Earthstone Energy (ESTE) Update - June 13

[dan_s]

Earthstone Energy (ESTE) is trading at $5.35/share this morning.

The note below was sent out by John White at Roth Capital this morning with my comments in blue.

Our valuation of ESTE is based on a net asset value (NAV) analysis which produced $11.86 per share, which we adjusted higher to derive our price target of $12.00.

ESTE: Stellar F&DC, Strong 2H Production Surge, Low Leverage < "FC&C" = Finding, Development & Completion Costs.

ESTE’s recent presentation illustrates its 2018 F&DC of $7.79/BOE as superior to a wide ranging list of active and, in our opinion, high quality Permian Basin E&Ps. ESTE's F&DC is 7% lower than the mean F&DC of our coverage at $8.41/BOE. This low F&DC showcases the high quality of ESTE’s acreage and operations expertise.

Our 2Q 2019 production estimate of 11,075 BOE per day is essentially flat with the 1Q 2019 actual production of 11,209 BOE per day. However, production in 2H 2019 is expected to show strong increases. Production guidance for 2019 is unchanged and is in the range of 11,000 BOE per day to 12,000 BOE per day. Production growth will be weighted to 2H 2019 due to the completion schedule. < My forecast is that Q2 production will be ~11,400 Boepd, rising to an exit rate of 12,500 Boepd by December.

ESTE has communicated it completed three wells in 1Q 2019, does not plan any well completions in 2Q 2019, and plans to commence drilling of nine wells in 2H 2019 and finalize completion of 10 wells in 2H 2019. All of these wells are in ESTE’s core areas of Midland county and Reagan county, Texas.

In the Eagle Ford Shale play ESTE has initiated drilling on a seven well project in southern Gonzales County, Texas with ESTE holding a 44% interest in all seven wells. These wells will average approximately 7,000 foot laterals with the completion program anticipated to begin by the end of 3Q 2019.

Accordingly, we model production growth of 13% from our projected 2Q 2019 figure of 11,075 BOE per day to our projected 4Q 2019 rate of 12,559 BOE per day for 3Q 2019 and 8% for 4Q 2019. < So, my Q2 production estimate may be too high, but my exit rate estimate may be too low.

ESTE is managing the balance sheet while pursuing production growth, with debt at 3/31/2019 of $120.8 million equal to 0.9x of estimated 2019 EBITDA of $129.2 million.

To better reflect the current commodity price environment, we have decreased our 2019 WTI crude oil price estimates as follows: 2Q 2019: from $64.00/bbl to $60.00/bbl, 3Q 2019: from $62.00/bbl to $55.00/bbl, 4Q 2019: from $64.00/ bbl to $55.00/bbl. Our 2020 estimate moves from $60.00/bbl to $54.25/bbl and our 2021 and thereafter price is introduced at $55.00/bbl.

ESTE’s 24% increase in proved reserves offsets our lower crude oil price deck and our target price is unchanged at $12.00. < This compares to my Fair Value Estimate for ESTE of $10.20.

[dan_s]

In the last 3 months, 3 ranked analysts (not including John White at Roth Capital) set 12-month price targets for ESTE. The average price target among the analysts is $9.33.

~82% of Earthstone's oil production for Q2 to Q4 2019 is hedged at an average price of $65.60. So...in addition to getting paid a nice cash settlement in Q2 2019, the company will book a big non-cash mark-to-market gain on the hedges in Q2 2019. My SWAG is that "Reported EPS" will be $0.50 or more in Q2.

I have tweaked my forecast/valuation model for ESTE based on new information provided in their June presentation (you can view it on the company's website) and posted it to the EPG website. My valuation increases to $11.00/share.