Under the Radar: The Real Impact of Increased Drilling on Oil Market Dynamics

Donald Trump made this a centerpiece of his campaign for a second term, suggesting that he could get oil and gas producers to turn on the spigots and drive the prices of gasoline below $2.

Judging by last week’s address to Congress, it is not an idea the President seems likely to drop.

A lot of oil and gas executives wish he would.

“Drill, Baby, Drill” and cheap gas is a cool campaign theme. It is a disaster for profit margins at small to midsize oil and gas producers.

Sustained high levels of production would destroy many of these companies.

The industry has been down this road before and has no desire to go there again.

As Pioneer Natural Resources CEO Scott Sheffield said last year when the topic first arose at a campaign rally, “No company wants to risk another price collapse. We are disciplined now because we’ve learned from past cycles.”

The big companies are not fans of the idea either. During the period between the election and inauguration, the President of Exxon’s XOM upstream division, Liam Mallon, told Bloomberg, “I think a radical change is unlikely because the vast majority, if not everybody, is primarily focused on the economics of what they’re doing.”

He added, “I don’t think we’re going to see anybody in the drill, baby, drill mode. I really don’t.”

While the industry may resist, it is safe to say the President is going to push the point.

What “Drill, Baby, Drill” is likely to accomplish is touching off a wave of oil patch merger and acquisition activity.

If we do begin to see large production increases coupled with a slowdown in economic activity because of policy decisions, smaller companies are going to struggle.

Just as we saw in the banking industry over the past 30 years, scale and size are going to be primary determinants of profits.

The bigger you are, the more likely you will be to stay profitable in the era of “Drill, Baby, Drill.”

The smart play is going to be for smaller companies to look for a larger partner.

The smarter play is to look for companies that are attractive targets that would be good buys to add attractive assets and gain scale but are capable of growing on a standalone basis.

Epsilon Energy EPSN is a perfect example of a smaller energy company that will allow investors to have the best of both worlds.

Epsilon Energy Ltd. is a debt-free independent energy company focused on natural gas and oil production, with core assets in the Northeast Pennsylvania Marcellus Shale, the Permian Basin, and Alberta, Canada. The company maintains a strong balance sheet with $8.8 million in cash and $45 million in undrawn revolver capacity, providing financial flexibility for growth and shareholder returns. With stable midstream revenues, low-cost natural gas production, and high-margin oil upside in the Permian and Alberta, EPSN presents a balanced mix of stability and growth potential.

EPSN has a core position in the Marcellus, one of the lowest-cost natural gas basins in the U.S. The company holds 5,142 net acres with 139 producing wells and a 35% stake in the Auburn Gas Gathering System, which provides stable midstream revenues.

The company also has 400,000-500,000 ft. of undeveloped inventory they can bring online as natural gas prices improve.

A relaxation of regulations that allows for new pipeline capacity to be added in the region would be an enormous plus for Epsilon.

Epsilon’s expansion into the Permian Basin is a game-changer. The company has poured $38 million into its Ector County, TX position, shifting its production mix toward high-margin oil. It’s already seeing strong results, with seven producing wells and a massive runway of 30-40 future drilling locations.

More importantly, this move diversifies EPSN away from natural gas price volatility. Natural gas has been a rough ride lately, but oil demand remains resilient. If prices remain steady, Epsilon’s forecasted 140%+ growth in liquids production could drive significant cash flow expansion.

Epsilon has maintained a disciplined approach to capital allocation, balancing strategic growth investments with consistent shareholder returns.

A significant portion of cash flow was directed toward the Permian Basin, where it is aggressively expanding its oil-weighted production.

20% was allocated to its core Marcellus asset, supporting ongoing development in one of the lowest-cost natural gas basins in the country.

The company also invested $2.6 million in its newly formed Alberta joint venture, a move designed to open long-term growth opportunities in a promising Canadian oil and gas play.

Beyond growth initiatives, EPSN has remained committed to returning capital to shareholders. The company paid out $5.5 million in dividends.

$2.2 million was allocated to stock buybacks, increasing the value of remaining shares.

In March 2024, EPSN authorized a new buyback program for up to 2.2 million shares, demonstrating continued confidence in its own undervalued stock.

Since mid-2022, it has already repurchased 1.82 million shares at an average price of $5.24 per share, signaling a strong commitment to enhancing shareholder value.

The combination of attractive assets in two of the more attractive producing regions in the country could prove to be an enticing target for a potential buyer.

At the same time, management has positioned the company to grow and made smart investments to increase scale organically.

Either way, Epsilon Energy allows investors to “Win, Baby, Win” no matter how “Drill, Baby, Drill” plays out.