I have updated my forecast/valuation model for Earthstone based on the details and guidance that the Company provided on December 18th with their press release announcing the definitive agreement to acquire Independence Resources Management, LLC (“IRM”), a privately held independent E&P company backed by Warburg Pincus, LLC and its affiliates (“Warburg”), and operating in the Midland Basin (the “Transaction”).
My valuation increases by $1.00 to $9.00 per share. First Call's valuation of $5.15 is the average price target of the 8 analysts reports that are in the Reuters database. 7 of the 8 reports are dated prior to the December 18 press release. They all rate ESTE a BUY or STRONG BUY.
Proforma production for 2021 is 25,000 Boepd (60% crude oil, 20% natural gas and 20% NGLs)
Revenues assuming realized prices (including cash settlements on hedges) of $50/bbl oil, $2.50/mcf ngas and $20/bbl NGLs) s/b approximately $338 million
My proforma EBITDA of $244.9 million compares to Earthstone's guidance of $246.0 million
For 2021 my proforma earnings per share are $0.46 and proforma operating cash flow per share is $2.68. < A valuation of 3X to 4X operating cash flow is reasonable.
A high percentage of Earthstone's leasehold is now held by production ("HBP"), so they are not under any pressure run out a bunch of drilling rigs. They plan to start with just a one rig drilling program in Q1. If commodity prices firm up, I expect them to add at least one more drilling rig next summer.
There is justification for a higher valuation for this stock, but small-caps aren't trading at reasonable valuations this year. After the deal closes and we see Q1 2021 results that confirm my model, the valuation should go higher. Earthstone has strong financial backers, which is a BIG PLUS these days.
Earthstone Energy (ESTE) Update - Dec 19
Earthstone Energy (ESTE) Update - Dec 19
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Earthstone Energy (ESTE) Update - Dec 19
High Praise from RBC Capital Markets on 12/22/2020
Investment summary
We believe that ESTE shares should outperform its peer
group over the next 12 months. The company has a
combination of a high quality asset base, experienced
management team, and a good balance sheet. We think that
provides a platform that reduces the risk profile compared to
small cap peers and allows for strong and accretive returns
at mid-cycle prices. We expect ESTE can grow production in
a +/-10% range while remaining FCF positive over the next
several years. The company's Grade A inventory depth is 5-6
years, so we expect management to remain active in pursuing
accretive bolt-on acquisitions.
• ESTE has a peer leading balance sheet with net debt-to-EBITDA
of 1x, well ahead of the 2.9x peer average.
• The company operates the majority of its investment capital
and production (>85%).
• The recent acquisition of "IRM" provides increased scale and
FCF to enhance shareholder value.
• The company is positioning to build scale and be a
consolidator in the current environment. With low leverage
we believe the company has ample room to flex on
its revolver to finance smaller transactions; however,
management likely looks to equity in order to finance any
transformational deals similar to its past larger acquisitions.
• Low leverage, a disciplined hedging strategy and a strong
operating team make ESTE an attractive take-out target for
larger consolidators in the current M&A wave, in our view.
• The Eagle Ford asset has minimal inventory left, making it an
area to harvest FCF but it could be a sale candidate at a
reasonable valuation.
• ESTE is positioned to generate robust FCF in 2021E,
benefiting from 6 wells to be turned online towards 2020
year-end, as well as a 5 well pad awaiting to be turned inline
sometime in 1Q21. These 11 wells should keep oil volumes
relatively flat year-over-year with very minimal spending.
Investment summary
We believe that ESTE shares should outperform its peer
group over the next 12 months. The company has a
combination of a high quality asset base, experienced
management team, and a good balance sheet. We think that
provides a platform that reduces the risk profile compared to
small cap peers and allows for strong and accretive returns
at mid-cycle prices. We expect ESTE can grow production in
a +/-10% range while remaining FCF positive over the next
several years. The company's Grade A inventory depth is 5-6
years, so we expect management to remain active in pursuing
accretive bolt-on acquisitions.
• ESTE has a peer leading balance sheet with net debt-to-EBITDA
of 1x, well ahead of the 2.9x peer average.
• The company operates the majority of its investment capital
and production (>85%).
• The recent acquisition of "IRM" provides increased scale and
FCF to enhance shareholder value.
• The company is positioning to build scale and be a
consolidator in the current environment. With low leverage
we believe the company has ample room to flex on
its revolver to finance smaller transactions; however,
management likely looks to equity in order to finance any
transformational deals similar to its past larger acquisitions.
• Low leverage, a disciplined hedging strategy and a strong
operating team make ESTE an attractive take-out target for
larger consolidators in the current M&A wave, in our view.
• The Eagle Ford asset has minimal inventory left, making it an
area to harvest FCF but it could be a sale candidate at a
reasonable valuation.
• ESTE is positioned to generate robust FCF in 2021E,
benefiting from 6 wells to be turned online towards 2020
year-end, as well as a 5 well pad awaiting to be turned inline
sometime in 1Q21. These 11 wells should keep oil volumes
relatively flat year-over-year with very minimal spending.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group