What changed in this filing

/stocks — the workspaceLOADING

Item 1. Business

2022-03-24 compared with 2021-03-25 · 56 added, 95 removed, 215 unchanged (41% of the section changed)

7 unchanged sentences

On February 14, 2019, Epsilon’s registration statement on Form 10 was declared effective by the United States Securities and Exchange Commission and on February 19, 2019, we began trading in the United States on the NASDAQ Global Market under the trading symbol “EPSN.” Effective as of the close of trading on March 15, 2019, Epsilon voluntarily delisted its common shares from the TSX.

At December 31, 2020, Epsilon’s total estimated net proved reserves were 88,658 million cubic feet (MMcf) of natural gas reserves and 371,343 barrels (Bbl) of oil and other liquids.

At December 31, 2021, Epsilon’s total estimated net proved reserves were 110,969 million cubic feet (MMcf) of natural gas reserves, 819,726 barrels (Bbl) of NGL reserves, and 305,052 barrels (Bbl) of oil and other liquids.

Epsilon holds leasehold rights to approximately 76,544 gross (13,176 net) acres.

11 unchanged sentences

Marcellus Shale—Pennsylvania

● During the year ended December 31, 2020, Epsilon’s realized natural gas price was $1.36 per Mcf, a 38% decrease from $2.18 for the year ended December 31, 2019.

● During the year ended December 31, 2021, Epsilon’s realized natural gas price was $3.04 per Mcf, a 124% increase from $1.36 for the year ended December 31, 2020.

● Total year ended December 31, 2021 natural gas production was 9.8 Bcf, as compared to 11.0 Bcf during 2020.

● Gathered and delivered 63.2 Bcf gross (22.1 Bcf net to Epsilon’s interest) during the year, or 173 MMcf/d through the Auburn Gas Gathering System.

● We participated in the drilling and completion of 8 gross (0.19 net) Marcellus wells in 2020.

These wells went into production at various times beginning in May and going through December.

A ninth (0.025 net) well was also drilled and was turned to production in January 2021.

● We participated in the drilling of 3 gross (0.42 net) and completion of 3 gross (0.27 net) Marcellus wells in 2021.

These wells went into production at various times beginning in January and going through October.

● At year end, the Company had 1 gross (0.18 net) well waiting on completion.

Anadarko, NW STACK Trend—Oklahoma

● During 2020, Epsilon’s realized price for all Oklahoma production was $2.36 per Mcfe, a 22% decrease from 2019.

● During 2021, Epsilon’s realized price for all Oklahoma production was $6.34 per Mcfe, a 169% increase from 2020.

● Total production for 2021 included natural gas, oil, and other liquids and was 0.73 Bcfe, as compared to 0.31 Bcfe during 2020.

● We did not drill or complete any wells during 2020.

Business highlights of 2019

Operational Highlights

Marcellus Shale—Pennsylvania

● During the year ended December 31, 2019, Epsilon’s realized natural gas price was $2.18 per Mcf, a 13% decrease from the year ended, December 31, 2018.

● Total year ended December 31, 2019, production was 7.6 Bcf of natural gas net to our revenue interest in Pennsylvania, as compared to 7.3 Bcf in 2018.

● We participated in the drilling and completion of 4 gross (1.07 net) lower Marcellus wells in 2019.

These wells went into production in October.

In addition, 5 wells (0.39 net) which were spud in Q4 2018 were completed and 4 were turned to production in February 2019, and the 5 th was turned to production in June.

Two of these wells targeted the Upper Marcellus.

● Gathered and delivered 87.8 Bcf gross (30.7 Bcf net to Epsilon’s interest) during the year, or 241 MMcf/d through the Auburn Gas Gathering System which represents approximately 73% of designed throughput capacity.

Anadarko, NW STACK Trend—Oklahoma

● During 2019, Epsilon’s realized price for all production was $3.01 per Mcfe.

● Total production for 2019 included natural gas, oil, and other liquids and was 0.29 Bcfe.

● We participated in the drilling of 2 gross (0.79 net) wells during 2019.

One well (0.10 net to Epsilon) was completed and turned to production in December.

Completion operations for the second well were postponed due to a significant decrease in NGL and oil prices.

The well will be considered for completion when commodity prices have recovered enough to generate an attractive return on the incremental capital required for the completion operation.

● In 2021, the Company participated in the drilling of 4 gross (0.75 net) wells and completion of 2 gross (0.6 net) wells.

As of December 31, 2021, Epsilon’s 76,544 gross (13,176 net) acres are all located in the United States and include 275 gross (35.84 net) wells.

Producing Wells

Total Producing Wells

Non-Producing Wells

5 unchanged sentences

(3) “Net Undeveloped” means the Company’s fractional working interest share in each leasehold tract of land where productive wells have yet to be drilled.

All of Epsilon’s Oklahoma undeveloped properties are deep rights acreage which is held by production of developed properties.

All of Epsilon’s Oklahoma undeveloped properties are deep rights acreage

which is held by production of developed properties.

Business Segments

23 unchanged sentences

The model then computes the new gathering rate that will yield the contractual rate of return to the Auburn GGS owners.

In 2026, prior to the end of the initial period on December 31, a new agreement governing rates will be negotiated between the Anchor Shippers and the gathering system owner.

In 2026, prior to the end of the initial period on December 31, a new agreement governing rates will be negotiated between the Anchor Shippers and the gathering system owners.

The Auburn GGS consists of approximately 44 miles of gathering pipelines, a small auxiliary compression facility and a main compression facility with three dehydration units and three Caterpillar 3612 compression units.

4 unchanged sentences

and Chesapeake Energy Corporation.

Additional but less significant revenues are earned from Chief Oil & Gas LLC.

Revenues derived from Epsilon’s production which have been eliminated from gathering system revenues amounted to $1.6 million and $1.8 million, respectively, for the years ended December 31, 2021 and 2020.

14 unchanged sentences

We have not engaged in any exploration capital spending in 2021 or 2020.

At this time, the Company is on track to develop our proved undeveloped properties within 5 years.

Our development capital spending to convert proved undeveloped reserves to proved developed reserves for the periods indicated is as follows:

● In 2020 in Pennsylvania, 8 gross (0.19 net) wells were drilled and completed.

● In 2021 in Pennsylvania, 3 gross (0.42 net) wells were drilled and 3 gross (0.27 net) completed.

(Net development capital $4.1 million).

Reserves of 4.1 Bcf for the 8 wells were reclassified as proved developed producing as these wells were turned online at various times beginning in May and going through December of 2020.

Reserves of 4.6 Bcf for the 3 wells were reclassified as proved developed producing as these well were turned online at various times beginning in January and going through October of 2021.

Additionally, 1 gross (0.18 net) well was drilled in 2021, but not completed (development capital $0.2 million).

It was turned to production in January 2021.

This well will add another 1.0 Bcf of reserves.

● In 2020 no wells were drilled in Oklahoma.

One well drilled in 2019 is still waiting on completion.

It is scheduled to be completed in April 2022.

● In 2021 in Oklahoma, we drilled 4 gross (0.75 net) wells and completed 2 gross (0.6 net) wells.

Reserves of 2.8 Bcfe were reclassified as proved developed producing.

Two gross (0.55 net) wells are scheduled to be completed in April.2022.

Internal Controls Over Reserves Estimation Process and Qualifications of Technical Persons with Oversight for The Company’s Overall Reserve Estimation Process

17 unchanged sentences

For the year ended December 31, 2021, we sold natural gas through ARM to 30 unique customers.

Alta Energy Marketing LLC, EQT Energy LLC, South Jersey Resources Group LLC, and Spotlight Energy LLC each accounted for 10% or more of our total revenue.

Direct Energy Business Marketing, LLC and SWN Energy Services Company, LLC each accounted for 10% or more of our total revenue.

For the year ended December 31, 2020, we sold natural gas to 29 unique customers.

EQT Energy LLC, and Spotlight Energy LLC each accounted for 10% or more of our total revenue.

Alta Energy Marketing LLC, EQT Energy LLC, South Jersey Resources Group LLC, and Spotlight Energy LLC each accounted for 10% or more of our total revenue.

Geographic Locations of Operations

6 unchanged sentences

This size differential relative to our competitors could disadvantage us, particularly in regard to accessing capital markets, acquiring technical expertise, and attracting and retaining talented personnel.

It is not uncommon in the oil and natural gas industry to experience shortages of drilling and completion rigs, equipment, pipe, services and personnel, which can cause both delays in development drilling activities and significant cost increases.

It is not uncommon in the oil and natural gas industry to experience shortages of drilling and completion rigs,

equipment, pipe, services and personnel, which can cause both delays in development drilling activities and significant cost increases.

We are exposed to the risk of industry competition for drilling rigs, completion rigs and availability of related equipment and services, among other goods and services required in our business.

8 unchanged sentences

● an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

● an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about our audit and our

financial statements;

● reduced disclosure about our executive compensation arrangements.

7 unchanged sentences

None of our employees are subject to a collective bargaining agreement or represented by a union.

The foundation of our Company is our employees and our success begins with a values-driven culture and commitment to developing a skilled, agile, diverse and engaged workforce where every employee understands that they can and do make a difference.

The foundation of our Company is our employees and our success begins with a values-driven culture and

commitment to developing a skilled, agile, diverse and engaged workforce where every employee understands that they can and do make a difference.

Advancing a safe, ethical, inclusive and diverse culture creates an environment that attracts and retains the high-performing workforce needed to successfully execute our strategy.

2 unchanged sentences

Legal Proceedings

At December 31, 2020, we did not have any legal proceedings to which we were a party.

However, please see Note 15, Subsequent Events, for current litigation.

On March 10, 2021, Epsilon filed a complaint against Chesapeake Appalachia, LLC (“Chesapeake”) in the United States District Court for the Middle District of Pennsylvania, Scranton, Pennsylvania.

Epsilon claims that Chesapeake has breached a settlement agreement and several operating agreements (“JOAs”) to which Epsilon and Chesapeake are parties.

Epsilon asserts that Chesapeake has failed to cooperate with Epsilon’s efforts to develop resources in the Auburn Development, located in North-Central Pennsylvania, as required under both the settlement agreement and JOAs.

Epsilon requested a preliminary injunction but was unsuccessful in obtaining that injunction.

Epsilon filed a motion to amend its original Complaint.

Chesapeake opposed.

The Court ruled in Epsilon’s favor and allowed Epsilon’s amendment.

Chesapeake moved to dismiss the amended Complaint.

The Court granted the motion to dismiss without prejudice to Epsilon’s right to file a new lawsuit based on new proposals made after the Court’s decision.

Epsilon filed a motion for reconsideration of that decision.

The motion for reconsideration was fully briefed in November 2021.

Epsilon filed a notice of additional evidence to the motion for reconsideration on January 4, 2022.

The motion for reconsideration was denied on January 18, 2022.

Epsilon filed a notice of appeal on February 15, 2022 challenging both the motion to dismiss and motion for reconsideration decisions.

Chesapeake filed a cross-appeal on March 1, 2022.

A briefing schedule has not yet been set but a decision on the appeal is expected in the fourth quarter of 2022.

Environmental Regulation

9 unchanged sentences

In addition, it is not anticipated, based on current laws and regulations, that Epsilon will be required in the near future to expend amounts (whether for environmental control facilities or otherwise) that are material in relation to its total exploration and development expenditure program in order to comply with such laws and regulations.

However, given that such laws and regulations are subject to change, Epsilon is unable to predict the ultimate cost of compliance or the ultimate effect on Epsilon’s operations, financial condition and results of operations.

However, given that such laws and

regulations are subject to change, Epsilon is unable to predict the ultimate cost of compliance or the ultimate effect on Epsilon’s operations, financial condition and results of operations.

Climate Change

23 unchanged sentences

Any limits on GHG emissions, however, could adversely affect demand for the oil and natural gas that production operators produce, some of whom are our customers, which could thereby reduce demand for our gas gathering services.

We are currently unable to calculate or predict the direct and indirect costs of GHG or climate change related laws, regulations and treaties, and accordingly, we cannot assure you that any such efforts will not have a material impact on our operations, financial condition and results.

We are currently unable to calculate or predict the direct and indirect costs of GHG or climate change related laws, regulations and treaties, and accordingly, we cannot assure you that any such

efforts will not have a material impact on our operations, financial condition and results.

Hydraulic Fracturing

17 unchanged sentences

The transportation and sale for resale of natural gas in interstate commerce is regulated primarily under the Natural Gas Act, or the NGA, and by regulations and orders promulgated under the NGA by the FERC.

In certain limited circumstances, intrastate transportation, gathering, and wholesale sales of natural gas may also be affected directly or

indirectly by laws enacted by the U.S.

In certain limited circumstances, intrastate transportation, gathering, and wholesale sales of natural gas may also be affected directly or indirectly by laws enacted by the U.S.

Congress and by FERC regulations.

1 unchanged sentence

Market Information.

Commencing on February 19, 2019, the common shares of the Company trade on the NASDAQ Global Market with the ticker symbol ‘‘EPSN.’’ Effective as of the close of trading on March 15, 2019, Epsilon voluntarily delisted its common shares from the Toronto Stock Exchange.

The last reported sales price of our common shares on the NASDAQ Global Market on March 24, 2021 was $3.90 per share.

Commencing on February 19, 2019, the common shares of the Company trade on the NASDAQ Global Market with the ticker symbol ‘‘EPSN.’’ The last reported sales price of our common shares on the NASDAQ Global Market on March 22, 2022 was $5.69 per share.

Shareholders.

We had approximately 800 shareholders of record as of December 31, 2021.

We have not declared or paid any cash or stock dividends on our common shares since our inception and do not anticipate declaring or paying any cash or stock dividends in the foreseeable future.

We have not declared or paid any cash or stock dividends on our common shares since our inception;

however, we anticipate paying quarterly cash or stock dividends beginning March 2022.

Securities Authorized for Issuance under Equity Incentive Plans.

At December 31, 2020, we were authorized to issue equity securities as follows:

Number of Shares to be

Weighted Average

Issued Upon Exercise or

Exercise or Vesting Price

Number of Shares Remaining

Vesting of Outstanding

of Outstanding Options

Available for Future Issuance

Plan Category

Options or Shares

Under Equity Compensation Plans

Equity share options under Amended and Restated 2017 Stock Option Plan

Common shares under Amended and Restated 2017 Stock Option Plan

Common shares under 2020 Equity Incentive Plan

The following table sets out the number of common shares to be issued upon exercise of outstanding options issued pursuant to our equity compensation plans and the weighted average exercise price of outstanding options for the periods indicated:

The following table sets out the number of common shares available to be issued upon exercise of outstanding options issued and the changes to the options outstanding for the year pursuant to our equity compensation plans and the weighted average exercise price of outstanding options for the periods indicated:

December 31, 2021

4 unchanged sentences

Exercisable at period-end

As of December 31, 2020, we had no warrants or other common share-related rights outstanding.

For the years ended December 31, 2021 and 2020, we had no warrants or other common share-related rights outstanding.

At December 31, 2021, under the 2020 Equity Incentive Plan (the “2020 Plan”) (See Note 6 Shareholders’ Equity of the Notes to the Consolidated Financial Statements), we are authorized to issue 2,000,000 Common Shares to employees and directors of the Company.

2 unchanged sentences

No more shares are authorized to be issued under this plan.

The following table sets out the number of time restricted common shares to be issued upon vesting over the next

three years pursuant to our share compensation plans and the weighted average market price at date of issue for outstanding shares for the periods indicated:

The following table sets out the number of time restricted common shares available to be issued upon vesting over the next three years and the changes during the year pursuant to our share compensation plans and the weighted average market price at date of issue for outstanding shares for the periods indicated:

December 31, 2021

2 unchanged sentences

Balance non-vested Restricted Stock at end of period

The following table sets out the number of performance-based common shares to be issued upon vesting over the next three years pursuant to our share compensation plans and the weighted average market price at date of issue for outstanding shares for the periods indicated:

The following table sets out the number of performance-based common shares available to be issued upon vesting over the next three years and the changes during the year pursuant to our share compensation plans and the weighted average market price at date of issue for outstanding shares for the periods indicated:

December 31, 2021

3 unchanged sentences

Recent Developments

The significant demand declines caused by the global response to the coronavirus 2019 pandemic (“COVID-19”) as well as the actions taken by a number of global oil producers contributed to steep declines in the demand and pricing for oil, natural gas and NGLs, negatively impacting U.S.

producers in 2020.

While Epsilon did not incur significant disruptions to operations during the year ended December 31, 2020 as a result of the COVID-19 pandemic, the Company did need to recognize an impairment on its legacy Oklahoma producing assets due to the historically low commodity prices.

The full impact of the COVID-19 pandemic continues to evolve as of the date of this report.

As such, the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations is uncertain.

Management is actively monitoring the impact of the COVID-19 pandemic on the Company's financial condition, liquidity, operations, suppliers, industry and ability to obtain financing in future reporting periods.

Given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, the Company is currently not able to estimate the effects of the COVID-19 pandemic on its results of operations, financial condition, or liquidity for the future.

The federal government has passed a series of relief and stimulus packages, including the CARES Act, for the country, but Epsilon has not and does not anticipate that it will apply for assistance under such programs.

Accordingly, these programs have no effect on Epsilon’s financial statements.

On June 28, 2020, Chesapeake Energy Corporation (“CHK”) filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code (“Petition”).

Chesapeake Energy Marketing, Inc., a subsidiary of CHK, is one of the Anchor Shippers under the Anchor Ship Gas Gathering Agreement (“ASGGA”) for the Auburn GGS with a 43.8750% voting percentage.

The Williams Companies Inc.

(“Williams”), including its subsidiary Appalachia Midstream Services, L.L.C.

(“AMS”), is listed in the petition as a top 30 creditor of CHK, with an amount due by CHK under the ASGGA.

On June 28, 2020 unpaid fees attributable to CHK for the ASGGA for May and June 2020 gathering fees were $1.1 million

and $1.3 million respectively.

On December 15, 2020, a global resolution between Williams and CHK was approved by the United States Bankruptcy Court.

As a part of the agreement, CHK affirmed the ASGGA for the Auburn GGS and agreed to pay all pre-petition and past due receivables related to midstream expenses, per the existing contracts.

We received our share of the pre-petition amounts and as such, reversed our $0.8 million allowance for doubtful accounts.

As of December 31, 2020, all cash has been received and revenue is included in the financial statements.

On March 10, 2021, Epsilon filed a complaint against Chesapeake Appalachia, LLC (“Chesapeake”) in the United States District Court for the Middle District of Pennsylvania, Scranton, Pennsylvania.

Epsilon claims that Chesapeake has breached a settlement agreement and several operating agreements (“JOAs”) to which Epsilon and Chesapeake are parties.

Epsilon has requested a preliminary injunction, among other requests for relief.

Accordingly, a hearing on that request is expected to be heard in Spring 2021.

On February 25, 2022, the Board of Directors approved a quarterly cash dividend of $0.0625 per common share, payable on March 31, 2022, to shareholders of record at the close of business on March 8, 2022.

With the initiation of a cash dividend, Epsilon intends to pay regular quarterly dividends, with future dividend payments subject to quarterly review and approval by its Board of Directors.

At this quarterly dividend rate, the annual dividend rate for the fiscal year 2022 is $0.25 per share.

The Board of Directors also authorized the repurchase of up to 1,183,410 of the outstanding common shares, representing 5% of the outstanding common shares of Epsilon, for an aggregate purchase price of not more than US $8.0 million, pursuant to a normal course issuer bid, during the one-year period commencing on March 8, 2022.

The program will end on March 7, 2023 unless the maximum amount of common shares is purchased before then or Epsilon provides earlier notice of termination.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business