Epsilon Energy Sees Non-Cash Hedge Losses, Aims 1–1.5x Leverage and Q2 Permian Well
Epsilon Energy said unrealized hedge losses slashed Q1 earnings and Powder River volumes remained flat for over two years, raising unit operating expenses. It cut debt through non-core asset sales to target 1–1.5x net debt/EBITDA and will bring its ninth Permian well online in Q2.
1. Infrastructure and Production Challenges
Epsilon Energy’s Powder River Basin assets have not added new volumes for over two years, leading to elevated unit operating expenses as fixed costs spread over lower output. The company faces potential gas takeaway development needs in Converse County and is weighing participation or reliance on gatherers to address infrastructure shortfalls.
2. Hedge Loss Impact on Earnings
Dramatic moves in oil prices resulted in significant unrealized hedge losses, which materially reduced reported Q1 earnings on a non-cash basis. This mismatch on the profit and loss statement underscores the sensitivity of Epsilon’s earnings to commodity price volatility.
3. Balance Sheet and Asset Divestitures
Management has pursued non-core asset sales and debt reduction to achieve a disciplined leverage target of 1 to 1.5 times net debt to adjusted EBITDA. These monetizations have provided liquidity and support the company’s commitment to a strong balance sheet amid operational challenges.
4. Production Growth Initiatives
Epsilon is optimizing production through gas lift compressor enhancements and converting wells to rod pump systems to lower operating costs and boost output rates. The firm has completed its ninth Permian well, scheduled to come online in the second quarter, and expects year-over-year production growth across the Permian and Powder River basins.