Epsilon Energy corrects Q2 adjusted net income to $0.03 loss per share
Epsilon Energy corrected its Q2FY26 adjusted net income to a loss of $0.03 per share after reclassifying asset sale proceeds. Revenue rose 57% YoY to $18.3 million, but adjusted EBITDA fell 21% to $5.8 million. The company provided full-year guidance for the first time, targeting 18% production growth.
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Epsilon Energy Ltd. (NASDAQ: EPSN) corrected its second quarter FY26 financial results, revising its adjusted net income to a loss of $0.03 per share, down from the previously reported earnings of $0.05. The company attributed the correction to the recategorization of sale proceeds from asset sales, which had no basis, from other income to gain on asset sales to align with its definition of adjusted net income. Reported GAAP earnings in the Form 10-Q remain unaffected by this change.
Total revenue for the quarter rose 57% year-on-year to $18.3 million, driven by higher realized prices for oil and natural gas liquids. However, adjusted EBITDA contracted 21% YoY to $5.8 million, reflecting a sharp decline in gas revenues despite price tailwinds in other commodities. The company ended the quarter with total debt of $40.5 million and cash plus short-term investments of $11.7 million.
Operational Highlights
Total net revenue interest (NRI) production declined 13% quarter-on-quarter to 3,088 MMcfe but remained broadly flat year-on-year. The decline was primarily due to planned maintenance and field optimization activities.
- Gas: Production fell 16% QoQ to 2,082 MMcf. Marcellus production dropped 16% due to a planned suction pressure increase in the Auburn Gas Gathering System.
- Oil: Output decreased 8% QoQ to 126 MBbl. Permian production remained flat as new well volumes came online.
- NGL: Volumes were stable at 42 MBbl, down 1% QoQ.
Financial Performance
Revenue composition shifted significantly toward liquids. Oil revenue surged 332% YoY to $11.8 million, while NGL revenue jumped 856% YoY to $1.4 million. Conversely, gas revenue fell 45% YoY to $3.8 million, impacted by lower volumes and a 28% drop in realized gas prices to $1.81/Mcf.
| Metric: | Q2FY26 | Q1FY26 | Q2FY25 | QoQ Change: | YoY Change: |
|---|---|---|---|---|---|
| Total Revenue ($M): | 18.3 | 25.6 | 11.6 | -29% | +57% |
| Adj. EBITDA ($M): | 5.8 | 13.4 | 7.4 | -57% | -21% |
| Adj. Net Income ($M): | -0.8 | 8.7 | 2.0 | -109% | -142% |
| Capex ($M): | 8.5 | 4.9 | 2.7 | +74% | +214% |
Capital expenditures rose 74% QoQ to $8.5 million as the company advanced development activities across its core basins. The company completed two Niobrara DUCs in the Powder River Basin and participated in five Marcellus wells expected to come online in December.
What the Numbers Show
The correction reveals that the previously reported profitability was driven by non-operational items. The reclassification of the $4.2 million gain on asset sales from other income to a specific gain line item removed it from the adjusted net income calculation, turning a reported profit into a loss. This highlights the sensitivity of the company's adjusted metrics to one-time asset disposals rather than core operational cash flow generation.
Guidance and Outlook
Epsilon issued full-year guidance, signaling confidence in its operational momentum. Management expects full-year FY26 total production of 13,740–14,280 MMcfe, representing 18% YoY growth at the midpoint. Oil production is guided at 640–670 MBbl, a 194% YoY increase at the midpoint.
Full-year capital expenditure guidance stands at $42.0–$47.0 million. Approximately 35% of 2026 capital spending is expected to impact results only in Q4, while another 24% will not impact 2026 results, deferring value creation to FY27.
The company maintains a hedge book covering significant portions of its expected production through FY27, with oil swaps averaging $64.32/Bbl and gas swaps averaging $3.90/MMBtu for the remainder of FY26.
How will the significant QoQ decline in adjusted EBITDA and the shift to a net loss impact Epsilon Energy's debt covenants and leverage ratios given its current $40.5 million debt load?
With 59% of FY26 capital expenditures deferred to impact results in late 2026 or FY27, what is the projected cash flow runway for the company before new production volumes from these investments come online?
Given the 16% drop in Marcellus gas production due to infrastructure maintenance, how might this temporary constraint affect the company's ability to meet its aggressive 18% YoY full-year production growth guidance?
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