Epsilon Energy Ltd. Q3 FY2025 earnings call

• Permian: Eighth well in project commenced production late in quarter, invested ~$42M, generated >$18M OCF; drilling to resume Q1 2026.
• Marcellus: Shoulder season inventory builds caused sub-$2 gas pricing, production curtailments, but colder November improved pricing; no material investments in H1 2026.
• Powder River Basin Acquisition: Executed definitive agreements to acquire Peak companies, subject to shareholder approval; BLM approvals help with contingent consideration; focus on production optimization and Parkman inventory.
• Hedge Book: Pro forma 60% of PDP oil volumes hedged in 2026 at weighted avg WTI $63.30; 50% gas hedged with costless collars.
• New Credit Facility: Announced new credit facility with better terms, manageable pro forma leverage.
• Adjusted Earnings: YTD adjusted earnings $0.45 per share, driven by new wells in Pennsylvania.
• Acquisition Valuation: Acquisition favorable from valuation perspective, acquiring assets at discounts to market value.
• Powder River Basin Assets: Strong operating team, efficient well operations, solid PDP, identified lift optimization candidates; substantial undeveloped inventory.
• Marcellus Midstream: Earnings power from incremental development.
• Noncore Assets: Early stages of exploring sale of Mid-Con assets in Oklahoma.

Permian: Invested approximately $42 million, generated over $18 million in operating cash flow through quarter end; eighth well commenced production late in quarter, with drilling activity set to resume in Q1 2026. Marcellus: Shoulder season inventory builds led to sub-$2 net gas pricing and production curtailments, but colder start to November improved pricing; no material investments anticipated in H1 2026. Powder River Basin: Acquisition of Peak companies with operated assets, including 111 net priority locations, oil-weighted production, and an experienced operating team. Canadian JV: In discussions with operator on plans for next 18 months. Mid-Con assets: Early stages of exploring sale.

• 2026 Focus: Integration and execution; 2027 transformational results under right market conditions.
• Permian: Drilling activity to resume Q1 2026.
• Marcellus: Uncertainty on H2 2026 CapEx timing, potential shift to Auburn area.
• Powder River Basin: 2026 focus on Campbell County Parkman; 2027 focus on Converse County with infrastructure investments.
• CapEx: Preliminary $20M CapEx in Peak assets, $6M net to interest in Permian, $13M Marcellus CapEx (some may slide to 2027).

• Market Factors: Factors could cause actual results to differ from forward-looking statements.
• BLM Approvals: Contingent on BLM approvals for contingent consideration.
• Integration Risks: Challenges in integrating the Peak team and assets.
• Commodity Price Volatility: Impact on hedging and production economics.

Q: Good news on the BLM permit front. 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 some of those Parkman wells in Converse County and maybe what your time line is over the next couple of years and how much capital you could commit to?

A: Sure. Yes. Thanks for the question. I'll maybe start and let Henry fill in where I'm incomplete. So we have been informed and observed that the BLM has started reissuing permits in Converse, which was part of the issue on our contingent share consideration. So as we see it right now, we think we're going through confirmation, but we think all of the requirements for that consideration have been met. So what that allows us to start doing is really, as Henry mentioned, next year, doing the front-end planning around some infrastructure for -- there's a particular area down there we call [ I Knot ] in Converse. So we're going to do some initial infrastructure investments. So I'd expect that to really kick off. Earliest would be late next year, but most likely, it's going to be a first half '27 where we're going to roll out a pretty steady program, commodity prices being compliant with us here, but '27 is going to be a big year for Converse activity. And as Henry mentioned, '26, we've got Campbell County Parkman that we're going to focus on that pads have already been built. Infrastructure investments have already been made. So we're in a great shape there to put that money to work. And then as far as your IRR, yes, the way we modeled the Parkman based on offset data and type curving, we do think the Converse stuff is from a rate of return standpoint, the most attractive. Campbell is a close second, but it is just based on offset data that we have. It's slightly below that Converse stuff. So I guess the other thing we'd offer, we underwrote the Parkman value at 2 wells per section. We've done some incremental work that indicates at least on parts of our acreage based on what other operators have done and are doing, we think we could actually have more sticks in the Parkman than that 14 priority locations that we listed in the deck. So that's nice upside that seems to be falling out of this as well. So does that answer all your question? Or Henry, do you have anything to add to that?

Q: And then could you speak a little bit to just expecting on kind of the existing 2026 activity, what you want to be doing next year?

A: Yes. 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 last quarter that had nominally $20 million of CapEx in the Peak assets. We 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 some of that CapEx slides into '27. We haven't firmed up plans with the operator there yet. But as we also mentioned, based on our conversations, we're excited about what seems to be their shifting focus to Auburn over the coming years versus where their focus has been in the last several. So I'd say that the moving piece probably at this point will be a little bit on that Marcellus, how much of that will actually fall into '26 versus '27.

Q: And then kind of as you've got your kind of focus on the integration and execution here in the next 18 months. If you could speak a little bit more about just the lift it requires to integrate that team, maybe investment to get -- hit the ground running and some of the non-drilling investment that 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?

A: Yes. So we've been working closely with the Peak team. So I actually feel -- I think 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 the right areas, the transition arrangements with some folks as well. So I'm real happy about how our cultures have fit. We're 2 small teams coming together that have complementary skill sets. They've got a long history of over 100 wells drilled in the Powder. So we're picking up a really solid team 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.

Q: And then just last one here. If you could speak a little bit to what other operators are doing kind of an offset activity in both, I guess, Campbell County and then Converse, if maybe areas where either they already have BLM permits or kind of planned activity around you the next 18 months here?

A: Sure. Yes, we watch offset operators pretty closely. I would say as a general observation, most offset operators with acreage around us have drilled up the Parkman because it is so economic. So what they're focused on primarily is Niobrara and to some degree, the Mowry. The Mowry is a little gassier. I think as we see gas prices improve, we'll probably see some increased capital allocation to the Mowry in the PRB. And then as we move a little bit to -- I've noticed a little bit to our west, there's still some Turner or what they call frontier development that's also going on. So there are about 8 rigs active in the basin right now, and that's been pretty consistent, and that's with some pretty big name operators that will be familiar to you, Continental, EOG, Devon, a big private company named Anschutz and then a company called WRC, which is a large -- has a big position there that's also a private entity. They've been consistent investors in the basin over the last several years. So we're pretty happy with how things are going and frankly, think that probably activity levels going forward have more upside from here than where they've been in the powder over the last several years. So I wouldn't be surprised if rig counts increase over the next 18 months.