Breaking Down Epsilon Energy Ltd. (EPSN) Financial Health: Key Insights for Investors

You're looking at Epsilon Energy Ltd. (EPSN) right now, and the third-quarter 2025 numbers present a classic energy-sector puzzle: strong profitability against a revenue headwind. The headline is that the company's net income surged 193% year-over-year to $1.07 million for Q3 2025, and they beat the consensus earnings per share (EPS) estimate, posting $0.09 versus the expected $0.03. But you can't ignore the top-line miss; quarterly revenue came in at $8.98 million, falling short of the $11.50 million analyst forecast, which is a clear sign that commodity price volatility is still a factor, even with operational efficiencies. The real near-term opportunity, and the biggest variable, is the recently completed acquisition of Peak Exploration and Production LLC, which is adding an estimated $51.2 million in assumed debt but is also set to significantly boost their asset base and production profile, especially in the Powder River Basin. This move, plus the fact they ended Q3 with a strong liquidity position of over $13.236 million in cash and short-term investments and no borrowings on their $45 million revolving credit facility, tells me this is a growth story with a complex, but defintely manageable, balance sheet. The stock, trading around $4.77 with a market cap of about $105.37 million as of mid-November 2025, is priced for caution, but the underlying assets and management's strategic clarity suggest a closer look is warranted.

Revenue Analysis

You need a clear picture of where Epsilon Energy Ltd. (EPSN)'s money is coming from, especially with the energy market's volatility. The direct takeaway is that Epsilon Energy Ltd. is seeing strong year-over-year (YoY) growth in 2025, primarily fueled by its upstream production, even as quarter-over-quarter results show the impact of seasonal price fluctuations.

For the nine months ended September 30, 2025, Epsilon Energy Ltd.'s total revenue was a solid $36,769,332, a significant jump from the prior year. The most recent quarter, Q3 2025, reported total revenue of approximately $8.98 million. That is a healthy 23.2% increase compared to the $7.29 million reported in Q3 2024. That kind of growth in a tough commodity environment defintely shows operational focus.

Breaking Down the Primary Revenue Streams

Epsilon Energy Ltd. operates on a two-pronged revenue model: Upstream operations (the actual drilling and production of resources) and Gas Gathering (midstream services). The upstream segment is the powerhouse, but the gathering segment provides a crucial, more stable cash flow stream, which is important for managing risk (commodity price volatility).

Here's the quick math on how the segments contributed to the Q3 2025 revenue of $8.98 million:

• Upstream Operations: This segment, which includes sales of natural gas, oil, natural gas liquids (NGL), and condensate, brought in $7.54 million.
• Gas Gathering: The midstream side, handling the collection and transport of gas, contributed $1.85 million.

The company's upstream revenue is the clear driver, making up the vast majority of the total. This means Epsilon Energy Ltd. is highly exposed to commodity price swings, so you need to keep a close eye on their hedging strategy.

Segment Contribution and Growth Dynamics

The year-to-date revenue performance in 2025 has been strong, driven by a few key factors, including increased production volumes and favorable commodity pricing, particularly for natural gas. For example, the company saw a 42% year-over-year growth in total production volumes in Q3 2025.

To see the financial weight of each segment, here is the Q3 2025 breakdown before intersegment eliminations (which net out transactions between the two business units):

What this table hides is the shift in the revenue mix. Epsilon Energy Ltd.'s long-term strategy is to increase the presence of oil and natural gas liquids (NGL) revenue, moving away from being a pure-play dry gas producer. This diversification into liquids, which often command higher prices, is a smart move to stabilize future returns. For a deeper dive into who is betting on this shift, check out Exploring Epsilon Energy Ltd. (EPSN) Investor Profile: Who's Buying and Why?

Near-Term Revenue Catalysts

A significant change that will impact future revenue is the strategic acquisition of Peak Exploration and Production LLC, which is expected to close in Q4 2025. This deal is set to enhance Epsilon Energy Ltd.'s asset base in the Powder River Basin. This acquisition is not just about adding acreage; it's about increasing their proved reserves by approximately 150% and boosting their overall production capacity, especially in liquids. This is a clear, actionable step by management to execute on their strategy of shifting the revenue mix toward higher-margin liquids production.

Profitability Metrics

You want to know if Epsilon Energy Ltd. (EPSN) is actually making money, and how efficiently. The quick answer is yes, and their profitability is defintely outperforming industry averages as of the latest 2025 numbers, largely due to a superior cost structure.

Looking at the nine months ended September 30, 2025, Epsilon Energy Ltd. reported a net income of $6.64 million on total revenue of $36.77 million. This translates to a strong year-to-date Net Profit Margin of about 18.06%. That's a significant jump from the full-year 2024 performance, showing the strategic focus on operational efficiencies is paying off.

Here's the quick math on their key profitability ratios based on Trailing Twelve Months (TTM) data through Q3 2025, which gives us a clearer picture of their cost management (operational efficiency):

• Gross Profit Margin: Approximately 74.47%. This is exceptional.
• Operating Profit Margin: Approximately 23.30%. This is where the rubber meets the road.
• Net Profit Margin: Approximately 18.06% (YTD 9M 2025).

The Gross Profit Margin is the biggest story here. At nearly 74.47%, it tells you Epsilon Energy Ltd. is highly effective at controlling its direct costs of production-things like lease operating expenses and gathering costs. For context, the median Gross Margin for the Oil and Gas Extraction industry in 2024 was around 37.8%. Epsilon Energy Ltd. is generating over twice the gross profit per dollar of revenue compared to the industry median. That's a massive competitive advantage.

When you move down to the Operating Profit Margin of 23.30%, you see the company is also managing its overhead (selling, general, and administrative expenses) well. This compares favorably to the 2024 industry median Operating Margin of 21.4%. The high gross margin gives them a lot of cushion to absorb G&A costs and still generate superior operating income.

Profitability Trends and Industry Comparison

The trend is a mixed bag, but the near-term picture is positive. While Epsilon Energy Ltd.'s earnings declined at an average annual rate of -4.4% over the past five years, the last year saw an acceleration in earnings growth, rising by 11.2%. This turnaround is reflected in the strong Year-over-Year (YoY) growth in Q3 2025, where net income rose to $1.07 million from $0.37 million in the same quarter last year.

To be fair, the Net Profit Margin of 18.06% (YTD 2025) is well above the 2024 industry median of 13.1%. However, the TTM Net Profit Margin of 12.9% (from one source) is noted as being lower than the prior year's 17%, indicating that while they are outperforming the industry, they are still navigating commodity price volatility that impacts the bottom line. The key takeaway is that their operational efficiency, as shown by the Gross Margin, is a structural strength that keeps them ahead of the pack. You can dive deeper into the ownership structure and market sentiment by Exploring Epsilon Energy Ltd. (EPSN) Investor Profile: Who's Buying and Why?

What this estimate hides is the quarter-to-quarter volatility in the energy market. For instance, Q3 2025 revenue of $8.98 million was a miss on analyst forecasts, despite the strong YoY growth. So, while the underlying cost structure is excellent, the realized pricing for gas and oil remains a major swing factor for their quarterly net income.

Debt vs. Equity Structure

If you look at Epsilon Energy Ltd.'s (EPSN) balance sheet before its major fourth-quarter 2025 acquisition, you see a company that was defintely a capital structure outlier-a virtual zero-debt operation. Their total debt was extremely low, sitting at approximately $387.06K in the most recent quarter, which translated to a Debt-to-Equity (D/E) ratio near 0. That's fantastic for safety, but it often signals a lack of aggressive, debt-fueled growth in a capital-intensive sector like energy.

This is changing fast. The company is strategically shifting its financing mix to execute its growth plan, moving toward a more conventional, though still conservative, leverage profile. The Oil & Gas Exploration and Production (E&P) industry average D/E ratio is around 0.48, so Epsilon Energy Ltd. has historically run far below its peers.

The key to understanding Epsilon Energy Ltd.'s current financial health is looking at the pro forma (as if the transaction were complete) structure following the Peak companies acquisition, which is expected to close in Q4 2025. This deal is being financed with a clear balance of both debt and equity.

Here's the quick math on the shift in the company's financing mix:

• Debt Funding: The company closed a new four-year senior secured reserve-based revolving credit facility in October 2025, with an initial borrowing base of $47.5 million, maturing in October 2029. This facility is the primary vehicle to refinance the Peak companies' existing term loan, estimated at $49.6 million at closing.
• Equity Funding: The acquisition consideration also includes the issuance of 6 million Epsilon Energy Ltd. common shares to the Peak shareholders, plus up to 2.5 million contingent shares. This is a substantial equity issuance.

The immediate impact is a jump in leverage, but it's a controlled jump. Post-acquisition, the company expects to be about 50% drawn on the expanded credit facility. This puts their forecasted net debt to adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization-a key cash flow proxy) ratio at a conservative 1x. This is a very manageable level of financial leverage (the use of borrowed money to fund assets) for an E&P company.

To see how this new capital structure compares to the old one and the industry, consider the following:

The company is balancing debt financing, which offers a lower cost of capital, with equity funding, which preserves balance sheet flexibility. Issuing 6 million shares (a dilution of equity ownership) is the price of acquiring a transformative asset base, but it keeps the overall leverage ratio well below the industry standard. This is smart capital allocation-they are using debt to fund a growth engine without overextending their balance sheet. If you want to dive deeper into the new ownership structure, you can check out Exploring Epsilon Energy Ltd. (EPSN) Investor Profile: Who's Buying and Why?

Liquidity and Solvency

Epsilon Energy Ltd. (EPSN) shows a very strong liquidity position as of late 2025, which is a great sign of financial health. Liquidity-your ability to meet near-term obligations-is defintely not a concern here. This strength is anchored by a high cash balance and an unused credit line, giving the company significant operational flexibility.

The company's liquidity ratios, which measure how easily it can cover its short-term debt, are excellent. The Current Ratio, which compares all current assets to current liabilities, stood at approximately 2.02 as of November 2025. This means Epsilon Energy Ltd. has over two dollars in liquid assets for every dollar of short-term debt. Even the Quick Ratio (acid-test ratio), which excludes less liquid assets like inventory, is robust at around 1.93. A Quick Ratio near 1.0 is generally considered healthy, so a value this high signals exceptional short-term financial strength. That's a clean balance sheet.

Working Capital Trends and Cash Flow

The trend in working capital is overwhelmingly positive, driven by strong cash generation. Cash and cash equivalents surged to $12,766,167 by September 30, 2025, a significant jump from $6,519,793 at the end of 2024. This material increase provides a substantial buffer. While the company saw Accounts Receivable (money owed by customers) temporarily soak up some cash flow earlier in the year due to higher natural gas prices, the overall cash position has still improved dramatically.

Reviewing the cash flow statement for the nine months ended September 30, 2025, shows where the money is moving:

• Operating Cash Flow: Net income for the nine-month period was strong at $6,639,790, up significantly from $2,688,577 in the same period last year. This growth in core business profitability directly feeds the liquidity pool.
• Investing Cash Flow: Capital expenditures (CapEx) are manageable, with Q1 2025 CapEx at $7.74 million and Q2 2025 CapEx at $4 million, primarily directed toward asset development. The company is funding its growth without straining the balance sheet.
• Financing Cash Flow: Epsilon Energy Ltd. is returning capital to shareholders, paying $1.379 million in dividends in Q3 2025. Crucially, the company has no borrowings outstanding under its $45 million revolving credit facility as of September 30, 2025.

Near-Term Liquidity Outlook and Actionable Risks

The primary near-term action that impacts liquidity is the pending acquisition of Peak Companies, expected to close in Q4 2025. This deal involves the assumption of an estimated $51.2 million in debt. While the company has a strong cash position and an undrawn credit line, this debt assumption will naturally increase their leverage (debt-to-equity) and reduce the liquidity ratios from their current high levels. The balance sheet can handle it, but the post-acquisition ratios will be lower-still healthy, but less exceptional.

Here's a quick look at the liquidity picture:

The company's ability to generate strong cash from operations while maintaining an unburdened credit line means they have the financial horsepower to execute their strategic acquisition and manage the assumed debt. For a deeper dive into the company's full strategic position, you can read our full analysis at Breaking Down Epsilon Energy Ltd. (EPSN) Financial Health: Key Insights for Investors.

Valuation Analysis

You're looking for a clear-eyed assessment of Epsilon Energy Ltd. (EPSN), and the data suggests a mixed picture: the stock is currently trading near its 52-week low, signaling a potential opportunity for value investors, but its high payout ratio introduces a near-term risk. Based on the closing price of $4.76 on November 19, 2025, the stock is trading at a significant discount from its yearly high, but technical indicators show some weakness.

The core valuation multiples point toward an undervalued or fairly valued stock within the Energy sector. For instance, the Enterprise Value-to-EBITDA (EV/EBITDA) ratio-a crucial metric for energy companies that strips out non-cash expenses like depreciation-stands at a low 3.33. This is defintely attractive. Here's the quick math on key trailing twelve-month (TTM) metrics:

• Price-to-Earnings (P/E): The TTM P/E is Mission Statement, Vision, & Core Values of Epsilon Energy Ltd. (EPSN), which is 17.53. This is a reasonable multiple, suggesting the stock is not excessively priced relative to its earnings.
• Price-to-Book (P/B): The P/B ratio is just 1.02. This means you are essentially paying $1.02 for every dollar of the company's net assets, which is often a sign of undervaluation.
• EV/EBITDA: At 3.33, this ratio is quite low, implying the company's operating cash flow is strong relative to its total enterprise value.

The stock has seen a significant drop over the last 12 months, falling by approximately 20.78%. The 52-week trading range highlights this volatility, with a low of $4.36 and a high of $8.50. It's been a rough year.

Dividend Sustainability and Analyst Consensus

Epsilon Energy Ltd. offers a compelling dividend, but you need to look closely at its sustainability. The annual dividend is $0.25 per share, translating to a strong dividend yield of approximately 5.25% as of late November 2025. However, the TTM dividend payout ratio-the percentage of earnings paid out as dividends-is high at 92.59%. What this estimate hides is that a payout ratio this close to 100% leaves very little room for error or reinvestment, especially in a capital-intensive industry like energy.

When we look at Wall Street, the consensus is cautious. The overall analyst consensus rating for Epsilon Energy Ltd. is a Hold. One analyst has a recent Buy rating with a price target of $5.50, following the company's strategic acquisition of Peak Exploration and Production LLC, completed in November 2025. This acquisition is a significant growth driver, but the market is still waiting to see the full financial impact.

The bottom line is that Epsilon Energy Ltd. looks cheap on traditional multiples, but the market is clearly discounting it due to the stock's poor momentum and the high dividend payout ratio. For a new position, I'd suggest waiting for the company's next earnings report to see the first full quarter's impact of the Peak acquisition on cash flow and the payout ratio.

Next Step: You: Monitor EPSN's cash flow from Q4 2025 results to assess dividend coverage by January 2026.

Risk Factors

You're looking at Epsilon Energy Ltd. (EPSN) because its recent strategic moves-especially the Powder River Basin (PRB) acquisition-are compelling, but you need a clear-eyed view of the risks. The direct takeaway is this: while Epsilon Energy Ltd. has a strong balance sheet that acts as a buffer, its near-term financial health is heavily exposed to commodity price volatility and the operational execution of its new, larger asset base.

The company's nine-month 2025 net income of $6.64 million looks good, but it rests on a foundation of volatile natural gas and oil prices. That's the core external risk for any exploration and production (E&P) company.

External and Market Risks: The Commodity Price Headwind

The biggest threat is the continued decline in natural gas and oil pricing, which directly impacts future earnings. Epsilon Energy Ltd. is an independent producer, so its revenue is a function of market rates. For instance, the Q3 2025 revenue of $8.98 million missed analyst expectations by over 21%, a clear sign of market pressure.

To be fair, Epsilon Energy Ltd. has a solid mitigation strategy in place: a hedging program (financial contracts to lock in a price). This provides a critical floor for a portion of its production, offering downside protection with hedges on approximately 3.2 Bcf of natural gas at $3.41/MMBtu and 72 MBbl of oil at $70.82/Bbl. Still, a severe and sustained downturn in commodity prices could materially change the company's future.

Operational and Strategic Risks: The Acquisition Test

The transformative acquisition of the Peak Companies, which closed in November 2025, introduces significant strategic and operational execution risks. This deal is projected to boost proved reserves by 150%, but integrating a new, large asset base is never easy. If the integration fails to meet management expectations, it would defintely set back growth plans.

Beyond M&A, the standard E&P operational risks are always present, including encountering unexpected formations, premature decline of reservoirs, and the loss of the ability to use hydraulic fracturing due to regulatory changes. Plus, the company has a small management team, so the loss of key personnel could be critical and difficult to replace.

Here's a quick map of the key risks and their impact:

Financial and Regulatory Risks

While Epsilon Energy Ltd. maintains a strong liquidity position-with cash and cash equivalents of $12.77 million as of September 30, 2025, and an undrawn $45 million reserve-based revolving credit facility-the strategic pivot has financial risks. The Peak acquisition involved assuming approximately $51.2 million of debt. This is a material change from the company's previously debt-free status, and while manageable now, it increases the risk profile. The company also faces potential financial strain from the Alberta joint venture impairment, which could hit future earnings.

Regulatory challenges are also a constant threat in the energy sector. Specific issues like permit moratoriums or new environmental regulations could hinder operations and force costly compliance.

• Manage debt load carefully after the $51.2 million assumption.
• Monitor the integration of the new PRB assets closely for any operational stumbles.
• The strong cash balance of $12.77 million provides a safety net.

For a deeper dive into the company's financial metrics, check out Breaking Down Epsilon Energy Ltd. (EPSN) Financial Health: Key Insights for Investors. Your next concrete step is to track the Q4 2025 earnings call for management commentary on the Peak integration progress and any changes to the borrowing base.

Growth Opportunities

You're looking at Epsilon Energy Ltd. (EPSN) and seeing a small-cap energy player, but honestly, the recent Peak Companies acquisition in late 2025 has completely changed the growth equation. The direct takeaway is this: the company is pivoting from a predominantly natural gas focus to a more balanced, oil-weighted portfolio, which sets up a massive projected earnings boost in 2026. This is a deliberate, strategic shift to diversify revenue and capitalize on oil price upsides.

The key growth driver is the Powder River Basin (PRB) acquisition, which closed in November 2025. This deal was transformational, instantly boosting the company's year-end 2024 proved reserves by over 150% and liquids production by more than 200%. The new assets include 40,500 net acres in the core of the PRB, adding over 600% more premium development locations to Epsilon Energy Ltd.'s inventory. That's a game-changer for a company this size.

Here's the quick math on projections: the consensus revenue estimate for the full 2025 fiscal year is approximately $50.87 million, with a consensus Earnings Per Share (EPS) estimate of $0.34. That's a solid, if unspectacular, year, especially considering the Q2 2025 EPS miss of $0.07 against an $0.11 forecast. But look ahead: analysts expect next year's EPS to grow by a staggering 85.00%, from a projected $0.20 to $0.37 per share, driven by the new oil-weighted production. The average stock price forecast for 2025 sits around $4.402, but the 2026 upside is what matters.

Strategic initiatives are focused on integrating and developing this new oil acreage while maintaining the legacy business. Epsilon Energy Ltd. plans to allocate approximately $20 million in capital expenditure to the Peak assets. Also, they've secured a new, extended credit facility out to Q4 2029, escalating the commitment to $80 million, which provides the financial flexibility needed for this development. Plus, they've smartly hedged 60% of the Peak oil volumes for 2026 at a weighted average WTI strike price of $63.30 per barrel, providing a defintely necessary floor against commodity price volatility. You can read more about their long-term vision here: Mission Statement, Vision, & Core Values of Epsilon Energy Ltd. (EPSN).

The company's competitive advantage now rests on a few pillars:

• Diversified Asset Base: Four core project areas (Marcellus, Permian, WCSB, PRB) balance natural gas and oil exposure.
• Financial Discipline: Pro forma net debt to adjusted EBITDA is conservative at approximately 1x, which is low for the energy sector.
• Operational Control: The acquisition brought an experienced in-basin operating team, giving them direct control over the PRB development.
• Recession Resistance: Their midstream operations in the Marcellus, which have take-or-pay contracts, provide a steady, recession-resistant cash flow source.

What this estimate hides is the execution risk of integrating a large acquisition and the potential for regulatory delays in the Powder River Basin. Still, the company is positioned for a significant growth ramp in 2026 and 2027. Your next step should be to monitor their Q4 2025 results and the initial capital deployment announcements for the PRB assets.