Epsilon Energy outlines transformative Peak acquisition and expects 150% reserves boost as company diversifies asset base

Earnings Call Insights: Epsilon Energy Ltd. (EPSN) Q2 2025

MANAGEMENT VIEW

* Jason P. Stabell, CEO, announced the acquisition of the Peak Companies with assets in the Powder River Basin, adding a new core area at what he described as an attractive price. Stabell stated the acquisition "adds oil-weighted production and a massive operated inventory of locations across multiple benches" and highlighted that the position is approximately 75% held by production, which allows for returns-driven capital allocation as commodity prices dictate. He emphasized that the PRB platform provides opportunities for both organic and inorganic growth, and that near-term activities will focus on the Parkman formation, citing competitive half-cycle economics and a lower implied acquisition cost per location than other basins in the company’s portfolio. Stabell further noted, "Post close, we think our high-quality asset mix across the Marcellus, Permian, Barnett and PRB is truly unique in the small-cap space."
* Stabell also announced the addition of Yorktown as a large shareholder, describing their firm as "experienced and successful energy investors that will bring tremendous value as we continue to grow the company."
* CFO J. Andrew Williamson explained, "Consideration at closing will be the issuance of 6 million Epsilon common shares and the assumption of approximately $49 million of long-term debt." He added that contingent consideration of up to 2.5 million Epsilon common shares is tied to access to certain acreage in Converse County, and that the company will refinance Peak's term loan with an expanded revolving credit facility, with an indicative borrowing base of $95 million at closing. Williamson highlighted, "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."
* COO Henry Nelson Clanton described the acquisition as a "significant addition to our undeveloped inventory" and noted it brings a highly experienced operating staff. Clanton stated, "This acquisition adds approximately 2,200 net barrels of oil equivalent of daily production, 56% oil with greater than 90% of the PDP value held within the operated wells."

OUTLOOK

* Management expects Marcellus drilling activity to resume in 2026, with operators planning to drill 7 gross, 1.2 net wells on 2 pads, with production scheduled to come online in Q4 2026.
* The company plans to develop 3 high-working interest Parkman wells, approximately 96% working interest, in Q1 next year, subject to closing the Peak transaction. Preliminary plans for the Permian Barnett project include drilling at least 2 additional gross wells next year.
* Epsilon addressed a drilling permit moratorium affecting 30% of the identified priority inventory in Converse County, Wyoming, making part of the acquisition consideration contingent on permit access and expressing optimism about a near- to medium-term resolution.

FINANCIAL RESULTS

* CFO Williamson reported that production was roughly flat for the quarter, driven by new Marcellus production that began in Q1. He stated, "Realized pricing was down meaningfully quarter-over-quarter for gas and oil. So cash flows were down roughly 30% quarter-over-quarter."
* Williamson indicated that at closing, Peak shareholders will represent approximately 21% of the equity, potentially rising to 28% if maximum contingent shares are issued. He reported, "Our year-end '24 proved reserves increased by over 150% based on Epsilon and Peaks third-party reports," and noted that liquids production increased by over 200% and priority inventory count rose by over 600%.
* Clanton commented on an impairment related to the Garrington joint venture in Alberta, attributing it to cost overruns and early well inflow performance below expectations, and stated, "We feel confident this robust review effort will lead to improved location selection and better drilling and completion planning moving forward."

Q&A

* There were no analyst questions during the Q2 2025 call. The operator closed the Q&A session without opening the line for questions.

SENTIMENT ANALYSIS

* Analyst sentiment cannot be assessed for Q2 2025 as no analyst questions were posed during the call.
* Management maintained a confident and optimistic tone, with Stabell stating, "I think it's a really, really exciting future for the company and appreciate your support."
* Compared to Q1, where analysts offered congratulatory remarks and routine operational queries, the absence of Q&A in Q2 removed direct expressions of analyst sentiment.
* Management's tone in both quarters remained consistently optimistic, though in Q2 it was more focused on the transformative nature of the Peak acquisition and its expected impact.

QUARTER-OVER-QUARTER COMPARISON

* The Q2 2025 call centered on the Peak acquisition, major asset base expansion, and the introduction of Yorktown as a significant new shareholder, signaling a strategic pivot towards diversification and scale.
* In contrast, Q1 2025 focused on organic performance, especially in the Marcellus, and capital discipline in a volatile pricing environment, with no mention of acquisitions or major shifts.
* Management's tone shifted from cautious optimism in Q1, emphasizing operational performance and capital discipline, to a more assertive and forward-looking stance in Q2.
* Q2 guidance introduced new production and inventory targets, while Q1 guidance was more reserved, focused on sustaining current operations and minimizing near-term activity.
* Analyst participation dropped from a brief Q&A in Q1 to no participation in Q2.

RISKS AND CONCERNS

* Management identified the Converse County drilling permit moratorium as a constraint on about 30% of priority inventory, mitigating this by structuring part of the acquisition consideration as contingent on permit access.
* Clanton addressed operational challenges and impairment in the Garrington JV, citing cost overruns and underperformance, and outlined ongoing technical collaboration to improve future outcomes.

FINAL TAKEAWAY

The Q2 2025 call marked a pivotal moment for Epsilon Energy, defined by the acquisition of Peak Companies, a substantial increase in reserves and inventory, and a strategic emphasis on diversification across multiple core basins. Management underscored a stable dividend, conservative leverage, and a robust development plan, while addressing known risks through structured deal terms and operational improvements. The company projects significant expansion in both scale and capability, positioning itself for future growth driven by organic and inorganic opportunities across its newly broadened asset base.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/epsn/earnings/transcripts]

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* Epsilon Energy Ltd. (EPSN) Q2 2025 Earnings Call Transcript [https://seekingalpha.com/article/4813717-epsilon-energy-ltd-epsn-q2-2025-earnings-call-transcript]
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