Earnings call transcript: Epsilon Energy Q2 2025 misses EPS forecast

Epsilon Energy Ltd reported its second-quarter 2025 earnings, revealing a significant miss in earnings per share (EPS) and revenue compared to forecasts. The company posted an EPS of $0.07, falling short of the expected $0.11, while revenue came in at $11.62 million, slightly below the anticipated $11.8 million. Following these results, Epsilon’s stock fell by 15.56% to $6.28 in premarket trading. Despite the earnings miss, InvestingPro data shows the company maintains strong fundamentals with a healthy current ratio of 2.23 and impressive revenue growth of 45.9% over the last twelve months.

Key Takeaways

• Epsilon Energy’s EPS missed analyst expectations by 36.36%.
• Revenue also fell short of forecasts by 1.53%.
• The stock dropped 15.56% in premarket trading, reflecting investor concerns.
• Acquisition of Peak Companies assets in Powder River Basin aims to boost production.
• Expanded credit facility suggests financial flexibility amid challenges.

Company Performance

Epsilon Energy faced a challenging quarter with a 30% decrease in quarter-over-quarter cash flows and a notable decline in realized pricing for gas and oil. Despite flat production levels, these factors contributed to the financial shortfall. The company expanded its revolving credit facility, indicating a strategic move to maintain liquidity.

Financial Highlights

• Revenue: $11.62 million, down from forecast
• Earnings per share: $0.07, below the $0.11 forecast
• Pro forma net debt to adjusted EBITDA ratio: approximately 1x

Earnings vs. Forecast

Epsilon Energy’s actual EPS of $0.07 was significantly below the forecasted $0.11, marking a 36.36% negative surprise. Revenue also missed expectations, coming in at $11.62 million compared to the forecast of $11.8 million. This marks a concerning trend for the company as it navigates financial headwinds.

Market Reaction

Following the earnings announcement, Epsilon Energy’s stock experienced a sharp decline of 15.56%, settling at $6.28 in premarket trading. This drop reflects investor unease about the company’s financial performance and future prospects. The stock’s movement is notably more negative than broader market trends, highlighting specific concerns about Epsilon’s outlook. According to InvestingPro analysis, the stock appears undervalued at current levels, with a P/E ratio of 26.94 and an attractive dividend yield of 3.86%. The platform’s Fair Value calculation suggests significant upside potential from current prices.

Outlook & Guidance

Looking ahead, Epsilon Energy forecasts EPS of $0.03 for Q4 2025 and $0.04 for Q1 2026, with revenue projections of $11.5 million and $11.36 million, respectively. The company expects a significant increase in proved reserves and liquids production by the end of 2024, driven by the recent acquisition in Powder River Basin. InvestingPro identifies several positive factors, including the company’s strong balance sheet with more cash than debt and analysts’ expectations for continued net income growth. Get access to 8 additional ProTips and comprehensive financial analysis through InvestingPro’s detailed research report, part of their coverage of over 1,400 US stocks.

Executive Commentary

CEO Jason Stebell emphasized the strategic importance of the recent acquisition, stating, "The deal adds a new core area to the company at an attractive price." He expressed optimism about growth opportunities, saying, "We think this PRB platform provides the opportunity for both organic and inorganic growth."

Risks and Challenges

• Continued decline in gas and oil pricing could impact future earnings.
• Potential financial strain from the Alberta joint venture impairment.
• Execution risks associated with integrating new acquisitions.
• Market volatility and macroeconomic pressures could affect performance.
• Regulatory challenges, including permit moratoriums, may hinder operations.

Q&A

The earnings call did not provide specific details from the Q&A session, but analysts likely focused on the financial miss and strategic plans to improve performance and leverage recent acquisitions for growth.

Full transcript - Epsilon Energy Ltd (EPSN) Q2 2025:

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

Andrew Williamson, Chief Financial Officer, Epsilon: Thank you, operator. And on behalf of the management team, I would like to welcome all of you to today’s conference call to review Epsilon’s acquisition of the Peak Companies and our second quarter twenty twenty five 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.

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 Stebell, our Chief Executive Officer.

Jason Stebell, Chief Executive Officer, Epsilon: Thank you, Andrew. Good morning and thank you for participating in our twenty twenty five second quarter 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. Today, along with our earnings release, we announced the acquisition of the Peak Companies with assets in the Powder River Basin, PRB.

The deal adds a new core area to the company at an attractive price. The acquisition includes key members of the Peak team that bring over fifteen years of in basin operating experience. It adds oil weighted production and a massive operated inventory of locations across multiple benches. Importantly, the position is approximately 75% held by production, allowing for returns driven capital allocation over time as commodity prices dictate. We think this PRB platform provides the opportunity for both organic and inorganic growth.

Our near term activities post closing will focus on the Parkman formation, a semi conventional reservoir with half cycle economics that rival anything in our existing portfolio at a significantly lower implied acquisition cost per location compared to available acreage in the Marcellus or the Permian. We estimate 14 net Parkman two mile laterals on the position with opportunities to add incremental interest via pooling and leasing. In addition, the assets add attractive inventory estimated at 90 net two mile locations in the Niobrara and Mowry, which offset operators, including EOG and Devon, are currently developing on adjacent acreage. Over time, we expect these intervals to develop into a meaningful percentage of our capital expenditures. They offer a nice balance of oil and gas potential.

Approximately 30% of the identified priority inventory is currently affected by a drilling permit moratorium in Converse County, Wyoming. We’ve addressed this issue by making a portion of the consideration contingent on our ability to access this inventory. We are optimistic that given the current regulatory environment, the moratorium will be lifted in the near to medium term. Post close, we think our high quality asset mix across the Marcellus, Permian Barnett and PRB is truly unique in the small cap space. The addition of this operated asset base gives us enhanced capabilities and control to add per share value.

We are also excited to add Yorktown as a large shareholder. I’ve known and worked with the principles of the firm for over twenty years. They are experienced and successful energy investors that will bring tremendous value as we continue to grow the company. I want to thank them and the Peak team led by Jack Vaughan for their partnership. I’ll now turn the call over to Andrew and Henry for some comments on the deal and our second quarter results.

Andrew Williamson, Chief Financial Officer, Epsilon: Thanks, Jason. I’ll start by talking through the mechanics of the transactions. Consideration at closing will be the issuance of 6,000,000 Epsilon common shares and the assumption of approximately $49,000,000 of long term debt. As Jason mentioned, additional contingent consideration of up to 2,500,000.0 Epsilon common shares is payable when we can access the affected acreage in Converse County. The contingent shares consideration will decrease over time if access delayed beyond year end twenty six.

Further details regarding the step down and consideration can be found in the presentation we released today. We will refinance Peak’s term loan with an expanded revolving credit facility at closing led by our existing lender. The process is underway to add a second bank to the facility with an indicative borrowing base of 95,000,000 at closing. We will be approximately 50% drawn with a forecasted net debt to adjusted EBITDA ratio of approximately one times, which we believe is conservatively leveraged pro form a business. Importantly, the transaction and associated leverage profile allows us to comfortably maintain our existing per share dividend and have sufficient discretionary cash flow to drive growth through a development plan that covers the Marcellus, Permian, and PRB starting next year.

At closing, the peak shareholders will represent approximately 21% of the equity, which can increase to as much as 28% if the maximum contingent shares are issued. In exchange, our year end ’24 proved reserves increased by over a 150% based on Epsilon and Peak’s third party reports, which are subject to change at year end twenty five based on development assumptions and SEC pricing. Liquids production increased by over 200% and our priority or premium inventory count increases by over 600%. We define priority inventory as two mile net locations that underwrite returns over 25% at $65 WTI and $4 Henry Hub flat price assumptions. Our underwriting has 40% of the acquired PRB inventory here exceeding that threshold.

This includes the Parkman and some of the Niobara. Given we plan to issue over 20% of our pre deal shares outstanding, closing will be subject to a shareholder vote planned for the fourth quarter. We will file a proxy statement this fall with additional detail on the peak companies and assets, transaction background and rationale and the financial position of the pro form a business. Now to the second quarter, production was roughly flat, driven by the new production in the Marcellus we started to see in the first quarter. Realized pricing was down meaningfully quarter over quarter for gas and oil, so cash flows were down roughly 30% quarter over quarter.

Now to Henry to discuss the PRB assets, the addition of operational control and our preliminary near term development plans on our legacy assets and the acquired assets for the remainder of this year and next.

Henry Clanton, Chief Operating Officer, Epsilon: Thank you, Jason and Andrew. As mentioned by Jason and Andrew, the acquisition of the Peak Companies is a significant addition to our undeveloped inventory and not only will it have a meaningful impact on our near term development, but it also adds a highly experienced operating staff who has drilled 100 plus wells in the Powder River Basin. Currently, the company has two two mile Nibreira ducts, 0.7 net in inventory that are scheduled for completion in Q4. Initial plans for next year call for the development of three high working interest Parkman wells, approximately 96% working interest in the first quarter, subject to the closing timeline of the transactions. This acquisition adds approximately 2,200 net barrels oil equivalent of daily production, 56% oil with greater than 90% of the PDP value held within the operated wells.

This production base has good value diversity spread across 168 wellbores in five intervals. The producing wells are relatively early life with majority of them less than ten years old and a forecasted base annual decline rate of approximately 15%. For our Marcellus asset, we are pleased to report that based on communications with the operator, we expect drilling activity to start up again in 2026. The operators plans, which of course are subject to change based on market conditions and other factors include the drilling of seven gross 1.2 net wells on two pads. Production from both pads is scheduled to come online in Q4 twenty twenty six.

All of these wells will be gathered through the Auburn gas gathering system. On our Permian Barnett project, our operating partner has successfully drilled, completed and placed on production the eighth well in the project, the Irma Unit 1H. The well has a completed lateral length of 10,966 feet. Preliminary development plans for next year includes the drilling of at least two additional gross wells, 0.5 net. I would also like to briefly comment on the impairment taken this quarter on our recent investments in our joint venture in the Garrington area Of Alberta.

The impairment was driven by a combination of drilling and completion cost overruns and early well inflow performance below expectations. We have had ongoing technical collaboration with the operating partner and we feel confident this robust review effort will lead to improved location selection and better drilling and completion planning moving forward. The JV covers a large acreage position that we believe remains valuable. Now back to Jason.

Jason Stebell, Chief Executive Officer, Epsilon: Thanks guys. Operator, we can now open the lines for questions.

Conference Operator: Thank you. We will now begin the question and answer session. That concludes the question and answer session. I’d like to turn the conference back over to Jason Stable for any closing remarks.

Jason Stebell, Chief Executive Officer, Epsilon: Thank you, operator. I want to thank everybody for joining today. I look forward to talking to you guys about our base business and the exciting new acquisition that we have teed up. I think it’s a really, really exciting future for the company and appreciate your support and we’ll talk to you soon. Everybody have a great day.

Thank you.

Conference Operator: Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.

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