Epsilon Energy Ltd. EPSN delivered a mixed performance in its second-quarter 2024 results, marked by significant growth in oil production that offset declines in natural gas revenues.
The company’s strategic focus on its Permian assets drove a notable increase in oil output and revenues, while challenges in the Marcellus shale impacted natural gas production. Despite a modest decline in overall profitability, EPSN maintained a strong balance sheet and continued to invest in its asset base, positioning itself for growth.
Epsilon Energy Ltd. Price, Consensus and EPS Surprise
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Q2 Results
Epsilon reported second-quarter 2024 earnings per share of 4 cents, doubling from 2 cents in the year-ago quarter.
Total quarterly revenues were $7.3 million, a 12% increase from $6.5 million in the second quarter of 2023.
This growth was primarily driven by a substantial rise in oil revenues, benefiting from higher production volumes and a slight increase in realized oil prices. However, this was partially offset by a significant decline in natural gas revenues due to lower gas production and realized prices.
Production
Oil: Production of the commodity surged 223% to 45 Mbbl from 14 Mbbl in the second quarter of 2023. This increase, coupled with a 4% rise in the realized oil price, resulted in a significant 236% year-over-year jump in oil revenues to $3.51 million. The company’s Permian assets continue to perform well, contributing to overall growth in oil volumes.
Natural Gas: Production of the commodity declined 34% to 1,407 MMcf from 2,118 MMcf in second-quarter 2023 largely due to production curtailments and deferred well completions in the Marcellus shale. This decline, coupled with a 2% decrease in the realized natural gas price, led to a 35% year-over-year drop in natural gas revenues, which fell to $1.96 million.
NGL: Production of the commodity increased 69% year over year to 19 Mbbl from 11 Mbbl in the prior-year quarter. However, the realized NGL price saw a slight decrease of 6%. Despite this, NGL revenues rose 59% to $0.39 million.
Overall, Epsilon's product mix shift toward higher oil production helped offset the declines in natural gas revenues, supporting the company's total revenue growth on a year-over-year basis.
Prices
In the second quarter of 2024, oil prices reached $78.44 per barrel, representing a 4% increase from $75.38 in the previous year.
However, gas prices were $1.39 per Mcf, reflecting a 2% decrease from $1.42 in second-quarter 2023. NGL prices were $20.21 per barrel, showing a 6% decline from $21.55 in second-quarter 2023.
Key Business Metrics
Epsilon’s financial performance in second-quarter 2024 was marked by a slight decline in profitability. The company’s adjusted EBITDA was $3.9 million, down 6% from $4.2 million in second-quarter 2023. This decline was largely attributed to lower natural gas production and pricing, coupled with increased operating expenses.
The company’s net income for the quarter was $0.82 million, up from $0.43 million in the prior-year quarter. This improvement was underpinned by higher oil and NGL revenues, partially offset by lower gas revenues, and higher depletion and amortization charges.
Costs
Epsilon's operating costs in second-quarter 2024 also experienced upward pressure. Lease operating expenses rose 15% year over year to $1.65 million from $1.44 million in second-quarter 2023, reflecting increased operational activity, particularly in its oil-focused assets in the Permian Basin.
Gathering system operating expenses increased 14% year over year to $0.65 million from $0.57 million in the prior-year quarter. These cost increases, along with higher depletion, depreciation, amortization and accretion expenses that moved up 27% year over year to $2.05 million, contributed to the overall rise in operating expenses.
Cash & Debt Position
As of Jun 30, 2024, Epsilon held $9.48 million in cash and short-term investments, a significant decrease from $36.79 million a year earlier. This reduction in cash was primarily due to substantial capital expenditure and shareholder returns during the second quarter. The company also maintained a strong balance sheet with minimal debt, evidenced by small interest expenses of $8,759 for the quarter, indicating that Epsilon has a conservative approach to leveraging.
Management Guidance
The company focused on driving growth in its Permian assets, while awaiting improved natural gas prices to capitalize on its Marcellus assets. It expects continued oil production growth for the third quarter of 2024, with the recent completion of its seventh well in the Permian expected to bolster output.
Other Developments
In second-quarter 2024, Epsilon Energy continued to invest in its asset base, with the capital expenditure totaling $5.7 million. The company completed one gross well and drilled another in its Texas operations. Additionally, two of its producing wells in Ector County, TX, were offline for part of the quarter due to completion operations on a new well. Epsilon also highlighted the potential upside of its Marcellus assets, which are expected to contribute more significantly once natural gas prices recover.
Epsilon remains committed to returning capital to shareholders, distributing $1.4 million in dividends during the second quarter. The company also realized gains of $0.4 million from its hedge positions, providing some cushion against the volatility in commodity prices.
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