Epsilon Energy Ltd.NASDAQ:EPSN) First Quarter 2024 Earnings Conference Call, May 9, 2024, 10:30 a.m. ET
Participating company
Andrew Williamson – Chief Financial Officer
Jason Stabell – CEO
Henry Clanton – Chief Operating Officer
Operator
Hello and welcome to Epsilon Energy’s First Quarter 2024 Earnings Conference Call. (Operator Instructions) I would now like to turn the floor over to Andrew Williamson. Please go ahead.
Andrew Williamson
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 various factors could cause Epsilon’s actual results to differ materially from the anticipated results or expectations expressed in such forward-looking statements. Today’s call may also contain certain non-GAAP financial measures. Please refer to the earnings release we issued yesterday for information on forward-looking statements and reconciliations of non-GAAP measures.
With that, I would like to turn the call over to Jason Stabell, our General Manager.
Jason Stabell
Thank you, Andrew. Good morning and thank you for joining our Q1 2024 conference call. I’m joined today by Andrew Williamson, our Chief Financial Officer; and Henry Clanton, our COO. We will be available to answer questions later in the call.
Today, I will keep my prepared remarks brief and let Andrew and Henry offer more detailed comments on our financial and operational results and forward-looking plans. Our Permian assets continue to perform well. We plan to bring two additional raw wells online during the summer at the Pradera Fuego Project in Ector 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 will not be fully reflected in our results until the third quarter due to the several-week shutdown in May of two producing wells during fracking operations.
However, we still expect liquid volume growth quarter-over-quarter in the second quarter. What’s more Full cores were taken from the deeper Woodford Bank of the well drilled in March to further assess the prospectivity of the interval, potentially adding a second development bench to our assets at Ector. We will keep you informed of the progress of this evaluation.
In Pennsylvania, we support our operating partner’s actions to delay handover lines on wells completed last quarter and selectively reduce production. Currently, we have seven completed wells, or 0.7 net, that are unlikely to begin producing until natural gas prices improve sustainably. Our current estimate for first production on deferred TILs is early 2025, based on conversations with the operator.
Additionally, the operator reduced some existing production at Auburn, representing approximately 4.5 million cubic feet per day of NRI production. These reductions are in response to current prices and we expect this production to return as prices improve.
Finally, we expect the combination of our more diversified revenue mix and defensive hedging program to result in flat to slightly declining cash flows in 2024 compared to 2023 at current strip prices, which combined with our solid balance sheet will allow us to continue to invest. in our promising Permian project, paying our dividend and our warehouse and gas volume for an improved pricing environment. All of this potentially sets us up for a significant increase in cash flow in 2025.
I would now like to turn the floor over to Andrew for a few comments.
Andrew Williamson
Thanks, Jason. Following some comments I made in March, we continued to ramp up our investment activities with over $42 million spent in the last 12 months through the end of the quarter. More than 80% of this amount was spent building the Permian business, with the remainder going to Marcellus on the recently completed wells.
These investments were financed through a combination of operating cash flow and available liquidity. The takeaway is that 70% of that spending didn’t contribute to a full quarter of results, but the $9 million spent on undeveloped leasehold land in Ector County and the Pradera project, where we have over 30 estimated gross 2 mile undeveloped projects, contribute to this. Locations. This excludes the Woodford Jason mentioned earlier. $6 million spent on Marcellus wells waiting to come online and $3.5 million spent on the current Pradera well.
Contribution delay is a feature of the drill business that we focus on. The Pradera PDP acquisition, which represented three wells and $12 million, contributed only one month in the quarter with the March 1 effective date. This all speaks to the pattern Jason mentioned earlier, which began this year for our Permian assets with continued growth over the next few quarters.
For the full year 2024, we estimate that the Permian will contribute well over half of our upstream cash flow at current strip prices. We are pleased with our ability to continue investing in the portfolio and potential new opportunities despite reduced liquidity. We expect an increasingly strong cash flow profile going forward, driven by Permian liquids and future higher gas prices as well as pending volumes in the Marcellus. We also have our undrawn revolver, part of which we could carefully deploy if the right opportunity presented itself. We are beginning our borrowing base redetermination process this month where we will add the Permian assets.
Back at the Marcellus, we are now in the final stages of negotiating a new gas gathering agreement which will replace the old cost of service agreement. The new agreement will establish fixed collection, compression and cross-flow rates for all shippers in the Auburn system beginning January 1, 2024. We expect the new collection rates to reflect the rates implemented more early this year under an interim agreement, which are $0.475 per MMBtu for gathering, up 17% year over year, $0.10 per MMBtu for compression, which is flat d ‘year-over-year and $0.12 per MMBtu for cross-flows from adjacent systems, up 17% year-over-year. -year.
According to the agreement, these rates will increase annually at the CPI-U level starting next year. We believe the updated agreement will be beneficial as both a system owner and shipper. Most importantly, it will eliminate pricing uncertainty associated with annual cost-of-service redeterminations. We also believe that the fixed amounts strike a good balance between the revenues of midstream owners and the operating costs and break-even point of shippers.
We will now turn the floor over to Henry for operations.
Henry Clanton
Thanks, Jason and Andrew. I would like to provide more operational details on the two Pradera Fuego wells Jason mentioned earlier. Currently, one of them is nearing completion and flowback operations are expected later this month. The two offset wells closed during completion operations will be returned to production at that time. Drilling operations have begun on the second well and completion operations are expected in July. These two wells will have a lateral length of just over 11,000 feet.
We are planning the third well, sharing is underway, which will be the 8th well of the project to date. Epsilon has a 25% working interest in this 16,000+ acre project. As noted previously, this acreage position adds a significant channel of approximately 30 gross 2-mile lateral locations, assuming a spacing of three wells per section. It is worth noting that we received a $1 premium over the NYMEX price for crude oil, excluding transportation.
Further analysis is underway at Woodford Court recently undertaken to further assess the prospectivity of the interval within the current lease position. In Northeastern Pennsylvania, we agree with deferred TILs on newly drilled wells and selective production curtailments currently in effect until gas prices improve. As noted in previous disclosures, the new wells are expected to perform consistently with other wells in the region and, depending on timing, will approximately double our net gas production from Marcellus.
Now back to Jason.
Jason Stabell
Thanks guys. Operator, we can now open the lines for questions.
Question and answer session
Operator
Jason Stabell
Thank you, operator. I want to thank everyone once again for their interest in Epsilon and for joining us today. I hope you have a good day and a good weekend ahead of you. THANKS.
Operator
The conference is now over. Thank you for attending today’s presentation. You can now log out.
