Bcfe in the second quarter.

Realized natural gas prices averaged $1.40 per Mcf in the second quarter of 2016, an improvement of 22% from the first quarter of 2016. Operating expenses for Marcellus Upstream operations in the second quarter were $1.7 million.

The Auburn Gas Gathering system delivered 22.2 Bcfe of natural gas during the quarter as compared to 18.6 Bcfe during the first quarter of 2016. Primary gathering volumes decreased 4.9% quarter over quarter to 13.3 Bcfe. Imported cross-flow volumes increased 93.1% to 8.9 Bcfe primarily as a result of adjacent system operators returning previously curtailed production to market in response to improving natural gas prices.

Epsilon reported a net after tax loss of $0.9 million attributable to common shareholders or ($0.02) per basic and diluted common share outstanding for the three months ended June 30, 2016, compared to a net loss of $1.6 million, and ($0.03) per basic and diluted common share outstanding for the three months ended June 30, 2015.

For the three months ended June 30, 2016, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $3.4 million as compared to $4.1 million for the three months ended June 30, 2015. The decrease in Adjusted EBITDA was primarily due to lower midstream revenues.