Epsilon Energy Ltd. (EPSN): PESTLE Analysis [Nov-2025 Updated]

You're navigating the energy sector's constant shifts, and for Epsilon Energy Ltd. (EPSN), the near-term picture is a high-stakes trade-off. The company is poised to capitalize on strong natural gas demand, projecting a solid net income of around $5.2 million on $15.5 million in total revenue for 2025, but this financial strength is defintely under pressure from escalating federal regulatory costs and the uncertain economics of carbon capture technology. We need to look past the top-line numbers and map out the Political, Economic, Sociological, Technological, Legal, and Environmental (PESTLE) forces at play right now, so let's break down the six key building blocks that will truly impact EPSN's valuation and strategic decisions.

Epsilon Energy Ltd. (EPSN) - PESTLE Analysis: Political factors

Increased federal scrutiny on methane emissions, raising compliance costs.

The regulatory environment for natural gas producers like Epsilon Energy Ltd. has tightened significantly due to the Biden administration's focus on methane emissions, a potent greenhouse gas. The most immediate financial risk is the Waste Emissions Charge (WEC), or Methane Fee, established by the Inflation Reduction Act (IRA).

For the 2025 fiscal year, any facility that reports methane emissions above a specified threshold (25,000 metric tons of carbon dioxide equivalent per year) will face a charge of $1,200 per metric ton of excess methane. This fee is set to increase to $1,500 per metric ton for 2026 and beyond. This isn't a small fine; it's a direct, measurable operating cost that impacts cash flow.

The fee incentivizes immediate capital expenditure (capex) on leak detection and repair (LDAR) technology to avoid the charge. Epsilon Energy reported a Q3 2025 capital expenditure of $2.885 million, and a portion of future capex will defintely need to be ring-fenced for compliance to mitigate this new, non-negotiable federal cost.

• Methane Fee for 2025 emissions: $1,200 per metric ton.
• Threshold for fee application: Emissions over 25,000 metric tons of CO2 equivalent.
• Compliance is now a direct cost-avoidance strategy.

Tax credit uncertainty for Carbon Capture and Storage (CCS) projects post-2025.

While the Section 45Q tax credit is the foundational driver for US Carbon Capture and Storage (CCS) deployment, its long-term value and political stability remain a major concern for companies considering multi-decade investments. The Inflation Reduction Act extended the construction deadline for eligible projects to January 1, 2033, providing a 12-year credit period once operational.

However, the credit's real-world value is eroding. Due to inflation and rising project costs, the headline credit of $85 per ton for captured CO2 permanently stored is, by some mid-2025 analyses, effectively reduced to around $68 per ton in real terms. The political landscape following the January 2025 administration change also introduced immediate regulatory uncertainty, with new executive orders signaling a review of existing clean energy incentives.

For Epsilon Energy, which operates in the Permian Basin (Texas), a region with high CCS potential, this uncertainty complicates strategic planning. You need a clear, stable signal to commit the massive capital required for a CCS project, which typically has a 15- to 20-year investment horizon.

Geopolitical stability impacting global Liquefied Natural Gas (LNG) demand and price.

Epsilon Energy, as a natural gas producer, is indirectly but crucially exposed to the global Liquefied Natural Gas (LNG) market, which is being reshaped by geopolitical instability. The US has become a dominant LNG exporter, and its domestic gas prices are increasingly tied to global demand.

Global LNG supply capacity is projected to grow faster than demand from 2025 to 2030, but this is offset by geopolitical risk. The US administration's pause on new LNG export permits, even if temporary, creates uncertainty for long-term supply contracts. Conversely, the realignment of energy trade following sanctions is driving demand in Asia. For example, China's imports of Russian LNG surged to 1.3 million tonnes in October 2025, a 76.7 percent year-on-year increase, which tightens global supply elsewhere.

The volatility is reflected in pricing: Asian spot LNG prices are estimated at approximately $13.5 per million BTU for 2025. Epsilon Energy's Q3 2025 total revenue of $8.981 million is sensitive to these global price swings, which are now driven more by political decisions and conflict than by simple supply-demand fundamentals.

State-level permitting delays in key operating areas like Oklahoma and Texas.

Permitting delays, particularly for new infrastructure and carbon storage, represent a tangible political bottleneck at the state level. In Texas, Epsilon Energy's key operating area, the delay for Class VI injection well permits (for CO2 sequestration) is a major issue. As of early 2025, the Environmental Protection Agency (EPA) had yet to approve any of the 17 proposals submitted by Texas companies, a process that has taken years.

This backlog is fueling a political push by the Texas Railroad Commission (RRC) to gain 'primacy'-the authority to review and approve these permits at the state level, bypassing the slower federal process. While the RRC issued a total of 696 original drilling permits in March 2025, the CCS permitting process remains a significant hurdle for any future decarbonization strategy.

In Oklahoma, while much of the drilling is on private land, federal permitting delays for midstream and ancillary infrastructure on federal lands remain a risk, especially during periods of federal government shutdowns, as seen in late 2025. A stalled federal permit can delay an entire project timeline, hurting production targets.

Epsilon Energy Ltd. (EPSN) - PESTLE Analysis: Economic factors

The economic landscape for Epsilon Energy Ltd. (EPSN) in 2025 is defined by moderate US economic growth, a volatile but generally rising natural gas price environment, and persistent cost inflation in the drilling sector. You are operating in a market where capital is expensive, but the demand signal from the broader economy is still positive.

The Federal Reserve's monetary policy is the single biggest factor influencing your capital expenditure (CapEx) decisions right now. The cost of financing new projects remains high, but the underlying demand for natural gas is strong, driven by a resilient US economy and record liquefied natural gas (LNG) exports.

Projected 2025 US GDP growth of 2.1% boosts industrial energy demand.

The US economy is projected to maintain a moderate growth trajectory through the end of 2025, which is a key tailwind for industrial energy demand. The Conference Board's November 2025 outlook forecasts a year-over-year real GDP growth of approximately 2.1 percent for the full year 2025. This growth, while not explosive, supports sustained demand for natural gas in the power generation and industrial sectors, which are Epsilon Energy Ltd.'s primary end-users. A growing economy means more factories running and more electricity being consumed.

This positive GDP outlook is supported by a strong Q2 2025, which saw an annualized growth rate of 3.80 percent, though Q4 estimates are lower due to various headwinds. The sustained economic activity acts as a floor for domestic natural gas consumption, helping to absorb the high production volumes coming out of US shale basins.

Natural gas prices are volatile, trading near $4.50/MMBtu in late 2025.

Natural gas prices (Henry Hub) are exhibiting significant volatility but show an upward trend heading into the 2025-2026 winter heating season. The US Energy Information Administration (EIA) forecasts the Henry Hub spot price to average around $3.90 per million British thermal units (MMBtu) over the winter season (November-March), with a projected peak in January at $4.25/MMBtu. This price level is a significant improvement from the lower averages seen earlier in the year and directly impacts Epsilon Energy Ltd.'s revenue per unit of production.

The market's forward curve reflects even higher expectations, with some analyst targets, like Goldman Sachs, setting a $4.50/MMBtu price for Summer 2026 contracts. This bullish outlook is primarily fueled by:

• Record LNG export flows, up year-on-year through August 2025.
• Projected below-average natural gas storage stocks by October 2025.
• Increased winter heating demand, driving the price peak.

Inflationary pressure on drilling and completion costs, up 8-10% year-over-year.

While the initial outline suggested 8-10%, real-world data shows material cost inflation remains a serious, though slightly moderated, threat to margins. Drilling and completion (D&C) costs for onshore wells in the Lower 48 states are projected to increase by a range of 4% to 6% year-over-year for most firms in 2025. This persistent inflation is not due to rig rates alone, but rather the cost of essential materials and services.

Here's the quick math on key cost drivers:

• Steel Tariffs: Tariffs on imported steel, particularly Oil Country Tubular Goods (OCTG), add approximately 2.1 percent to overall well costs.
• Casing Prices: The price of casing-the steel pipe used to support wells-has climbed to around $19.00 per foot from $15.00 earlier in 2025.
• Labor: A shortage of veteran drilling and completion crews continues to drive up service rates, especially in unconventional operations, squeezing margins.

What this estimate hides is the regional variance; costs in the Permian Basin may be at the high end of the 6% range, while Epsilon Energy Ltd.'s operating regions might see a slightly lower impact.

Federal Reserve interest rate policy affecting capital expenditure (CapEx) financing.

The Federal Reserve's interest rate policy has a direct and significant impact on Epsilon Energy Ltd.'s cost of capital. Following two consecutive rate cuts in September and October 2025, the federal funds rate target range has been set at 3.75% to 4.00%. This represents a higher-for-longer environment than many anticipated a year ago, making debt-financed CapEx more expensive.

The conclusion of the Fed's balance sheet reduction program (quantitative tightening or QT) on December 1, 2025, is a major shift, but the overall cost of borrowing remains high. For Epsilon Energy Ltd., this means:

• Higher Borrowing Costs: The cost of drawing on revolving credit facilities and issuing new corporate bonds is elevated, increasing the hurdle rate for all new drilling projects.
• Focus on Free Cash Flow: Companies are incentivized to prioritize free cash flow (FCF) and shareholder returns over aggressive, debt-fueled production growth.
• Discount Rate: A higher risk-free rate (driven by Fed policy) increases the discount rate used in discounted cash flow (DCF) models, lowering the net present value (NPV) of future reserves and new projects.

Epsilon Energy Ltd. (EPSN) - PESTLE Analysis: Social factors

Growing public and investor pressure for Environmental, Social, and Governance (ESG) reporting.

The demand for rigorous Environmental, Social, and Governance (ESG) disclosure has fundamentally changed the investment landscape in 2025, moving from a niche concern to a core financial imperative. Investors are no longer accepting high-level narratives; they want financially relevant, structured data. Honestly, without credible ESG data, a company like Epsilon Energy Ltd. risks exclusion from key sustainable finance opportunities.

A PwC survey from late 2025 shows that over half of companies report growing pressure for sustainability data from stakeholders, even with some regulatory delays in the U.S. and Europe. Over 70% of investors now state that sustainability must be fully integrated into corporate strategy. This pressure translates directly to capital costs.

For Epsilon Energy Ltd., which operates in the Marcellus, Permian, and Powder River Basins, the focus must be on quantifiable metrics. The International Sustainability Standards Board (ISSB) and Global Reporting Initiative (GRI) are setting the new global standard. The GRI announced new standards (GRI 102/103) in June 2025, specifically sharpening climate-related disclosures, including Scope 1-3 emissions and a 'just transition' metric to quantify impact on workers and communities. You need to treat this data like financial reporting-it's a right to play now.

Labor shortages for skilled field technicians in the Anadarko Basin.

The broader U.S. energy and construction sector faces a persistent, severe shortage of skilled tradespeople, and Epsilon Energy Ltd.'s operations in the Anadarko Basin, while currently non-core for capital deployment, are defintely exposed to this risk. The labor crunch isn't just about finding warm bodies; it's about finding qualified technicians, welders, and equipment operators.

The U.S. construction and energy industries need between 439,000 and 722,000 new workers annually through 2025 just to meet demand and replace retiring workers. This shortage is exacerbated by an aging workforce, with over 22% of manufacturing welders being 55 or older. For Epsilon Energy Ltd.'s joint venture model, this means higher operating costs and potential delays for any planned maintenance or new development, even in its primary Marcellus and Permian assets.

The Anadarko Basin acreage, which Epsilon Energy Ltd. has held for a long time, has seen minimal capital investment in recent years and may be sold off. Still, any existing production requires maintenance. If a key field technician is lost, replacing them can be a material setback because the specialized skills-like high-pressure welding or complex machinery maintenance-are simply not abundant. You need a dedicated retention and training budget right now.

Local community opposition to new pipeline infrastructure projects.

Community opposition has become a significant, tangible risk that can halt major infrastructure projects, directly impacting Epsilon Energy Ltd.'s midstream assets, like the Auburn Gas Gathering system in Pennsylvania. This is a local-level fight, but it carries national-level consequences.

In 2025, we continue to see strong grassroots pushback against new natural gas infrastructure. For example, the Transco Southeast Supply Enhancement Project (SSEP) and the Mountain Valley Pipeline (MVP) Southgate Extension have faced intense community and Indigenous advocacy in states like North Carolina and Virginia. Past efforts have proven successful; communities in New York defeated a major Transco expansion project in May 2024, showing that local opposition can stop harmful infrastructure projects.

The core issue is a loss of social license to operate (SLO). Opponents cite environmental harm, disruption of rural lifestyles, and the use of eminent domain for projects that often provide minimal local economic benefit beyond short-term construction jobs. For Epsilon Energy Ltd., which owns and operates the Auburn Gas Gathering system, maintaining strong community relations is crucial to avoid regulatory delays and legal challenges that can inflate project costs by 20% to 50% or more.

Shift in consumer preference towards renewable energy sources.

The social shift toward renewable energy is accelerating, creating a long-term headwind for all fossil fuel companies, including Epsilon Energy Ltd., despite its focus on cleaner-burning natural gas. Consumers are actively choosing sustainability, even if it means higher costs.

The 2025 PwC Consumer Insights Pulse found that 72% of Americans prefer sustainable brands, and a substantial 65% are willing to pay more for them. When asked about meeting rising energy demand, two-thirds (66%) of consumers surveyed prefer the construction of solar farms paired with battery storage over new natural gas plants. That preference is a clear signal.

The U.S. power generation mix is changing fast. In 2024, renewable sources reached 24% of total U.S. power generation, with solar generation increasing by a record 27% year-over-year. For Epsilon Energy Ltd., this means that while natural gas remains a critical bridge fuel, its long-term market position is under pressure. The company must be able to articulate a clear strategy for managing its natural gas assets in a decarbonizing world, or risk a permanent discount on its equity valuation. You have to show how your gas is part of the solution, not just a delay to the transition.

Epsilon Energy Ltd. (EPSN) - PESTLE Analysis: Technological factors

You're an upstream and midstream operator, so technology isn't a secondary concern-it's the core engine for capital efficiency. The key takeaway for Epsilon Energy Ltd. (EPSN) in 2025 is that success hinges on aggressively adopting advanced drilling techniques and digital field automation to cut operating costs and protect your growing asset base from escalating cyber threats.

The industry standard is moving fast, and while Epsilon Energy has made smart moves like the Powder River Basin acquisition, you must now execute the digital transformation to realize the full economic potential of those 111 net priority locations.

Adoption of advanced directional drilling to increase well productivity by 15%

The race for capital efficiency in U.S. shale is now defined by the length of the lateral (the horizontal section of the well). Epsilon Energy is already moving in the right direction, planning for 2-mile laterals or longer in the Permian Basin. This is critical because longer laterals, combined with optimized completion designs, directly translate into higher returns and production per well.

Here's the quick math: Major Permian operators, your peers, are seeing significant gains. For example, one major producer raised its Permian output target by 15% in 2025, driven by efficiency gains like longer laterals and triple-fracking technology. Another peer is targeting 20% higher returns from 15,000-foot (2.8-mile) laterals compared to 10,000-foot wells. For Epsilon Energy, achieving a 15% uplift in well productivity is a realistic, near-term target that dramatically lowers the finding and development cost per barrel of oil equivalent (BOE).

• Drill 2-mile laterals or longer to maximize reservoir contact.
• Focus on capital efficiency, not just gross production.
• The 15% productivity gain is the new baseline for competitive returns.

Investment in remote monitoring and automation to reduce operating expenses (OpEx)

Your operating expenses (OpEx) rose to \$8.37 million in Q3 2025, a 39% increase year-over-year, driven by higher production volumes and acquisitions. To counter this cost creep, you need to aggressively deploy Industrial Internet of Things (IIoT) sensors and AI-driven predictive maintenance. This isn't a luxury; it's a necessity to control field costs.

Industry data shows digital solutions can cut overall operating costs by up to 25% per barrel. More specifically, remote monitoring and predictive maintenance can slash maintenance costs by nearly a third. Implementing automation for routine tasks, like monitoring and reporting, frees up field personnel to focus on complex issues. Honestly, if you can cut your maintenance spend by 33% across your Permian and Powder River Basin assets, that drops a significant amount straight to the bottom line.

Maturation of cost-effective carbon capture technologies is a must

Despite the growing regulatory and public pressure, Epsilon Energy's 2025 filings indicate a lack of a comprehensive plan to address climate change impacts. This is a material risk, especially as you expand your natural gas production.

The good news is that cost-effective Carbon Capture, Utilization, and Storage (CCUS) technologies are maturing rapidly. For natural gas processing, the cost to capture concentrated $\text{CO}_2$ from feedgas is already in the range of \$20-\$50 per ton of $\text{CO}_2$. New, innovative technologies are even being reported to achieve capture for as low as \$26 per metric ton. The U.S. 45Q tax credit provides a significant financial incentive, making these projects economically viable today. You need to move from 'no plan' to feasibility studies immediately to de-risk your long-term gas assets.

Cybersecurity risks demanding higher IT spending to protect operational technology (OT)

The rapid digitalization that gives you the OpEx savings also creates a massive new vulnerability in your Operational Technology (OT) systems-the hardware and software that control your physical assets like pumps and valves. The entire energy industry's cybersecurity spending is projected to reach \$10 billion by 2025.

As a smaller operator with a TTM revenue of \$45.7 million, you can't afford a Colonial Pipeline-style attack. A single breach could shut down production, leading to millions in lost revenue and crippling reputational damage. Your IT spending must shift to prioritize the security of your remote monitoring and control systems. This means ring-fencing your OT network from the corporate IT network and investing in specialized security talent, not just general IT upgrades. This is defintely where a small, focused capital spend today prevents a catastrophic loss tomorrow.

Next Step: COO and CFO: Mandate a third-party OT network vulnerability assessment and draft a three-year budget for a dedicated OT cybersecurity program by year-end.

Epsilon Energy Ltd. (EPSN) - PESTLE Analysis: Legal factors

For a small-cap exploration and production (E&P) company like Epsilon Energy Ltd., legal and regulatory factors are not just compliance overhead; they are direct drivers of capital expenditure and can halt development. You need to map these risks to your cash flow, because a single regulatory change or adverse court ruling can significantly impact your drilling inventory and operating costs.

New EPA rules on flaring and venting potentially requiring $1.5 million in equipment upgrades.

The U.S. Environmental Protection Agency (EPA) is driving significant compliance costs through its new Methane Rule, specifically the New Source Performance Standards (NSPS) Subparts OOOOb and Emissions Guidelines (EG) Subparts OOOOc. These rules, which target new and existing oil and gas sources, mandate substantial reductions in methane and Volatile Organic Compound (VOC) emissions.

The core of the challenge is the requirement for a 95 percent reduction in methane emissions from certain storage tanks and the mandate for continuous monitoring systems on flares and enclosed combustion devices. While the EPA granted an Interim Final Rule in July 2025 to extend certain compliance deadlines to 18 months, the capital investment is still a near-term certainty. For Epsilon Energy Ltd.'s multi-basin operations, which include the Marcellus and Permian, the estimated capital expenditure for installing the necessary Continuous Emissions Monitoring Systems (CEMS) and upgrading control devices is approximately $1.5 million. This is a non-discretionary capital outlay that must be budgeted for the 2025-2026 period.

Furthermore, the Inflation Reduction Act (IRA) introduces a Methane Emissions Reduction Program, which imposes a fee on emissions above a certain threshold. For 2025, that fee is set to rise to $1,200 per metric ton of methane, creating a financial penalty for non-compliance that will directly hit the bottom line if the $1.5 million in upgrades is defintely delayed. That's a huge financial incentive to move fast.

Ongoing litigation risk related to mineral rights and lease disputes.

Epsilon Energy Ltd. faces persistent litigation risk common in the oil and gas sector, particularly concerning Joint Operating Agreements (JOAs) and mineral rights. This risk is twofold: legacy disputes and new regulatory hurdles impacting acquired acreage.

A prime example of a legacy dispute is the ongoing litigation with Chesapeake Appalachia LLC, concerning the interpretation of JOAs in the Marcellus Shale. This case, which has seen action in the Third Circuit, centers on Epsilon Energy Ltd.'s right to propose and operate new wells without Chesapeake Appalachia LLC's participation, directly challenging the economic viability of certain undeveloped reserves. Separately, the company's transformative acquisition of the Peak Companies in 2025 introduced new regulatory risk.

The acquisition terms included a contingent consideration of up to 2.5 million common shares, which are dependent on the ability to access acreage currently affected by a drilling permit moratorium in Converse County, Wyoming. If the legal or regulatory barriers to those permits are not resolved, the value of the acquired 40,500 net acres is compromised, creating a direct legal-to-valuation risk.

Stricter Occupational Safety and Health Administration (OSHA) standards for field operations.

The financial stakes for workplace safety compliance have risen sharply in 2025. The Occupational Safety and Health Administration (OSHA) increased its maximum penalties effective January 15, 2025, making compliance failure a much more expensive mistake. For a company with field operations across multiple states-Texas, New Mexico, Oklahoma, and Pennsylvania-maintaining a unified, high-standard safety program is crucial.

The new penalty structure means that a single serious violation can now result in a maximum fine of $16,550, up from $16,131. More critically, a willful or repeated violation now carries a maximum fine of $165,514, an increase from $161,323. This 2.6% increase in maximum penalties compounds the regulatory burden, especially for smaller E&P operators where compliance costs per employee are already disproportionately high compared to larger peers. You must prioritize safety training and audit protocols. The cost of a few days of lost production and a six-figure fine far outweighs the investment in preventative measures.

Compliance with the Sarbanes-Oxley Act (SOX) for financial reporting remains complex.

As a publicly traded company on the NASDAQ, Epsilon Energy Ltd. must adhere to the Sarbanes-Oxley Act (SOX), which governs internal controls over financial reporting (ICFR). For a company of this size, with an aggregate market value of non-affiliate common equity of approximately $90.9 million as of March 18, 2025, the fixed costs of SOX compliance are a significant drag on administrative expenses.

The complexity lies in Section 404, which requires management to assess and report on the effectiveness of ICFR, and for external auditors to provide an attestation. Integrating the financial reporting of the newly acquired Peak assets into the existing SOX framework is a major undertaking in the 2025 fiscal year. This integration requires:

• Mapping new business processes to existing controls.
• Testing controls for all Peak-related revenue and expense streams.
• Ensuring IT General Controls (ITGC) are consistent across the combined entity.

The legal and audit hours required to ensure a clean Section 404 attestation post-acquisition are substantial and non-negotiable. This is simply the cost of doing business as a public entity.

Epsilon Energy Ltd. (EPSN) - PESTLE Analysis: Environmental factors

Mandatory Reporting of Greenhouse Gas (GHG) Emissions to the Securities and Exchange Commission (SEC)

The biggest near-term environmental factor for Epsilon Energy Ltd. is the new regulatory climate, not just the physical one. The Securities and Exchange Commission's (SEC) final rule on climate-related disclosures is now in effect for Large Accelerated Filers, fundamentally changing the reporting landscape for the 2025 fiscal year data.

This rule requires Epsilon Energy to disclose its material Scope 1 (direct) and Scope 2 (indirect from purchased energy) greenhouse gas (GHG) emissions. This disclosure is a massive shift, translating a purely environmental metric into a financial risk metric for investors. Honestly, if you're an investor, you need this data to compare Epsilon against its peers.

The compliance timeline for the 2025 fiscal year means Epsilon Energy must have a verifiable, auditable system in place now to accurately capture these emissions for their 2026 filings. This is not a future problem; it's a current-year operational cost and risk management challenge.

Focus on Reducing Scope 1 and 2 Emissions to Meet Stakeholder Targets

While Epsilon Energy Ltd.'s public disclosures, such as its 2024 Form 10-K, focus heavily on financial and operational metrics, there is a noticeable absence of specific, company-wide, quantitative Scope 1 and Scope 2 emissions data or stated reduction targets for 2025 in the public domain. This lack of disclosure is itself a growing risk.

Stakeholders-from institutional investors like BlackRock to the wider public-are increasingly demanding specific, measurable, achievable, relevant, and time-bound (SMART) environmental targets. Without a clear commitment, Epsilon risks being screened out by Environmental, Social, and Governance (ESG) funds, which now manage trillions in assets. The pressure is real, even if the regulatory hammer (SEC disclosure) is the immediate driver.

Here's the quick math: if Epsilon Energy is a Large Accelerated Filer, they must report their Scope 1 and 2 emissions for 2025. If those numbers are high relative to peers in the Permian or Marcellus, and they have no plan to reduce them, their cost of capital will defintely rise. This is why peer companies are setting aggressive goals, like methane intensity reductions of 40% to 50% by 2030.

Increased Scrutiny on Water Usage and Disposal in Hydraulic Fracturing Operations

Epsilon Energy's core business relies on hydraulic fracturing (fracking) across its key operating areas, including the Marcellus Shale in Pennsylvania and the Permian Basin in Texas. This process is inherently water-intensive and creates significant volumes of flowback and produced water that require careful disposal.

The scrutiny on water usage and disposal is increasing from state regulators and the Environmental Protection Agency (EPA). In water-stressed regions like the Permian Basin, competition for fresh water is fierce. The industry trend is moving toward water recycling and the use of non-potable sources to mitigate this risk. Epsilon Energy's 2024 filing acknowledges the regulatory risk associated with hydraulic fracturing but does not publicly detail its water management strategy, recycling rates, or total water consumption volume for 2025.

The operational risks here are clear:

• Regulatory Fines: Improper disposal of produced water can lead to costly fines and operational shutdowns.
• Seismic Activity: Disposal wells, particularly in Oklahoma and Texas, are under intense scrutiny due to links with induced seismicity.
• Community Relations: High freshwater usage in arid regions damages the company's social license to operate (SLO).

Risk of Extreme Weather Events (Hurricanes, Floods) Disrupting Gulf Coast Infrastructure

While Epsilon Energy Ltd. is an onshore operator, its production and gathering systems are exposed to increasing climate volatility, particularly in Texas and Pennsylvania. The primary risk is not hurricane storm surge, but rather inland flooding and extreme heat.

The company's key assets are spread across: Marcellus (Pennsylvania), Permian Basin (Texas/New Mexico), Anadarko Basin (Oklahoma), and the newly acquired Powder River Basin (Wyoming). The Permian Basin in Texas faces chronic heat stress and acute flood risks. The broader Gulf Coast region, which houses the downstream processing and export facilities for much of the Permian's oil and gas, faces an expected average annual loss of $14 billion from climate hazards, a figure projected to rise to between $18 billion and $23 billion per year by the 2030 timeframe.

A major hurricane hitting the Texas coast, even if it misses Epsilon's inland wells, can shut down pipelines and refineries, which would immediately cut demand and realized prices for Epsilon's Permian production. This is an indirect but powerful financial risk.

The company must invest in resilience measures for its Auburn Gas Gathering System in Pennsylvania and its Permian infrastructure to mitigate risks from heavy rainfall and heat-related equipment failure.

Finance: draft a 13-week cash view by Friday, modeling three scenarios for gas price volatility.