Epsilon Energy Ltd
NASDAQ:EPSN
Earnings Call Analysis
Q3-2023 Analysis
Epsilon Energy Ltd
- Epsilon Energy is excited about upcoming development investments in Pennsylvania and Texas, planning a more robust CapEx budget for the next 12 months, which is expected to significantly increase volume growth in both liquids and natural gas. - In Pennsylvania, the company has elected to participate in 7 wells, with more details available from the COO, Henry Clanton. - In Texas, activities will continue in 2024 on a large contiguous leasehold position acquired earlier in the year, expected to unlock significant value potential. - The company has hedged a portion of natural gas production for the next 12 months and may do the same for crude volumes in the Permian, depending on market conditions. - Shareholder returns remain a priority, with over $4 million returned in the quarter through dividends and share purchases.
- Gas hedges have been put in place for a portion of forecasted volumes through October 2024 to mitigate downside risks. - The company is comfortable with the current exposure level given forward prices and plans to consider hedging a portion of crude volumes from Ector County wells based on market conditions. - Anticipated CapEx of $15-20 million from Q4 through the first half of the following year, split between Pennsylvania and the Permian, is expected to be comfortably funded by existing cash on hand and cash flow. - Incremental cash flows from the new wells in the Permian are projected to have a meaningful impact starting in the fourth quarter. - Business development efforts are ongoing to explore investment opportunities beyond the current asset base while maintaining a disciplined evaluation approach.
- In Pennsylvania, Epsilon Energy has elected to participate in 7 wells over the next 9 months, with meaningful volume contribution expected by midyear. - The first 3 wells have been drilled and are awaiting completion in Q1 2024, while the remaining 4 wells are scheduled for drilling completion in the first half of the same year. - In the Permian Basin project, flowback operations for the first 2 appraisal wells began in mid-October, showing encouraging preliminary results that align with expectations. - Plans are being finalized to drill up to 4 additional appraisal wells in the coming year, with an estimated 20 to 30 gross locations that are anticipated to enhance the company's liquidity mix and cash flows. - All wells undergoing remedial work on the Crumlin pad during the third quarter have been returned to production by late September.
- Epsilon Energy appreciates the participation in the third-quarter call and looks forward to updating stakeholders on the progress of these plans.
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Good morning, and welcome to the Epsilon Energy Third 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 third 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.
Thank you, Andrew. Good morning to everyone, and thank you for participating in the Epsilon Energy Third Quarter 2023 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.
Our press release and 10-Q posted yesterday provide details on our business results. Today, I'd like to discuss several key highlights since our last quarterly release in August.
First and most importantly, we are excited about our recent and planned near-term development investments in Pennsylvania and Texas. Alongside our operating partners, we're planning a more robust CapEx budget for the next 12 months relative to the last few years, which will add significant volume growth in both liquids and natural gas. We are already underway in Pennsylvania having recently elected to participate in 7 wells. Henry can add more detail here.
In Texas, we recently completed our first 2 wells and activity will continue in 2024 on our large contiguous leasehold position that we acquired earlier this year. This approximately 11,000-acre gross position where we hold a 25% interest sits in close proximity to the 2 recently drilled and completed wells. Our 2024 plans will begin to unlock the value potential of this large asset.
We have hedged a portion of our natural gas production for the next 12 months and will monitor the oil market to potentially do the same with a portion of the crude volumes coming on in the Permian.
Finally, we continue to prioritize shareholder returns through our well-supported dividend and opportunistic share purchases. These returns totaled over $4 million for the quarter, including a $525,000 share purchase at $5 per share in July and our $1.4 million quarterly dividend paid in September.
Now I'd like to turn the call over to Andrew and Henry for some more detailed comments on our finances and operations.
Thanks, Jason.
As Jason just mentioned, we put on some gas hedges over the last 45 days, swaps for Henry Hub and our basis of Tennessee Gas Pipeline Zone 4. Details are included in the press release posted yesterday. We wanted to take some risk off based on potential downside we see to the forward curve and looking ahead to the capital program over the next 12 months. Approximately 25% of our forecasted volumes through October 2024 are hedged.
With our balance sheet, we're comfortable with that exposure level at current forward prices. With our first 2 wells online in Ector County, we will look at hedging a portion of our crude volumes this quarter depending on forward prices. We're excited about our recent and upcoming drill bit investments. It's shaping up to be one of the most active periods for the company in the last several years. I'll let Henry talk about the operations aspect, but the plan is for $15 million to $20 million in CapEx from the fourth quarter of this year through the first half of next year, depending on the pace of development in Ector County. That spend is roughly split evenly between PA and the Permian. All of this will be comfortably funded from our existing cash on hand and cash flow.
We expect the associated incremental cash flows to make a meaningful impact starting in the fourth quarter with the first 2 wells online in the Permian. We continue to spend a big part of our time on business development, looking for investment opportunities outside of our existing asset base. We would like to add another area to deploy capital but remain disciplined in our evaluation process. Hopefully, we'll have something to report there next year.
Now to Henry for comments on the operations.
Thank you, Andrew.
As Jason mentioned earlier, the company is pleased to report our election to participate in 7 wells in Pennsylvania over the next 9 months. These wells are representative of our inventory and are expected to provide meaningful volume contribution by midyear. The first 3 wells have been drilled and are waiting for completion scheduled for Q1 of 2024. The remaining 4 wells are expected to be drilled by year-end with the completion scheduled for the first half of 2024 as well.
In our Permian Basin project, the first 2 appraisal wells have been completed and flowback operations began in mid-October. Preliminary results are encouraging as both wells have achieved peak rates consistent with our type curve expectation in less than 30 days. Plans are now being finalized to drill up to 4 additional appraisal wells next year.
As Jason mentioned, this project has significant runway. We estimate 20 to 30 gross locations and is expected to add meaningfully to the company's liquids mix and cash flows going forward. And finally, all wells that were shut in during the third quarter on the [ Crumlin ] pad for remedial well work have been returned to production late September. Now back to Jason.
Thanks, guys. Operator, we can now open the line for questions.
[Operator Instructions] Showing no questions. This concludes our question-and-answer session. I would like to turn the conference back over to Jason Stabell for any closing remarks.
Thank you, Gary, and I want to thank everyone for joining us today for the third quarter call. We look forward to updating you on the progress on these plans, and we hope you have a great Friday and a nice weekend. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.