Earthstone Energy (ESTE) Update - Dec 12

[dan_s]

John White at Roth Capital has issued a new report on Earthstone. Below are his words cut from the report. My comments are in blue.

Our valuation is based on a net asset value (NAV) analysis which produced $15.44 per share, which we
rounded higher to derive our price target of $15.50. < This compares to my valuation of $16.50 per share and First Call's price target of $14.07.

We have adjusted our 4Q 2018 estimates to reflect our recently decreased crude oil price projection. Our 4Q 2018 crude oil price estimate decreased from $69.00/bbl to $65.00/bbl. Due primarily to this change, our EPS/EBITDA estimates move lower, from $0.29/$37.7 million to $0.25/$33.5 million. < Compares to my Q4 EPS/EBITDA forecast of $0.17/$32.3 million.

Our full year 2019 estimates have changed due to the pending acquisition, as explained below.

We have adjusted our 2019 estimates using the following assumptions: 1) we model the Sabalo Energy acquisition as closing on 1/1/2019, although the shareholder vote is scheduled for 1/3/2019, 2) our model reflects the assumptions that the new shares are issued to the seller, that the $500 million senior notes offering, the $225 million 8.75% convertible preferred and the revised bank credit facility also close on 1/1/2019. For the new senior note issue, we assume a 10% coupon with the notes priced at par. For oil and gas production we employ 24,144 BOE per day, slightly under the low end of the ESTE issued guidance range of 25,000 BOE per day to 29,000 BOE per day. < My 2019 forecast is based on estimated production of 26,000 BOE per day.

Our 2019 estimates revenues, cash flow and earnings increase significantly. Revenues increase 132%, EBITDA moves up 149% and EPS jumps 179%.
John's EPS/EBITDA forecast for 2019 of $1.31/$291.8 million, which compares to my forecast of $1.23/$290.7 million.

Finally, we note at yesterday’s closing price of $6.14 per share, the stock is trading at 4.7x our 2019 estimated EPS of $1.31
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MY TAKE: It is quite clear that The Wall Street Gang has not yet figured out the significance of the Sabalo Energy acquisition. Some Wall Street firms will not consider the impact of an acquisition until it closes.

[ChuckGeb]

Seems like Wall Street has figured out that oil and gas stocks were a bad place to invest capital in 2018, a self perpetuating situation. When do you see the worm turning with meaningful buyers coming back into the market to reward us smart guys who have figured it out?

[dan_s]

Based on the assumption that the upstream oil & gas industry will survive, which of course it must if there is any hope for humanity, EVENTUALLY the FEARs will fade away. GREED will then draw some buyers because the majority of upstream companies' stocks are grossly oversold.

Like ESTE, there are a lot of high quality companies now trading at very low PE ratios. BTW I do think John White's forecast for ESTE is conservative.

One myth that must be overcome is that upstream companies cannot make money at $50 oil. That just isn't true. Most of the Sweet 16 did not have realized prices much higher than $50 during the first three quarters and they are all extremely profitable. For example, PXD's realized oil price (net of cash settlements on hedges) has only been $54.50/bbl during the first nine months of 2018 and during that period it has generated GAAP EPS of $3.78 and operating cash flow of $2.4 Billion (over $14 CFPS). Adjusted EPS are approximately $1.00/share higher.

Q4 results for the Sweet 16 are going to be higher than what I believe the Wall Street Gang is expecting. Why??????????
> High oil prices in October should push the average WTI price close to $60/bbl for the quarter.
> High natural gas prices and NGL prices should soften the blow of lower oil prices.

My SWAG is that fund managers will wait until January to rotate money into this grossly oversold sector. They just need to believe that oil has found a "bottom". A few are optimistic.
> Wells Fargo has raised their WTI oil price forecast by $5 to $65 for 2019
> Raymond James thinks WTI will stabilize in Q1 and then march higher to $75 in Q4 2019, averaging $62 in 2019 and $92.50 in 2020. < Impact of IMO 2020 is HUGE.
> Lots of the Wall Street Gang are now using $50 WTI for all future periods to value companies, which is appropriate. Even at that oil prices most firms are valuing the companies at much higher share prices than where they are trading today.
> It will only take a slight "Paradigm Shift" to bring in lots of money that is sitting on the sidelines. FEAR and GREED drive the markets.

It would definitely help if our government was not such a mess. It is comical, but very sad that we ended up with the clowns we have in Washington these days. Power and Greed is what destroys nations. Let's hope that God is still watching out for us.

[ChuckGeb]

I can’t think of anything more comical than Rick Perry in Iraq playing let’s make a deal. He has done nothing for the oil business in Texas and seems to favor coal over oil. No wonder Trump has kept him. He is not dumb and lazy like Rex Tillerson!

My thinking matches yours that there is no hope for a rebound in 2018 as no fund manager wants to show energy holdings in their year end portfolio. I am just hoping that GPOR, AR, and the others with stock buy back programs are aggressively acquiring shares at these prices.

Can’t wait for Goldman to give the buy order to its flock!

[dan_s]

As we have both seen many times over the decades, when GS thinks they have milked the downside as much as they can, they will suddenly become very bullish on oil.

IMO all we need is one big Unplanned Supply Outage and the price of oil spikes. I don't put it past some of the OPEC members to fund a temporary shutdown to the Strait of Hormuz after they go long on oil futures. The chance to make incredible money can motivate a terrorist cell to take a risk. One swift boat loaded with explosives can cripple a tanker in the Strait.

BTW Iran threatened to do it yesterday.