Epsilon Energy Ltd. (EPSN) stock intrinsic value fair value estimate & owner earnings analysis

Epsilon Energy is a small natural gas and oil producer incorporated in Alberta, Canada, and run from Houston, Texas. Until late 2025 its earnings came mainly from Pennsylvania natural gas (about 67% of 2025 revenue), a 35% interest in the Auburn gas gathering system that charges fees to move that gas, oil and gas in the Permian Basin of Texas, and small Oklahoma and Alberta positions. On November 14, 2025 it bought Peak Exploration & Production, adding Powder River Basin oil and gas assets in Wyoming (284 gross wells and 60,945 gross acres). On December 11, 2025 it sold its Oklahoma assets at a loss of $19.3 million, which is the main reason 2025 shows a net loss of $5.8 million even though operating cash flow was $20.6 million. How we measured earning power. We take cash from operations, remove the swings from working capital, subtract stock compensation as a real cost, and subtract all drilling and property spending as the cost of replacing production. For a producer, revenue moves mostly with gas and oil prices, so we did not treat any spending as growth spending. On that basis, owner earnings for 2018 through 2025 were $10.2M, $2.9M, $5.4M, $13.1M, $32.6M, -$2.9M, -$20.6M and $10.0M. Two of the eight years were negative, both after heavy spending in 2023 and 2024 (total capital spending of $18.6M and $36.6M). Revenue in 2022 was $70.0M, more than double the $30.7M of 2023. The middle of the eight years, about $7.7M a year, is our anchor. We use all eight years because they cover a low-revenue year (2020, $24.4M), a high-revenue year (2022) and both heavy and light spending years. Owner earnings in 2025 were $10.0M against -$20.6M in 2024, a swing that says little about trend, so year one of every case starts at the anchor with no growth. These figures describe the business before Peak, and roughly 22 to 23 million shares; Peak is valued separately below and the current share count of about 30.4 million is used for all per-share values. The base case: $4.18 per share. The existing business earns $7.7M a year for ten years. After that it fades to zero over another ten years, because Epsilon has a drilling inventory it describes as substantial but not a counted, dated one. That is worth about $72 million. Peak is credited only with what the reserve report shows: the discounted value of proved reserves (a standard 10% discount measure) rose from $50.7 million to $156.1 million during 2025, a gain of $105.4 million. Total proved reserves rose 86% to 156,037 million cubic feet of gas equivalent, mostly from Wyoming. We subtract the $50.5 million drawn on the credit facility (interest at SOFR plus 3.25%, maturing October 10, 2029, borrowing base $80 million) that helped fund the deal, because the reserve value does not reflect the cost of that borrowing. That leaves about $55 million. Together, about $127 million, or $4.18 per share. We give no separate credit for the $59.0 million of unproved Wyoming leasehold recorded in the purchase price, for higher prices, or for production growth, since none of these is secured. The bear case: $0.53 per share. Owner earnings drop to $2.9M a year (the 2019 level, the third-weakest of eight years) for ten years and then end, worth about $21 million. From Peak we keep only the developed reserves, about half of the total: Wyoming proved developed reserves were 38,996 million cubic feet equivalent at year-end 2025, against 38,041 acquired undeveloped, and the undeveloped half needs new drilling money. That leaves about $53 million of reserve value, less the $50.5 million of debt and the $8.3 million of long-term ad valorem taxes assumed with Peak, so Peak contributes about -$5 million. Two purchasers took 95.7% of Wyoming operated oil and gas revenue in 2025, so losing or repricing one hurts. The bull case: $4.96 per share. Owner earnings run at $10.2M, the 2018 level and close to the 2025 figure of $10.0M, for ten years and then fade to zero, about $96 million. Peak is valued as in the base case, about $55 million. The bull case is only modestly above the base case because we cannot name further drivers that are already secured. What changed and what to watch. First-half 2026 revenue was $43.9M and operating cash flow $22.4M; net investing outflow was $6.4M after $4.2M of property sale proceeds, and $10M was repaid on the credit line. On our measure that is roughly $5M to $6M of owner earnings for the six months, though we could not fully separate working-capital effects. That is above the pace of our anchor, but two quarters do not move it. Natural gas prices matter: Pennsylvania gas realized $2.98 per thousand cubic feet in 2025 versus $1.80 in 2024, and revenue rose 64% to $51.6M. What would make this wrong: Peak's reserves failing to convert at the cost the reserve report assumes, or lenders cutting the borrowing base. What we could not settle from the filings: how much of the 2023 and 2024 spending was growth versus maintenance, and the split of the reserve value between Peak and the assets sold.