What changed in this filing

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Item 1A. Risk Factors

2023-03-24 compared with 2022-03-24 · 65 added, 70 removed, 269 unchanged (33% of the section changed)

18 unchanged sentences

We cannot assure you that we will be able to locate and continue to locate satisfactory properties for acquisition or participation.

Moreover, if we do identify such acquisitions or participations, we may determine that current markets,

terms of acquisition and participation or pricing conditions make such acquisitions or participations uneconomic.

Moreover, if we do identify such acquisitions or participations, we may determine that current markets, terms of acquisition and participation or pricing conditions make such acquisitions or participations uneconomic.

We cannot assure you that we will discover or acquire further commercial quantities of oil and natural gas.

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These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions.

While diligent well supervision and effective maintenance operations can contribute to maximizing production rates over time, production delays and declines from normal field operating conditions cannot be eliminated and can be expected to adversely affect revenue and cash flow levels to varying degrees.

While diligent well supervision and effective maintenance operations can contribute to maximizing production rates over time, production

delays and declines from normal field operating conditions cannot be eliminated and can be expected to adversely affect revenue and cash flow levels to varying degrees.

Oil and natural gas exploration, development and production operations are subject to all the risks and hazards typically associated with such operations, including hazards such as fire, explosion, blowouts, cratering, sour gas releases and spills, each of which could result in substantial damage to oil and natural gas wells, production facilities, other property and the environment or in personal injury.

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Losses resulting from the occurrence of any of these risks could have a material adverse effect on our future results of operations, liquidity and financial condition.

Our proved reserve estimates may be inaccurate, and future net cash flows as well as our ability to replace any reserves are uncertain.

Our reserve estimates may be inaccurate, and future net cash flows as well as our ability to replace any reserves are uncertain.

There are numerous uncertainties inherent in estimating quantities of oil and natural gas reserves and cash flows to be derived thereof, including many factors beyond our control.

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Our actual production, revenues, taxes and development and operating expenditures with respect to our reserves will vary from estimates thereof and such variations could be material.

In accordance with applicable securities laws, the technical report on our oil and natural gas reserves prepared by DeGolyer and MacNaughton, independent petroleum consultants, as of December 31, 2021 and 2020, or the DeGolyer Reserve Reports, used SEC guideline prices and cost estimates in calculating net cash flows from oil and natural gas reserve quantities included within the report.

In accordance with applicable securities laws, the technical report on our oil and natural gas reserves prepared by DeGolyer and MacNaughton, independent petroleum consultants, as of December 31, 2022 and 2021, or the DeGolyer Reserve Report, used SEC guideline prices and cost estimates in calculating net cash flows from oil and natural gas reserve quantities included within the report.

Actual future net revenue will be affected by other factors such as actual commodity prices, production levels, supply and demand for oil and natural gas, curtailments or increases in consumption by oil and natural gas purchasers, changes in governmental regulation or taxation and the impact of inflation on costs.

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There can be no assurance that our future exploration and development efforts will result in the discovery and development of additional commercial accumulations of oil and natural gas.

Risks Related to Stage of Development and Capital Resources

Currently, our activity is highly concentrated to one product in one area.

Although we are attempting to expand our operations to other areas with multiple products, we may not be successful in these other areas.

An investment in us is subject to certain risks.

There are numerous factors that may affect the success of our business that are beyond our control including local, national and international economic and political conditions.

Our business involves a high degree of risk, which a combination of experience, knowledge and careful evaluation may not overcome.

Through December 31, 2021, our primary source of revenue originated from natural gas production and gathering system revenues in the state of Pennsylvania.

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 and Oklahoma.

Our future depends on being able to successfully fund and develop these assets.

There can be no assurance that our business will be successful or that profitability will continue or that we will discover additional commercial quantities of crude oil or natural gas.

Risks Related to Stage of Development, Structure and Capital Resources

If there is a sustained economic downturn or recession in the United States or globally, natural gas and oil prices may fall and may become and remain depressed for a long period of time, which may adversely affect our results of operations.

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Depending on future exploration and development plans, we may require additional equity and/or debt financing that may not be available or, if available, may not be available on favorable terms.

Neither our articles nor our by-laws limit the amount of indebtedness that we may incur.

Neither our articles of incorporation nor our by-laws limit the amount of indebtedness that we may incur.

The level of our indebtedness, from time to time, could impair our ability to obtain additional financing in the future on a timely basis to take advantage of business opportunities that may arise.

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Our operations involve utilizing the latest drilling and completion techniques in order to maximize cumulative recoveries and generate high returns.

However, high returns are not guaranteed, and the results of drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production.

Newer or emerging formations and areas have limited or no production history and, consequently, a less predictable future of drilling results in these areas.

Ultimately, the success of drilling and completion techniques can only be evaluated as more wells are drilled and production profiles are established over a sufficiently long time period.

If drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems and limited takeaway capacity or otherwise, or if crude oil and natural gas prices decline, the return on our investment in these areas may not be as attractive as anticipated.

Further, as a result of less than desirable results in developments we could incur material write-downs of our oil and natural gas properties and the value of undeveloped acreage could decline in the future.

as anticipated.

Further, less than anticipated results in developments could incur material write-downs of our oil and natural gas properties and the value of undeveloped acreage could decline in the future.

Extensive government legislation and regulatory initiatives could increase costs and impose burdensome operating restrictions that may cause operational delays.

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Any federal or state legislative or regulatory changes with respect to hydraulic fracturing could cause us to incur substantial compliance costs or result in operational delays, and the consequences of any failure to comply by us or our third-party operating partners could have a material adverse effect on our financial condition and results of operations.

Our corporate structure could result in incremental tax burden in certain circumstances.

Epsilon Energy Ltd.

is an Alberta company.

Epsilon Energy USA Inc.

(Ohio corporation) may be a U.S.

real property holding corporation (a “USRPHC”) for U.S.

federal income tax purposes if it is determined, at any time, that the fair market value of its assets that consist of “United States real property interests,” as defined in the Internal Revenue Code, and applicable Treasury regulations, constitute at least 50% of the combined fair market value of our real estate interests and other business assets.

If Epsilon Energy USA Inc.

were a USRPHC, then Epsilon Energy Ltd.’s investment in Epsilon Energy USA Inc.

would be a United States Real Property Interest (USRPI) for US federal tax purposes.

As a result, the Foreign Investment in Real Property Tax Act, or “FIRPTA,” would require Epsilon Energy Ltd.

federal income tax at the corporate income tax rates on capital gain distributions made by Epsilon Energy USA Inc.

to Epsilon Energy Ltd.

Distributions made out of earnings and profits are not expected to be subject to the FIRPTA tax but would be subject to U.S.

withholding tax.

Our operations are currently geographically concentrated and therefore subject to regional economic, regulatory and capacity risks.

Approximately 93% and 97% of our production during fiscal 2021 and 2020, respectively was derived from our properties in the Marcellus region of 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.

Additionally, we may be exposed to additional risks, such as changes in field-wide rules and regulations that could cause us to permanently or temporarily shut-in many or all of our wells within the Marcellus.

Approximately 91% and 93% of our production during fiscal 2022 and 2021, respectively was derived from our properties in the Marcellus Shale region of 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.

Delays in business operations may reduce cash flows and subject us to credit risks.

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Because each of these firms may have different evaluation methods and approaches, these initial assessments may differ significantly from the assessments of the firm that we use.

Any such instance may offset the return on and value of the common shares.

We depend on third-party operators and our key personnel, and competition for experienced, technical personnel may negatively affect our operations.

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The objectives and strategy of those operators may not always be consistent with ours, and we have a limited ability to exercise influence over, and control the risks associated with, operations of these properties.

The failure of an operator of our wells to adequately perform operations, an operator’s breach of the applicable agreements or an operator’s failure to act in ways that are in our best interests could reduce our production and revenues from our conventional assets or could increase costs or create liability for the operator’s failure to properly maintain the well and facilities and to adhere to applicable safety and environmental standards.

The failure of an operator of our wells to adequately perform operations, an operator’s breach of the applicable agreements or an operator’s failure to act in ways that are in our best interests could reduce our production and revenues from our assets or could increase costs or create liability for the operator’s failure to properly maintain the well and facilities and to adhere to applicable safety and environmental standards.

In addition to the operator, our success will depend in large measure on certain key personnel.

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Certain of our directors and officers are also directors of other companies and as such may, in certain circumstances, have a conflict of interest requiring them to abstain from certain decisions.

Conflicts, if any, will be subject to the procedures and remedies of the Conflicts Committee.

Conflicts, if any, will be subject to the procedures and remedies of the Conflicts Committee of our board of directors.

Our leasehold interests are subject to termination or expiration under certain conditions.

28 unchanged sentences

There is substantial risk that commodity prices may decline in the future, although it is not possible to predict the time or extent of such decline.

Volatile oil and natural gas prices make it difficult to estimate the value of producing properties for acquisition and often cause disruption in the market for oil and natural gas producing properties, as buyers and sellers have difficulty

agreeing on such value.

Price volatility also makes it difficult to budget for and project the return on acquisitions and development and exploitation projects.

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Some of our counterparties may be highly leveraged and subject to their own operating and regulatory risks.

Despite our analysis, we may experience financial losses in our dealings with these and other parties with whom we enter into transactions as a normal part of our business activities.

Despite our analysis, we may experience financial losses in our dealings with these and other parties with whom we enter into

transactions as a normal part of our business activities.

Any nonpayment or nonperformance by our counterparties could have a material adverse impact on our business, financial condition and results of operations.

4 unchanged sentences

Our ability to market our natural gas may depend upon our ability to acquire space on pipelines that deliver crude oil and natural gas to commercial markets.

This risk is somewhat mitigated by our 35% ownership of a gathering system in the Marcellus in Pennsylvania.

This risk is somewhat mitigated by our 35% ownership of a gathering system in the Marcellus Shale in Pennsylvania.

We may also be affected by extensive government regulation relating to price, taxes, royalties, land tenure, allowable production, and many other aspects of the oil and natural gas business.

If we are unable to successfully compete with the large number of oil and natural gas producers in our industry, we may not be able to achieve profitable operations.

Oil and natural gas exploration is intensely competitive in all its phases and involves a high degree of risk.

We compete with numerous other participants in the search for, and the acquisition of, oil and natural gas properties and in the marketing of oil and natural gas, as well as, for the hiring of skilled industry personnel, contractors and equipment.

Our competitors include oil and natural gas companies that have substantially greater financial resources, staff and facilities than we do.

Our ability to increase reserves in the future will depend not only on our ability to explore and develop our present properties, but also on our ability to select and acquire suitable producing properties or prospects for exploratory drilling.

Competitive factors in the distribution and marketing of oil and natural gas include price and methods and reliability of delivery.

Competition may also be presented by alternate fuel sources.

Investor sentiment towards climate change, fossil fuels, and sustainability could adversely affect our business and our share price.

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The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities to governments and third parties and may require us to incur costs to remedy such discharge.

Although we believe that we are in material compliance with current applicable environmental regulations, we cannot assure you that environmental laws will not result in a curtailment of production or a material increase in the costs of production, development or exploration activities or otherwise adversely affect our financial condition, results of operations or prospects.

Although we believe that we are in material compliance with current applicable environmental regulations, we cannot assure you that environmental laws will not result in a curtailment

of production or a material increase in the costs of production, development or exploration activities or otherwise adversely affect our financial condition, results of operations or prospects.

We must also conduct our operations in accordance with various laws and regulations concerning occupational safety and health.

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However, since such laws and regulations are frequently changed, we are unable to predict the future effect of these laws and regulations.

Management continues to actively monitor 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 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.

To date, the COVID-19 pandemic has had little direct effect on the Company or its financial condition.

Risks Related to Internal Controls

For as long as we are an “emerging growth company,” we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to some other public companies.

As an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements.

As an “emerging growth company” as defined in the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements.

We are an emerging growth company until the earliest of:

● the last day of the fiscal year during which we have total annual gross revenues of $1.235 billion or more;

● the last day of the fiscal year following the fifth anniversary of our registration on February 14, 2019;

● the last day of the 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 previous 3-year period, issued more than $1 billion in non-convertible debt;

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● comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis);

● submit certain executive compensation matters to shareholders parachute provisions (requiring a non-binding shareholder vote to approve golden parachute arrangements for certain executive advisory votes pursuant to the “say on frequency” and “say on pay” provisions (requiring a non-binding shareholder vote to approve compensation of certain executive officers) and the “say on golden officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010;

● include detailed compensation discussion and analysis in our filings under the Exchange Act and instead may provide a reduced level of disclosure concerning executive compensation.

● submit certain executive compensation matters to shareholder approval (requiring a non-binding shareholder vote to approve golden parachute arrangements in connection with mergers and certain other business combinations, and advisory votes on executive compensation pursuant to the “say on frequency” and “say on pay” provisions under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010;

● include detailed compensation discussion and analysis in our filings under the Securities Exchange Act of 1934 (the “Exchange Act”) and instead may provide a reduced level of disclosure concerning executive compensation.

In addition, the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period for complying with new or revised accounting standards.

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As we grow, we may be subject to growth-related risks including capacity constraints and pressure on our internal systems and controls.

Our ability to manage growth effectively will require us to continue to implement and improve our operational and financial systems and to expend, train and manage our employee base.

Our ability to manage growth effectively will require us to continue to implement and improve our operational and financial systems and to train and manage our employee base.

We must maintain effective disclosure controls and procedures.

We must also maintain effective internal controls over financial reporting or, at the appropriate time, our independent auditors will be unwilling or unable to provide us with an unqualified report on the effectiveness of our internal controls over financial reporting as required by Section 404(b) of the Sarbanes-Oxley Act.

If we fail to maintain effective controls, investors may lose confidence in our operating results, the price of our common shares could decline and we may be subject to litigation or regulatory enforcement actions.

Risks Related to Gathering System

Because of the natural decline in production from existing wells, our success depends on the Anchor Shippers’ economically developing the remaining Marcellus reserves.

Because of the natural decline in production from existing wells, our success depends on the Anchor Shippers’ economically developing the remaining Marcellus Shale reserves.

Our natural gas gathering system is dependent upon the level of production from natural gas wells, from which production will naturally decline over time.

In order to maintain or increase throughput levels on our gathering system and compression facility, we must continually obtain new supplies.

In order to maintain or increase throughput levels on our gathering system and compression facility, we must continually develop reserves within the Auburn GGS boundary or obtain new supplies external to the Auburn GGS boundary.

Developing reserves within the system boundary is the priority as external natural gas volumes have a contractual gathering rate that is 25% of the Anchor Shipper rate.

The primary factors affecting our ability to obtain new supplies of natural gas is the level of successful drilling activity from the Anchor Shippers, of which Epsilon is one, as well as our ability to compete for volumes from successful new wells drilled by third parties proximate to our system.

If we are not able to obtain new supplies of natural gas to replace the natural decline in volumes from existing wells, throughput on our pipelines and the utilization rates of our compression facility would decline, which could have an adverse effect on our business, results of operations, financial position and cash flows.

The gathering rate on the Auburn Gas Gathering System is subject to a cost of service model which could result in a non-competitive gathering rate and reduced throughput.

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

Although gross throughput at the Auburn CF has declined from 2018-2022, the share of Anchor Shipper gas has increased.

The gathering rate on the Auburn GGS is subject to a cost-of-service model which could result in a non-competitive gathering rate and reduced throughput.

The gathering rate charged by the Auburn GGS is determined by a cost-of-service model whereby the Anchor Shippers in the system, of which Epsilon is one, dedicate acreage and reserves to the gas gathering system in exchange for the Auburn GGS owners agreeing to a contractual rate of return on invested capital.

The term of this arrangement is 15 years commencing in 2012 and expiring in 2026 with an 18% rate of return.

1 unchanged sentence

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.

All else being equal, if total throughput on the system is lower than forecasted, the gathering rate will increase.

If the gathering rate on the Auburn GGS increases, it could render drilling uneconomic for shippers or result in shippers allocating capital to more competitive areas which could result in further increases in the gathering rate.

Although the Anchor Shippers have dedicated their reserves to the Auburn GGS, they are under no obligation to develop reserves if they determine that development is uneconomic.

Because of the large supply of gas, and limited availability of transportation out of the Marcellus area, our gas is subject to a price differential.

In January 2027, the Auburn GGS will transition to a fixed gathering rate.

Under the cost-of-service model, if total throughput on the system is lower than forecasted in the prior year, the gathering rate will increase.

The 2022 model forecasts 276 Bcf throughput from 2022-2026 (approximately 69% of current capacity at the 550 psig design suction pressure) which resulted in a $0.40 gathering rate.

If the gathering rate on the Auburn GGS increases, it could result in reduced or deferred development in the Auburn GGS.

In one unlikely scenario, if no further development activity beyond work in progress occurs in the Auburn GGS, forecast throughput from 2022-2026 is expected to decline to 205 Bcf (approximately 52% of current capacity at the 550 psig design suction pressure) resulting in a still acceptable $0.62 gathering rate.

Although the Anchor Shippers have dedicated their reserves to the Auburn GGS, they are under no obligation to develop the reserves.

Because of the large supply of gas, and limited availability of transportation out of the Marcellus Shale area, our gas is subject to a price differential.

Differential is an energy industry term that refers to the discount or premium received for the sale of a petroleum product at a specific location relative to a nationally recognized sales hub.

In the Marcellus, natural gas is significantly discounted to Henry Hub and the size of the differential can be volatile.

In the Marcellus Shale, natural gas is significantly discounted to Henry Hub and the size of the differential can be volatile.

Many factors influence the size and duration of differentials including local supply / demand imbalances, seasonal fluctuations in demand, transportation availability and cost, as well as the regulatory environment as it pertains to constructing new transportation pipelines.

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Although the Anchor Shippers have dedicated their acreage and reserves to the Auburn GGS, the Auburn GGS may not be chosen by other producers in these areas to gather and compress the natural gas extracted.

We compete with

other companies, including co-owners of the Auburn gas gathering system who operate other systems, for any such production from non-anchor shippers on the basis of many factors, including but not limited to geographic proximity to the production, costs of connection, available capacity, rates and access to markets.

We compete with other companies, including co-owners of the Auburn GGS who operate other systems, for any such production from non-Anchor Shippers on the basis of many factors, including but not limited to geographic proximity to the production, costs of connection, available capacity, rates and access to markets.

Competition in natural gas gathering is based in large part on existing assets, reputation, efficiency, system reliability, gathering system capacity and pricing arrangements.

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Further, during any such bankruptcy proceeding, prior to assumption, rejection or renegotiation of such contracts, the bankruptcy court may temporarily authorize the payment of value for our services less than contractually required, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

If we fail to adequately assess the creditworthiness of existing or future customers and counterparties or otherwise do not take or are unable to take sufficient mitigating actions, including obtaining sufficient collateral, deterioration in their creditworthiness, and any resulting increase in nonpayment and/or nonperformance by them could cause us to write down or write off accounts receivable.

down or write off accounts receivable.

Such write-downs or write-offs could negatively affect our operating results in the periods in which they occur, and, if significant, could have a material adverse effect on our business, results of operations, cash flows, and financial condition.

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This volatility and discount has adversely impacted reserve development in the past, and could do so again in the future.

A slowing pace or complete halt to the development of reserves will impact our financial results, cash flows, access to capital and ability to maintain our gas gathering system.

A slowing pace relative to the cost of service model forecast or complete halt to the development of Anchor Shipper reserves will impact our financial results, cash flows, and access to capital.

The financial condition of our natural gas gathering businesses is dependent on the continued availability of natural gas supplies and demand for those supplies in the markets we serve.

Our ability to maintain and expand our natural gas gathering businesses depends on the level of drilling and production by Anchor Shippers and third parties in our gathering area.

Production from existing wells with access to our

gathering systems will naturally decline over time.

Our ability to expand our natural gas gathering business primarily depends on the level of drilling and production by the Anchor Shippers.

Production from existing wells with access to our gathering systems will naturally decline over time.

The amount of natural gas reserves underlying these existing wells may also be less than anticipated, and the rate at which production from these reserves declines may be greater than anticipated.

We do not obtain independent evaluations of the other Anchor Shippers or third-party natural gas reserves connected to our systems and compression facilities.

Accordingly, we do not have independent estimates of total reserves dedicated to our systems or the anticipated life of such reserves.

We do not obtain independent evaluations of the third-party natural gas reserves flowing into our systems and compression facilities.

Demand for our services is dependent on the demand for gas in the markets we serve.

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Any of these risks could result in loss of human life, personal injuries, significant damage to property, environmental pollution, impairment of our operations and substantial financial losses to us.

In accordance with customary industry practice, we maintain insurance against some, but not all, of these risks and losses, and only at levels we believe to be appropriate.

In accordance with customary industry practice, we maintain insurance against some, but not all, of these risks and losses, and only at levels we believe

to be appropriate.

The location of certain segments of our facilities in or near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks.

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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 1A. Risk Factors