Epsilon Energy Ltd. (EPSN) navigated a year of transition in 2023, confronting an oversupplied natural gas market that resulted in multiyear low prices. Despite these challenges, the company managed to strengthen its position through strategic transactions, adding new core areas in the Permian Basin and securing oil exposure.
Epsilon maintained a focus on shareholder returns and upheld a robust balance sheet. The company's recent activities set the stage for diversified forward revenues and a promising investment runway.
Key Takeaways
- Epsilon Energy experienced a year of transition in 2023, with natural gas prices hitting multiyear lows due to oversupply.
- The company added a new core area in the Permian Basin, providing multiyear investment opportunities and oil exposure.
- Epsilon continued its commitment to shareholder returns while maintaining a strong balance sheet.
- CEO Jason Stabell expressed confidence in the long-term fundamentals of natural gas and the company's Marcellus assets.
- The Permian Basin's Pradera Fuego project showed promising early well performance, exceeding expectations.
- Epsilon's Anadarko operations in Oklahoma provide steady cash flow and could be considered for disposition in the right market conditions.
- The company's capital investments increased in 2023, with a significant portion allocated to the Permian Basin.
- Share buybacks and regular dividends continued, with the dividend payout rate remaining well supported by midstream cash flows.
Company Outlook
- Epsilon anticipates diversified forward revenues from natural gas, oil, and fee-based midstream income.
- The company plans to continue its shareholder return strategy through dividends and share repurchases.
- Epsilon is actively pursuing business development opportunities to identify one to two additional projects.
Bearish Highlights
- The North American natural gas market remains oversupplied, with short-term fundamentals causing concern.
- Production and cash flow from Pennsylvania are expected to decline in 2024 based on current pricing.
Bullish Highlights
- Announced production deferrals and CapEx reductions by larger operators indicate a potential market recovery.
- Epsilon's Marcellus assets are positioned in one of the lowest cost gas basins, with a reserve life of over 25 years.
- The company has seen strong early performance in the Permian Basin, with production and acreage recently increasing.
Misses
- The oversupplied natural gas market has exerted pressure on Epsilon's performance, particularly in the Marcellus region.
Q&A highlights
- CEO Jason Stabell and other executives expressed readiness to answer questions regarding the company's operations and outlook.
- The management team emphasized their confidence in the company's strategic direction and asset quality.
In conclusion, Epsilon Energy's management team has demonstrated resilience in the face of a challenging natural gas market and has taken steps to position the company for future growth. With a diversified portfolio and a focus on shareholder returns, Epsilon Energy appears to be navigating the current energy landscape with strategic foresight.
InvestingPro Insights
Epsilon Energy Ltd. (EPSN) has shown a remarkable ability to maintain a strong financial position amidst market volatility. Notably, the company holds more cash than debt on its balance sheet, a significant indicator of financial health that can provide investors with confidence in the company's ability to manage its finances and invest in growth opportunities. T
his resilience is further underscored by the fact that Epsilon's cash flows can sufficiently cover interest payments, ensuring the company's debt servicing capabilities remain robust.
Investors should note that the stock's current P/E ratio stands at 8.57, with an adjusted P/E ratio for the last twelve months as of Q3 2023 at a slightly lower 7.56, suggesting a potentially undervalued stock in comparison to earnings.
Furthermore, with a price/book ratio of 1.12 for the same period, the company's stock is trading close to its book value, providing a potentially attractive entry point for value investors.
The company's disciplined approach to capital allocation is reflected in its continued commitment to shareholder returns, with a dividend yield of 4.76% as of early 2024, which is considerably attractive in the current investment climate. Additionally, Epsilon's stock has experienced a 1 Year Price Total Return of 10.29%, indicating a positive trend in shareholder value over the past year.
For those interested in exploring further, there are additional InvestingPro Tips available that can provide deeper insights into Epsilon Energy Ltd.'s financial health and stock performance. By using coupon code PRONEWS24, readers can obtain an additional 10% off a yearly or biyearly Pro and Pro+ subscription to access these valuable tips. Currently, InvestingPro offers 5 more tips for EPSN, which could further inform investment decisions.
Full transcript - Epsilon Energy Ltd (EPSN) Q4 2023:
Operator: Good morning, everyone, and welcome to the Epsilon Energy Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After the today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Andrew Williamson, Chief Financial Officer. Please go ahead.
Andrew Williamson: Thank you, operator. And on behalf of the management team, I'd like to welcome all of you to today's conference call to review Epsilon's full year and fourth quarter 2023 financial and operational results. Before we begin, I'd 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. 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'd like to turn the call over to Jason Stabell, our Chief Executive Officer.
Jason Stabell: Thank you, Andrew. Good morning, and thank you for participating in our 2023 year end 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. 2023 was a year of transition for Epsilon. Natural gas transitioned from the strongest market in recent memory in 2022 to an oversupplied market in 2023 that saw prices hit multiyear lows. Despite these headwinds, our business is in a strong position. Through two transactions closed in 2023, we added a new core area in the Permian Basin, giving us a multiyear investment runway and oil exposure. We also continued our track record of shareholder returns, all while maintaining a strong balance sheet. The rewards of this strategy transition now sit largely in front of us. So what do we like about our business? We own high quality assets in two premier basins that produce strong operating cash flows and have runways for multiyear growth. Our forward revenues will be more diversified to provide our shareholders with exposure to both natural gas and oil alongside the fee-based income from our midstream position. The combination of these attributes is unique in the small-cap public energy space. Now I'd like to offer some comments on a few key areas. First, I would like to discuss our current view of the Marcelus assets. The North American natural gas markets remain oversupplied. The short-term fundamentals of natural gas have concerned us for the last 18 months and similar to 2023, we have taken defensive action for 2024 with our hedging program. However, we are starting to see changes that set the stage for a recovery in the next 12 months. Recently announced production deferrals and reductions to 2024 CapEx by larger operators are positives. As I like to say, it is never the punch you see that knocks you out. So we don't know what surprises the future holds, but we do know we have production and inventory in one of the lowest cost gas basins in the world. At current production levels, our remaining reserve life is over 25 years. We are also partnered with one of the premier natural gas operators in North America. So we enjoy the benefits provided by their scaled business. Although, I can't provide precise timing, our belief in the long-term fundamentals of natural gas makes us feel confident that our Marcelus asset will be a major contributor for many years at levels meaningfully above our 2023 performance. If you are constructive on North American natural gas, these are phenomenal assets to own. That said, we expect production and cash flow from Pennsylvania will be down in 2024 based on current pricing and discussions with our operator about the timing of first production for the seven recently drilled and completed wells. In the Permian, we have a 25% working interest in the Pradera Fuego project in Ector County. The Mississippian play is beginning to receive a lot of industry attention based on our results and those of neighboring operators. Early performance on our wells drilled in the fourth quarter exceeds our pre-drill expectations by more than 25%. Last month, we added additional production and acreage in the project. Our interest is now across approximately 16,000 gross acres with current net revenue production of 600 BOE per day, which is 90% liquids. Later in the call, Henry will provide more details on our results and forward plans. Our third area of operation is the Anadarko in Oklahoma, which represents a relatively small piece of our net asset value. We like the cash flow these assets provide and our 7,000 net acre position that is held by production is attractive for additional investment in a higher gas price environment. Oklahoma could also be a candidate for disposition under the right circumstances. Our business development efforts are ongoing. Ideally, we would identify an additional one to two projects that are drill bit focused. Andrew can offer more details later in the call. Finally, our strong balance sheet and diversified cash flow stream leave us well positioned to continue our shareholder returns in the form of a regular dividend and opportunistic share purchases. The current dividend payout rate remains well supported. As I mentioned in the press release yesterday, we believe the combination of these factors makes Epsilon an extremely compelling investment opportunity. My recent personal share purchases should speak louder than words. Now I would like to turn the call over to Andrew for some comments.
Andrew Williamson: Thanks, Jason. I'll elaborate on the Permian business, which will be a much bigger contributor to results in 2024. We will have a full year from the wells brought on in the fourth quarter. Contribution from our recently announced acquisition, which has a meaningful production component to it and multiple new wells developed and brought on through the year. The first is underway. At current prices, we expect the Permian to contribute more than 50% of our upstream cash flow this year. Our capital investments were up meaningfully in 2023, driven by the Permian activity. These were underwritten at attractive rates of return that set us up for multiyear growth in liquids production. We expect almost all of our incremental development spend in Texas this year, which is estimated at over $10 million to be funded from the project's cash flows. I would also like to say that the Permian assets are not yet included in our borrowing base under the revolver. They will be added in the next redetermination this spring, so the reduction in liquidity from the deals will be partially offset. We continued our track record of consistent shareholder returns last year. We repurchased 1.16 million shares during the year for just over $6 million at an average price per share of $5.20. Those shares represent roughly 5% of the shares outstanding at the beginning of the year. We returned another $5.6 million through our regular dividend, which as Jason mentioned, remains well supported by our fee-based midstream cash flows going forward. We picked back up in January this year, repurchasing another 250,000 shares at $4.82 per share. As we announced yesterday, we reloaded the buyback program with 2.19 million shares, effective on March 27 that will run through March 26 of next year. We are still busy looking for additional opportunities that will bring in at least one new project as an option to deploy capital going forward. We look for drill bit development-focused opportunities, which offer higher return potential and the opportunity to compound with follow-on investment. The other major criterion for us is alignment with the operator on operating practices and the pace of development. Now I'll turn it over to Henry for commentary on the operations.
Henry Clanton: Thank you, Jason and Andrew. I too would like to add some additional color on our Permian Basin project. As Jason mentioned earlier, we are very pleased with the performance of the Pradera Fuego project to date. The two initial wells, low 2-mile laterals have demonstrated higher initial production rates and lower early life decline rates than our predrill estimates. The most recent acquisition was a 25% acquisition and an additional 4,000-plus acres in the area that includes three producing wells, all 2-mile laterals. This raises the total project acreage to over 16,000 gross acres and five producing wells currently producing approximately 600 barrels of oil equivalent per day net to Epsilon. The current development plan for 2024 includes drilling at least three additional wells, the first of which has been drilled and is currently waiting on completion. A vertical pilot has been drilled and logged and a full core was taken over the target interval. This data capture will benefit the ongoing development as well as evaluate additional intervals within the acreage block for commercial viability. As mentioned previously, we think Pradera Fuego provides the company with a substantial runway of at least 20 additional gross locations, assuming 2-mile laterals. In the Marcelus, Jason mentioned the company's participation in the seven wells, 0.74 net to Epsilon that are now being drilled that are in various stages of completion. We remain in contact with the operator related to the timing of bringing these wells on and are aligned with deferred TILs given the current pricing environment. We are confident that once on production, these wells will perform consistently with other wells in the area. And depending on timing, we expect them to roughly double our net gas production from the Marcelus. Now back to Jason.
Jason Stabell: Thanks, guys. Operator, we can now open the line for questions.
Operator:
Jason Stabell: Thank you, Jamie. I want to thank everyone for their interest in Epsilon and for joining us today. If you have any questions, please reach out to us at our Houston office. And hope you have a great Thursday and the rest of your week. Thank you, again.
Operator: Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
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