Epsilon Energy Ltd. Fair Value Disclosure
17. Fair Value Measurements
The methodologies used to determine the fair value of our financial assets and liabilities at December 31, 2025 were the same as those used at December 31, 2024.
Cash, restricted cash, accounts receivable, and accounts payable are carried at cost, which approximates fair value because of the short term maturity of these instruments. Cash equivalents from the Company’s money market accounts are carried at fair value. The Company’s revolving line of credit has a recorded value that approximates its fair value since its variable interest rate is tied to current market rates and the applicable margins represent market rates. The revolving line of credit is classified within Level 2 of the fair value hierarchy.
Commodity derivative instruments consist of NYMEX HH swap and option contracts and basis swap contracts for natural gas and NYMEX WTI CMA swap and option contracts for crude oil. The Company’s derivative contracts are valued based on a marked to market approach. These assumptions are observable in the marketplace throughout the full term of the contract, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace, and are therefore designated as Level 2 within the valuation hierarchy. The Company utilizes its counterparties’ valuations to assess the reasonableness of its own valuations.
| December 31, 2025 | ||||||||||||||
| Level 1 | Level 2 | | Level 3 | | Effect of Netting | | Net Fair Value | |||||||
Assets | | | | | | ||||||||||
Derivative contracts | $ | — | $ | 5,401,303 | $ | — | $ | (1,552,027) | $ | 3,849,276 | |||||
Cash equivalents | $ | 181,076 | $ | — | $ | — | $ | — | $ | 181,076 | |||||
Liabilities | |||||||||||||||
Derivative contracts | $ | — | $ | 1,552,027 | $ | — | $ | (1,552,027) | $ | — | |||||
December 31, 2024 | |||||||||||||||
Level 1 | Level 2 | | Level 3 | | Effect of Netting | | Net Fair Value | ||||||||
Assets | | | | | | ||||||||||
Derivative contracts | $ | — | $ | 403,032 | $ | — | $ | (403,032) | $ | — | |||||
Cash equivalents | $ | 298,767 | $ | — | $ | — | $ | — | $ | 298,767 | |||||
Liabilities | |||||||||||||||
Derivative contracts | $ | — | $ | 890,580 | $ | — | $ | (403,032) | $ | 487,548 | |||||
Non-Recurring Fair Value Measurements
For the year ended December 31, 2025, the Company performed an impairment test on our oil and gas properties and it was determined that the carrying amount in New Mexico and Canada each exceeded the estimated undiscounted future cash flows resulting in a reduction of the carrying amount of the oil properties to their estimated fair values by $3.9 million. Fair value is determined using management’s best estimate of proved reserves and net cash flows by area, using forward commodity prices from the last day of the year. The undiscounted future net cash flows are compared to the carrying value of each area. This nonrecurring fair value measurement is classified within Level 3 of the fair value hierarchy.
The table below summarizes the fair value of the impaired assets as of the fair value measurement date, December 31, 2025.
| Quoted Prices | Significant | ||||||||||
in Active | Other | Significant | ||||||||||
Markets for | Observable | Unobservable | ||||||||||
December 31, | Identical Assets | Inputs | Inputs | |||||||||
2025 | | (Level 1) | | (Level 2) | | (Level 3) | ||||||
Nonrecurring fair value measurement | ||||||||||||
Long-lived assets held and used | $ | 1,110,288 | $ | — | $ | — | $ | 1,110,288 | ||||
Total Nonrecurring fair value measurement | $ | 1,110,288 | $ | — | $ | — | $ | 1,110,288 | ||||
For the year ended December 31, 2024, the Company performed an impairment test on our oil and gas properties and it was determined that the carrying amount of the Killam project in Alberta, Canada exceeded the estimated undiscounted future cash flows resulting in a reduction of the carrying amount of the oil properties to their estimated fair values by $1.45 million. Fair value is determined using management’s best estimate of proved reserves and net cash flows by area, using forward commodity prices from the last day of the year. The undiscounted future net cash flows are compared to the carrying value of each area. This nonrecurring fair value measurement is classified within Level 3 of the fair value hierarchy.
The table below summarizes the fair value of the impaired assets as of the fair value measurement date, December 31, 2024.
| Quoted Prices | Significant | ||||||||||
in Active | Other | Significant | ||||||||||
Markets for | Observable | Unobservable | ||||||||||
December 31, | Identical Assets | Inputs | Inputs | |||||||||
2024 | | (Level 1) | | (Level 2) | | (Level 3) | ||||||
Nonrecurring fair value measurement | ||||||||||||
Long-lived assets held and used | $ | 492,253 | $ | — | $ | — | $ | 492,253 | ||||
Total Nonrecurring fair value measurement | $ | 492,253 | $ | — | $ | — | $ | 492,253 | ||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Mar 27, 2026 | Showing above |
| 2024 | Mar 19, 2025 | |
| 2023 | Mar 21, 2024 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.