Epsilon Energy Ltd. (EPSN) discussed its financial and operational results for the second quarter of 2024 in a recent earnings conference call. The company highlighted the performance of its Permian assets, which accounted for half of the quarter's revenue and three-quarters of its cash flow. Despite several wells being offline for more than two weeks, the Permian business is expected to see a sequential increase in volumes for the sixth consecutive quarter. In contrast, the Marcellus operations faced natural declines and continued curtailments, leading to decreased revenues and volumes. However, the company remains optimistic about its long-term prospects, including the potential uplift from curtailed volumes and deferred Turn-In-Line (TIL) operations, which could more than double the current net production. Epsilon also anticipates meaningful volume and cash flow growth in 2025, supported by its strong liquidity position and new business development efforts.
Key Takeaways
- Epsilon's Permian assets performed strongly, contributing significantly to the quarter's revenue and cash flow.
- The company experienced decreased revenues and volumes in the Marcellus due to natural declines and curtailments.
- Epsilon is well-positioned for growth in 2025, with several potential interim value catalysts on the horizon.
- The company is actively pursuing new business development opportunities, especially in Canada.
- Epsilon's borrowing base was redetermined higher to $45 million, reflecting the addition of Texas production.
Company Outlook
- Epsilon expects its Marcellus cash flow to trough in the second and third quarters of 2024.
- The company remains leveraged to an increase in natural gas prices.
- There is anticipation for volume growth from the Permian in the third quarter.
- Epsilon is exploring new opportunities for capital deployment, focusing on Canada.
Bearish Highlights
- Several Permian wells were offline for a significant period during the quarter.
- Revenues and volumes in the Marcellus declined due to natural declines and continued curtailments.
Bullish Highlights
- The Permian business is expected to continue its sequential volume increase.
- The company has a new gas gathering agreement providing clarity and a stable rate regime going forward.
- Epsilon's liquidity position and improving cash flow profile allow for comfortable capital deployment.
Misses
- The 12-month natural gas strip has deteriorated over the summer, impacting earnings.
Q&A highlights
During the Q&A session, management addressed various inquiries, but specific questions and responses were not detailed in the summary provided.
Epsilon Energy's second quarter of 2024 showcased a mix of challenges and opportunities. While the company faced headwinds in the Marcellus, its Permian operations and strategic initiatives point to a positive outlook for the future. The company's focus on new business development, particularly in Canada, and its strong liquidity position, are poised to drive growth and add value for shareholders in the coming years.
InvestingPro Insights
Epsilon Energy Ltd. (EPSN) has been navigating a complex environment, as reflected in their recent earnings call. Yet, the numbers reveal a nuanced picture of the company's financial health and potential. Here are some key insights based on the latest data from InvestingPro:
- Epsilon Energy holds a market capitalization of $112.9 million, which, considering its revenue and profitability, paints a picture of a company with a solid presence in its sector.
- The company has managed to maintain a gross profit margin of 68.9% over the last twelve months as of Q1 2024, indicating strong operational efficiency despite the challenges faced in the Marcellus operations.
- With a P/E ratio adjusted for the last twelve months of 19.06, Epsilon Energy is valued by the market above its earnings, which could suggest investor confidence in its future growth potential.
InvestingPro Tips for Epsilon Energy highlight several aspects that are particularly relevant to investors:
- The company is profitable over the last twelve months, which is a positive sign for potential investors looking at the company's ability to generate earnings.
- Epsilon has more cash than debt on its balance sheet, suggesting a strong liquidity position that aligns with the company's optimistic outlook for volume and cash flow growth in 2025.
For those interested in a deeper dive into Epsilon Energy's financials and operations, InvestingPro offers additional insights and tips. Currently, there are 5 more InvestingPro Tips available that can provide a more comprehensive understanding of the company's investment potential. Access these tips by visiting https://www.investing.com/pro/EPSN.
Full transcript - Epsilon Energy Ltd (EPSN) Q2 2024:
Operator: Good day, and welcome to the Epsilon Energy Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to our Chief Financial Officer, Mr. Andrew Williamson. Please go ahead, sir.
Andrew Williamson: Thank you, operator. And on behalf of the management team, I would like to welcome all of you to today's conference call to review Epsilon's Second Quarter 2024 Financial and Operational Results. Before we begin, I'd like to remind you that our comments may include forward-looking statements. It should be noted that a variety of factors could cause Epsilon'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.
Jason Stabell: Thank you, Andrew. Good morning, and thank you for participating in our second quarter 2024 conference call. Joining me today are Andrew Williamson, our CFO; and Henry Clanton, our COO. We will be available to answer questions later in the call. Our Permian business remains a bright spot. These assets contributed approximately 50% of our quarterly revenue and 75% of our cash flow, despite the fact that several wells were off-line for more than 2 weeks during the quarter due to offset completion activities. In the third quarter, we expect volumes in the Permian to increase sequentially for the sixth consecutive quarter. In Pennsylvania, natural declines and continued curtailments resulted in decreased revenues and volumes for the quarter. We remain extremely leveraged to a rebound in natural gas prices, with our combination of curtailed volumes and deferred TILs representing the potential for an initial uplift of more than 100% of current net production. The 12-month natural gas strip has continued to deteriorate over the summer, so we support the proactive approach of our operator to remove and defer volumes in an oversupplied gas market. Overall, the company remains well positioned to deliver meaningful volume and cash flow growth in 2025, with several potential interim value catalysts. The first of which is the ongoing sale process of our operator in Ector County, where we expect an update before year-end. The second potential catalyst is our ongoing business development efforts in new areas, matched with our strong liquidity position that will allow us to take advantage of attractive opportunities that become available. Now I'd like to turn the call over to Andrew for additional comments.
Andrew Williamson: Thanks, Jason. We are expecting upstream cash flow from the Marcellus to trough in Q2, Q3 this year based on the current forward strip and as our curtailed and pending volumes come online. As I mentioned last quarter, we have a new rate regime for the gas gathering system, after executing a new gathering agreement in May that provides some clarity on the rate regime on the system going forward, which is a good thing as a system owner and shipper. That said, gathering revenues will continue to come down until curtailments are lifted and incremental new development volumes from the dedicated Auburn leaseholder put through the system. As Jason mentioned, we feel very good about the long-term viability of the asset, and are comfortable that midstream earnings will continue to underwrite most of our dividend. However, we are leveraged to better gas prices on the midstream side as well. We will see contribution and incremental volume growth from the recent development in the Permian in the third quarter, but we're uncertain on additional development there in the near term until the operator sale process is completed, which we expect will happen before year-end. We expect and are eager to participate in more development there once that happens. We've been active looking at new opportunities, and we're excited about the potential of adding additional areas to deploy capital, which we can do comfortably with our liquidity position and improving cash flow profile. Our focus this year has been in Canada, where we see a number of potentially attractive opportunities. We will keep you updated as things progress. As announced in June, our borrowing base was redetermined higher to $45 million, with lender commitments at the same amount, after adding in our Texas production and despite the temporary challenges in the Marcellus. Now I'll turn it over to Henry for operations.
Henry Clanton: Thank you, Jason and Andrew. We continue to build meaningful value in the Permian Basin. Flowback operations began in July on the seventh horizontal well in the Pradera Fuego project. This is the southernmost well drilled to date, crossing into the greater than 11,000-acre undevelopment block. Early productivity results are meeting predrill expectations and more importantly, are further confirming productivity of the interval in this significant development runway. Peak production of the well is expected during August, adding to the meaningful growth in production from the project. Recent spacing test in the play by leading operators indicate initial pad development of up to 4 wells per section, minimizing potential parent-child risks, an increase over our spacing guidance last quarter. The undeveloped status of the acreage block to the south of the existing wells provides for a thoughtfully planned full field development, including water supply and disposal infrastructure that can meaningfully reduce development costs moving forward. As reported previously, evaluation efforts continue on a second perspective interval, the Woodford. Analysis of the recent core taken within the acreage through the Woodford interval demonstrates high organic content and thermal maturity similar to the Barnett. The thickness of the interval, coupled with offset well performance, suggests prospectivity worthy of appraisal. In the Marcellus, we continue to support the production curtailments and delayed TILs of the new drills during this current low price environment. Now back to Jason.
Jason Stabell: Thanks, guys. Operator, we can now open the line for questions.
Operator:
Jason Stabell: Thank you, operator. I appreciate your interest in Epsilon and joining us today. And as always, if you have any questions, please contact us here in Houston. Thanks, and have a great day.
Operator: The conference has now concluded. Thank you for attending today's presentation.
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