Epsilon Energy Ltd. (EPSN) Earnings

Management highlights

- **Operational Execution & Development Progress** * All major 2026 operational initiatives are progressing on schedule and on budget, with the company focused on execution of its development plan. * Powder River Basin: Two Niobrara duck completions were finished during the quarter and brought online in July, with early production exceeding type curve expectations. The three-well Parkman pad drilling was completed one month ahead of schedule; completions are scheduled for Q3 2026, with first production expected in Q4 2026. The 1 million barrel water supply and impoundment facility in Converse County has final contractor bids under evaluation, with construction set to begin in Q3; the design was modified to allow produced water recycling to lower future water costs. A compressor downsizing program has cut $65,000 in monthly operating expenses to date, with total annual savings expected to exceed $100,000 per month by year-end with no production declines. * Permian Basin: The first 3-mile Barnett lateral well was placed on flow back in June 2026, and is currently performing in line with pre-drill type curve expectations, marking a key milestone for longer lateral development. The operator plans to drill two additional Barnett wells in H2 2026, with completions scheduled for Q1 2027. The Woodford appraisal well (in which Epsilon declined participation) has been drilled and is scheduled for completion in late August 2026; a positive result could expand the company's future drilling inventory on its existing acreage. * Marcellus (Pennsylvania): Production was impacted by planned temporary curtailments to adjust gathering system operating pressure, creating capacity for newly drilled wells scheduled to come online in Q4 2026. Five wells (4 net) have finished drilling, with completions planned for H2 2026; first production is expected in December 2026, forecast to add 6.5 million cubic feet per day net, and increase gathering system throughput by 80-90 million cubic feet per day. - **Acquisition Integration & Financial Position** * Integration of the acquired Peak operated assets in the Powder River Basin is largely complete, with personnel, systems, and field operations integrated successfully. The company's balance sheet remains strong, with $10 million in debt paydown over the first half of 2026. * Epsilon completed a non-core Marcellus overriding royalty interest sale and sold down partial interest in the Parkman development, retaining a 70+% working interest in the project. The planned sale of the Durango office building did not close, and will be re-evaluated later in 2026.

Guidance

- This quarter marks the first time Epsilon has provided production guidance for H2 2026, with the company expecting meaningful quarter-over-quarter production growth through the remainder of 2026, driven primarily by crude oil volumes from the Powder River Basin, with the largest contribution coming from the Parkman wells in Q4 2026. - Full-year 2026 production guidance midpoint projects high teens year-over-year total production growth, and almost 200% year-over-year oil volume growth. - Full year 2026 capital spending: Over half of full-year capital will not contribute to production results until Q4 2026, and over one-third will not contribute until 2027, including the Converse County facilities build-out. Capital spending in Q3 2026 will be meaningfully higher than prior quarters to fund Parkman development, Permian drilling, and the Wyoming facilities build-out. The company will use its revolving credit facility to partially fund the investment ramp, and expects to stay within its target leverage level of 1.5x EBITDA. - 2027 planned activity: Total development activity will exceed 2026 levels across all three core operating regions, with the largest component being additional operated Parkman development in the Powder River Basin. Growth is also expected in both Permian and Marcellus assets, subject to operating partner final plans. Epsilon plans to release full-year 2027 guidance in Q1 2027, to be refined throughout the year on a quarterly basis.

Segment performance

No explicit segmented absolute financial results or revenue contribution percentages were provided in the call transcript. Operational performance by core operating region is detailed in operational highlights.

Risks & headwinds

- Forward-looking statements are subject to a variety of factors that could cause actual results to differ materially from anticipated results. - Production in the Marcellus has been exposed to natural price volatility, with depressed netback prices leading to intentional curtailments in Q2 2026. - First operated development in the Powder River Basin carried inherent execution risk, partially mitigated by a partial working interest sell-down on the first Parkman program. - There is uncertainty around the timing of operator-led development in non-operated assets (Permian Barnett and Marcellus), with a margin of error for volume timing built into current guidance. - The planned sale of the Durango office property failed to close, introducing uncertainty around potential proceeds from non-core asset sales.

Analyst Q&A

• Q: What will Epsilon's guidance approach be for 2027 and beyond, and can you share details on Q2 Marcellus production curtailments, hedging policy, and the Parkman sell-down market? /

  A: Epsilon plans to release full-year 2027 guidance in Q1 2027, with quarterly refinements throughout the year. For Marcellus, the company intentionally curtails production during periods of sustained low natural gas prices ($1.80 netback in Q2 2026) and maximizes output during high-price periods ($5.50 netback in Q1 2026) to boost annual returns, and exact volume splits between curtailment and natural decline are not separable. Epsilon maintains a policy of hedging 50% of proven developed production over the next 18 months, matching credit facility covenants, using collars for gas and will add oil hedges incrementally as new production becomes visible. The AFE sell-down market is active for high-quality projects, and the Parkman sell-down was completed at a premium to cost, reducing capital outlay and execution risk while retaining a 70%+ stake, and will remain a tool to right-size capital spending to stay within leverage targets going forward.

• Q: Why was the Parkman drilling accelerated, and what is rig availability like in the Powder River Basin looking into 2027? /

  A: The program was accelerated because all permits, site preparation, and personnel were ready early, and available rig capacity opened up to allow moving the schedule forward one month. Currently, rig activity in the two active Powder River counties (Campbell and Converse) is stable, with 13 total active rigs, 9 focused on shale plays (Niobrara) and 4 focused on sandstone plays like Parkman, supporting continued stable access for Epsilon's planned development.

• Q: Can you share more details on the reported discussions with large Powder River Basin operators to pull forward shale development at lower cost? /

  A: Epsilon holds a large acreage position in the basin, and has received multiple inbound inquiries for acreage swaps, trades, and joint development partnerships. Discussions are well advanced on a couple of opportunities, but no definitive details are available yet, with updates expected within the next quarter. These partnerships would allow Epsilon to extend lateral lengths, or participate alongside large scaled operators that have existing infrastructure to lower development costs, primarily for the Niobrara shale play, and represent upside beyond the company's base Parkman-focused development plan.