Epsilon Energy Ltd.

Good day and welcome to the Epsilon Energy First Quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. I would now like to turn the conference over to Andrew Williamson. 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 First Quarter 2024 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 Stabell, our Chief Executive Officer.

Thank you, Andrew. Good morning, and thank you for participating in our First Quarter 2024 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, I'll keep my prepared remarks brief and let Andrew and Henry offer more detailed comments on our financial and operating results and forward plans. Our Permian assets continue to perform well. We expect to bring two additional gross wells online over the summer in the Perdera Fuego project in Hector County. We are also in discussions about the location and timing of a potential additional well in the second half of this year. This activity, combined with our recent acquisition, won't be fully reflected in our results until the third quarter due to a several-week shut-in in May of two producing wells during frac operations. However, we still expect to see -over-quarter liquids volume grow from the second quarter. In addition, a full core was taken in the deeper Woodford bench in the well drilled in March to further evaluate the prospectivity of the interval, potentially adding a second development bench to our assets in Hector. We will keep you updated on the progress of this evaluation. In Pennsylvania, we support the actions of our operating partner to delay turn-in lines on wells completed last quarter and selectively curtail production. Currently we have seven completed wells, .7 net, that will likely not begin production until natural gas prices improve sustainably. Our current estimate for first production on the deferred tills is early 2025 based on conversations with the operator. In addition, the operator has curtailed some existing production in Auburn representing approximately 4.5 million cubic feet a day of NRI production. These curtailments are in response to current pricing and we anticipate this production to return as prices improve. Finally, we expect the combination of our more diverse revenue mix and defensive hedging program to result in flat to slightly down cash flow in 2024 versus 2023 at current strip prices, which in combination with our strong balance sheet will allow us to continue to invest in our promising Permian project, pay our dividend, and warehouse a material volume of gas for an improved pricing environment. All of this potentially sets us up for a material uplift in cash flow in 2025. Now I would like to turn the call over to Andrew for some comments.

Thanks Jason. Following on some comments I made in March, we've continued to ramp up our investment activity with over 42 million spent over the last 12 months through quarter end. Over 80% of that was spent building the Permian business with the remainder spent in the Marcellus on the recently completed wells. These investments were funded by a combination of operating cash flows and cash on hand. The important takeaway is that 70% of that spend has not contributed to a full quarter of results. Yet to contribute are the 9 million spent on undeveloped leasehold in Ector County in the Predera project, where we have over 30 estimated gross 2 mile undeveloped locations. That excludes the Woodford that Jason mentioned earlier. 6 million spent on the Marcellus wells awaiting turn in line and 3.5 million spent on the current well in Predera. The contribution delay is a characteristic of the drill bit activity we're focused on. The Predera PDP acquisition, which was 3 wells and 12 million, only contributed one month during the quarter with a March 1st effective date. All of this speaks to the set up Jason mentioned earlier, which started this year for our Permian assets with continued growth through the next few quarters. Looking at the full year 2024, we estimate the Permian to contribute well over half of our upstream cash flow at current strip prices. We feel good about our ability to continue to invest in the portfolio and potential new opportunities despite the reduction in cash. We project an increasingly strong cash flow profile going forward, driven by the Permian liquid and higher future gas prices plus the pending volumes in the Marcellus. We also have our undrawn revolver, a portion of which we could conservatively deploy given the right opportunity. We start our borrowing based redetermination process this month, where we will add in the Permian assets. Back to the Marcellus, we're now in the final stages of negotiating a new gas gathering agreement that will replace the legacy cost of service agreement. The new agreement will establish fixed gathering, compression, and cross flow rates for all shippers on the Auburn system effective January 1st, 2024. We expect the new gathering rates to mirror the rates put in place earlier this year under an interim agreement, which are 47.5 cents per MMBTU for gathering, which is up 17% year over year, 10 cents per MMBTU for compression, which is flat year over year, and 12 cents per MMBTU for cross flow from adjacent systems, which is up 17% year over year. Per the agreement, these rates will escalate at CPIU annually starting next year. We believe the updated arrangement will be beneficial as both an owner of and shipper on the system. Most importantly, it will remove the rate uncertainty that came with annual cost of service redeterminations. We also believe the fixed rate amounts strike a good balance between midstream owner revenues and shipper operating costs and break evens. Now we'll turn it over to Henry for operations. Thank

you, Jason and Andrew. I'd like to provide further operational details on the two Pidera-Fuego wells Jason mentioned earlier. Currently, one is being completed with flowback operations expected later this month. The two offset wells shut in during completion operations will be returned to production at that time. Drilling operations have commenced on the second well with completion operations expected in July. Both of these wells will have completed lateral lengths just over 11,000 foot. Well planning for the third well this year is underway, which will be the eighth well in the project to date. Epsilon owns a 25% working interest in this 16,000 plus acre project. As stated previously, this acreage position adds a significant fairway of an estimated 30 gross locations of two mile laterals, assuming spacing of three wells per section. It is worthy to know that we receive a dollar premium to NYMEX pricing for the crude oil excluding transportation. Further, analysis is underway on the Woodford core taken recently to continue assessment of the interval's prospectivity within the current lease position. In northeast Pennsylvania, we agree with deferred TILs on the newly drilled wells and the selective production curtailments currently in place until gas pricing improves. As stated in prior disclosures, the new wells are expected to perform consistently with the other wells in the area, and depending on timing, will roughly double our net gas production from the Marcellus. Now back to Jason.

Thanks guys. Operator, we can now open the lines for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble a roster. Again, if you have a question, that's star then one. There are no questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Jason Stabel for any closing remarks.

Thank you, operator. I want to thank everyone again for their interest in Epsilon and for joining us today. I hope you have a good day and a great weekend ahead of you. Thank you.

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