CONCORD, ONTARIO — (Marketwire) — 11/08/12 — Epsilon Energy Ltd. (“Epsilon”) (TSX: EPS) today announced 2012 third quarter results of operations. Highlights include:
In the third quarter of 2012, revenues increased 574% compared to the third quarter of 2011, and remained level with the 2nd quarter 2012. The increase in revenues was driven by a significant increase in natural gas production in the Marcellus Shale and associated revenues from Epsilon–s jointly owned gas gathering and compression system. The increase in production volume was offset by a $2.49 or 58% decrease in the realized price per Mcf of gas in the third quarter of 2012 versus 2011, and a $0.49 or 21% decrease in the third quarter of 2012 versus the second quarter of 2012. Epsilon–s natural gas production exit rate as of September 30, 2012 was 42.0 Mmcf/day compared to 43.8 Mmcf/day as of June 30, 2012 and 1.1 Mmcf/day at September 30, 2011. Production curtailments were implemented in the third quarter of 2012 due to low natural gas prices. Due to the significant improvement in natural gas prices and reduced transportation differentials in our region, curtailments have ceased and fourth quarter production is expected to increase from third quarter levels. This should be coupled with improved realized prices to generate significantly higher operating margins and cash flow per Mmcf.
In the fourth quarter, natural gas fundamentals continue to improve with NYMEX prices almost doubling since record lows earlier this year. In addition, basis differentials have decreased dramatically with the addition of multiple Marcellus pipeline expansion projects. With the significant improvement in prices, production curtailments have ceased and six gross wells are expected to come online in the fourth quarter. In addition, Epsilon has a significant inventory of 16 gross wells that have been drilled but not completed pending continued improvement of realized natural gas prices in the Marcellus.
The Auburn gas gathering system (“Auburn GGS”), of which Epsilon owns 35%, generated $3.6 million in revenue during the third quarter of 2012 gathering on average approximately 200 Mmcf/day. The Auburn gas gathering system began operating in September 2011 and construction of the compression facility was completed in July 2012 to reach compression capacity of 300 Mmcf/day with pipeline gathering capacity of 500 Mmcf/day.
The Company remains active in oil exploration activities in Canada. In September 2012, Epsilon signed a definitive agreement with a private Canadian company whereby Epsilon will have the opportunity to earn a 50% interest in leasehold properties in Alberta, Canada by spending approximately $3 million of drilling and completion costs attributable to the prospect, with subsequent expenditures split between Epsilon and its partner in accordance with their participating interests, which are expected to be 50/50 thereafter. Epsilon, acting as operator, spud the first of five wells November 2nd which it is currently drilling. Epsilon is operating the project in the Pembina area of Central Alberta targeting Basal Belly River zone.
Net income for the three and nine months ended September 30, 2012 was lower as compared to the same periods in the prior year due primarily to the recognition of a $27.6 million gain on the Chesapeake farmout agreement assets in 2011. Excluding this gain, there was a decrease in net income for the three and nine months ending September 30, 2012 as compared to the same periods in 2011 due to interest expense in 2012 associated with the convertible debenture that was issued in February 2012 to fund capital expenditures.
Commenting on the third quarter results, Zoran Arandjelovic, Epsilon–s Chairman, CEO and President, said, “Epsilon is stronger than it has ever been and poised to capitalize on significantly improved natural gas fundamentals in the Marcellus and expand its oil production through low risk, low cost Canadian development projects in Alberta and Saskatchewan. We realize now, more than ever, that the company is significantly undervalued relative to the value of its assets and growth potential. In response to the significant gap between the value of the Company–s underlying assets, and the value being recognized in the Company–s stock price, the Board of Directors has recently initiated a review process to consider a range of strategic alternatives with a view to preserving and enhancing shareholder value. To that effect the Board of Directors has approved the terms on which a Strategic Advisor will be engaged on a fixed fee basis to aid in this process. Execution of an agreement reflecting these terms is expected to be completed within the next five working days.”
Epsilon also announces that the Board of Directors has approved an amendment to the Corporation–s general by-law, By-Law Number 1, which adds a provision requiring proposed nominations for directors to be provided to the Board in advance of shareholder meetings that deal with the election of directors. The by-law amendment is in effect now and will be presented to shareholders at the next shareholders meeting for their confirmation, rejection or further amendment. In the event the by-law amendment is rejected by shareholders, it will cease to effect immediately following such meeting. A copy of the by-law amendment may be obtained by shareholders of the Epsilon by contacting the Corporation at its head office.
Reconciliation of Adjusted EBITDA:
The term Adjusted EBITDA consists of net income plus interest, taxes, depreciation and amortization. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered in isolation from or as a substitute for net income or cash flow measures prepared in accordance with generally accepted accounting principles 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 our ability to service debt and to fund capital expenditures and provides investors a helpful measure for comparing its operating performance with the performance of other companies that have different financing and capital structures or tax rates. The following table sets forth a reconciliation of Adjusted EBITDA to net income, which is the most directly comparable measure of financial performance calculated under generally accepted accounting principles.
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 in such forward-looking statements are based on reasonable assumption 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.
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.
Contacts:
Epsilon Energy Ltd.
Lisa Bromiley
Vice President of Business Development
(281) 670-0002