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Item 1A. Risk Factors

2024-03-21 compared with 2023-03-24 · 59 added, 44 removed, 290 unchanged (26% of the section changed)

6 unchanged sentences

Historically, the markets for oil and natural gas have been volatile, and this volatility may continue in the future.

The volatility of the energy markets generally make it extremely difficult to predict future oil and natural gas price movements.

Also, prices for crude oil and prices for natural gas do not necessarily move in tandem.

The volatility of the energy markets generally makes it extremely difficult to predict future oil and natural gas price movements.

Also, prices for oil and prices for natural gas do not necessarily move in tandem.

Declines in oil or natural gas prices would not only reduce revenue but could also reduce the amount of oil and natural gas that can be economically produced and therefore potentially lower natural gas and oil reserve quantities.

If the oil and natural gas industry continues to experience low prices, we may, among other things, be unable to meet all of our financial obligations or make planned expenditures.

Substantial and extended declines in oil and natural gas prices may result in impairments of proved natural gas and oil properties or undeveloped acreage and may materially and adversely affect our future business, financial condition, cash flows, results of operations, liquidity or ability to finance planned capital expenditures.

If the oil and natural gas industry continues to experience low prices, we may, among other things, be unable to meet all our financial obligations or make planned expenditures.

cash flows, results of operations, liquidity or ability to finance planned capital expenditures.

To the extent commodity prices received from production are insufficient to fund planned capital expenditures, spending will be required to be reduced, assets could be sold or funds may be borrowed to fund any such shortfall.

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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.

4 unchanged sentences

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.

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

The reserve and associated cash flow information set forth herein represents estimates only.

In general, estimates of economically recoverable oil and natural gas reserves and the future net cash flows thereof are based upon a number of variable factors and assumptions such as historical oil and natural gas prices, production levels, capital expenditures, operating and development costs, the effects of regulation, the accuracy and reliability of the underlying engineering and geologic data, and the availability of funds;

In general, estimates of economically recoverable oil and natural gas reserves and the future net cash flows therefrom are based upon a number of variable factors and assumptions such as historical oil and natural gas prices, production levels, capital expenditures, operating and development costs, the effects of regulation, the accuracy and reliability of the underlying engineering and geologic data, and the availability of funds;

all of which may vary from actual results.

For those reasons, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues expected thereof and prepared by different engineers, or by the same engineers at different times, may vary.

For those reasons, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom and prepared by different engineers, or by the same engineers at different times, may vary.

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.

1 unchanged sentence

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.

Actual production and revenues derived thereof will vary from the estimates contained in the DeGolyer Reserve Report, and such variations could be material.

Actual production and revenues derived therefrom will vary from the estimates contained in the DeGolyer Reserve Report, and such variations could be material.

The DeGolyer Reserve Report is based in part on the assumed success of activities that we intend to undertake in future years.

49 unchanged sentences

Future equity transactions could result in dilution to existing stockholders.

We may make future acquisitions or enter into financing or other transactions involving the issuance of securities or the sale of a portion or all of an interest in one or more of our projects, all of which may be dilutive to existing security holders.

Competition in the natural gas and oil industry is intense, which may hinder our ability to contract for drilling equipment, and we may not be able to control the scheduling and activities of contracted drilling equipment.

We may make future acquisitions or enter into financing or other transactions involving the issuance of securities, which may be dilutive to existing security holders.

Competition in the natural gas and oil industry is intense, which may hinder our ability, and the ability of our third-party operating partners, to contract for drilling equipment, and we may not be able to control the scheduling and activities of contracted drilling equipment.

Oil and natural gas exploration and development activities are dependent on the availability of drilling and related equipment in the particular areas where such activities will be conducted.

Demand for such limited equipment or access restrictions may affect the availability of such equipment to us and may delay exploration and development activities.

Demand for such limited equipment or access restrictions may affect the availability of such equipment to us and our third-party operating partners and may delay exploration and development activities.

Past industry conditions have led to periods of extreme shortages of drilling equipment in certain areas of the United States.

2 unchanged sentences

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

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, 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.

Hydraulic fracturing, which involves the injection of water, sand and chemicals under pressure into deep rock formations to stimulate crude oil or natural gas production, is often used in the completion of unconventional crude oil and natural gas wells.

Hydraulic fracturing, which involves the injection of water, sand and chemicals under pressure into deep rock formations to stimulate oil or natural gas production, is often used in the completion of unconventional oil and natural gas wells.

Currently, hydraulic fracturing is primarily regulated in the United States at the state level, which generally focuses on regulation of well design, pressure testing, and other operating practices.

13 unchanged sentences

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.

7 unchanged sentences

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

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.

Approximately 77% and 88% of our revenue during fiscal years 2023 and 2022, respectively, was derived from natural gas production and gathering system revenues in the state of Pennsylvania.

As a result of prolonged weak pricing in Zone 4 of the Tennessee Gas Pipeline and, therefore, a reduced pace of development, Epsilon’s management is striving to allocate capital to additional upstream opportunities outside of the Marcellus Shale.

More specifically, the Company has allocated capital to the Permian Basin through its investments in New Mexico and Texas.

Epsilon’s management expects to continue to seek opportunities outside of the Marcellus Shale in order to provide the Company the flexibility to respond to market conditions by allocating capital across multiple basins and commodities.

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 Shale.

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

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The loss of the services of such key personnel could have a material adverse effect on us.

We do not have key-person insurance in effect for management.

We do not have key-person insurance in effect

for management.

The contributions of these individuals to our immediate operations are likely to be of central importance.

In addition, the competition for qualified personnel in the oil and natural gas industry is intense, and there can be no assurance that we will be able to continue to attract and retain all personnel necessary for the development and operation of our business.

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.

Certain of our directors 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 of our board of directors.

15 unchanged sentences

Risks Related to Commodity Prices, Hedging and Marketing

Natural gas and oil prices fluctuate widely, and low prices for an extended period would likely have a material adverse impact on our business.

Natural gas and oil prices fluctuate widely, and low prices for an extended period would likely have a material adverse effect on our business.

Our revenues, profitability and future growth and the carrying value of our oil and natural gas properties are substantially dependent on prevailing prices of oil and natural gas.

10 unchanged sentences

There can be no assurance that recent commodity prices can be sustained over the life of our operations.

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.

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.

7 unchanged sentences

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.

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

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 effect on our business, financial condition and results of operations.

Additionally, we may, due to circumstances beyond our control, be put in a position of over-hedging.

23 unchanged sentences

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.

1 unchanged sentence

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

Risks Related to Cybersecurity

We may be subject to interruptions or failures in our information technology systems.

We rely on sophisticated information technology systems and infrastructure to support our business, including process control technology.

Any of these systems are susceptible to outages due to fire, floods, power loss, telecommunications failures, usage errors by employees, computer viruses, cyberattacks or other security breaches or similar events.

The failure of any of our information technology systems may cause disruptions in our operations, which could adversely affect our revenue and profitability.

We are subject to cybersecurity risks.

A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss.

We depend on information technology systems that we manage, and others that are managed by third-party service and equipment providers, to conduct our day-to-day operations, including critical systems, and these systems are subject to risks associated with cyber incidents or attacks, especially originating from countries such as China, Russia, Iran, and North Korea as broadly reported in the media.

Our technology systems and networks, and those of our vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches.

A cyber incident could negatively impact the Company in a number of ways, including but not limited to:

(i) remediation costs, such as liability for stolen assets or information and repairs of system damage;

(ii) increased cybersecurity protection costs, which may include the costs of making organizational changes, deploying additional personnel and protection technologies, training employees, and engaging third-party experts and consultants;

(iii) lost revenue resulting from downtime, operational disruptions, the unauthorized use of proprietary information or the failure to retain or attract customers following an attack;

(iv) litigation and legal risks, including regulatory actions by state and federal governmental authorities and non-U.S.

authorities and related investigation costs;

(v) increased insurance premiums;

(vi) reputational

damage that adversely affects customer or investor confidence;

(vii) the loss, theft, corruption or unauthorized release of intellectual property, proprietary information, customer and vendor data or other critical data and (viii) damage to the Company’s competitiveness, stock price, and long-term stockholder value.

Certain cyber incidents, such as surveillance, may remain undetected for an extended period of time.

As the sophistication of cyber incidents continues to evolve, we will likely be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents.

Our insurance coverage for cyberattacks may not be sufficient to cover all the losses we may experience as a result of such cyberattacks.

Risks Related to Internal Controls

1 unchanged sentence

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 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;

● the date on which we are deemed a “large accelerated filer” as defined under the federal securities laws.

We will cease being an emerging growth company not later than December 31, 2024.

For so long as we remain an “emerging growth company,” we will not be required to:

● have an auditor report on our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;

● have an auditor report on our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002 (provided that this exemption will continue to apply for so long as we are a “non-accelerated filer”);

● 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);

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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, once we become subject to those requirements.

the Sarbanes-Oxley Act, once we become subject to those requirements.

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.

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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 Shale, 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 pricing 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.

9 unchanged sentences

A significant increase in competition in the gas gathering industry could have a material adverse effect on our financial position, results of operations and cash flows.

Several of our assets have been in service for many years may require significant expenditures to maintain them.

Several of our assets that have been in service for many years may require significant expenditures to maintain them.

As a result, our maintenance or repair costs may increase in the future.

10 unchanged sentences

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.

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.

3 unchanged sentences

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

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.

A slowing pace of 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.

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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.

1 unchanged sentence

Accidents or other operating risks could further result in loss of service available to our customers.

UNRESOLVED STAFF COMMENTS.

The information required by Item 2 is contained in ‘ ‘Item 1.

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