Epsilon Energy Ltd.

Depletion, Depreciation, Amortization and Accretion (“DD&A”)

Natural gas and oil and gathering system assets are depleted and depreciated using the units of production method aggregating properties on a field basis. For leasehold acquisition costs and the cost to acquire proved and unproved properties, the reserve base used to calculate depreciation and depletion is total proved reserves. For natural gas and oil development and gathering system costs, the reserve base used to calculate depletion and depreciation is proved developed reserves.

Depreciation expense includes amounts pertaining to our office furniture and fixtures, leasehold improvements, and computer hardware. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 7 years. Also included in depreciation expense is an amount pertaining to buildings owned by the Company. Depreciation for the buildings is calculated using the straight-line method over an estimated useful life of 30 years.

Accretion expense is related to the asset retirement costs.

DD&A expense for the three and six months ended June 30, 2026 decreased by $0.4 million, or 12%, and $0.9 million, or 13%, respectively, from the same period in 2025. This decrease was a result of higher reserves and lower production in Pennsylvania and Texas and the sale of the Oklahoma assets (offset by the addition of the Wyoming assets).

Impairment

We perform a quantitative impairment test whenever events or changes in circumstances indicate that an asset group's carrying amount may not be recoverable, over proved properties using the market forward prices, timing, methods and other assumptions consistent with historical periods. When indicators of impairment are present, GAAP requires that the Company first compare expected future undiscounted cash flows by asset group to their respective carrying values. If the carrying amount exceeds the estimated undiscounted future cash flows, a reduction of the carrying amount of the properties to their estimated fair value is required. Additionally, GAAP requires that if an exploratory well is determined not to have found proved reserves, the costs incurred, net of any salvage value, should be charged to expense.

For the three and six months ended June 30, 2026, there was no impairment. For the three and six months ended June 30, 2025, the Company recorded an impairment of $2.7 million for two wells drilled in Alberta, Canada. The impairment was a result of a decrease in estimated reserves due to early production coming in below expectations, cost overruns and lower forward commodity prices.

Gain on sales of oil and gas properties

For the three and six months ended June 30, 2026, the Company sold its overriding royalty interests (ORRIs) in Susquehanna Co, Pennsylvania for $3.9 million and a wellbore interest in Texas for $0.3 million. There were no property sales for the three and six months ended June 30, 2025.

Transaction Costs

For the three and six months ended June 30, 2026, the Company had transaction costs related to the Peak acquisition of $0.2 million and $0.3 million, respectively, for advisory and legal services incurred by the Company. For the three and six months ended June 30, 2025, there were no transaction costs.