Epsilon Energy Ltd (EPSN) 2023 Q2 法說會逐字稿

Good morning and welcome to the Epsilon Energy second quarter 2023 earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Andrew Williamson, Chief Financial Officer, please go ahead.

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 second 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 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.

Thank you, Andrew. Good morning to everyone and thank you for participating in the Epsilon Energy second quarter 2023 conference call. Andrew and I are joined by Henry Clanton, our COO, who will be available to answer questions later in the call. I hope you have had a chance to review our press release as I will not go through it in detail, but I would like to touch on a few highlights before I turn the call over to Andrew and Henry for their comments.

I am pleased to report that we delivered a productive quarter advancing several key initiatives despite natural gas pricing headwinds in the Marcellus. We closed investments in two areas in the Permian Basin, adding geographic operator and commodity diversity to our business. We also expanded our liquidity by $5 million under a new $35 million credit facility with reduced costs and increased flexibility.

Finally, our strong balance sheet allowed us to opportunistically purchase year to date almost 5% of our shares outstanding at an average cost of $5.21 per share. Net of our investments, we had no free cash flow in the quarter for the first time during my tenure. This is due to the depressed pricing for natural gas, especially in our area of the Marcellus and the significant leasehold and drilling capital investments we made in the Permian.

We have been active yet disciplined in our pursuit of new investments, and you should expect that to continue. Some opportunities such as our recent one in New Mexico will be accretive day one, while others, such as Ector County will contribute over longer periods of time with the pace of development. What doesn't change is our focus on deploying our resources to create durable growth in our per-share equity value.

Now I'd like to turn the call over to Andrew and Henry for some comments on our finances and operations.

Thank you, Jason. I'd like to highlight the new credit facility with Frost Bank, which we closed in June. As evidenced by our balance sheet and history, we take a cautious approach to the use of leverage in our capital structure. That said, we think it's important to have available liquidity to take advantage of attractive opportunities, both acquisitions and investments in our existing asset base as they present themselves.

We added four years of term and $5 million of liquidity with the new deal on what we believe are commercially attractive terms. On the recently announced transactions in the Permian, we've started to see contribution from the liquids volumes during the quarter with the New Mexico wells, partially offsetting the revenue declines in Pennsylvania on lower natural gas of wellhead prices. And we expect to see more of this in the second half of the year as the first Texas wells come online.

The large acreage position in Ector County provides a path for growth through the drill bit in addition to our substantial remaining location inventory in the Marcellus.

Now to Henry for comments on the operations.

Thank you, Andrew. In the Northern Delaware Basin in Eddy County New Mexico, the Company participated in two horizontal Wolfcamp wells. Based upon flowback results today, we are pleased to report the productivity of these wells are exceeding projections. On the Central Basin Platform in Ector County, the appraisal program in this Mississippian/Barnett project is ongoing.

Following the drilling of the initial well in the second quarter, the second well is currently drilling with back-to-back completions planned for the late in the third quarter and first production expected in the fourth quarter. As previously reported, the initial appraisal plans for this 12,000 plus acre project call for an additional two to four gross wells in 2024.

Thank you, guys. Operator, we can now open the line for questions.

(Operator Instructions) Tom McIntyre, MFF.

Yes, good morning, gentlemen. Maybe you could just comment a little bit on your strategies and thoughts on natural gas pricing as we head into end of this year next year and because I know you did some hedging and I don't know if that's just going to roll off or just what you're -- if you have a strategy at or how you think about it?

Thanks, Tom. Yeah, we had some fear that we'd see an overbuild on inventories as we were coming out of last winter. And clearly that played out. We had put some hedges on as a precautionary hedge to that outcome. In retrospect, obviously we would have liked to have had more on unhedged, but at present, we don't have any additional hedges extending beyond October. We do agree that there will be a strengthening as we head into winter. I think that the key determinant at this point is where do we end fall inventory builds in early November. Right now -- builds have rolled over just a little bit. So I think there's some hope that we're going to come in in the winter here and realize something close to where we are on strip. So short answer is we don't yet have any plans for additional hedges. It's something we watch very closely. We're going to be watching the inventories for us in Marcellus. Obviously, there's not a lot of in-basin demand.

So really the weather coming into the shoulder season here is going to be a big determinant for us in how we might act proactively on a hedging basis.

The strip for next year versus this year next year, it looks to be quite better than what turned out to be reality this year. Is that good enough for you? Or do you just want to see some more factors for you to make a decision?

Yeah, I think the key thing obviously will be weather and what everybody is waiting for is some sort of moderation of production in the gas basins, primarily in the Haynesville and what's coming out of the Midland. I think those are that are going to be the big drivers on inventories. We're starting to see some of that production moderate or at least the growth moderate. So again, a combination of normal weather and continued moderation on the gas side is probably going to set us up for a better pricing as we head into the winter. But I'm certainly no expert. We watch it very closely. So it didn't surprise -- again, what we tell people is our balance sheet affords us the opportunity to be opportunistic around the hedge program that played out well and the position that we've put on. That said, it's really hard to lean in on a big hedge position when you have the liquidity that we do. So we monitor it closely. It's a big piece of our forward cash flows. So it's something that you may see us put some more of hedges on, but at this point, we don't have any firm plans.

Right. I guess one of the things I'm just trying to -- forget, either anybody is trying to outguess where the market is going to go. If it just went to where the strip is now, wouldn't that be a substantial uptick for you folks the next year versus even what you did this year with the hedging --?

Yes, absolutely. Our Marcellus netback average in the second quarter was something in the [one thirty five] with Mcf range. So that's pretty ugly. We've had periods where we've been down near $1 or below in the history of this company. But certainly that's as bad as we've been in the Marcellus since 2021, 2020 period. So certainly what happens in the Marcellus because it's not a big in-basin demand is we're at the very end of the demand structure. So the netbacks get pretty gnarly in the summertime when gas is flowing to the Gulf Coast and storage down there. And we're at the very end of that line where we sit in the northeastern part of the Marcellus on the takeaway.

Well, it seems to me with the -- as you say with your balance sheet and with the better strip out to the future then what we experienced, of course, the strip year ago was great, too, but not knowing the future, it just seems like you're in a much better position. And the industry is in a much better position. So and you're in a stronger position to be [cute] with -- not cute, but to be -- to wait to see how things play out in the event you do want to hedge or just want to play it. I am just -- but I think as it is now, you would have a much improved winter, spring '24 than you had even with the hedges you put on in '23. So and you know, things can change, but it seems like you're changing in your favor, not the other way around like we were last year.

Yes, I think that's a good be when we're in the low single digit dollars here on prices that we've got more upside exposure than we do downside. And as I said, activity has really moderated in the Marcellus. Haynesville's starting to rollover. So given some normal weather, I think we're biased to the upside, but it's something we're just going to have to watch. And really the next 90 days is going to be critical to what the strip is going to look like in the winter and through the next year.

And as far as the recent uptick, which might have some legs in oil itself, does that make it -- it probably makes it harder for you to find more expansion in the Permian or wherever you're looking, a major prices have risen to reflect that. But is there anything in your mind you'd want to say about that?

We're active at looking at things. We're excited about the Ector County. We'll have more to report on that on the next call. By that time, we should have completed those first two wells by the time we have our third quarter conference call. And as Henry mentioned, at this point, we're going to sit with the operator in the early part of the fourth quarter and lay out a plan for Ector County activity next year. But our initial guide on that is two to four gross wells. So we're a quarter of that. So that would be anywhere from a half to a full well. As far as additional opportunities, what we've been looking at most (technical difficulty) focused opportunities, I think we'll continue to lean that way. Obviously, the PDP market, we find to be pretty attractive or pretty unattractive just because it's so competitive. But we've looked at constellation of different things, and we'll continue to do so. So but nothing imminent to report today on that front.

I think lastly, the press release referred to a -- after the quarter ended, I think a buyback of a $0.5 million share block and stock. I kind of watched it carefully. I don't remember seeing a volume spike like that. Obviously it happened. Was that done -- was that a privately negotiated transactions are done on the market? I don't remember seeing a block like this.

It was done on the market at the very beginning of July, right after the holiday, July 6.

(multiple speakers) It wasn't done with an insider or a major shareholder, I don't believe, but I can figure that out myself. Since I missed --

That's right.

So I'm glad to see it got a good price. Thank you.

Thanks. Thanks, Tom. (technical difficulty)

This concludes our question and answer session. I would like to turn the conference back over to Jason Stabell, CEO, for any closing remarks.

Thank you, operator. I appreciate everybody taking the time to join us today for the call. And as always, appreciate your interest and support for Epsilon. And we look forward to hearing from you as we go forward and have a great weekend. Thank you.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.