Epsilon Energy Ltd. (EPSN) Earnings

Management highlights

- **Core Strategic Direction** • The company is in execution mode, targeting meaningful oil-weighted production growth starting in Q2 2026, ramping through the second half of 2026 and continuing into 2027, with new production fully exposed to current higher oil prices. • Strategic priorities are advancing oil-weighted development in core basins while maintaining a strong balance sheet through disciplined capital allocation. - **Balance Sheet and Non-Core Asset Monetization** • Since closing the Powder River Basin (PRB) acquisition in November 2025, the company has paid down $10 million in debt. • In Q2 2026, Epsilon sold a non-core overriding royalty interest package in Pennsylvania for $3.9 million (6x the next 12 months' expected cash flow from the assets, which contributed only 1.5% of total upstream revenue over the prior four quarters). • The company's acquired Peak office building is under contract for sale at $3 million, with closing expected within 30 days. • Proceeds from non-core asset sales are used to fund current capital investment plans. - **Permian Basin Operations** • The first 3+ mile Barnett lateral well is on track to come online in Q2 2026, with forecasted net production of 226 BOE per day. Two additional 3-mile offset wells are planned for late 2026, with similar forecasted production rates. • An operator-proposed appraisal test of the Woodford shale interval is scheduled to spud in May 2026. Epsilon sold its wellbore-only interest for this initial test but will consider future participation after reservoir performance is delineated. A successful test would meaningfully increase the company's inventory. Epsilon holds a 25% working interest across the project. - **Powder River Basin Operations** • Two acquired Niobrara lateral wells are on track for completion in June 2026 and production start in Q3 2026. Total net capex for the wells is $6.8 million, with a pre-completion estimated peak net production of 475 BOE per day. Epsilon holds a combined 0.7 net revenue interest in the wells. • A three-well Parkman Formation development program in Campbell County is planned to spud in August 2026, with completion in October 2026 and peak production forecast in December 2026. Total gross capex is estimated at $23 million for the company's 95% working interest, with peak production of 1,600 BOE per day if full interest is retained; the company is evaluating a 20-33% sell-down of the interest that would reduce capex and lower forecasted peak production to ~1,060 BOE per day. Production facilities are already pre-constructed. • A $3.5 million multi-well water supply facility is planned for the 2027 six-well INOT unit development in Converse County, to enable cost-efficient, timely development and support future well programs. • Multiple operational optimization initiatives are underway to lower costs and boost production: 10+ gas lift compressors will be downsized to cut monthly operating costs by ~35% without impacting production; conversion of selected gas-lifted wells to rod pumps is expected to increase average production by 10% per well and lower lifting costs; production chemical program optimization will reduce per-unit treatment costs starting in June 2026. - **Marcellus Operations** • The operator has completed drilling 5 scheduled wells (4 net to Epsilon) with drilling costs coming in below approved AFE. Completion is planned for H2 2026, with first production targeted for December 2026. Total pre-approved capex for the program is $3.8 million, and initial production is forecast to add 6.5 million cubic feet per day of net production, increasing midstream system throughput by ~86 million cubic feet per day. - **Financial Cost Outlook** • Unit operating costs and G&A are expected to trend down over the remainder of 2026 as incremental production is added and 2025 acquisition integration costs roll off.

Guidance

• Production: Material oil-weighted year-over-year production growth is expected starting in the second half of 2026, with growth continuing into 2027. • Capital expenditure: Full-year 2026 capital plans are maintained and sized to keep the company's net debt to adjusted EBITDA leverage ratio within the 1.0x to 1.5x target range. • Costs: Unit operating costs and G&A are forecast to decline for the remainder of 2026, with total company unit operating costs expected to drop by several dollars per BOE by Q4 2026 as PRB volumes come online, bringing PRB unit costs from the current high teens/low 20s per BOE to the mid-teens per BOE.

Segment performance

The transcript does not break out separate financial performance and revenue contribution percentages for individual product or geographic segments. Overall Q1 2026 adjusted earnings were $0.29 per share, with headline earnings materially impacted by non-cash unrealized hedge losses from Q1 2026 oil price movements. Total outstanding debt as of Q1 2026 was $40.5 million, representing $10 million in debt paydown since the Powder River Basin acquisition closed in November 2025. Capex for Q1 2026 was just under $5 million, with full-year capex sized to maintain the company's 1.0x to 1.5x net debt to adjusted EBITDA leverage target.

Risks & headwinds

• Rig availability in the Powder River Basin is tightening as regional activity increases, and rig rates are creeping up. Management remains confident it can secure a rig for the August 2026 Parkman spud on schedule and at an acceptable cost. • Required additional gas takeaway infrastructure will be needed for the 2027 INOT unit development in Converse County, PRB, though most of Epsilon's incremental capital commitment is focused on the water supply facility already planned. Management noted Epsilon will have the option to participate in the gas takeaway development if desired. • Actual production results from new development wells and the Woodford appraisal well may differ from pre-drill estimates, which would impact growth and returns.

Analyst Q&A

• Q: With persistently higher oil prices, has the board discussed accelerating development beyond the current plan, and what barriers exist to faster growth? /

  A: Management confirms they are exploring incremental upside opportunities, including potential drill-to-earn deals or partnerships with other operators on existing PRB acreage that is not scheduled for development until late in the current 5-year plan. No immediate acceleration is imminent, but management is working through all available options that could add upside to the base capital plan. Management also corrected earlier prepared remarks: the 1,060 BOE per day peak forecast for the Parkman 3-well program assumes 20-33% sell-down; peak production would be 1,600 BOE per day if full 95% working interest is retained.

• Q: Is securing rig capacity for the 2026 Parkman program more difficult or expensive amid rising PRB activity? /

  A: Henry Clanton confirmed rig availability is tightening and rig rates are creeping up as expected, but the company already has discussions ongoing with multiple providers and is confident it will secure a suitable rig to meet the targeted August 2026 spud date at a cost-efficient rate.

• Q: After selling the low-hanging non-core assets, are there additional opportunities for further non-core divestments to fund capital projects? /

  A: Management notes the portfolio is already in good shape after recent sales. Any further optimization will be opportunistic, most likely taking the form of selling down small portions of working interest in active development programs if market appetite is attractive, consistent with the company's current strategy of small, edge-of-portfolio adjustments.

• Q: What unit operating cost reduction should be expected as production scales in the PRB through 2026 and 2027? /

  A: CFO Andrew Williamson explains Q1 unit costs were elevated because the full PRB asset base was included with no new production added, overstating fixed cost per BOE. As new PRB volumes come online primarily in Q4 2026, PRB unit operating costs are expected to fall from the current high teens/low 20s per BOE to the mid-teens, resulting in a several dollar per BOE drop for the total company.