Epsilon Energy Ltd. Q4 FY2025 earnings call

• Epsilon delivered a standout year with adjusted EBITDA up 75% and production up 54% y/y. • In Q4, closed acquisition of peak companies, bringing new production, over 100 net high rate of return drilling locations, etc. • Board declared 17th consecutive quarterly dividend and renewed share buyback program. • In 2026 to date, portfolio performing well, with favorable natural gas pricing in PA. • Peak acquisition closed on 11/14/2025, BLM permitting issues resolved, 7 approved drilling permits. • Year-end results driven by higher volumes and better pricing, with wells coming online in Q1 paid for prior year. • Had one-off items impacting earnings like transaction costs from peak acquisition, impairments on wellbores in Canada and New Mexico, loss on sale of Oklahoma assets. • Doing things to increase liquidity like selling overriding royalty interest package in Marcellus and having Colorado office building under contract for $3 million. • Development plans for 2026: in Powder River Basin, initiated completion operations of two 2-mile Niobrara ducts, plan to drill three 2-mile laterals in Q3; in Permian Barnett, project management and operatorship changed, first three-mile Barnett well drilled, completion planning in progress; in Marcellus, development activity restarting with well proposals for five wells; LOE optimization efforts in Wyoming; no 2026 activity planned in Canada.

Epsilon delivered a standout year, growing adjusted EBITDA 75% and production 54% year over year. In the fourth quarter, they closed the acquisition of the peak companies, achieving 69% growth in proved developed producing reserves and an 86% increase in total proved reserves. In late January, they realized extremely favorable natural gas pricing in Pennsylvania, generating over $4.8 million in net natural gas sales in a single week. Current PDP production is approximately 60% hedged for the rest of the year, with incremental oil volumes unhedged. The year-over-year growth in production and cash flow was primarily driven by higher volumes and better pricing, with realized prices up over $1 per MMBTU year-over-year in the Marcellus. The company earned $0.92 per share in 2025. Total reserves increased to 156 BCF equivalent due primarily to the 78 BCF of additions related to the acquisition of the Powder River Basin assets.

• Portfolio performing exceptionally well in 2026 to date. • Current PDP production approximately 60% hedged for rest of year, incremental oil volumes unhedged providing upside exposure. • Expect vast majority of Marcellus volumes to flow through Auburn Gathering System when developed, driving strong capital-efficient cash flow growth in midstream asset. • Development plans for 2026 and beyond including operated high-return Parkman development in Powder River Basin, accelerated Barnett development in Permian, steady development in Marcellus with expected increases in gas production and midstream throughput in 2027-2028 timeframe. • First quarter 2026 corporate presentation available on website showing potential cash flow impact of some developments.

• A variety of factors could cause Epsilon's actual results to differ materially from anticipated results or expectations expressed in forward-looking statements. • BLM permitting issues on acquired acreage could have impacted operations, although resolved around peak acquisition closing. • Well under performance in Canada, area does not currently compete for capital in portfolio. • Major adjustment was loss on sale of Oklahoma assets, but deal was accretive on multiple basis. • Uncertainties around market conditions and oil/gas pricing could impact returns on inventory and development plans.

Q: Hey, morning, guys. Thanks for taking the question here. I just wanted to ask on looking at kind of some of the details you gave around the peak acquisition timing, and I think you still have referenced like a $65 oil level for returns and IRRs. Just curious if we're looking at it through a lens of today, whether it's the kind of front month or even going back to you like the curve is in the mid-70s going through the back half of 2026. Just curious what returns look like under those oil assumptions rather than $65.

A: Hey, Anthony. Jason here. Thanks for the question. I'll let Andrew address that one. Yeah, thanks for the question, Anthony. So yesterday's forward averaged $77 through year end 27. We run price sensitivities on our type curves in $5 increments. So it's $75 WTI. Returns for our oil-rated inventory increased meaningfully. I'm going to add the Permian stuff alongside the question on the powder. Barnett three-mile at 65, as mentioned in our corporate presentation, is 45%. IRR with a two-year payout, roughly three times multiple on invested capital. And at $70, those move into the 60% range, 18-month payouts and 3.5 times on the multiple. In the powder, starting with the Parkman, and that's the focus of our development in the basin over the next 18 to 24 months. Again, in the presentation, we talk about the Parkman split into the inventory across the two counties. So in Converse, which is the best stuff, That's 150% return, 10-month payout, two and a half times. The Campbell County Parkman is then the 45% to 50% range with 20-month payouts. And at $75, those increase for Converse to over 200%, eight-month payouts, three times. And in Campbell, increases to 80%, less than 18 months on the payout and over two times. The largest component of the inventory in the basin and the powder is the upper NIO. Where at 65, that's in the 25 to 30% range, three-year payouts and two times. At $75, that increases to 40, 45% two-year payout and two and a half times. And we've got 40, 46 net locations there in the NIO.

Q: And just thinking, I guess, between those, You can see, obviously, the Parkman stands out. I'm curious, it's a good problem to have, but just curious on how you guys look at how capital kind of competes with the variance of you controlling your own destiny with the Parkman and PRB locations and then having the non-op working interest and kind of dealing with the operator in the Barnet, the new operator.

A: Yeah, I mean, it's going to go highest and best use. Right now, kind of looking at the portfolio, Anthony, we think about it at about 50% of our investment over the next two years is going to be powder focused. And then the remainder split between Marcellus and Barnett. So I think with pricing doing what they do, I don't see a huge change to that. As we mentioned on the call, We're excited about the new operator that we have in the Barnett Oil Play. It's a large-scaled private operator that has pretty aggressive plans for ramping this year but really stepping up next year. So we think, in addition to the PRB, that Barnett asset is going to be a nice source of liquids growth for us. And as Andrew quoted the returns, in a world 65-plus, those Barnett investments are quite attractive. And I think we get more excited thinking about a three-mile lateral world in the Barnett. We had our first well drilled there that we're going to complete, as we mentioned, mid this year. So I think it's all shaping up how we would have liked. We've got options. We've got our operated position that we can flex up and down depending on macro. We've got a A lot of inventory there. Parkman focused, certainly. But as I mentioned, we want to remind people we've also got this pretty deep NIO inventory, which is where most of the industry in the PRV is currently focused its capital.

Q: On that NIO piece, which as you lay out, it's probably 2028 before that really competes for capital, given just the Parkman inventory. I'm curious, like you had said, it seems like people are getting more active there and it's being proved out more by larger scaled operators. I'm curious what you're seeing and hearing from those that are really committing capital to the NIO and MARI right now in the PRB.

A: Sure. I'll start maybe with some general comments, and Henry can fill in anywhere that he sees fit. Yeah, I think around us in Campbell and Converse, there are a number of rigs. Right now, the big operators, and I'll just name a few, Devon, EOG, Continental, Oxy, they're really focusing their capital on the NIO. I think what What you're seeing there is similar to what you're seeing in other basins. We're going from a two-mile lateral world. The standard right now in the NIO, I think, for this year and forward is three to three and a half-mile laterals, which enhances economics quite a bit. We even have an offset operator that we know is planning a four-mile lateral in the NIO, or a DSU, a four-miler. I think the economics there, as you start to extend laterals, batch drill wells, you're going to see that the NIO and the PRB is competing for capital in much larger portfolios of the companies I mentioned. So we're encouraged by that. As we said, we're watching closely. I think our near-term focus is going to remain the Parkman. Probably over the next two years, we will have some non-ops. opportunities and some of these nio wells in some of that offset acreage as well that i think we'd be interested in so i'll stop there and let henry add Yeah the only thing i could add to that is um we've got 12 rigs running in campbell and converse and johnson county around our acres position and uh 10 of those 12 are nibrera focused so that gives you some color on how focused The big guys that Jason mentioned are allocating their capital.

Q: Just one final one for me here. If you could add a little bit more color. You had mentioned you're in the market looking at selling an overriding royalty package on some of the Marcellus assets. Just if you could give some more color to that and just how best to think about that for potential proceeds.

A: Yeah, I'm not going to guide on proceeds, but it's a small amount of production. So我们're talking somewhere, I think, less than a million cubic feet a day of production. So it represents a pretty small overall piece of our production. It sits outside of our core Auburn area. These are some overrides we've picked up over the years due to acreage trades with some other area operators. There's a pretty... robust interest as we understand it for override mineral interests. So we're doing a market test to see. We believe, as Andrew mentioned, that we're going to have an opportunity to potentially sell it at a pretty attractive multiple. Nothing's locked in there until we get some bids next month and decide if it's something of interest to us or not. So we're We're just kind of pruning around the edges on the portfolio. As we talked, we moved the Anadarko assets last year. There was some cash we brought on the balance sheet, but also had some positive after-tax impacts for us. That office building that came in the peak deal, we thought it made sense to explore a sale of that. And as Andrew mentioned, that's $3 million. that we've got under contract. So I expect that'll close in the second quarter. So just as we've expanded the portfolio, we're trying to make sure that it's optimized as best as possible. And we're creating opportunities to reinvest in what we think are our best sources of inventory. So feel good about it.