Epsilon Energy Q3 2024 Earnings Call Transcript

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November 7, 2024

There are 6 speakers on the call.

Operator

would now like to turn the conference over to Andrew Williamson, Chief Financial Officer. Please go ahead.

Speaker 1

Thank you, operator. And on behalf of the management team, I would like to welcome all of you today's conference call to review Epsilon's Q3 2024 financial and operational results. 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.

Speaker 1

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 would like to turn the call over to Jason Stebel, our Chief Executive Officer.

Speaker 2

Thank you, Andrew. Good morning and thank you for participating in our Q3 2024 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. In the Permian, we brought the 7th Ector well online in the 3rd quarter, driving 19% quarter over quarter oil production growth.

Speaker 2

In the 4th quarter, we will see some quarter over quarter declines in liquids production until drilling resumes next year. Henry will discuss specific well performance later in the call. In Pennsylvania, wellhead prices have remained low heading into winter. In October, we have seen a small portion of our curtailed volumes come back online and 3 of the 7 previously announced deferred TILs were put on production last week. So we expect quarter over quarter growth in natural gas volumes in the 4th quarter with a further ramp expected into the Q1 of next year as curtailments are lifted and the remaining deferred till wells are brought on.

Speaker 2

Currently, we do not forecast incremental drilling in Pennsylvania in 2025, but we will keep you updated after discussions with our operator in the Q4. Late last month, we announced our entry into Alberta, Canada through 2 joint ventures with Calgary based private operators. In the larger deal, after approximately a $7,500,000 USD development carry is satisfied, we will earn 25% in approximately 160,000 acres. Our initial development focus will be the Garrington area, approximately 30,000 gross acres in the liquids rich, glauconitic and Ehlersley intervals. Initial plans call for 4 gross wells in 2025 with operations likely to commence in the Q4 of this year.

Speaker 2

Andrew can provide further details on the projected capital expenditures. Overall, the company remains well positioned to deliver volume and cash flow growth in 2025. We continue to evaluate opportunities and see the potential for additional investments, particularly in Canada. Meanwhile, we will continue to pay our dividend and monitor opportunities to reduce our share count at attractive prices. Now I would like to turn the call over to Andrew for additional comments.

Speaker 1

Thanks, Jason. This quarter was the trough for our PA business both on the midstream and upstream side. Production curtailments continued through the quarter and realized prices were $1.54 per Mcf. We were also impacted by plugging and abandonment activities in the Auburn area, increasing PA operating costs by approximately 40% for the quarter. The lifting of curtailments, volumes from the deferred wells that were developed in the Q1 starting to come back on at peak rates and better pricing will start to bring us back from here.

Speaker 1

As Jason mentioned, the Permian has picked up some of the slack contributing approximately $8,500,000 of adjusted EBITDA year to date, which is 70% of the total company figure. On a project level, we've invested approximately $40,000,000 starting in Q2 of 2023 with 20% of that in currently undeveloped leasehold. We received cash flows of approximately $12,000,000 back through the end of the Q3 with 2 gross 0.5 net of the 9 gross 2 net producing wells coming on in the last 4 months. We are still not clear on investment activity details for Texas year as the previously mentioned strategic alternatives review process of the operated interest plays out over the rest of the year. However, we do expect to be active there in 2025 and resume growth.

Speaker 1

As Jason mentioned, drilling activity is scheduled to start later this quarter in Alberta on our Garrington JV position. We expect to have approximately $10,000,000 of CapEx there in the 12 month period from this December. We are excited about this deal with our ability to earn into a large acreage position that is underwritten holds over 25 highly economic locations in the Garrington area, in partnership with a premier private operator in the basin. Relative to other opportunities we've seen, Canada stands out due to the cost structure, royalty regime and large opportunity set of liquids focused development. Also, as mentioned in the announcement of the joint venture, there are some corporate advantages to us conducting business north of the border.

Speaker 1

We have added incrementally to our hedge book for 2025 locking in prices above the current strip. We will continue to add opportunistically there if we see the opportunity to do so. On liquidity, our available revolver capacity currently stands at $45,000,000 leaving us well positioned to move on other opportunities while maintaining a strong balance sheet. Now, I will turn it over to Henry for operations.

Speaker 3

Thank you, Jason and Andrew. I'll begin with comments on our Permian Basin Mississippian Barnett project. We previously reported the 7th well in the project began production in July. The early life productivity is consistent with the initial 6 wells and continues to perform well. We'd like to highlight that this well is the southern most drilled in the project to date.

Speaker 3

It is providing confirmatory evidence of the prospectivity of the Interpol on the large acreage development position south of most of the existing production. As Andrew mentioned, a strategic alternatives review process for the operated interest continues. Accordingly, we do not anticipate any additional development to occur while the process is underway, and we'll provide updates on the development plans moving forward as they become available. Moving to Canada and our recently announced Garrington JV, we have begun the development planning phase with the operator and will identify the location and targeted intervals of the first group of wells to be drilled. Currently, 4 2 mile horizontal wells are anticipated over the next 12 months beginning in December.

Speaker 3

We will provide updates as well proposals are finalized including CapEx, target interval and timing. Under the smaller joint venture formed in Alberta in April of this year, the company participated in 2 multi leg horizontal wells, 1 net, in the Lower Manville formation in 2 separate oil pools in the Killam area. Results to date have been mixed and technical reviews of well performance are ongoing. Net drilling and completion cost incurred for the 2 wells is approximately $1,700,000 No additional capital investment is required. In Northeast PA, as Jason mentioned, last week the operator commenced initial flowback on 3 0.4 net deferred TIO wells, the Clamper pad.

Speaker 3

We expect these wells to add meaningfully to our net production in the basin, currently producing approximately 8,000,000 a day net. Now back to Jason.

Speaker 2

Thanks, guys. Operator, we can now open the lines for questions.

Operator

We will now begin the question and answer session. Our first question today is from John White with ROTH Capital. Please go ahead.

Speaker 4

Good afternoon, gentlemen, and congratulations on a nice quarter. Thanks, John. Thanks, John. Thanks, John. You said in the press release, 3 of the 7 wells were put on flow back during the last week of October, producing 60,000,000 a day.

Speaker 4

What is the net production from that?

Speaker 5

That's the 8,000,000 a day that I reported in the call there.

Speaker 4

Go ahead.

Speaker 5

We have about a 13 a little over 13% net revenue interest in that pad. So it equates to about $8,000,000 a day.

Speaker 4

That's great. On the $3,000,000 to $4,000,000 a day that was offline during the quarter, you had in the Q3, you had a negative natural gas differential of $0.65 with your realized gas price at $1.46 Looking at 4Q, if we use Henry Hub at $2.75 and a negative differential of $0.91 you get $1.84 realized gas price. So that's a nice increase. Do you think that will spur the $3,000,000 to $4,000,000 a day coming back online? John, we

Speaker 5

yes, I think from what we understand from the operator, they're going to be bringing back that those curtailed volumes as price dictated. As you mentioned, the forward curve would suggest those volumes come on. We don't have a clear visibility actually if we look at it day to day, they're still turning some wells on certain days and some off. But the way that we think about it is that that will clear out by the beginning of Q1. So we're still not terribly clear on the schedule for those curtailed volumes to come back.

Speaker 5

But we do see some of them already coming back as we've indicated.

Speaker 4

Well, that's helpful. And congratulations on West Texas results. That's all I have for now. I'll turn the call back to the operator.

Speaker 5

Thanks, John.

Operator

Showing no further questions. This concludes our question and answer session. I would like to turn the conference back over to Jason Stebel for any closing remarks.

Speaker 5

Thank you, operator. I want to thank everyone for their interest in Epsilon and for joining us today. And as always, if you have additional questions or comments, feel free to contact us here at the Houston office. Have a great day. Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • Permian Basin oil production rose 19% quarter-over-quarter with the 7th Ector well online, contributing about $8.5 million of adjusted EBITDA (70% of the total) year-to-date.
  • In Northeast Pennsylvania, Q3 natural gas volumes were depressed by curtailments and a $1.54/Mcf realized price, but Q4 is expected to see volume growth with a further ramp in Q1 as curtailed and deferred wells return.
  • Entry into Alberta through two joint ventures allows Epsilon to earn up to 25% of ~160,000 acres after a $7.5 million development carry, with four liquids-rich wells planned in the Garrington area starting in Q4 and ~$10 million of CapEx over the next 12 months.
  • The company maintains strong liquidity with $45 million of revolver capacity, has added 2025 hedges above current strip prices, and plans to continue its dividend while opportunistically reducing share count.
  • A strategic alternatives review for operated Permian assets is underway, pausing further development until the process concludes.
AI Generated. May Contain Errors.
Earnings Conference Call
Epsilon Energy Q3 2024
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