Q1 2024 Epsilon Energy Ltd Earnings Call

Good day and welcome to the Epsilon energy first quarter 'twenty 'twenty four earnings conference call.

Operator: Good day, and welcome to the Epsilon Energy first quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. I would now like to turn the conference over to Andrew Williamson. Please go ahead.

Operator: All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two.

Operator: I would now like to turn the conference over to entry will Andrew Williamson. Please go ahead.

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 first quarter 2024 financial and operational results. Before we begin, I would 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.

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 <unk> first quarter 2024 financial and operational results.

Andrew Williamson: Before we begin I would like to remind you that our comments may include forward looking statements.

Andrew Williamson: Should be noted that a variety of factors could cause epsilon <unk> actual results to differ materially from the anticipated results or expectations expressed in these forward looking statements.

Andrew Williamson: 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.

Andrew Williamson: Today's call May also contain certain non-GAAP financial measures. Please refer to the earnings release that we issued yesterday, our disclosures on forward looking statements and reconciliations of non-GAAP measures.

Jason P. Stabell: With that I'd like to turn the call over to Jason to Bell, our Chief Executive Officer.

Jason P. Stabell: Thank you Andrew.

Jason P. Stabell: Andrew, good morning and thank you for participating in our first 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. Today, I'll keep my prepared remarks brief and let Andrew and Henry offer more detailed comments on our financial and operating results and forward plan.

Jason P. Stabell: Good morning, and thank you for participating in our first quarter 2024 conference call.

Jason P. Stabell: Joining me today are Andrew Williamson, our CFO, and Henry Clinton or C O L.

Jason P. Stabell: We will be available to answer questions later in the call.

Jason P. Stabell: Today I'll keep my prepared remarks brief and let Andrew and Henry offer more detailed comments on our financial and operating results and forward plans.

Jason P. Stabell: Our Permian assets continue to perform well.

Jason P. Stabell: Our Permian assets continue to perform well. We expect to bring two additional gross wells online over the summer at the Pradera Fuego project in Hector County. We are also in discussions about the location and timing of a potential additional well in the second half of this year. This activity, combined with our recent acquisition, won't be fully reflected in our results until the third quarter due to a several-week shut-in in May of two producing wells during frack operations.

Jason P. Stabell: We expect to bring two additional gross wells online over the summer and the <unk> project in Ector County.

Jason P. Stabell: We are also in discussions about the location and timing of a potential additional well in the second half of this year.

Jason P. Stabell: This activity combined with our recent acquisition won't be fully reflected in our results until the third quarter due to a several week shut in in May of two producing wells during frac operations.

Jason P. Stabell: However, we still expect to see quarter-over-quarter liquids volume growth in the second quarter. In addition, a full core was taken from the deeper Woodford bench in the well drilled in March to further evaluate the prospectivity of the interval, potentially adding a second development bench to our assets in equity. We will keep you updated on the progress of this evaluation.

Jason P. Stabell: However, we still expect to see quarter over quarter liquids volume growth in the second quarter.

Jason P. Stabell: In addition, our full core was taken in the deeper Woodford bench in the well drilled in March to further evaluate the prospectively of the interval.

Jason P. Stabell: Potentially adding a second development matched to our assets and actor.

Jason P. Stabell: We will keep you updated on the progress of this evaluation.

Jason P. Stabell: In Pennsylvania, we support the actions of our operating partner to delayed turn in lines on wells completed last quarter.

Jason P. Stabell: In Pennsylvania, we support the actions of our operating partner to delay turn-in lines on wells completed last quarter and selectively curtail production. Currently, we have seven completed wells, 0.7 net, that will likely not begin production until natural gas prices improve sustainably. Our current estimate for first production on the deferred tills is early 2025 based on conversations with the operators. In addition, the operator has curtailed some existing production in Auburn, representing approximately 4.5 million cubic feet of daily NRI production.

Jason P. Stabell: And selectively curtailed production.

Jason P. Stabell: Currently we have seven completed wells 0.7 net.

Jason P. Stabell: That will likely not begin production until natural gas prices improve sustainably.

Jason P. Stabell: Our current estimate for first production on the deferred pills is early 2025 based on conversations with the operator.

Jason P. Stabell: In addition, the operator has curtailed some existing production and Auburn, representing approximately four and a half million cubic feet, a day and NRI production Easter.

Jason P. Stabell: These curtailments are in response to current pricing, and we anticipate this production to return as prices improve. Finally, we expect the combination of our more diverse revenue mix and defensive hedging program to result in flat to slightly lower cash flow in 2024 versus 2023 at current strip prices, which, in combination with our strong balance sheet, will allow us to continue to invest in our promising Permian project, pay our dividend, and warehouse a material volume of gas for an improved pricing environment. All of this potentially sets us up for a material uplift in cash flow in 2025. Now, I would like to turn the call over to Andrew for some comments.

Jason P. Stabell: These curtailments are in response to current pricing and we anticipate this production to return as prices improve.

Andrew Williamson: Finally, we expect the combination of our more diverse revenue mix and defensive hedging program to result in flat to slightly down cash flow in 2024 versus 2023 at current strip prices.

Andrew Williamson: In combination with our strong balance sheet will allow us to continue to invest in our promising Permian project pay our dividend and warehouse material volume of gas for an improved pricing environment. All of this potentially sets us up for a material uplift in cash flow in 2025.

Jason P. Stabell: Now I would like to turn the call over to Andrew for some time.

Andrew Williamson: Thanks, Jason.

Andrew Williamson: Following some comments I made in March, we've continued to ramp up our investment activity with over $42 million spent over the last 12 months through quarter end. Over 80% of that was spent building the Permian business, with the remainder spent in the Marcellus on the recently completed wells. These investments were funded by a combination of operating cash flows and cash on hand.

Andrew Williamson: Following on some comments I made in March we've continued to ramp up our investment activity with over 42 million spent over the last 12 months through quarter end.

Andrew Williamson: Over 80% of that was spent building the Permian business with the remainder spent in the Marcellus on the recently completed wells.

Andrew Williamson: These investments were funded by a combination of operating cash flows and cash on hand.

Andrew Williamson: The important takeaway is that 70% of that spend has not contributed to a full quarter of results. Yet to contribute are the $9 million spent on undeveloped leasehold in Ector County in the Predera Project, where we have over 30 estimated gross two-mile undeveloped locations. That excludes the Woodford that Jason mentioned earlier.

Andrew Williamson: The important takeaway is it 70% of that spend has not contributed to a full quarter of results.

Andrew Williamson: Yeah to contribute or the 9 million spent on undeveloped leasehold and actor County, and the print era project.

Andrew Williamson: Where are we have over 30 estimated gross two mile undeveloped locations that excludes the Woodford that Jason mentioned earlier.

Andrew Williamson: $6 million spent on the Marcellus wells awaiting turn in line, and $3.5 million spent on the current well in Predera. The contribution delay is a characteristic of the drill bit activity we're focused on; the Predera PDP acquisition, which was three wells and twelve million, only contributed for one month during the quarter with a March 1st effective date. All of this speaks to the setup Jason mentioned earlier, which started this year for our Permian assets with continued growth through the next few quarters.

Andrew Williamson: 6 million spent on the Marcellus wells awaiting turned in line and.

Andrew Williamson: And three and a half million spent on the current well and for Dara.

Andrew Williamson: The contribution delay is a characteristic of the drill bit activity we're focused on.

Andrew Williamson: The premiere of P. D P acquisition, which was three wells and 12 million.

Andrew Williamson: Only contributed one month during the quarter with a march 1st effective date.

Andrew Williamson: All of this speaks to the setup, Jason mentioned earlier, which started this year for our Permian assets with continued growth through the next few quarters.

Andrew Williamson: Looking at the full year 'twenty 'twenty four we estimate the Permian to contribute well over half of our upstream cash flow at current strip prices.

Andrew Williamson: Looking at the full year 2024, we estimate the Permian to contribute well over half of our upstream cash flow at current strip prices. We feel good about our ability to continue to invest in the portfolio and potential new opportunities despite the reduction in cash. We project an increasingly strong cash flow profile going forward, driven by the Permian liquids and higher future gas prices, plus the pending volumes in the Marcellus. We also have our undrawn revolver, a portion of which we could conservatively deploy given the right opportunity.

Andrew Williamson: We feel good about our ability to continue to invest in our portfolio and potential new opportunities. Despite the reduction in cash.

Andrew Williamson: We projected increasingly strong cash flow profile going forward, driven by the Permian liquids and higher future gas prices plus the pending volumes in the Marcellus we.

Andrew Williamson: We also have our undrawn revolver, a portion of which we can conservatively deploy given the right opportunity.

Henry Nelson Clanton: We start our borrowing-based redetermination process this month, where we will add the Permian assets. Back to Marcellus, we are now in the final stages of negotiating a new gas gathering agreement that will replace the legacy cost of service agreement. The new agreement will establish fixed gathering, compression, and cross-flow rates for all shippers on the Auburn system, effective January 1, 2024. We expect the new gathering rates to mirror the rates put in place earlier this year under an interim agreement, which are 47.5 cents per MMBTU for gathering, which is up 17% year over year, 10 cents per MMBTU for compression, which is flat year over year, and $0.12 per mm BTU for cost flow from adjacent systems, which is up 17% year-over-year.

Andrew Williamson: We start our borrowing base redetermination process this month.

Henry Nelson Clanton: Where we will add in the Permian assets.

Henry Nelson Clanton: Back to the Marcellus we're now in the final stages of negotiating a new gas gathering agreement that will replace the legacy cost of service agreement.

Henry Nelson Clanton: The new agreement will establish fixed gathering compression and cross flow rates for all shippers on the Auburn system effective January one 'twenty 'twenty four.

Henry Nelson Clanton: We expect the new gathering rates to mirror the rates put in place earlier this year under an interim agreement, which are 47 and a half cents per M. M. Btu for gathering which is up 17% year over year 10 cents per M. N btu for compression, which is flat year over year.

Henry Nelson Clanton: And 12 cents per M. N V to you for Clos flow from adjacent systems, which is up 17% year over year.

Henry Nelson Clanton: Per the agreement, these rates will escalate at CPIU annually starting next year. We believe the updated arrangement will be beneficial as both an owner of and shipper on the system. Most importantly, it will remove the rate uncertainty that came with annual cost of service redetermination. We also believe the fixed rate amounts strike a good balance between midstream owner revenues and shipper operating costs and breakevens. Now we'll turn it over to Henry for operation.

Henry Nelson Clanton: For the agreement these rates will escalate at C. P. I you annually starting next year.

Henry Nelson Clanton: We believe the updated arrangement will be beneficial as both an owner of an shipper on the system. Most importantly, it will remove the rate uncertainty that came with annual cost of service Street determinations.

Henry Nelson Clanton: We also believe the fixed rate amount strike a good balance between midstream owner revenues and shipper operating costs and break evens.

Henry Nelson Clanton: Now I'll turn it over to Henry for operations.

Henry: Thank you, Jason and Andrew.

Henry Nelson Clanton: Thank you, Jason and Andrew. I'd like to provide further operational details on the two Pedera Fuego wells Jason mentioned earlier. Currently, one is being completed, with flowback operations expected later this month. The two offset wells shut in during completion operations will be returned to production at that time. Drilling operations have commenced on the second well, with completion operations expected in July. Both of these wells will have completed lateral links just over 11,000 feet long.

Henry Nelson Clanton: I'd like to provide further operational details on the two Panera Fuego Wells, Jason mentioned earlier currently one is being completed with flowback operations expected later this month.

Henry Nelson Clanton: The two offset wells shut in during completion operations will be returned to production at that time.

Henry Nelson Clanton: Drilling operations have commenced on the second well with completion operations expected in July.

Henry Nelson Clanton: Both of these wells will have completed lateral links just over 11000 foot.

Henry Nelson Clanton: While planning for the third well their shares underway, which will be the eighth well in the project to date.

Henry Nelson Clanton: Well planning for the third well this year is underway, which will be the eighth well in the project to date. Epsilon owns a 25% working interest in this 16,000-acre project. As stated previously, this acreage position adds a significant fairway of an estimated 30 gross locations of two-mile laterals, assuming spacing of three wells per section. It is worth to note that we receive a dollar premium to NYMEX pricing for crude oil excluding transportation.

Henry Nelson Clanton: Epsilon owns a 25% working interest in the 16000 plus acre project.

Henry Nelson Clanton: As stated previously this acreage position as a significant fairway of an estimated 30 gross locations a two mile laterals, assuming spacing of three wells per section.

Henry Nelson Clanton: It is worthy to note that we receive a dollar premium to Nymex pricing for the crude oil excluding transportation.

Henry Nelson Clanton: In addition, analysis is underway on the Woodford core taken recently to continue assessment of the interval's prospectivity within the current lease position. In Northeast Pennsylvania, we agree with deferred TILs on newly drilled wells and the selective production curtailments currently in place until gas pricing improves. As stated in prior disclosures, the new wells are expected to perform consistently with the other wells in the area and, depending on timing, will roughly double our net gas production from the Marcellus. Now back to...

Henry Nelson Clanton: Other analysis is underway on the Woodford core taken recently to continue assessment of the intervals prospectively within our current lease position.

Henry Nelson Clanton: In northeast, Pennsylvania, we agree with deferred T I else on the newly drilled wells and the selected production curtailments currently in place until gas pricing improves.

Henry Nelson Clanton: As stated in prior disclosures the new wells are expected to perform consistently with the other wells in the area.

Henry Nelson Clanton: And depending on timing will roughly double our net gas production from the Marcellus.

Henry Nelson Clanton: Now back to Jason.

Speaker Change: Thanks, guys operator, we can now open the lines for questions.

Jason P. Stabell: Thanks guys. Operator, we can now open the lines for questions.

Speaker Change: We will now begin the question and answer session.

Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

Operator: Ask a question you May press Star then one on your Touchtone phone.

Operator: If youre using a speakerphone please pick up your handset before pressing the keys.

Operator: To withdraw your question, please press star, then 2. At this time, we'll pause momentarily to assemble a roster. Again, if you have a question, that's star, then 1. There are no questions in the queue. I would like to turn the conference back over to Jason Stabell for any closing remarks.

Operator: To withdraw your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.

Jason P. Stabell: Again, if you have a question Thats Star then one.

Jason P. Stabell: There are no questions in the queue.

Jason P. Stabell: This concludes our question and answer session I.

Jason P. Stabell: I would like to turn the conference back over to Jason Staebell for any closing remarks.

Operator: Okay.

Jason P. Stabell: Thank you operator.

Jason P. Stabell: Thank you, operator. I want to thank everyone again for their interest in Epsilon and for joining us today. Hope you have a good day and a great weekend ahead of you. Thank you.

Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Jason P. Stabell: Thank you everyone again for their interest in Epsilon and for joining US today I Hope you have a good day and a great weekend ahead of you.

Operator: Thank you.

Operator: Yeah.

Operator: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Operator: [music].