Epsilon Energy Ltd.

Commodity Price Risks

Epsilon engages in price risk management activities from time to time. These activities are intended to manage Epsilon’s exposure to fluctuations in commodity prices for natural gas and oil by securing derivative contracts for a portion of expected sales volumes.

Inherent in the Company’s fixed price contracts, are certain business risks, including market risk and credit risk. Market risk is the risk that the price of oil and natural gas will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by the Company’s counterparty to a contract. The Company does not currently require collateral from any of its counterparties nor do its counterparties currently require collateral from the Company.

The Company enters into certain commodity derivative instruments to mitigate commodity price risk associated with a portion of its future natural gas and oil production and related cash flows. The natural gas and oil revenues and cash flows are affected by changes in commodity product prices, which are volatile and cannot be accurately predicted. The objective for holding these commodity derivatives is to protect the operating revenues and cash flows related to a portion of the future natural gas and oil sales from the risk of significant declines in commodity prices, which helps ensure the Company’s ability to fund the capital budget.

Epsilon has historically elected not to designate any of its financial commodity derivative contracts as accounting hedges and, accordingly, accounts for these financial commodity derivative contracts using the mark-to-market accounting method. Under this accounting method, changes in the fair value of outstanding financial instruments are recognized as gains or losses in the period of change and are recorded asLoss on derivative contracts on the condensed Consolidated Statements of Operations and Comprehensive Income. The related cash flow impact is reflected in cash flows from operating activities. During the three months ended March 31, 2026, Epsilon recognized losses on commodity derivative contracts of $8,929,829. This amount included cash paid of $1,047,836. For the three months ended March 31, 2025, Epsilon recognized losses on commodity derivative contracts of $1,462,170. This amount included cash paid on settlements on these contracts of $415,043.

Commodity Derivative Contracts

At March 31, 2026, the Company had outstanding NYMEX HH swaps totaling 1.27 Bcf, NYMEX HH options totaling 4.33 Bcf, NYMEX WTI CMA swaps totaling 312,077 Bbls, and NYMEX WTI CMA options totaling 157,987 Bbls for the contract period of April 2026 to January 2028.

At March 31, 2025, the Company had outstanding natural gas NYMEX Henry Hub (“HH”) swaps totaling 1.56 Bcf, natural gas Tennessee Z4 basis swaps totaling 1.56 Bcf, and crude oil NYMEX WTI CMA swaps totaling 47 MBbls.

The following table presents the changes in the fair value of Epsilon’s commodity derivatives for the periods indicated: