Epsilon Energy Ltd. 2026 Q2 Earnings Call
Review the key takeaways and the transcript of this earnings call.
- Epsilon reported that second quarter 2026 production was at a trough for the year, with new development in the Powder River Basin and Permian Basin starting to contribute late in the quarter.
- The company anticipates meaningful quarter-over-quarter production growth through the remainder of 2026, primarily driven by crude volumes in the Powder River Basin.
- The midpoint of full year 2026 guidance shows high teens year-over-year growth in total production and almost 200% year-over-year growth in oil volumes.
- Two Niobrara Duck completions in the Powder River Basin were completed during the quarter and brought online in early July, exceeding type curve expectations.
- Drilling operations on the three-well Parkman pad were completed about one month ahead of plan, with production expected to begin in the fourth quarter.
- In the Permian Basin, the first three-mile Barnett well was placed on flowback in June and is performing in line with pre-drill type curve.
- Two additional Barnett wells are expected to be drilled in the second half of 2026 with completion scheduled for the first quarter of 2027.
- The Woodford appraisal well, which Epsilon did not participate in, has been drilled and is scheduled for completion later in the month, potentially expanding future drilling inventory.
- Marcellus production in Pennsylvania was impacted by planned temporary curtailments related to operating pressure adjustments on the gathering system to accommodate new wells expected to come online late in the fourth quarter.
- Epsilon has largely completed the transition period associated with the Peak acquisition, integrating personnel, systems, and field operations.
- The company paid down $10 million of debt in the first half of the year and plans to utilize its revolver to partially fund the investment ramp starting in the third quarter.
- Capital spending is expected to increase meaningfully in the third quarter, with over half of full year capital spending not contributing to results until the fourth quarter or later.
- Epsilon sold a non-core Marcellus overriding royalty interest and reduced its interest in the Parkman development to over 70%.
- The potential sale of the Durango office building did not close but may be reevaluated later in the year.
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Transcript
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At this time, I would like to turn the conference over to your President and CEO, Jason Stabell. Please go ahead. Good morning.
Before we begin our prepared remarks, we would like to address the press release correction issued yesterday. The correction was limited to the presentation of adjusted net income and adjusted EPS in the summary table. The reconciliation later in the release reflected the correct treatment. After identifying the inconsistency, we promptly updated the release. There was no impact to our reported GAAP results, cash flows, or the underlying economics of the business. Thank you, operator. I'll now turn the call over to Andrew Williamson, our CFO.
Thank you, operator. On behalf of the management team, I would like to welcome all of you to today's conference call to review Epsilon's second quarter 2026 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 a variety of factors could cause Epsilon's actual results to differ materially from the anticipated results or expectations expressed in these forward-looking statements. Today's call may also contain certain non-GAAP financial measures. Please refer to the earnings release that we issued yesterday for disclosures on forward-looking statements and reconciliations of non-GAAP measures. With that, I would like to turn the call over to Jason Stabell, our Chief Executive Officer.
Thank you, Andrew, and good morning, everyone. Joining me today are Andrew Williamson, our CFO, and Henry Clanton, our COO. We will be available for questions following our prepared remarks. Our message this quarter remains consistent with what we communicated in May. We are focused on execution, and I am pleased to report that our major operational initiatives have progressed on schedule and on budget. We have started to execute our development plan as expected and anticipate meaningful quarter-over-quarter production growth through the remainder of 2026, primarily driven by crude volumes in the Powder River Basin. As a result of the progress we have made across the portfolio, for the first time, we are providing production guidance for the second half of 2026.
The anticipated increase in volumes reflects the commencement of production from several high-return oil projects that have either recently been brought online or are expected to begin contributing over the coming months. We refer you to a presentation posted to our website this morning for additional details on our guidance. In the Powder River Basin, execution on our acquired operated assets has been particularly strong. Our two Niobrara DUC completions were completed during the quarter and brought online in July. Early production results have exceeded our type curve expectations. In addition, drilling operations on our three-well Parkman pad were completed approximately one month ahead of plan. These high working interest Parkman wells are now on track to begin production during the fourth quarter and represent the biggest contributor to our anticipated growth profile.
In the Permian Basin, our first three-mile Barnett well was placed on flowback during June and is currently performing in line with our pre-drill type curve. The successful execution of this well marks another important milestone in the development of the project and provides further confidence in the operator's transition to longer lateral development. Looking ahead, the operator has informed us that two additional Barnett wells are expected to be drilled during the second half of 2026, with completion scheduled for the first quarter of 2027. In addition, the Woodford appraisal well, in which Epsilon elected not to participate, has now been drilled and is scheduled for completion later this month. A successful result could meaningfully expand the future drilling inventory associated with our acreage position and provide additional development opportunities beyond the Barnett formation.
In Pennsylvania, production from our Marcellus assets was impacted during the quarter by planned temporary curtailments associated with operating pressure adjustments on our gathering system, which will make room on the system for newly drilled wells scheduled to turn in line late in the fourth quarter of this year. From an organizational standpoint, we have largely completed the transition period associated with the Peak acquisition. The integration of personnel, systems, and field operations has progressed well, and I want to thank our employees for their efforts throughout this process. The successful integration of the acquired assets has allowed our team to remain focused on execution while continuing to identify opportunities to improve operational performance and efficiencies. Overall, we are accomplishing what we set out to do at the start of the year. Our development program is advancing as planned.
Our balance sheet remains strong, and we expect to deliver meaningful quarter-over-quarter production growth through the remainder of 2026, as reflected in the guidance provided today. Andrew and Henry will provide additional detail on our major operational initiatives, production outlook, and financial position. Andrew, I'll turn it over to you.
Thanks, Jason. On the recent results, the second quarter was a trough for us this year on production as new development in the Powder River Basin, Permian started to contribute late in the quarter. As Jason mentioned, we anticipate growth from here as Q2 activity is reflected in Q3 and escalates through year-end and into 2027 with continued activity across the portfolio. The biggest impact this year will come in the fourth quarter with our first Parkman volumes in the Powder River Basin. The midpoint of full year 2026 guidance shows high teens year-over-year growth in total production and almost 200% year-over-year growth in oil volumes.
On the capital side, also as shown in our guidance figures, we plan to spend meaningfully more in the third quarter than we have in past quarters, with the high-interest Parkman development already mentioned, together with drilling activity in the Permian and facilities build-out in one of our core areas in Converse County, Wyoming, in preparation for a ramp in development activity there early next year. Well over half of our full-year capital spending will not contribute to results until the fourth quarter, with over a third showing up in results starting next year, including the facilities build-out I mentioned. We made several moves during the second quarter in preparation for these investments, including the non-core Marcellus overriding royalty interest sale and an interest sell down in this quarter's Parkman development, which still leaves us with over 70% interest in the project.
The previously disclosed potential sale of our Durango office building did not close, but we expect to reevaluate a potential sale later this year. Over the first half of the year, we paid down our debt balance by $10 million. We expect to utilize the revolver to partially fund the investment ramp starting this quarter. That said, we're very comfortable we can execute our plans while staying within our target leverage level of 1.5 times EBITDA. Looking ahead to next year, we're planning to continue to invest for growth, with development activity in excess of 2026 expected across all three of our primary areas. The biggest component will be the Powder River Basin, with additional operated development targeting the Parkman.
We are also in discussions with some of the larger operators in the basin to pull forward some of our shale inventory there in partnerships allowing us to develop cost efficiently. The Permian and Marcellus assets are expected to exhibit growth next year as well, subject to the final plans of our operating partners.
Now to Henry. Thank you, Andrew, and good morning to everyone.
Today, I'd like to begin by highlighting some recent operations on our Powder River Basin assets. The company successfully stimulated both of the 2-mile Niobrara laterals in Campbell County, Wyoming, we acquired from Peak. The frac win is planned with all design, sand placed, and the 100 stages completed. The wells were flowed back under a managed pressure procedure to technically guide the choke management decisions. Both wells continue to flow up casing on a reduced choke and are performing above expectation, with peak daily rates achieved in excess of 900 barrels of oil a day from each well. Different from the timing provided in the prior earnings call, we were able to accelerate the drilling of our 3-well Parkman program in July.
This being our first drilling operation in the basin, I'm pleased to report that all three wells were successfully drilled to their planned depths. The completions are scheduled for later this quarter. As we've done with the Niobrara wells, all production facility work that could be built out prior to placing the wells on production has been completed. Initial production is expected in the fourth quarter. In Converse County, the 1 million barrel Inod water supply and impoundment facility has been finalized with contractor bids under evaluation. Construction is expected to begin in Q3. The original design of the impoundment ponds have been modified to allow for intake and recycling of produced water in the future, which will reduce the total water sourcing and processing costs moving forward.
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