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Item 1. Business

2023-03-24 compared with 2022-03-24 · 127 added, 91 removed, 180 unchanged (55% of the section changed)

Epsilon Energy Ltd.

(the “Company” or “Epsilon” or “we”) was incorporated under the laws of the Province of Alberta, Canada March 14, 2005, pursuant to the ABCA.

(the “Company” or “Epsilon” or “we”) was incorporated under the laws of the Province of Alberta, Canada on March 14, 2005, pursuant to the ABCA.

The Company is extra-provincially registered in Ontario pursuant to the Business Corporations Act (Ontario).

Epsilon is a North American on-shore focused independent natural gas and oil company engaged in the acquisition, development, gathering and production of natural gas and oil reserves.

Our primary area of operation is Pennsylvania.

Our assets are concentrated in areas with known hydrocarbon resources, which are conducive to multi-well, repeatable drilling programs.

On October 24, 2007, the Company became a publicly traded entity trading on the Toronto Stock Exchange (“TSX”) in Canada.

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, 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.

At December 31, 2022, Epsilon’s total estimated net proved reserves were 90,040 million cubic feet of natural gas reserves, 491,226 barrels of NGL reserves, and 211,059 barrels of oil and other liquids.

Epsilon holds leasehold rights to approximately 75,954 gross (13,625 net) acres.

The Company has natural gas production in the Marcellus in Pennsylvania and oil, natural gas liquids and natural gas production in the Anadarko Basin in Oklahoma.

The Company has natural gas production in the Marcellus Shale in Pennsylvania and oil, natural gas liquids and natural gas production in the Anadarko Basin in Oklahoma.

We conduct operations in the United States through our wholly owned subsidiaries Epsilon Energy USA Inc., an Ohio corporation, or Epsilon Energy USA;

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Epsilon Operating, LLC, a Delaware limited liability company, Dewey Energy GP LLC, a Delaware limited liability company, Dewey Energy Holdings LLC, a Delaware limited liability company, and Altolisa Holdings, LLC, a Delaware limited liability company.

Substantially all of the production from our Pennsylvania acreage (4,597 net) is dedicated to the Auburn Gas Gathering System, or the Auburn GGS, located in Susquehanna County, Pennsylvania for a 15-year term expiring in 2026 under an operating agreement whereby the Auburn GGS owners receive a fixed percentage rate of return on the total capital invested in the construction and maintenance of the system.

Substantially all the production from our Pennsylvania acreage (5,098 net) is dedicated to the Auburn Gas Gathering System, or the Auburn GGS, located in Susquehanna County, Pennsylvania for a 15-year term expiring in 2026 under an operating agreement whereby the Auburn GGS owners receive a fixed percentage rate of return on the total capital invested in the construction and maintenance of the system.

We own a 35% interest in the Auburn GGS which is operated by a subsidiary of Williams Partners, LP.

In 2022, we paid $1.5 million to the Auburn GGS to gather and treat our 9.0 Bcf of natural gas production in Pennsylvania ($1.6 million was paid to the Auburn GGS to gather and treat our 9.8 Bcf in 2021).

Our principal executive office is located at 16945 Northchase Drive, Suite 1610, Houston, Texas 77060, and our telephone number at that address is (281) 670-0002.

Our principal executive office is located at 500 Dallas Street, Suite 1250, Houston, Texas 77002, and our telephone number at that address is (281) 670-0002.

Our registered office in Alberta, Canada is located at 14505 Bannister Road SE, Suite 300, Calgary, AB, Canada T2X 3J3.

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● Total year ended December 31, 2022 natural gas production was 9.0 Bcf, as compared to 9.8 Bcf during 2021.

● 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.

● Gathered and delivered 66.3 Bcf gross (23.2 Bcf net to Epsilon’s interest) during the year, or 182 MMcf/d through the Auburn GGS.

● We participated in the drilling of 5 gross (0.05 net) and completion of 4 gross (0.21 net) Marcellus wells in 2022.

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.

These wells went into production at various times in August and September.

● At year end, the Company had 2 gross (0.02 net) wells waiting on completion.

Anadarko, NW STACK Trend—Oklahoma

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

● During the year ended December 31, 2022, Epsilon’s realized price for all Oklahoma production was $8.68 per Mcfe, a 37% increase from $6.34 for the year ended December 31, 2021.

● Total production for 2022 included natural gas, oil, and other liquids and was 0.93 Bcfe, as compared to 0.73 Bcfe during 2021.

● In 2022, the Company participated in the drilling of 2 gross (0.26 net) wells and completion of 3 gross (0.70 net) wells.

● At year end, the Company had 1 gross (0.11 net) well waiting on completion.

As of December 31, 2022, Epsilon’s 75,954 gross (13,625 net) acres are all located in the United States and include 351 gross (36.33 net) wells.

Producing Wells

Total Producing Wells

Non-Producing Wells

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(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

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A summary of our net oil and natural gas production, average oil and natural gas prices and related revenues and our gathering system revenues for the years ended December 31, 2022 and 2021, respectively, follows:

Production Volumes

Natural gas (MMcf)

Total (Mmcfe)

Natural gas (MMcf)

Natural gas liquids (MBbl)

Oil & other liquids (MBbl)

Total (Mmcfe)

Company Total

Natural gas (MMcf)

Natural gas liquids (MBbl)

Oil & other liquids (MBbl)

Total (Mmcfe)

Natural gas revenue

Volume (MMcf)

Price ($/Mcf)

PA Exit Rate (MMcfpd)

Oil and other liquids revenue

Price ($/Bbl)

Gathering system revenue

Total Revenues

Total PA Revenues

Natural gas revenue

Price ($/Mcf)

Natural liquids revenue

Price ($/Bbl)

Oil and condensate revenue

Price ($/Bbl)

Total OK Revenues

Total Company Revenues

Gathering System Operations

Epsilon Energy USA is the 100% owner of Epsilon Midstream, which owns a 35% undivided interest in the Auburn Gas Gathering System, or the Auburn GGS, located in Susquehanna County, Pennsylvania, with partners Appalachia Midstream Services, LLC (43.875%) and Equinor Pipelines, LLC (21.125%).

The Anchor Shippers, Epsilon Energy, Equinor USA Onshore Properties, Inc., and Chesapeake Energy Corporation dedicated approximately 18,000 mineral acres to the Auburn GGS for an initial term of 15 years under an operating agreement whereby the Auburn GGS owners receive a fixed percentage rate of return on the total capital invested in the construction of the system.

The gathering rate of the Auburn gas gathering system (“Auburn GGS”) is determined by a cost of service model whereby the Anchor Shippers in the system dedicate acreage and reserves to the gas gathering system in exchange for the Auburn GGS owners agreeing to an 18% contractual rate of return on invested capital.

Epsilon Energy USA is the 100% owner of Epsilon Midstream, which owns a 35% undivided interest in the Auburn GGS, located in Susquehanna County, Pennsylvania, with partners Appalachia Midstream Services, LLC (43.875%) and Equinor Pipelines, LLC (21.125%).

The Anchor Shippers, consisting of Epsilon Energy USA, Equinor USA Onshore Properties, Inc., and Chesapeake Energy Corporation, dedicated approximately 18,000 mineral acres to the Auburn GGS for an initial term of 15 years under an operating agreement whereby the Auburn GGS owners receive a fixed percentage rate of return on the total capital invested in the construction of the system.

The gathering rate of the Auburn GGS is determined by a cost of service model whereby the Anchor Shippers dedicate acreage and reserves to the gas gathering system in exchange for the Auburn GGS owners agreeing to an 18% contractual rate of return on invested capital.

The term of this arrangement is 15 years commencing January 1, 2012 and expiring December 31, 2026.

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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 owners.

In January 2027, the Auburn GGS will transition to a

fixed gathering rate.

Revenues from the Auburn GGS are earned primarily from the Anchor Shippers.

Revenues are also earned from third-party customers of the system to transport gas from the wellhead to the compression facility, and then to the delivery meter at Tennessee Gas Pipeline.

The relative mix of Anchor Shipper gas and third-party gas is critical to the revenue and earnings of the Auburn GGS because the third-party gathering rate is only 25% of the Anchor Shipper rate.

Third-party shippers must pay the gathering rate of the originating gathering system plus 25% of the Auburn GGS gathering rate.

The purpose of the reduced rate is to attract additional volumes that require delivery to Tennessee Gas Pipeline when there is spare capacity at the Auburn compression facility, or the “Auburn CF”.

Throughput at the Auburn CF has declined from 100.1 Bcf in 2018 to 66.3 Bcf in 2022, a decrease of 34%.

However, Anchor Shipper gas as a percentage of total throughput has increased from 57% in 2018 to 71% in 2022.

As a result of this shift toward a higher percentage of Anchor Shipper gas, revenues and earnings for the gathering system have only declined 21% and 15%, respectively, from 2018 to 2022.

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.

Design capacity of the Auburn compression facility, or the Auburn CF, is approximately 330,000 Mcf per day.

At inception, the capacity of the Auburn CF was approximately 330,000 Mcf per day at a design suction pressure of 800 psig.

The design suction pressure was subsequently reduced to 550 psig in June 2020 at the request of the Anchor Shippers.

This request served to minimize throughput decline during a period of low pricing in which the drilling of new wells was undesirable.

Operating at the lower design suction pressure also has the benefit of reducing hydrate occurrences in the system which can pose an operational hazard.

The current system capacity of the Auburn CF at this lower design pressure is approximately 220,000 Mcf per day.

The facility capacity could be increased again, if required, by either adding compression units or increasing the design suction pressure.

The Auburn CF delivers processed natural gas into the Tennessee Gas Pipeline at the Shoemaker Dehy receipt meter.

The Auburn GGS is connected with the adjacent Rome GGS, which allows for the receipt of additional natural gas to maximize utilization of the Auburn CF and Tennessee Gas Pipeline meter capacity.

Revenues from the Auburn GGS are earned primarily from Anchor Shippers, Epsilon Energy USA, Equinor USA Onshore Properties, Inc.

and Chesapeake Energy Corporation.

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.

During the years ended December 31, 2022 and 2021, the Auburn GGS delivered 66.3 Bcf and 63.2 Bcf respectively, of natural gas, or 182 and 173 MMcf per day.

Revenues derived from Epsilon’s production which have been eliminated from gathering system revenues amounted to $1.5 million and $1.6 million, respectively, for the years ended December 31, 2022 and 2021.

Proved Reserves

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Oil and Other

Pennsylvania-Marcellus Shale

Proved developed producing

Proved undeveloped

Total Pennsylvania proved reserves

Oklahoma-Anadarko Basin

Proved developed producing

Proved undeveloped

Total Oklahoma proved reserves

Proved developed reserves

Proved undeveloped reserves

Total Proved Reserves at December 31, 2022

Changes in Total Proved Undeveloped Reserves

Proved undeveloped reserves at December 31, 2021

Revisions of previous estimates

Extensions and discoveries

Transfers to proved developed

Proved undeveloped reserves at December 31, 2022

Revisions to previous estimates for total proved undeveloped reserves for 2022 include reductions of 23,505 MMcfe related to changes to the previously adopted development plan, additions of 226 MMcfe related to commodity pricing, and reductions of 83 MMcfe related to well performance.

Transfers to proved developed relates to the development

of one well in Pennsylvania and three wells in Oklahoma.

We have not engaged in any exploration capital spending in 2022 or 2021.

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(Net development capital $2.5 million).

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.

Reserves of 5.4 Bcf for the 1 well with proved undeveloped reserves were reclassified as proved developed producing as this well was turned online in August 2022.

Additionally, 2 gross (0.02 net) wells were drilled in 2022, but not completed (development capital $0.1 million).

They were completed and turned online in January 2023.

● 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 4.6 Bcf for the 3 wells were reclassified as proved developed producing as these wells 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).

● In 2022 in Oklahoma, we drilled 2 gross (0.26 net) wells and completed 3 gross (0.7 net) wells.

(Net development capital $5.4 million).

Reserves of 2.9 Bcfe for the 3 wells were reclassified as proved developed producing as these wells were tuned online at various times beginning in March 2022 and going through October 2022.

One gross (0.11 net) well was drilled in 2022, but not completed.

It is scheduled to be completed in April 2023.

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

(Net development capital $3.0 million).

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

Our policies regarding internal controls over reserve estimates require reserves to be prepared by an independent engineering firm under the supervision of our Chief Executive Officer, and to be in compliance with generally accepted geologic, petroleum engineering and evaluation principles and definitions and guidelines established by the SEC.

Our policies regarding internal controls over reserve estimates require reserves to be prepared by an independent engineering firm under the supervision of our Chief Operating Officer, and to be in compliance with generally accepted geologic, petroleum engineering and evaluation principles and definitions and guidelines established by the SEC.

The corporate staff interacts with our internal petroleum engineers and geoscience professionals in each of our operating areas and with operating, accounting and marketing employees to obtain the necessary data for the reserves estimation process.

We provide our engineering firm with property interests, production, capital budgets, current operating costs, current production prices and other information.

This information is reviewed by our Chief Executive Officer and our Chief Operating Officer to ensure accuracy and completeness of the data prior to submission to our independent engineering firm.

Reserves are reviewed and approved internally by our Chief Executive Officer on a semi-annual basis.

Our Chief Executive Officer holds a Bachelor of Science degree in Chemical Engineering has studied Petroleum Engineering courses on a Masters Level and completed a Masters in Business Administration.

He has over 37 years of experience in various positions in the global natural gas and oil business, primarily holding positions in the areas of reservoir development strategy, property valuations, completions and production optimization.

He has also been managing the allocation of capital in natural gas and oil investments and appraising the values of those assets on a quarterly basis with Domain Energy Advisors since January 2005.

The reserve information in this report is based on estimates prepared by DeGolyer and MacNaughton, our independent engineering firm.

The person responsible for preparing the reserve report, Gregory Graves, is a Registered Professional Engineer (No.70734) in the State of Texas and a Senior Vice President of the firm.

Graves graduated from the University of Texas at Austin with a degree in Petroleum Engineering, and is a member of the Society of Petroleum Engineers and the Society of Petroleum Evaluation Engineers, and has prepared estimates of natural gas and oil reserves since joining DeGolyer and MacNaughton in 2006.

This information is reviewed by our Chief Operating Officer to ensure accuracy and completeness of the data prior to submission to our independent engineering firm.

Reserves are reviewed and approved internally by our Chief Operating Officer on a semi-annual basis.

Our Chief Operating Officer holds a Bachelor of Science degree in Petroleum Engineering and received a Master’s Degree of Business Administration.

He has over 30 years of experience in upstream exploration and production, and has managed all phases of drilling, completions, production and field operations.

The reserve information in this report is based on estimates prepared by DeGolyer and MacNaughton, our independent petroleum consultants.

Estimates of reserves were prepared by the use of appropriate geologic, petroleum engineering, and evaluation principles and techniques that are in accordance with the reserves definitions of Rules 4-10(a) (1)-(32) of Regulation S-X of the SEC and with practices generally recognized by the petroleum industry as presented in the publication of the Society of Petroleum Engineers entitled “Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information (revised June 2019) Approved by the SPE Board on 25 June 2019” and in Monograph 3 and Monograph 4 published by the Society of Petroleum Evaluation Engineers.

The method or combination of methods used in the analysis of each reservoir was tempered by experience with similar reservoirs, stage of development, quality and completeness of basic data, and production history.

For the evaluation of unconventional reservoirs, a performance-based methodology integrating the appropriate geology and petroleum engineering data was utilized for this report.

Performance-based methodology primarily includes

(1) production diagnostics, (2) decline-curve analysis, and (3) model-based analysis (if necessary, based on availability of data).

Production diagnostics include data quality control, identification of flow regimes, and characteristic well performance behavior.

These analyses were performed for all well groupings (or type-curve areas).

The person responsible for preparing the reserve report, Dilhan Ilk, is a Registered Professional Engineer (No.139334) in the State of Texas and a Senior Vice President of the firm.

Ilk graduated from Texas A&M University with a Doctor in Philosophy degree in Petroleum Engineering, is a member of the Society of Petroleum Engineers, and has in excess of 11 years of experience in oil and gas reservoir studies and reserves evaluations.

Marketing and Major Customers

Natural gas marketing is extremely competitive in northeast Pennsylvania because of the limited interstate transportation capacity and ample natural gas supply.

Natural gas marketing is competitive in northeast Pennsylvania because of the limited interstate transportation capacity and ample natural gas supply.

We do not currently own any firm transportation on interstate pipelines that would enable us to diversify our natural gas sales to downstream customers.

As a result, all of our Pennsylvania gas sales occur in Zone 4 of the Tennessee Gas Pipeline at the Shoemaker Dehy meter, which is the receipt point from the Auburn Compression Facility.

As a result, all of our Pennsylvania gas sales occur in Zone 4 of the Tennessee Gas Pipeline at the Shoemaker Dehy meter, which is the receipt point from the Auburn CF.

Epsilon uses a third-party service, ARM Energy Management LLC (“ARM”) for its natural gas marketing.

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For the year ended December 31, 2022, we sold natural gas through ARM to 26 unique customers.

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

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

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.

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

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Our asset in Pennsylvania has not yet reached the mature stage, but at some point, we may need to acquire and develop other producing assets to maintain our current level or to grow.

To this end, we have begun to acquire leases and to expand our holdings in Pennsylvania.

As a result of this geographic concentration, we may be disproportionately exposed to the effect of regional supply and demand factors, delays or interruptions of production from wells in this area caused by governmental regulation, processing or transportation capacity constraints, market limitations, weather events or interruption of the processing or transportation of crude oil or natural gas.

In the Marcellus Basin, we operate in a competitive environment for acquiring leases, developing reserves and marketing production.

In most instances, we are a substantially smaller organization than our competitors both in terms of our personnel as well as our financial capability.

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.

In our gas gathering activity in the Marcellus, the competition for customer shippers on our Auburn GGS is significant.

Although the Auburn GGS has three dedicated shippers (of which we are one), there is non-dedicated acreage within the footprint of the gathering system.

However, the Auburn GGS currently serves only one non-anchor shipper, and there is no guarantee that we will be able to attract other customers to the system.

Our Status as an Emerging Growth Company

We are an “emerging growth company,” as defined in the JOBS Act.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act”.

Certain specified reduced reporting and other regulatory requirements are available to public companies that are emerging growth companies.

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● an exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting required by Section 404 of the Sarbanes—Oxley Act of 2002;

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

● 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;

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● the last day of our fiscal year in which we have total annual gross revenues of $1.235 billion (as such amount is indexed for inflation every five years by the SEC to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest $1 million) or more;

● the last day of our fiscal year following the fifth anniversary of the date of our first sale of common equity securities under an effective Securities Act registration statement;

● the last day of our fiscal year following the fifth anniversary of the date of our first issuance of common equity securities under an effective Securities Act registration statement (December 31, 2019);

● the date on which we have, during the prior three-year period, issued more than $1 billion in non-convertible debt;

● the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission, or SEC, which means the market value of our common shares that is held by non-affiliates (or public float) exceeds $700 million as of the last day of our second fiscal quarter in our prior fiscal year.

● the date on which we are deemed to be a large accelerated filer under the rules of the SEC, which means the market value of our common shares that is held by non-affiliates (or public float) exceeds $700 million as of the last day of our second fiscal quarter in our prior fiscal year.

As of December 31, 2022, we had nine full-time employees (including executive officers) in Houston, Texas.

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.

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Legal Proceedings

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.

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 (“Middle District”).

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

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

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Chesapeake opposed.

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

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 motion for reconsideration of that decision, but the court denied the motion for reconsideration 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.

A briefing schedule was set and briefing closed October 14, 2022.

Oral argument was held in January 2023.

A decision on the appeal is not expected until mid-2023.

Epsilon re-filed a complaint against Chesapeake in the Middle District on May 9, 2022.

Epsilon generally asserts similar claims as in the previous suit, pursuing declaratory judgment claims regarding Chesapeake’s obligation to Epsilon to cooperate with Epsilon’s efforts in the Auburn Development and regarding Chesapeake’s obstruction of Epsilon’s efforts with the Pennsylvania Department of Environmental Protection permitting process but not based on specific well proposals.

Chesapeake filed a motion to stay pending a decision on the Third Circuit appeal, which was granted.

The matter is stayed pending a decision from the Third Circuit.

Environmental Regulation

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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

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If such effects were to occur, our development and production operations, as well as operations of our third party providers and customers, could be adversely affected.

To date, we have not developed a comprehensive plan to address potential impacts of climate change on our operations and there can be no assurance that any such impacts would not have an adverse effect on our financial condition and results of operations.

To date, we have not developed a comprehensive plan to address potential impacts of climate change on our operations and there can be no assurance that any such impacts would not have

an adverse effect on our financial condition and results of operations.

Attempts to address GHGs, as well as climate change more generally, have taken the form of local, state, national and international proposals.

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Simply, EPA has concluded that emissions of carbon dioxide, methane and other GHGs present an endangerment to public health and the environment.

For example, EPA adopted regulations that require Prevention of Significant Deterioration (“PSD”) construction under Title V operating permit reviews for GHG emissions from certain large stationary sources that constitute major sources of emissions.

For example, the EPA adopted regulations that require Prevention of Significant Deterioration (“PSD”) construction under Title V operating permit reviews for GHG emissions from certain large stationary sources that constitute major sources of emissions.

Facilities required to obtain PSD permits for their GHG emissions also will be required to meet “best available control technology” standards.

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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

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In 2014, the EPA issued an advanced notice of proposed rulemaking under the Toxic Substances Control Act of 1976 requesting comments related to disclosure for hydraulic fracturing chemicals.

The Department of the Interior had released final regulations governing hydraulic fracturing on federal and Native American oil and natural gas leases which require lessees to file for approval of well stimulation work before commencement of operations and require well operators to disclose the trade names and purposes of additives used in the fracturing fluids.

The Department of the Interior had released final regulations governing hydraulic fracturing on

federal and Native American oil and natural gas leases which require lessees to file for approval of well stimulation work before commencement of operations and require well operators to disclose the trade names and purposes of additives used in the fracturing fluids.

However, in December 2017, the Bureau of Land Management published a final rule rescinding the March 26, 2015 rule (“BLM 2015 Rule”), entitled “Natural gas and oil;

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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;

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

We had approximately 675 shareholders of record as of February 21, 2023.

On February 24, 2022, the Board of Directors approved a quarterly cash dividend of $0.0625 per common share.

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.

Epsilon made aggregate quarterly distributions of $5.9 million ($0.25 per share) during the year ended December 31, 2022.

Securities Authorized for Issuance under Equity Incentive Plans.

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As of that date, we had 449,131 common shares granted under the 2020 Plan.

We also had, as of December 31, 2021, 56,002 unvested shares outstanding under the predecessor plan, the 2017 Stock Compensation Plan.

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

No more shares are authorized to be issued under our predecessor plan.

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:

6 unchanged sentences

December 31, 2021

Balance non-vested Restricted Stock at beginning of period

Balance non-vested Restricted Stock at end of period

Balance non-vested Performance Shares at beginning of period

Balance non-vested Performance Shares at end of period

Recent Developments

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