Epsilon Energy Ltd.

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 and six months ended June 30, 2025, Epsilon recognized gains on commodity derivative contracts of $2,573,863 and $1,111,693, respectively. These amounts included cash received of $306,660 and cash paid of $108,383 on settlements on these contracts, respectively. For the three and six months ended June 30, 2024, Epsilon recognized losses on commodity derivative contracts of $94,891 and $195,617, respectively. These amounts included cash received on settlements on these contracts of $272,257 and $760,542, respectively.

Commodity Derivative Contracts

At June 30, 2025, the Company had outstanding natural gas NYMEX Henry Hub (“HH”) swaps totaling 2.67 Bcf, natural gas Tennessee Z4 basis swaps totaling 0.78 Bcf, natural gas NYMEX HH options totaling 0.93 Bcf, and crude oil NYMEX WTI CMA swaps totaling 40 MBbls.

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