Epsilon Energy : Announces Second Quarter 2022 Results

News Release

EPSILON REPORTS SECOND QUARTER 2022 RESULTS

Houston, Texas - August 11, 2022 - Epsilon Energy Ltd. ("Epsilon" or the "Company") (NASDAQ: EPSN) today reported second quarter 2022 financial and operating results and material subsequent events following the end of the quarter through the date of this release.

• Total net revenue interest (NRI) production averaged 27.4 MMcfe/d (Working Interest of 31.4 MMcfe/d) for the three months ended June 30, 2022.
• Realized natural gas prices of $6.81/Mcf including hedges ($6.88/Mcf excluding hedges) for the three months ended June 30, 2022.
• Total revenues of $19.9 million ($17.9 million from natural gas, oil, and NGL sales, $2.0 million from gathering and compression fees through our ownership in the Auburn Gas Gathering System)
• Adjusted EBITDA of $15.6 million for the quarter
• Net cash provided by operations of $8.1 million and $15.8 million for the three and six months ended June 30, 2022
• Free cash flow (FCF) before changes in working capital of $9.5 million and $13.7 million for the three and six months ended June 30, 2022
• Cash at quarter end of $30.9 million ($31.5 million including restricted cash).
• For the quarter ended June 30, 2022, the Company returned a total of $6.1 million to shareholders - $4.6 million through the repurchase of 697,100 shares, representing a 3% reduction of outstanding shares as well as $1.5 million to shareholders through dividends.

Jason Stabell, CEO, commented, "The second quarter results reflect the strong back drop for commodity prices, particularly natural gas. Sequentially, revenues increased 46%, driven largely by an increase of 68% on realized natural gas prices. We remain largely unhedged with a pristine balance sheet (no debt) and robust liquidity including $30.9 million of cash and a $14.0 million undrawn line of credit.

During the quarter, we returned $6.1 million to our shareholders in dividends and buybacks. Through August 9, 2022, under our authorized NCIB, we have purchased 978,600 shares at an average cost of $6.35 of which 281,500 shares have been purchased since quarter end (avg. $5.88 per share). We have 204,810 shares remaining in our authorized NCIB.

I have been with the Company for only a short time, but I am very excited about the prospects ahead. We continue to maintain a lean organization focused on disciplined capital allocation. At current prices, we project our cash balances to continue to grow this year. For 2H22, we are well positioned to opportunistically invest in our project areas, purchase shares, and evaluate new opportunities."

Financial and Operating Results

		Three months ended			Six months ended
		June 30,				June 30,
Revenues		2022			2021			2022			2021
Natural gas revenue	$	15,984,348	$	5,106,922	$	26,687,432	$	11,439,021
Volume (MMcf)		2,324			2,548			4,675			5,014
Avg. Price ($/Mcf)	$	6.88	$	2.00	$	5.71	$	2.28
Oil and other liquids revenue	$	1,931,488	$	131,832	$	2,707,729	$	238,888
Volume (MBO)		27.6			3.2			42.5			6.9
Avg. Price ($/Bbl)	$	69.92	$	41.68	$	63.73	$	34.58
Gathering system revenue	$	1,987,168	$	1,851,095	$	4,107,941	$	3,853,252
Total Revenues	$	19,903,004	$	7,089,849	$	33,503,102	$	15,531,161
Total Daily Production, Mcfe/d		27.4			28.2			27.2			27.9

Capital Expenditures

Epsilon's capital expenditures were $1.5 million for the three months ended June 30, 2022. This capital was mainly related to the drilling of three gross (0.03 net to EPSN) wells in Pennsylvania and the drilling of one gross (0.15 net to EPSN) and completion of one gross (0.11 net to EPSN) wells in Oklahoma.

Second Quarter Results

Epsilon generated revenues of $19.9 million for the three months ended June 30, 2022 compared to $7.1 million for the three months ended June 30, 2021.

Realized natural gas prices averaged $6.88/Mcf (excluding hedges) for Upstream operations in the second quarter of 2022. Operating expenses for Upstream operations in the second quarter were $2.6 million.

Epsilon reported a net after tax income of $10.6 million attributable to common shareholders or $0.45 per basic and $0.44 per diluted common share outstanding for the three months ended June 30, 2022, compared to net after tax loss of $0.5 million, and $0.02 per basic and diluted common share outstanding for the three months ended June 30, 2021.

For the three months ended June 30, 2022, Epsilon's Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $15.6 million as compared to $3.0 million for the three months ended June 30, 2021.

The Auburn Gas Gathering System gathered and delivered 16.7 Bcf gross of natural gas during the quarter as compared to 18.3 Bcf during the first quarter of 2022. Primary gathering volumes decreased 2.4% quarter over quarter to 11.3 Bcf. Imported cross-flow volumes decreased 22.1% to 5.4 Bcf as a result of the normal decrease in gas demand following the peak winter season.

About Epsilon

Epsilon Energy Ltd. is a North American onshore natural gas production and midstream company with a current focus on the Marcellus Shale of Pennsylvania.

Forward-Looking Statements

Certain statements contained in this news release constitute forward looking statements. The use of any of the words "anticipate", "continue", "estimate", "expect", 'may", "will", "project", "should", 'believe", and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated. Forward-looking statements are based on reasonable assumptions, but no assurance can be given that these expectations will prove to be correct and the forward-looking statements included in this news release should not be unduly relied upon.

The reserves and associated future net revenue information set forth in this news release are estimates only. In general, estimates of oil and natural gas reserves and the future net revenue therefrom are based upon a number of variable factors and assumptions, such as production rates, ultimate reserves recovery, timing and amount of capital expenditures, ability to transport production, marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary materially from actual results. For those reasons, estimates of the oil and natural gas reserves attributable to any particular group of properties, as well as the classification of such reserves and estimates of future net revenues associated with such reserves prepared by different engineers (or by the same engineers at different times) may vary. The actual reserves of the Company may be greater or less than those calculated. In addition, the Company's actual production, revenues, development and operating expenditures will vary from estimates thereof and such variations could be material.

Statements relating to "reserves" are deemed to be forward-looking statements as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated and can be profitably produced in the future. There is no assurance that forecast price and cost assumptions will be attained and variances could be material.

Proved reserves are those reserves which are most certain to be recovered. There is at least a 90% probability that the quantities actually recovered will equal or exceed the estimated proved reserves. Undeveloped reserves are those reserves expected to be recovered from known accumulations where a significant expenditure (for example, when compared to the cost of drilling a well) is required to render them capable of production. They must fully meet the requirements of the reserves classification (proved, probable) to which they are assigned. Proved undeveloped reserves are those reserves that can be estimated with a high degree of certainty and are expected

to be recovered from known accumulations where a significant expenditure is required to render them capable of production.

The estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties due to the effects of aggregation. The estimated future net revenues contained in this news release do not necessarily represent the fair market value of the Company's reserves.

Contact Information:

281-670-0002

Jason Stabell

Chief Executive Officer

[e-mail]

Andrew Williamson

Chief Financial Officer

[e-mail]

Special note for news distribution in the United States

The securities described in the news release have not been registered under the United Stated Securities Act of 1933, as amended, (the "1933 Act") or state securities laws. Any holder of these securities, by purchasing such securities, agrees for the benefit of Epsilon Energy Ltd. (the "Corporation") that such securities may not be offered, sold, or otherwise transferred only (A) to the Corporation or its affiliates; (B) outside the United States in accordance with applicable state laws and either (1) Rule 144(as) under the 1933 Act or (2) Rule 144 under the 1933 Act, if applicable.

EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income

(All amounts stated in US$)

							Three months ended June 30,			Six months ended June 30,
							2022			2021			2022				2021
Revenues from contracts with customers:
Gas, oil, NGL, and condensate revenue	$	17,915,836	$	5,238,754	$	29,395,161		$	11,677,909
Gas gathering and compression revenue		1,987,168			1,851,095			4,107,941				3,853,252
Total revenue				19,903,004			7,089,849			33,503,102				15,531,161
Operating costs and expenses:
Lease operating expenses		2,621,750			1,784,138			4,392,404				3,378,327
Gathering system operating expenses		171,495			173,547			330,706				364,494
Development geological and geophysical expenses		2,386			11,451			4,772				22,990
Depletion, depreciation, amortization, and accretion		1,803,739			1,646,094			3,192,958				3,328,954
Gain on sale of oil and gas properties		(221,642)			-			(221,642)				-
General and administrative expenses:
Stock based compensation expense		194,050			236,041			336,352				438,540
Other general and administrative expenses		1,465,143			2,048,300			2,636,275				3,375,461
Total operating costs and expenses			6,036,921			5,899,571			10,671,825				10,908,766
Operating income				13,866,083			1,190,278			22,831,277				4,622,395
Other income (expense):
Interest income		21,945			8,904			37,166				16,717
Interest expense		(745)			(22,345)			(16,064)				(49,418)
Gain (loss) on derivative contracts		776,994			(1,827,334)			(194,910)				(1,361,993)
Other (expense) income		(61,713)			(279)			(67,119)				1,663
Other income (expense), net				736,481			(1,841,054)			(240,927)				(1,393,031)
Net income (loss) before income tax expense		14,602,564			(650,776)			22,590,350				3,229,364
Income tax expense (benefit)			4,019,576			(165,751)			6,201,474				978,822
NET INCOME (LOSS)	$	10,582,988	$	(485,025)	$	16,388,876		$	2,250,542
Currency translation adjustments			(19,150)			242			(13,748)				(1,242)
NET COMPREHENSIVE INCOME (LOSS)		$	10,563,838		$	(484,783)		$	16,375,128			$	2,249,300
Net income (loss) per share, basic	$	0.45	$	(0.02)	$	0.69		$	0.09
Net income (loss) per share, diluted	$	0.44	$	(0.02)	$	0.69		$	0.09
Weighted average number of shares outstanding, basic		23,576,746			23,779,205			23,627,015				23,862,749
Weighted average number of shares outstanding, diluted		23,822,123			23,779,205			23,796,166				23,941,340