Epsilon Reports Third Quarter 2013 Results

HOUSTON, TEXAS--(Marketwired - Nov 5, 2013) - Epsilon Energy Ltd. ("Epsilon" or the "Company") (TSX:EPS) today reported third quarter 2013 financial and operating results. Highlights for the third quarter and material subsequent events following the end of the quarter through the date of this release include:

• Net production of 3.5 billion cubic feet equivalent (Bcfe) from Marcellus during the 3^rd quarter
• Reduced operating expenses 13% to $0.79 per Mcfe, from $0.91 per Mcfe for the third quarter 2012
• Settled final issues related to Q2 shareholder meeting requisition of $1 million
• Continued to pursue Canadian asset sale as part of strategic plan to focus exclusively on Pennsylvania Marcellus upstream and midstream assets

Management Comments

Mr. Michael Raleigh, Chief Executive Officer, commented, "The new management team and board were put in place to maximize the value of the Epsilon's integrated Marcellus asset and this remains our exclusive focus. Over the last several months, we have made significant progress on a number of fronts. And, we believe these initiatives will eventually be reflected in the share price of Epsilon. During the 3^rd quarter, we began marketing our Canadian Assets and we expect to receive bids during the 4^th quarter. As we continue to focus on optimizing our NE PA Marcellus assets, we recently met with our upstream and midstream partners and have begun our capital budgeting process for 2014 and beyond. We are especially excited about the anticipated capacity expansion plans for the midstream assets during 2014. We continue to flow our gas through the facilities and expect compression to begin during the 4^th quarter which will reduce back pressure on the wells and allow a higher flow rate from the properties.

We have engaged third party engineers to help forecast the long term value of the upstream reserves. Furthermore, we have met with the upstream operator and conducted our own analysis of Epsilon's reserves. Our preliminary conclusions are that the current reserves bookings are conservative and that the overall practices of the operator are supportive of maximizing gas recoveries. We will have more definitive comments regarding this, in conjunction with our year end reserve disclosures during the 1^st quarter of 2014.

General and administrative expenses were negatively impacted over the quarter by requisition meeting costs, bank line initiation costs and severance costs which are all non-recurring. We continue to rationalize G&A expenses and we anticipate cash costs of $200,000 per month in 2014 as we continue to bring efficiencies to the organization. This compares to $300,000 per month for 2012 under previous management.

Since taking control of the company, the stock has declined approximately 10%. As we have indicated consistently to the market, we will pursue a strategy which will enhance the value of the stock through prudent capital allocation and cash flow management. As such, to date we have purchased approximately 475k shares for retirement. In our opinion, the reasons for the decline in the stock price are twofold. First, through our discussions with a number of investors, we believe there were expectations that the strategic review process would result in the near-term sale of the company. The sales process run by the prior management did not meet those expectations. In our opinion, the optimal time to approach the divestiture market is when both the upstream and midstream assets have been optimized. We will continue to pursue a monetization strategy that is accretive to shareholders for the foreseeable future. Second, and likely more important, the fundamentals in the natural gas market remain very challenging. Spot prices remain below $4/mcf and the price differential (the difference between price paid to Epsilon and NYMEX) for our operating region remains stubbornly high due to infrastructure constraints and the productive nature of the sub-surface rock. We believe the current differential will narrow significantly in coming quarters as new infrastructure projects become operational. In the longer term, we believe gas will trade between $3.50 - $4.50/mcf. In this environment, our two assets will generate attractive levels of cash flow which will provide management the opportunity to repurchase additional shares or pay dividends to shareholders.

Capital Expenditures

Epsilon's total upstream and midstream capital expenditures were $14.6 million for the three months ended September 30, 2013. Total Marcellus related capital expenditures were $13.9 million with $12.6 million for well completions and $1.3 million for expansion of the midstream gathering and compression system. The Company allocated a significant portion of its 2013 upstream capital budget to the Marcellus Shale and plans to focus exclusively on development and optimization of these assets during the remainder of 2013. Canadian capital expenditures were $0.7 million for the three months ended September 30, 2013. The Company has discontinued investment in Canada and is currently marketing the Canadian Assets for disposition.

Marcellus Operational Guidance

During the 4^th quarter, we do not anticipate any new wells will be placed into production although we anticipate that completion operations on 4 gross wells (0.99 net to Epsilon) will commence. Epsilon's working interest production from this asset averaged above 46 Mmcf per day during the month of October, 2013 and is expected to reach approximately 45 - 50 Mmcf per day at year end based on the current anticipated completion schedule and the commencement of compression prior to year end.

Compression is scheduled to commence in November 2013 to mitigate elevated pressure levels in Tennessee Gas Pipeline which hampered third quarter production volumes. Compression is anticipated to increase production approximately 10% to 15%.

Epsilon hedges portions of its expected production volumes to increase the predictability of its cash flow and to help maintain a strong financial position. Epsilon is currently monitoring the market to take suitable hedges for the winter months.

Third Quarter Results

Epsilon generated revenues of $10.6 million for the three months ended September 30, 2013 compared to $10.4 million for the three months ended September 30, 2012. Marcellus natural gas production levels were impacted by natural production decline as wells mature and high line pressures on Tennessee Gas Pipeline. Realized natural-gas prices averaged $2.36 per Mcf in the third quarter of 2013, up from $1.75 in the third quarter of 2012. Marcellus production levels and a reduction in the gathering rate for 2013 versus 2012 negatively impacted midstream revenues in the third quarter 2013.

The Company's upstream Marcellus asset produced 3.5 net Bcfe of natural gas in the third quarter 2013 compared to 3.7 net Bcfe in the third quarter 2012. The decrease in production was driven primarily by natural decline rates as wells mature coupled with a reduction in drilling and completion activities in 2013. During the third quarter 2013, Epsilon placed 7 gross (2.2 net) new wells on initial production.

Epsilon reported net income of $0.1 million attributable to common shareholders or <$0.01 per basic and diluted common shares outstanding for the three months ended September 30, 2013, compared to a net loss of $2.2 million, or ($0.04) per basic and diluted common shares outstanding for the three months ended September 30, 2012.

For the three months ended September 30, 2013, Epsilon's Adjusted Earnings Before Interest, Income Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $6.5 million as compared to $6.7 million for the three months ended September 30, 2012. The decrease in Adjusted EBITDA was primarily due to one-time $1.0 million shareholder meeting requisition costs not anticipated to recur on a go-forward basis.

Adjusted EBITDA

Epsilon defines Adjusted EBITDA as earnings before (1) net interest expense, (2) depreciation, depletion and amortization expense, (3) recovery of prior impairments of oil and gas properties, (4) non-cash stock compensation expense, (5) unrealized gain on derivatives and (6) other income. Adjusted EBITDA is not a measure of net income or cash flows as determined by IFRS.

Management believes these non-IFRS financial measures facilitate evaluation of the Company's business on a "normalized" or recurring basis and without giving effect to certain non-cash expenses and other items, thereby providing management, investors and analysts with comparative information for evaluating the Company in relation to other oil and gas companies providing corresponding non-IFRS financial measures. These non-IFRS financial measures should be considered in addition to, but not as a substitute for, measures for financial performance prepared in accordance with IFRS, and that the reconciliations to the closest corresponding IFRS measure should be reviewed carefully.

About Epsilon

Epsilon Energy Ltd. is a North American onshore exploration and production 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 in such forward-looking statements are based on reasonable assumption 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.

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.