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Epsilon Energy Ltd.

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Business Summary

Epsilon Energy Ltd. is a North American onshore-focused independent natural gas and oil company engaged in the acquisition, development, gathering, and production of natural gas and oil reserves . The company operates in the Appalachian Basin in Pennsylvania, the Powder River Basin in Wyoming, the Permian Basin in Texas and New Mexico, and the Western Canadian Sedimentary Basin in Alberta, Canada . As of December 31, 2025, Epsilon's total estimated net proved reserves were 86.4 Bcf of natural gas, 9.3 MMBbls of oil, and 2.4 MMBbls of NGL reserves . The company holds leasehold rights to approximately 101,265 gross (54,044 net) acres .

Epsilon's core business model involves two operating segments: Upstream and Gathering System . The Upstream segment focuses on the acquisition, exploration, development, and production of oil and natural gas reserves . The Gathering System segment involves interest in a natural gas gathering system . Revenue is generated from the sale of natural gas, crude oil, and NGLs, as well as from fees for gas gathering and compression services . The company recognizes upstream revenue when control is transferred to the customer, typically at the delivery point, and gathering system revenue over time as services are provided .

For the year ended December 31, 2025, the Upstream segment generated $44,903,821 in revenue from gas, oil, NGL, and condensate sales, while the Gas Gathering segment generated $6,683,735 in revenue (net of elimination) from gathering and compression fees. Total consolidated operating revenue for the year was $51,587,556 . The Upstream segment's operating loss was $3,812,219 , and the Gas Gathering segment's operating income was $5,155,895 .

Key financial metrics for the year ended December 31, 2025, include total revenue of $51,587,556 , an operating loss of $10,517,383 , and a net loss of $5,798,863 . Basic and diluted net loss per share were both $0.25 . Net cash provided by operating activities was $20,619,683 . As of December 31, 2025, cash and cash equivalents stood at $8,959,954 , and the company had a credit facility payable of $50,500,000 .

Comparing 2025 to 2024, total revenues increased by $20.1 million , or 64% , from $31.5 million in 2024 to $51.6 million in 2025. Upstream natural gas revenue increased by $18.3 million , or 170% , due to higher prices and increased volumes from new and returning wells in Pennsylvania. Upstream natural gas liquids revenue increased by $0.5 million , or 34% , driven by higher volumes from new wells in the Permian and Powder River Basins and higher NGL prices. Upstream oil and condensate revenue increased by $0.1 million , or 1% , with increased production from new wells in the Permian and Powder River Basins largely offset by lower oil prices. Gathering system revenue (net of elimination) increased by $1.2 million , or 21% , primarily due to higher throughput and the displacement of cross-flow gas with higher-fee Anchor Shipper gas. The company's net income shifted from a profit of $1,927,800 in 2024 to a loss of $5,798,863 in 2025, which included a $19.3 million loss on the sale of Anadarko Basin assets.

During 2025, Epsilon acquired Peak Exploration & Production LLC and Peak BLM Lease LLC (together, "Peak") on November 14, 2025, for a total consideration of $88.5 million , which included the issuance of 5,681,489 common shares valued at $27.6 million , contingent consideration of up to 2,500,000 common shares valued at $10.6 million , and the settlement of $50.3 million of debt. The acquisition added 284 gross (60 net) wells and 60,945 gross (39,566 net) acres in Wyoming, contributing 16.8 Bcf of natural gas, 8.2 MMBbls of oil, and 2.0 MMBbls of natural gas liquids to proved reserves . Concurrently, on December 11, 2025, Epsilon divested Dewey Energy Holdings, LLC, selling all its interests in Oklahoma for $2.5 million , resulting in a $19.3 million loss on sale. The company also closed a new senior secured reserve-based revolving credit facility on October 10, 2025, with a borrowing base of $80 million and a maturity date of October 10, 2029 .

Business Outlook

Epsilon anticipates that its current cash balance, available borrowings, and cash flows from operations will be sufficient to meet its cash requirements for at least the next twelve months . The company is committed to disciplined capital allocation, which may include shareholder returns in the form of dividends and/or share buybacks . Management plans to maintain a strong balance sheet and liquidity position to opportunistically invest in both existing project areas and potential new projects .

A major growth area for Epsilon is the integration and development of the assets acquired from Peak Exploration & Production LLC and Peak BLM Lease LLC in the Powder River Basin, Wyoming . This acquisition, completed on November 14, 2025, added 16.8 Bcf of natural gas, 8.2 MMBbls of oil, and 2.0 MMBbls of natural gas liquids to the company's proved reserves . The acquired assets are expected to materially increase the geographic diversification of revenues and provide enhanced flexibility to respond to market conditions by allocating capital across multiple basins and commodities .

The company also has a substantial remaining drillable location inventory within its existing leaseholds in Pennsylvania, Wyoming, and Texas . Capital expenditure commitments as of December 31, 2025, included $3.8 million related to the drilling of 1 gross (0.25 net) well in Texas . The company's development capital spending to convert Proved Undeveloped Reserves to Proved Developed Reserves in 2025 included 4 gross (0.24 net) wells turned on line in Pennsylvania in January 2025 and 3 gross (0.04) wells turned on line in March 2025 . In the Permian Basin, 1 gross (0.25 net) well went into production in July 2025 , and in Canada, 2 gross (0.5 net) wells turned on line in March 2025 .

Operationally, Epsilon aims to optimize its gathering system. The Auburn GGS's design suction pressure was reduced from 550 psig to 450 psig in January 2025 and further to 400 psig in December 2025 to minimize hydrate occurrences . The current system capacity of the Auburn CF at this lower design pressure is approximately 127,000 Mcf per day , and capacity could be increased by adding compression units or increasing design suction pressure if needed . The company is required to hedge 50% of its forecasted Proved Developed Producing production over a rolling 18-month period, with this requirement dropping to 25% for the last 6 months of the 18-month period if facility utilization falls below 50% .

Regarding capital allocation, the Board authorized a new share repurchase program on February 18, 2026, for up to 3,014,986 common shares , representing 10% of outstanding common shares, for an aggregate purchase price of not more than US $15.0 million . This program commenced on February 19, 2026, and is set to expire on February 18, 2027 . Epsilon made aggregate quarterly distributions of $6.0 million ($0.25 per share) during 2025 and intends to maintain this dividend, subject to quarterly Board approval .

The company explicitly flagged geographic concentration as a structural headwind and execution risk. Approximately 67% of its revenue during fiscal year 2025 was derived from natural gas production and gathering system revenues in Pennsylvania, and 19% from oil, natural gas, and natural gas liquids revenues in Texas . This concentration exposes Epsilon to regional supply and demand factors, governmental regulation, processing or transportation capacity constraints, market limitations, weather events, or interruptions of crude oil or natural gas processing or transportation .

Risk Factors

Epsilon's business is highly dependent on volatile oil and natural gas prices, which can significantly impact revenues, profitability, liquidity, and future growth prospects . Declines in commodity prices could reduce economically producible reserves and potentially lead to impairments of proved properties . The company faces substantial capital requirements to replace and grow reserves, and there is no assurance that debt or equity financing will be available on acceptable terms or that cash generated by operations will be sufficient . The borrowing base under its credit facility, which is primarily based on the collateral value of Proved Developed Reserves, is subject to semi-annual redeterminations and could be reduced by commodity price declines or reserve changes, potentially forcing immediate debt repayment . Operational risks include shortages of drilling and completion rigs, equipment, and personnel, as well as hazards like fire, explosion, and environmental damage, for which the company may not be fully insured . The company's reserve estimates are inherently uncertain and subject to material revisions, and actual production, revenues, and costs may vary significantly from estimates . Geographic concentration, with 67% of 2025 revenue from Pennsylvania and 19% from Texas, exposes Epsilon to regional economic, regulatory, and capacity risks, including significant natural gas price discounts in northeast Pennsylvania due to limited interstate transportation capacity . Dependence on third-party operators for approximately 50% of its oil and natural gas properties means Epsilon has limited control over their activities, and their failures could adversely affect production and revenues . Cybersecurity risks, including information theft, data corruption, and operational disruption, are also present, and insurance coverage may not be sufficient to cover all losses .

Management Priorities

Management's message to shareholders emphasizes a commitment to disciplined capital allocation, which could include shareholder returns in the form of dividends and/or share buybacks, and a plan to maintain a strong balance sheet and liquidity position to opportunistically invest in both existing project areas and potential new projects . The company intends to maintain its aggregate quarterly distributions of $6.0 million ($0.25 per share) , subject to quarterly Board approval . Strategic priorities for the period ahead include the integration and development of the recently acquired Peak assets in the Powder River Basin, Wyoming, which are expected to materially increase geographic diversification and provide enhanced flexibility to respond to market conditions . Additionally, management is focused on developing the substantial remaining drillable location inventory within existing leaseholds in Pennsylvania, Wyoming, and Texas , and optimizing the Auburn Gas Gathering System by operating at lower design suction pressures to reduce hydrate occurrences and potentially increasing capacity if required .

View Source Annual Report on SEC.gov ↗

References

  1. [1] Item 1, Business — Summary
  2. [2] Item 1, Business — Summary
  3. [3] Item 1, Business — Summary
  4. [4] Item 1, Business — Summary
  5. [5] Item 1, Business — Business Segments
  6. [6] Item 1, Business — Business Segments
  7. [7] Item 1, Business — Business Segments
  8. [8] Item 3, Summary of Significant Accounting Policies — Revenue Recognition
  9. [9] Item 3, Summary of Significant Accounting Policies — Revenue Recognition
  10. [10] Item 14, Operating Segments — Segment activity as of and for the year ended December 31, 2025
  11. [11] Item 14, Operating Segments — Segment activity as of and for the year ended December 31, 2025
  12. [12] Item 14, Operating Segments — Reconciliation of operating revenue
  13. [13] Item 14, Operating Segments — Segment operating (loss) income
  14. [14] Item 14, Operating Segments — Segment operating (loss) income
  15. [15] Item 7, MD&A — Results of Operations, Revenues
  16. [16] Item 7, MD&A — Results of Operations, Operating (loss) income
  17. [17] Item 7, MD&A — Results of Operations, Net (loss) income
  18. [18] Item 8, Consolidated Statements of Operations and Comprehensive Income — Net (loss) income per share, basic and diluted
  19. [19] Item 8, Consolidated Statements of Cash Flows — Net cash provided by operating activities
  20. [20] Item 8, Consolidated Balance Sheets — Cash and cash equivalents
  21. [21] Item 8, Consolidated Balance Sheets — Credit facility payable
  22. [22] Item 7, MD&A — Results of Operations, Revenues
  23. [23] Item 7, MD&A — Results of Operations, Revenues
  24. [24] Item 7, MD&A — Results of Operations, Revenues
  25. [25] Item 7, MD&A — Results of Operations, Revenues
  26. [26] Item 7, MD&A — Results of Operations, Revenues
  27. [27] Item 7, MD&A — Results of Operations, Revenues
  28. [28] Item 7, MD&A — Results of Operations, Revenues
  29. [29] Item 7, MD&A — Results of Operations, Revenues
  30. [30] Item 7, MD&A — Results of Operations, Revenues
  31. [31] Item 7, MD&A — Results of Operations, Revenues
  32. [32] Item 7, MD&A — Results of Operations, Revenues
  33. [33] Item 7, MD&A — Results of Operations, Revenues
  34. [34] Item 7, MD&A — Net (Loss) Income Compared to Adjusted EBITDA
  35. [35] Item 7, MD&A — Net (Loss) Income Compared to Adjusted EBITDA
  36. [36] Item 7, MD&A — Loss on Sale of Assets
  37. [37] Item 1, Business — Summary
  38. [38] Item 1, Business — Summary
  39. [39] Item 1, Business — Summary
  40. [40] Item 1, Business — Summary
  41. [41] Item 7, MD&A — Overview
  42. [42] Item 7, MD&A — Overview
  43. [43] Item 1, Business — Recent Developments, Business Combination
  44. [44] Item 1, Business — Recent Developments, Asset Sale
  45. [45] Item 1, Business — Recent Developments, Asset Sale
  46. [46] Item 1, Business — Recent Developments, Credit Facility
  47. [47] Item 1, Business — Recent Developments, Credit Facility
  48. [48] Item 7, MD&A — Capital Resources and Liquidity, Cash Flow
  49. [49] Item 7, MD&A — Overview
  50. [50] Item 7, MD&A — Overview
  51. [51] Item 1, Business — Summary
  52. [52] Item 1, Business — Recent Developments, Business Combination
  53. [53] Item 1, Business — Geographic Locations of Operations
  54. [54] Item 7, MD&A — Overview
  55. [55] Item 7, MD&A — Contractual Obligations
  56. [56] Item 7, MD&A — Contractual Obligations
  57. [57] Item 1, Business — Proved Reserves, Changes in Total Proved Undeveloped Reserves
  58. [58] Item 1, Business — Proved Reserves, Changes in Total Proved Undeveloped Reserves
  59. [59] Item 1, Business — Proved Reserves, Changes in Total Proved Undeveloped Reserves
  60. [60] Item 1, Business — Gathering System Operations
  61. [61] Item 1, Business — Gathering System Operations
  62. [62] Item 1, Business — Gathering System Operations
  63. [63] Item 7, MD&A — Credit Agreement
  64. [64] Item 7, MD&A — Credit Agreement
  65. [65] Item 7, MD&A — Credit Agreement
  66. [66] Item 7, MD&A — Repurchase Transactions
  67. [67] Item 7, MD&A — Repurchase Transactions
  68. [68] Item 7, MD&A — Repurchase Transactions
  69. [69] Item 7, MD&A — Repurchase Transactions
  70. [70] Item 1, Business — Dividends
  71. [71] Item 1, Business — Dividends
  72. [72] Item 1, Business — Geographic Locations of Operations
  73. [73] Item 1, Business — Geographic Locations of Operations
  74. [74] Item 1, Business — Geographic Locations of Operations
  75. [75] Item 1, Business — Geographic Locations of Operations
  76. [76] Item 1A, Risk Factors — Risks Related to Commodity Prices, Hedging and Marketing
  77. [77] Item 1A, Risk Factors — Risks Related to Oil and Natural Gas Reserves
  78. [78] Item 1A, Risk Factors — Risks Related to Stage of Development, Structure and Capital Resources
  79. [79] Item 1A, Risk Factors — Risks Related to Stage of Development, Structure and Capital Resources
  80. [80] Item 1A, Risk Factors — Risks Related to Oil and Natural Gas Reserves
  81. [81] Item 1A, Risk Factors — Our reserve estimates may be inaccurate, and future net cash flows as well as our ability to replace any reserves are uncertain.
  82. [82] Item 1A, Risk Factors — Our operations are currently geographically concentrated and therefore subject to regional economic, regulatory and capacity risks.
  83. [83] Item 1A, Risk Factors — Our operations are currently geographically concentrated and therefore subject to regional economic, regulatory and capacity risks.
  84. [84] Item 1A, Risk Factors — Our operations are currently geographically concentrated and therefore subject to regional economic, regulatory and capacity risks.
  85. [85] Item 1A, Risk Factors — We depend on third-party operators and our key personnel, and competition for experienced technical personnel may negatively affect our operations.
  86. [86] Item 1A, Risk Factors — We depend on third-party operators and our key personnel, and competition for experienced technical personnel may negatively affect our operations.
  87. [87] Item 1A, Risk Factors — We are subject to cybersecurity risks.
  88. [88] Item 7, MD&A — Overview
  89. [89] Item 1, Business — Dividends
  90. [90] Item 1, Business — Dividends
  91. [91] Item 1, Business — Geographic Locations of Operations
  92. [92] Item 7, MD&A — Overview
  93. [93] Item 1, Business — Gathering System Operations

Analysis on 5/21/2026