Q3 2024 Epsilon Energy Ltd Earnings Call

Good afternoon, and welcome to the Epsilon Energy 3rd 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 presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2.

Speaker Change: I would now like to turn the conference over to Andrew Williamson, Chief Financial Officer. 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 third 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. 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 would 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 third 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.

In the Permian, we brought the seventh hectare well online in the third quarter, driving 19% quarter-over-quarter oil production growth.

Jason Stabell: In the fourth quarter, we will see some quarter-over-quarter declines in liquids production until drilling resumes next year. Henry will discuss specific well performance later in the call.

In Pennsylvania, wellhead prices have remained low heading into winter.

Andrew Williamson: In October, we have seen a small portion of our curtailed volumes come back online, and three of the seven previously announced deferred tills were put on production last week.

Andrew Williamson: So we expect quarter-over-quarter growth in natural gas volumes in the fourth quarter, with a further ramp expected into the first quarter of next year, as curtailments are lifted and the remaining deferred till wells are brought on.

Andrew Williamson: Currently, we do not forecast incremental drilling in Pennsylvania in 2025, but we will keep you updated after discussions with our operator in the fourth quarter.

Andrew Williamson: Late last month, we announced our entry into Alberta, Canada through two joint ventures with Calgary-based private operators.

Andrew Williamson: In the larger deal, after approximately a $7.5 million USD development carry is satisfied, we will earn 25% in approximately 160,000 acres.

Andrew Williamson: Our initial development focus will be the Garrington area, approximately 30,000 gross acres, in the Liquids Ridge, Glockenetic, and Ellerslie intervals. Initial plans call for four gross wells in 2025, with operations likely to commence in the fourth quarter of this year.

Andrew can provide further details on the projected capital expenditures.

Andrew Williamson: Overall, the company remains well positioned to deliver volume and cash flow growth in 2025. We continue to evaluate opportunities and see the potential for additional investments, particularly in Canada.

Andrew Williamson: Meanwhile, we will continue to pay our dividend and monitor opportunities to reduce our share count at attractive prices.

Andrew Williamson: Now I would like to turn the call over to Andrew for additional comments.

Andrew Williamson: Thanks, Jason. This quarter was the trough for our PA business, both on the midstream and upstream side. Production curtailments continued through the quarter and realized prices were $1.54 per MCF.

Andrew Williamson: We were also impacted by plugging and abandonment activities in the Auburn area, increasing PA operating costs by approximately 40% for the quarter.

Andrew Williamson: The lifting of curtailments, volumes from the deferred wells that were developed in the first quarter starting to come back on at peak rates, and better pricing will start to bring us back from here.

Speaker Change: As Jason mentioned, the Permian has picked up some of the flack, contributing approximately $8.5 million of adjusted EBITDA year-to-date, which is 70% of the total company figure.

Speaker Change: On a project level, we've invested approximately $40 million starting in Q2 of 2023, with 20% of that in currently undeveloped leasehold.

Speaker Change: We've received cash flows of approximately 12 million back through the end of the third quarter with 2 gross 0.5 net of the 9 gross 2 net producing wells coming on in the last four months.

Speaker Change: However, we do expect to be active there in 2025 and resume growth.

Speaker Change: As Jason mentioned, drilling activity is scheduled to start later this quarter in Alberta on our Garrington JV position.

Speaker Change: We expect to have approximately 10 million of CapEx there in the 12-month period from this December.

Speaker Change: We are excited about this deal, with our ability to earn into a large acreage position that, as underwritten, holds over 25 highly economic locations in the Garrington area, in partnership with a premier private operator in the basin.

Speaker Change: Relative to other opportunities we've seen, Canada stands out due to the cost structure, royalty regime, and large opportunity set of liquids focused development. Also, as mentioned in the announcement of the joint venture, there are some corporate advantages to us conducting business north of the border.

Speaker Change: We have added incrementally to our hedge book for 2025, locking in prices above the current strip. We will continue to add opportunistically there if we see the opportunity to do so.

Speaker Change: On liquidity, our available revolver capacity currently stands at $45 million, leaving us well-positioned to move on other opportunities while maintaining a strong balance sheet.

Now, I will turn it over to Henry for operations.

Thank you, Jason and Andrew.

Henry Clanton: I'll begin with comments on our Permian Basin Mississippian Barnet project.

Henry Clanton: We previously reported the seventh well in the project began production in July. The early life productivity is consistent with the initial six wells and continues to perform well.

Henry Clanton: We'd like to highlight that this well is the southernmost drilled in the project to date.

Henry Clanton: It is providing confirmatory evidence of the prospectivity of the Interpol on the large acreage development position south of most of the existing production.

Speaker Change: As Andrew mentioned, a strategic alternatives review process for the operated interest continues. Accordingly, we do not anticipate any additional development to occur while the process is underway and will provide updates on the development plans moving forward as they become available.

Speaker Change: Moving to Canada in our recently announced Garrington JV, we have begun the development planning phase with the operator and will identify the location and targeted intervals of the first group of wells to be drilled.

Speaker Change: Currently, four 2-mile horizontal wells are anticipated over the next 12 months beginning in December.

Speaker Change: We will provide updates as well proposals are finalized including CAPEX, target interval, and timing.

Speaker Change: Under the smaller joint venture formed in Alberta in April of this year, the company participated in two multi-leg horizontal wells, one net, in the lower Manville formation in two separate oil pools in the Killam area.

Speaker Change: Results to date have been mixed and technical reviews of well performance are ongoing.

Speaker Change: Net drilling and completion cost incurred for the two wells is approximately 1.7 million U.S. dollars. No additional capital investment is required.

Speaker Change: In Northeast PA, as Jason mentioned, last week the operator commenced initial flowback on three 0.4 net deferred TIL wells at the Clapper Pad.

Speaker Change: We expect these wells to add meaningfully to our net production in the basin, currently producing approximately 8 million a day net.

Now back to Jason.

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

We will now begin the question and answer session.

Speaker Change: To ask a question, you may press star then 1 on your telephone keypad.

Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.

Speaker Change: To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Thank you. Bye-bye.

Speaker Change: Our first question today is from John White with Roth Capital. Please go ahead.

Good afternoon, gentlemen, and congratulations on a nice quarter.

Thanks, John. Thanks, John. Thanks, John.

Speaker Change: He said in the press release, three of the seven wells

Speaker Change: were put on flow back during the last week of October producing 60 million a day. What is the net production from that?

Speaker Change: That's the $8 million a day that I reported in the call there.

Thank you. You're welcome.

Thank you.

Go ahead.

Speaker Change: We have a little over 13% net revenue interest in that pad, so it equates to about $8 million a day.

That's great.

Speaker Change: on the three to four million a day that was offline during the quarter.

You had, uh...

In the third quarter, you had a

Looking at 4Q, if we use...

Speaker Change: Henry Hub a 275 and a negative differential of 91 cents you get $1.84 realized gas price so that's a nice increase

Do you think that will spur the...

three to four million a day coming back online

John Witt

Speaker Change: Yeah, I think from what we understand from the operator, they're going to be bringing back those curtailed volumes as price dictated, as you mentioned, the forward curve.

Speaker Change: would suggest those volumes come on. We don't have a clear visibility, actually. If we look at it day-to-day, they're still turning some wells on on certain days and some off.

Speaker Change: but the way the way that we think about it is that that will clear out by by the beginning of the first quarter so we're still not terribly clear on the

Speaker Change: The schedule for those curtailed volumes to come back, but we do see some of them already coming back as we've indicated

Speaker Change: That's all I have for now. I'll turn the call back to the operator.

Thanks, John.

Speaker Change: Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to Jason Stabell for any closing remarks.

Jason Stabell: Thank you operator. I want to thank everyone for their interest in Epsilon and for joining us today and as always if you have additional questions or comments feel free to contact us here at the Houston office.

Have a great day. Thank you

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