Q3 2025 Epsilon Energy Ltd Earnings Call
Good day and welcome to the Epsilon energy. Third quarter 2025 earnings conference call. 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 presentation, there will be an opportunity to ask questions to ask a question. You may press star then 1 on your touchtone phone,
To withdraw your question. Please. Press star. Then 2
I would now like to turn the conference over to Andrew Williamson Chief Financial Officer. Please go ahead.
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'd like to turn the call over to Jason stibel or chief executive officer
Thank you, Andrew.
Good morning, and thank you for participating in our 2025, third quarter 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.
This is a big quarter for the company.
The announcement of the transactions in the Powder. River Basin is a major strategic Milestone that positions the company for success and outperformance over both the medium and long term.
Before I discuss the deal.
I'd like to offer some comments on the quarter results.
In the Permian, we participated in the drilling and completion of the eighth. Well, in our project,
The welcome ends production late in the quarter and the asset continues to perform well.
Since Inception a little over 2 years ago, we've invested approximately 42 million in our Texas asset which has generated more than $18 million in operating cash flow through quarter end.
Looking ahead, we expect Permian drilling activity to resume in the first quarter of next year.
Turning to the Marcellus.
Shoulder season inventory, bills drove sub 2 net, gas pricing in the back half of the quarter which resulted in some operator elected production curtailment during the quarter.
However, a cold or start to November has strengthened pricing and allowed for a staged return of these volumes.
We are actively engaged with the operator regarding foreword, investment plans.
At this time, we do not anticipate any material investments in the first half of 2026.
We'll provide updates when second half 2026 plans firm up next year.
On the transaction to summarize what we announced in August.
We executed definitive agreements to acquire the peak companies with operated Assets in the Powder River basin.
The transaction includes the issuance of up to 8 and a half million Epsilon shares and is subject to shareholder approval at the meeting scheduled for November 12th.
Due diligence and integration planning, have progressed as expected.
And we anticipate closing shortly after the shareholder vote.
Based on recent BLM approvals, we expect the 2 and a half million. Share contingent consideration to be paid at or near closing.
A really nice positive surprise that will allow us to begin planning on what we believe to be the best. Inventory in the combined company portfolio,
The acquisition adds an experienced operating team, oil-weighted production, and a significant inventory of economic locations across multiple ventures.
Our initial Focus will be on production optimization and the highly economic conventional Parkman inventory.
The pro-forma company sits well positioned to capitalize on our oil price recovery.
In addition, we expect investment in our marcelis position to increase meaningfully over the next several years. As our operator, shifts their focus towards the Auburn area.
Which we estimate still holds over 15 Grouse, undrilled locations.
It has taken us several years to reposition the company.
I am happy to report that post close are Diversified drilling inventory.
Coupled with our fee-based cash flows from the Auburn Midstream system, we are in a position to opportunistically increase investment and cash flows while continuing our track record of shareholder returns.
In 2026. Our Focus will be on integration and execution setting us up for truly transformational results in 2027 under the right market conditions.
With that. I'll now turn the call over to Andrew.
Thanks Jason. I'll start with the updates. We've made to the Hedge book, over the last few months on a pro-forma basis with Peak PDP oil volumes or 60% hedged in 2026.
3/4 of that coverage is swapped at strike. Prices is above the forward strip, with a weighted average WTI strike price of 63.30 cents per barrel.
We like the protection that gives us next year, with the recent weakness in oil prices.
Nx4 above 3.30 and a weighted average ceiling above 5 dollars leaving us, plenty of upside participation in gas prices next year.
We will have protection on for 50%, of PDP, for WTI and NX for the next 18 months to comply with the terms of our new credit facility.
Last month we announced a new credit facility bringing in a new lender alongside Frost in Texas Capitol and adding term to Q4 2029.
Most importantly, we now have the commitments in place to refinance the peak Term Loan with our revolver. On substantially better terms with excess liquidity on the revised borrowing base after adding the prb assets at closing.
I'll reaffirm the point I made last quarter that the pro-forma Leverage is very manageable and allows us to execute on our capital investment and shareholder return plans over the next few years.
On the results, I'll highlight the year-to-date adjusted earnings of 45 cents per share.
The adjustments included, the Canadian impairment and the second quarter and transaction expenses and the third quarter related to the peak transaction.
The intention is to highlight the normal course, Legacy business performance which was strong over the 9 months. The driver was the new wells, 1.2 net, and Pennsylvania that came on in the first half of this year,
This is representative of the earnings power incremental. Marcellus development can have to both the upstream and Midstream sides of our business.
1 thing to mention on the acquisition, the stock price movement, since we first, negotiated the deal has worked in our favor from evaluation perspective on the acquired assets.
The deal is for a set number of shares to be issued at closing, plus the Assumption of debt using for example, $5 per share for Epsilon common. We are requiring core. Undeveloped net acreage in the prb at less than 900 per acre or thought of another way paying less than 300,000 per priority location.
Both of those metrics, we believe to be discounts to market value.
now, to Henry, to provide more detail on the operating team and asset base we're bringing on
Thank you, Andrew, and good morning to everyone.
I'd like to begin by highlighting again. The attributes of the Powder River Basin assets. We are planning to acquire
We are thrilled with the strength of the operating team. We are bringing on.
They've had significant continuity in personnel in their technical team.
Which is a testament to peak's, founder, Jack Bond. Whom we are pleased to be adding to our board.
This includes their field staff.
Who continue to operate the wells and inefficient manner, coupled with an excellent track record of compliance with all federal and state regulations.
Well, site facilities have been outfitted with the appropriate technologies for us to continue to optimize production and reduce downtime going forward.
We're very pleased with the excellent design and condition of the field assets.
As mentioned last quarter, the PDP is solid with consistently performing producing interests across multiple Horizons.
The majority of these Wells have been developed in the last 10 years and the value diversity is spread quite nicely.
Recently, we participated in Thoreau, well-reviewed for all operated Wells and have identified candidates for Lyft optimization, which we expect will drive operating cost reductions and an uplift in production.
The undeveloped inventory associated with this acquisition is substantial.
For those who may not have reviewed the deck posted to our website summarizing and Peak acquisition. We encourage you to do so.
With approximately 75% of the lease. Hold held by production. We have identified 111, net, priority locations.
Priority meaning locations with laterals greater than 10,000 ft completable lateral, length.
Having greater than 45%, working interest, that meet our return thresholds, at a $55 WTI $4.96.
Planning around. This inventory will be the main focus of the technical team post-closing and offer the ability to drive production growth in the Basin for years.
Currently, there are 2, 2-m, nyebera, Ducks, scheduled for completion in 2026.
In addition, as Jason mentioned.
The initial focus will be on the Parkman inventory. Parkman, which is a conventional reservoir, has lower development costs per foot than unconventional targets in the Nira and Maui.
Turning to the Marcellus.
We continue to be aligned with the operator on the seasonal, price related production, curtailment.
To optimize economics of those Reserves.
At the expected gas price environment. We anticipate development levels to increase over the next several years relative to the last several years in the Auburn area.
Our puran Basin Barnett project continues to be a solid performer.
The eighth. Well in the play is performing very consistently compared with the first 7 Wells.
We now have 2, net Wells making approximately 575 barrels of oil equivalent per day in the project.
At least 2 more Barnett. Wells, 0.5. Net are planned for 2026.
In our Canadian JV, we are in discussions with the operator on potential plans for the next 18 months.
and lastly, the companies in the early stages of exploring, a sale of our non-core mid-con Assets in Oklahoma,
Thank you, and now back to JSON.
Thanks guys.
We can now open the lines for questions.
Thank you. We will now begin the question and answer session to ask a question. You may press star then 1 on your touchtone phone,
To withdraw your question. Please. Press star. Then 2
Again, pressing star, then 1 will allow you to ask a question at this time, we will pause momentarily to assemble our roster.
And the first question will be from Anthony. Palla from punch and Associates. Please go ahead.
Hey there guys. Good morning. Thanks for taking my question.
Yeah, hey Anthony, thanks, good morning morning. Um, great news on, uh, um, BLM permit front. Um, just first off, any more that, you can add to that and kind of the clarity and line of sight. It gives to you being able to develop, um,
some of those Park.
Sales and Converse County and maybe what your timeline is over the next couple of years and how much Capital you could commit to. I think what you highlighted in the deck was greater than or close to 100% irr, given the 65 for um commodity prices.
Sure. Yeah, thanks for the question. I'll I'll maybe start and let Henry uh fill in uh, where I'm incomplete. So
Uh, we have, uh, been informed and observed that the BLM has started reissuing permits in uh, in Converse which uh, was part of the issue on our contingent.
Uh, share consideration. So as we see it right now, we think, uh, we're going through confirmation, but we think all of the uh
All all of the requirements for that consideration have have been met. So what that allows us to start doing? Is that really is Henry mentioned. Next year doing the front end planning uh around some infrastructure for there's a particular area down there we call. I not
In Converse. So we're going to do some initial infrastructure Investments. So I'd expect
that to really kick off.
Earliest would be.
Uh, late next year. But most likely it's going to be the first half of 2027, where we're going to roll out a pretty steady program, commodity prices being compliant with us here. But 2027 is going to be a big year for Converse activity. As Henry mentioned, in 2026, we've got Campbell.
Uh, County Parkman, that that we're going to focus on that. That pads have already been built infrastructure. Investments have already been made. So we're we're in a great shape there to to put that money to work. And then, as far as your irr, yeah, the way we modeled.
Uh, the Parkman based on offset, uh, data and type curving. We do think the, the converse stuff is from a rate of return standpoint the most attractive Campbell Campbell's a close second. But, but it is, uh, just based on offset, uh, data that we have. It's, it's
slightly below that Converse stuff. So,
I guess the other thing we'd we'd offer, we underwrote the Parkman
value at uh 2 Wells per section. We've done some incremental work.
That indicates at least on parts of our acreage.
Uh, based on what other operators are have done and are doing, we think we could actually have more sticks in the Parkman than that, that 14.
Be listed in the deck. So that's that's nice upside that that's seems to be falling out of this as well. So
That answer all your questions, or Henry, do you have anything to add to that? I'd only add color to the infrastructure that we would be looking to build in Converse County. It ties mainly to water sourcing and storage.
And we'll begin. Uh, setting us up for future development in the area there. After that, we'll allow us to drive some economies. But uh, working next year, primarily in the summer months, will be the water sourcing and storage that we'll be looking at.
And I think Anthony has a placeholder on the Parkman just kind of a 2 Mile. You know, we, we budget that at at somewhere between 7 to 7 and a half million per well, so, you know, we're talking 750 or lower of foot on that. So it's, it's pretty attractive at even even at a, a low 60s oil price.
and um, could could you speak a little bit to um,
Just expect.
On kind of the existing 2026 activity. What you want to be doing? Um,
Next year.
Yeah, we're still finalizing that. We've got a board meeting later this month where we're going to be laying out firmer plans there, but we put out a preliminary.
plan. Uh, last quarter that had, you know, nominally 20 million of capex in in the peak assets. We'd provisioned for the 2 wells in the Permian that Henry mentioned. So that's about 6 million net to our interest.
And then the other piece of that was the Marcellus, we had 13 million of capex, there for the back half of next year, which at this point. As I indicated in my part of the speech, I think there's some potential that that some of that capex slides into 27, we haven't, uh, we haven't formed up plans with the operator there yet, but but as we also mentioned based on our conversations were, were excited about what? What seems to be their shifting Focus to to Auburn over the the coming years versus uh, where their focus has been the last several. So
I'd say that the moving piece probably at this point will be a little bit on that marcelis. How much of that will actually fall into 26 versus 27?
Thanks a lot sense and it it was a 27 kind of cash flow event. Anyways once it gets into production. That's right. So
Okay, and then and kind of as you got your kind of focus on the integration and execution here, the next 18 months, if you could speak a little bit more about just the list, it requires to integrate that team, maybe investment to get hit the ground running. Um and some of the non drilling investment that you you mentioned a little bit on the call but what you can do to optimize a little bit here, maybe in December. And in the first half of 2026, once the deal does close,
Yeah, so we've we we've been working closely with the the peak team.
Uh, so I actually feel I think we're, we're going to hit the ground running, pretty close after close, Anthony, because we've done a lot of front-end work on making sure we have the right team in place, post close making sure we have in in the right areas the transition.
Uh, Arrangements, uh, with with some folks, as well. So, I I'm, I'm
Real happy about how both our cultures have fit. We're, we're, we're two small teams coming together that have complementary skill sets.
They've got a long history of over 100 Wells drilled in the in the powder. So we're picking up a really solid team of that has the experience and has done it.
So, I don't think that's going to be a real impediment to rolling out what we want to do in the powder.
That's great. And then just the last 1 here, um, if you could speak a little bit to what other operators are doing kind of and offset activity, um, in both, I guess Campbell County and then Converse it, it may be areas where either they already have BLM permits or kind of planned activity around you the next 18 months here?
Focused on primarily is is NAA and to some degree, the Maui, the Maui is a little gassier, I think as we see gas prices improve, we'll probably see some increased Capital allocation to the Maui in the prb.
Um, and then as
We move a little bit to uh I've noticed a little bit to our uh West there's still some Turner or what they call Frontier development. That's also going on. So
there are, there are about 8, rigs active um in the Basin right now and that's been pretty consistent, and that's
Uh, with some pretty big name operators that will be familiar to you: Continental, EOG, Devon.
Uh, a big private company named Anschutz?
And then uh and then a a company called WRC which is a large has a has a big position there. That's also a private entity they've been consistent
Uh, consistent investors in in the Basin over the last several years. So
we, uh,
We're pretty happy with uh with how things are going. And and and frankly think that probably activity levels. Going forward, you know, have have more upside from here than where they've been in the powder over the last several years. So it wouldn't be surprised if rig counts increase over over the next 18 months.
Excellent, that's good. That's that's all for me. Um, thank thanks for taking the questions.
No, appreciate it. Thanks Anthony.
And again, if you would like to ask a question, please press star then 1.
Ladies and gentlemen, this concludes today's question and answer session. I would like to turn the conference back to Jason Sabel for any closing remarks.
Uh, no closing remarks. Other than to thank everybody for joining us today and and hope you have a great Thursday. And as always, if you've got, uh, questions comments feedback, uh, please reach out to us here in Houston and
I look forward to hearing from everybody. Thank you.
Thank you sir at the conference has now concluded, thank you for attending today's presentation. You may now disconnect