Epsilon Energy analysis Moram

Epsilon Energy analysis – $EPSN

Introduction to Epsilon Energy

Epsilon Energy is an interesting story we discovered a couple of years ago. A small-cap company ($110 million market cap & 0 debt) originally focused on natural gas production (Marcellus and Anadarko basins in the US ), with the particularity of owning a 35% stake in a pipeline that provides steady income every year ($9MM revenue per year and >$7MM EBITDA – only midstream asset ).

Until two years ago, it had a very defensive capital allocation strategy and little growth. Epsilon was in a situation where they were making a lot of money, the business was mature enough and it needed a little reinvestment, but there was an inexistent ambitious for growth, and the money generated went to buybacks and dividends. Among the three options on the table (continue being a cash cow, sell the company, or engage in M&A activity), they probably chose the best one for potential new shareholders: changing the CEO and CFO in search of growth.

Mr Stabell and Mr Williamson joined the company in May 2022. Both have a past in PE and investment firms in the Energy sector (Egypt and Texas). Both have been working together for 20 years, but they had no experience neither in Marcellus or Oklahoma.

We spoke with Mr. Stabell (CEO) for the first time in September 2022, and he explained his idea of how to run the business and his vision for Epsilon Energy. At that time, we thought they needed some time to understand the assets and take the necessary steps to transition from the comfortable position they were in then to the company they wanted to become.

Now, 18 months and 3 acquisitions later, having already diversified from being 96% natural gas to our estimate of around 55-60% (depending on the timing of the new drills coming online and commodity prices) while maintaining the secured & stable income from its midstream asset, achieving one of their goals of making the stock more liquid, with the CEO aggressively buying stock in the open market at current prices and being itself a call option on natural gas prices as they have 7 wells ready and waiting for natural gas prices to recover to connect them, we have reviewed the stock and analysed it from scratch.

We share the analysis of its four operating assets with its production profiles, valuation model available on our website, the detail of our conversation with its management and our thoughts about the potential opportunity (plus capital allocation, capital structure, hedge requirements,…)

Epsilon Energy – Assets

As we have mentioned, Epsilon has a midstream asset and three upstream operating areas, two of them focused on natural gas (Pennsylvania and Oklahoma) and one on oil (Permian). All of them have assets in different stages of their life cycle and are governed by different price and tax benchmarks.

Upstream – Oil Permian Basin

As we have discussed, in the last 12 months they have purchased 3 assets in the Permian (a location well-known to the CEO and CFO from their previous tenure at the private equity fund).

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