Epsilon Energy Ltd. (EPSN): Business Model Canvas [11-2024 Updated]

Explore the dynamic business model of Epsilon Energy Ltd. (EPSN), a player in the energy sector committed to delivering reliable natural gas and oil solutions. This post delves into the company's key partnerships, activities, and value propositions, revealing how Epsilon navigates the complexities of the market while ensuring sustainability and efficiency. Discover how Epsilon's strategic approach positions it as a competitive force in the energy landscape.

Epsilon Energy Ltd. (EPSN) - Business Model: Key Partnerships

Collaborations with Appalachia Midstream Services for gas gathering

Epsilon Energy Ltd. has established a long-term partnership with Appalachia Midstream Services, LLC. On May 17, 2024, Epsilon executed a new Anchor Shipper Gas Gathering Agreement (ASGGA) for Northern Pennsylvania, effective January 1, 2024. This agreement spans a primary term of ten years and sets fixed gathering, compression, and cross-flow rates for natural gas produced by Epsilon. The fixed rate for gathering services in the Auburn Gas Gathering System (GGS) for 2024 is set at $0.475 per MMBtu. The agreement also stipulates that rates will be adjusted annually based on the Consumer Price Index starting January 2025.

During the nine months ended September 30, 2024, Epsilon gathered and delivered a total of 30.2 Bcf gross (10.6 Bcf net to Epsilon's interest), averaging 111 MMcf/d through the Auburn GGS.

Joint ventures in the Permian Basin and Western Canadian Sedimentary Basin

Epsilon has engaged in strategic joint ventures to expand its operations in key oil and gas regions. In October 2024, Epsilon formed a joint venture with a private operator covering lands in the Western Canadian Sedimentary Basin (WCSB) in Alberta, Canada. Under this agreement, Epsilon will acquire a 25% working interest across approximately 160,000 gross acres after completing a carried interest commitment of $7.3 million by December 1, 2025.

In the Permian Basin, Epsilon acquired a 25% working interest in three producing wells and 3,246 gross undeveloped acres in Ector County, Texas, for a total purchase price of $14.8 million.

Partnerships with service providers for drilling and completion activities

Epsilon collaborates with various service providers to enhance its drilling and completion activities. The company participated in the drilling of two gross wells in Ector County during the second and third quarters of 2024. The company also acquired a 50% working interest in 14,243 gross acres for $1.0 million, which is expected to facilitate further drilling operations.

As of September 30, 2024, Epsilon had seven gross (0.7 net) drilled and completed wells waiting to be turned in line, indicating the ongoing collaboration with service providers to optimize production.

Partnership Type	Partner	Details	Financial Commitment	Working Interest
Gas Gathering	Appalachia Midstream Services	New ASGGA for gas gathering in Northern Pennsylvania	—	—
Joint Venture	Private Operator	Western Canadian Sedimentary Basin, Alberta	$7.3 million carried interest commitment	25%
Acquisition	Private Operator	Permian Basin, Ector County, Texas	$14.8 million	25%
Acquisition	Private Operator	14,243 gross acres	$1.0 million	50%

Epsilon Energy Ltd. (EPSN) - Business Model: Key Activities

Exploration and production of natural gas and oil

Epsilon Energy Ltd. engages in the exploration and production of natural gas and oil primarily in the Marcellus Shale in Pennsylvania, the Permian Basin in Texas, and the Anadarko Basin in Oklahoma. As of September 30, 2024, Epsilon's realized natural gas price was $1.54 per Mcf, reflecting a 44% increase compared to the same period in 2023. However, net revenue interest natural gas production decreased by 32% to 1.2 Bcf for the three months ended September 30, 2024, from 1.7 Bcf in 2023. For the nine-month period, production dropped 33% from 6.0 Bcf to 4.0 Bcf.

Operation of gas gathering systems

Epsilon operates gas gathering systems, including the Auburn Gas Gathering System (GGS) in Pennsylvania, where it has a 35% ownership interest. In the three months ended September 30, 2024, the company gathered and delivered 7.0 Bcf gross (2.5 net to Epsilon's interest), which translates to an average of 76 MMcf/d. For the nine months ended September 30, 2024, this figure increased to 30.2 Bcf gross (10.6 net) at an average of 111 MMcf/d. The new Anchor Shipper Gas Gathering Agreement executed on May 17, 2024, establishes a fixed gathering rate of $0.475 per MMBtu for 2024.

Management of commodity price risk through derivatives

Epsilon employs a strategy of managing commodity price risk through derivatives. As of September 30, 2024, the company had outstanding natural gas swaps totaling 1.13 Bcf and crude oil swaps totaling 28 MBbls. The fair value of these derivative assets was approximately $358,189. For the three months ended September 30, 2024, Epsilon recognized gains on derivative contracts amounting to $440,712. During the nine months ended September 30, 2024, net cash settlements received from derivative contracts amounted to $1,245,931.

Activity	Details	Statistics
Exploration and Production	Natural gas and oil production primarily in PA, TX, and OK	Realized gas price: $1.54/Mcf; Production: 1.2 Bcf (3M 2024)
Gas Gathering Operations	Operation of Auburn GGS with a 35% interest	Gathered: 7.0 Bcf gross (3M 2024); Fixed rate: $0.475/MMBtu
Commodity Price Risk Management	Utilization of derivatives for price risk management	Swaps: 1.13 Bcf gas; Fair value of derivatives: $358,189

Epsilon Energy Ltd. (EPSN) - Business Model: Key Resources

35% Interest in the Auburn Gas Gathering System

Epsilon Energy Ltd. holds a 35% ownership stake in the Auburn Gas Gathering System (GGS), a crucial asset that enhances its operational capabilities in the Marcellus Shale region. The Auburn GGS spans approximately 45 miles and facilitates the efficient gathering and transportation of natural gas. The system gathered and delivered 7.0 Bcf gross (2.5 Bcf net to Epsilon's interest) during the three months ended September 30, 2024, equating to an average of 76 MMcf/d. For the nine months ended September 30, 2024, the gathering volume was 30.2 Bcf gross (10.6 Bcf net), averaging 111 MMcf/d.

Metric	Q3 2024	YTD 2024
Gross Gas Gathered	7.0 Bcf	30.2 Bcf
Net Gas Gathered	2.5 Bcf	10.6 Bcf
Average Daily Gathering Rate	76 MMcf/d	111 MMcf/d

Proved Reserves of Natural Gas and Oil

Epsilon Energy's portfolio includes substantial proved reserves vital for its production and revenue generation. As of December 31, 2023, the company reported:

• 65,916 MMcf of natural gas
• 383,174 Bbls of natural gas liquids (NGLs)
• 341,286 Bbls of oil and condensate

This inventory of reserves is essential for maintaining production levels and supporting the company's growth strategy.

Resource Type	Volume
Natural Gas	65,916 MMcf
NGLs	383,174 Bbls
Oil and Condensate	341,286 Bbls

Skilled Workforce and Technical Expertise in Energy Extraction

Epsilon Energy boasts a skilled workforce with significant technical expertise in the energy sector, particularly in the extraction of natural gas and oil. This human capital is crucial for the company's operational efficiency and innovation in drilling and production techniques. The company's focus on training and development ensures that its workforce remains adept at navigating the complexities of the energy market and implementing best practices in extraction technologies.

Workforce Metrics	Details
Industry Experience	Over 15 years (average)
Training Programs	Regular safety and technical training sessions
Technical Certifications	Majority of workforce certified in relevant fields

Epsilon Energy Ltd. (EPSN) - Business Model: Value Propositions

Reliable supply of natural gas and oil to customers

Epsilon Energy Ltd. is positioned to provide a reliable supply of natural gas and oil, underpinned by its extensive production capabilities. As of September 30, 2024, the company reported net revenue interest natural gas production of 1.2 billion cubic feet (Bcf) for the third quarter, a decrease from 1.7 Bcf in the same period in 2023. For the nine months ended September 30, 2024, the production was 4.0 Bcf, down from 6.0 Bcf year-over-year, reflecting a 33% decline.

In the Permian Basin, Epsilon's realized price for oil and natural gas liquids was $54.19 per barrel of oil equivalent (Boe) during the third quarter of 2024, a 16% increase from the previous year. The total net revenue interest production for the same period was 73.3 thousand Boe, marking a significant increase of 428% compared to 13.9 thousand Boe in 2023.

Competitive pricing through efficient operations and hedging strategies

Epsilon Energy utilizes efficient operations and strategic hedging to maintain competitive pricing. The company executed a new Anchor Shipper Gas Gathering Agreement in May 2024, establishing fixed gathering rates of $0.475 per million British thermal units (MMBtu) for 2024, which will be adjusted annually based on the Consumer Price Index. This approach supports stable operational costs amid fluctuating market prices.

For the nine months ended September 30, 2024, Epsilon's total revenue reached $22.58 million, an increase from $22.17 million in the previous year, while the average realized price for natural gas was $1.60 per MMBtu. The company also reported net cash settlements of $1.24 million related to derivative contracts during this period, reflecting its effective risk management strategies.

Commitment to sustainable practices in energy production

Epsilon Energy is dedicated to sustainable practices in its operations. The company is actively involved in projects that focus on environmentally responsible energy production. As part of its strategy, Epsilon has engaged in a joint venture in October 2024, covering approximately 160,000 gross acres in Alberta, Canada, with a commitment of $7.3 million to fulfill its carried interest.

Furthermore, Epsilon's total estimated net proved reserves as of December 31, 2023, included 65,916 million cubic feet (MMcf) of natural gas, 383,174 barrels (Bbls) of natural gas liquids, and 341,286 Bbls of oil and condensate, showcasing its commitment to maintaining a robust reserve base while adhering to sustainable practices.

Metric	Q3 2024	Q3 2023	9M 2024	9M 2023
Net Revenue Interest Natural Gas Production (Bcf)	1.2	1.7	4.0	6.0
Realized Price (Permian Basin) ($/Boe)	$54.19	N/A	$53.82	N/A
Total Revenue ($ million)	$7.29	$6.31	$22.58	$22.17
Net Cash Settlements on Derivative Contracts ($ million)	$0.49	N/A	$1.25	$2.98
Total Proved Reserves (MMcf)	65,916	N/A	N/A	N/A

Epsilon Energy Ltd. (EPSN) - Business Model: Customer Relationships

Direct engagement with major industrial customers

Epsilon Energy Ltd. directly engages with major industrial customers, primarily through its natural gas production and services. For the three months ended September 30, 2024, Epsilon sold natural gas to 22 unique customers, with the three largest customers accounting for 34%, 14%, and 12% of total revenue. This direct interaction fosters strong relationships and ensures tailored service delivery that meets the specific operational needs of these customers.

Long-term contracts with key customers for gas supply

The company has established long-term contracts with key customers to secure stable revenue streams. On May 17, 2024, Epsilon executed a new Anchor Shipper Gas Gathering Agreement with Appalachia Midstream Services, LLC, effective January 1, 2024, for a primary term of ten years. This agreement includes fixed gathering, compression, and cross-flow rates, which will be adjusted annually by the Consumer Price Index starting in January 2025. The fixed rate for gathering services in the Auburn Gas Gathering System for 2024 is set at $0.475 per MMBtu.

Contract Type	Customer Type	Duration	Rate ($/MMBtu)	Effective Date
Anchor Shipper Gas Gathering Agreement	Major Industrial Customers	10 years	$0.475	January 1, 2024

Responsive customer service and support for operational needs

Epsilon maintains a responsive customer service framework to support its operational needs. The company has reported significant increases in production efficiency, with total net revenue interest production for the nine months ended September 30, 2024, reaching 191.4 Mboe, a 565% increase compared to the same period in 2023. This operational success is complemented by robust customer service practices that address customer inquiries and service needs promptly.

Epsilon Energy Ltd. (EPSN) - Business Model: Channels

Direct sales to industrial and commercial clients

Epsilon Energy Ltd. primarily engages in direct sales of natural gas and oil to industrial and commercial clients. For the nine months ended September 30, 2024, Epsilon reported total revenues of $22.58 million, reflecting a slight increase from $22.17 million during the same period in 2023. The company sold natural gas to 30 unique customers, with two customers representing 18% and 11% of total revenue.

Utilization of gas gathering systems for distribution

Epsilon utilizes its gas gathering systems, particularly the Auburn Gas Gathering System, to distribute natural gas. During the three months ended September 30, 2024, Epsilon gathered and delivered 7.0 Bcf gross (2.5 net to Epsilon's interest), translating to a rate of 76 MMcf/d. The Auburn Gas Gathering System is critical to Epsilon's operations, as the company owns a 35% interest in this 45-mile system. The fixed rate for gathering services in Auburn GGS for 2024 is $0.475 per MMBtu.

Period	Gross Gathered (Bcf)	Net to Epsilon (Bcf)	Rate ($/MMBtu)
Q3 2024	7.0	2.5	0.475
9 Months 2024	30.2	10.6	0.475

Online platforms for investor relations and information dissemination

Epsilon Energy leverages online platforms for investor relations and information dissemination. The company maintains an active presence on its website, providing up-to-date information on financial performance, operational updates, and press releases. As of September 30, 2024, Epsilon had a working capital surplus of $7.5 million, down from $33.2 million at the end of 2023. This indicates the company's ongoing commitment to transparency and accessibility for investors and stakeholders.

Epsilon Energy Ltd. (EPSN) - Business Model: Customer Segments

Industrial consumers of natural gas and oil

As of September 30, 2024, Epsilon Energy Ltd. has been actively serving industrial consumers of natural gas and oil, which are critical to its revenue stream. The company gathered and delivered 30.2 Bcf gross (10.6 net to Epsilon's interest) during the nine months ended September 30, 2024, translating to an average of 111 MMcf/d through its Auburn Gas Gathering System.

The realized natural gas price for Epsilon during this period was $1.60 per Mcf, reflecting an 8% decrease compared to the same period in 2023. This pricing impacts the cost structure for industrial consumers, who rely on stable supply and pricing for their operations.

Utility companies seeking reliable energy sources

Utility companies form another significant customer segment for Epsilon Energy. The Auburn Gas Gathering System, in which Epsilon holds a 35% interest, plays a vital role in supplying gas to these utilities. The fixed gathering rate for 2024 has been established at $0.475 per MMBtu, which will be adjusted annually based on the Consumer Price Index starting in 2025.

During the three months ended September 30, 2024, Epsilon’s realized price for all Permian Basin production was $54.19 per Boe, indicating a 16% increase compared to the previous year, which is crucial for utility companies looking for reliable energy sources.

Investors looking for opportunities in the energy sector

Epsilon Energy Ltd. also targets investors looking for opportunities in the energy sector. The company reported a net income of $2,688,577 for the nine months ended September 30, 2024, down from $4,349,191 in the same period in 2023. This decline in net income reflects the volatility in energy prices, which can influence investor sentiment and decisions.

As of September 30, 2024, Epsilon had a working capital surplus of $7.5 million, a decrease from $33.2 million at the end of 2023. The company’s share repurchase program also indicates a strategic move to enhance shareholder value, having repurchased 125,000 shares at an average price of $5.00 during the nine months ended September 30, 2024.

Customer Segment	Key Metrics	Notes
Industrial Consumers	30.2 Bcf gross delivery (9M 2024)	Average price: $1.60 per Mcf
Utility Companies	Fixed gathering rate: $0.475 per MMBtu	Realized price for Permian production: $54.19 per Boe
Investors	Net income: $2,688,577 (9M 2024)	Working capital surplus: $7.5 million

Epsilon Energy Ltd. (EPSN) - Business Model: Cost Structure

Significant capital expenditures for exploration and production

In 2024, Epsilon Energy Ltd. reported total capital expenditures of approximately $32.9 million, with significant investments directed towards exploration and production activities across various regions including Pennsylvania and Texas. This includes a $14.8 million acquisition for a 25% working interest in producing wells and undeveloped acres in Texas. Additionally, Epsilon has committed to a carried interest of $7.3 million in a joint venture in Alberta, Canada.

Operational costs associated with gas gathering and processing

Operational costs for the three months ended September 30, 2024, amounted to $12.6 million, with specific breakdowns as follows:

Cost Category	Amount ($)
Lease Operating Costs	2,099,501
Gathering System Operating Costs	490,325
General and Administrative Expenses	1,758,685
Depletion, Depreciation, Amortization and Accretion	7,127,641
Total Operational Costs	12,641,773

The gathering system operating costs for the nine months ended September 30, 2024, were reported at $1.69 million. The operational costs reflect ongoing expenses related to gas processing and gathering systems, which are crucial for Epsilon's production capabilities.

Costs related to compliance and regulatory requirements

Epsilon Energy incurs compliance costs associated with regulatory requirements that govern their operations. For the nine months ended September 30, 2024, general and administrative costs, which include compliance expenses, totaled $5.43 million. This represents a decrease of 9% compared to the same period in 2023. Additionally, the company has ongoing asset retirement obligations estimated at $3.6 million as of September 30, 2024, which are necessary for environmental compliance and regulatory adherence upon the cessation of operations at specific sites.

Epsilon Energy Ltd. (EPSN) - Business Model: Revenue Streams

Revenue from the sale of natural gas, oil, and NGLs

Epsilon Energy Ltd. generates significant revenue from the sale of natural gas, oil, and natural gas liquids (NGLs). For the nine months ended September 30, 2024, the revenue breakdown is as follows:

Revenue Source	Amount ($)
Natural Gas	6,828,155
NGLs	1,096,678
Oil and Condensate	10,193,535
Total Revenue from Product Sales	18,118,368

The total operating revenue from these sources for the nine months ended September 30, 2024, was $22,582,502, reflecting a slight increase from $22,166,939 during the same period in 2023.

Income from gas gathering and compression services

Epsilon Energy also provides gas gathering and compression services, which contribute to its revenue. For the nine months ended September 30, 2024, the income from gas gathering and compression services was:

Service Type	Income ($)
Gas Gathering and Compression Fees	4,464,134

This revenue is derived from the company's ownership in the Auburn Gas Gathering System, which operates under a fixed rate structure established in the new Anchor Shipper Gas Gathering Agreement effective January 1, 2024.

Gains from commodity derivatives and hedging activities

Epsilon engages in commodity derivative contracts to hedge against fluctuations in natural gas and oil prices. For the nine months ended September 30, 2024, the company recognized gains from these activities as follows:

Activity Type	Gain ($)
Gains on Derivative Contracts	245,095
Cash Settlements Received	1,245,931
Total Gains from Derivatives	1,491,026

In comparison, for the nine months ended September 30, 2023, Epsilon had losses of $1,672,535 from derivative contracts.

Updated on 16 Nov 2024

Resources:

1. Epsilon Energy Ltd. (EPSN) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of Epsilon Energy Ltd. (EPSN)' financial performance, including balance sheets, income statements, and cash flow statements.
2. SEC Filings – View Epsilon Energy Ltd. (EPSN)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.