Earthstone Energy (ESTE) Valuation Update - June 28

[dan_s]

At the time of this post ESTE was trading at $16.43. First Call's price target is $24.22, but it has not been updated since mid-May.

I have updated my current valuation by $1 to $39.00.

> My valuation multiple has been lowered by 0.5 to 5.5 X Annualized Operating Cash Flow Per Share because of the additional debt that will be needed to close the Titus Acquisition that was announced this morning.
> Closure of the Chisholm Acquisition on February 15 and the BigHorn Acquisition on April 14 should increase Earthstone's production from 35,509 Boepd in Q1 to ~71,500 Boepd in Q2 2022.
> Timing of the Titus Acquisition will impact Q3 production. If it closes in early September, the Company's production should be ~80,000 Boepd in Q3.
> Earthstone's production guidance for Q4 2022 (on their website today) is 94,000 to 103,000 Boepd (~46% crude oil).

If all goes according to plan and Earthstone's realized commodity prices net of cash settlements on their hedges in 2H 2022 are $6.00/mcf for natural gas and $92/bbl for crude oil, the Company's 2022 operating cash flow should be close to $1,063 million ($7.47/share) and free cash flow from operations should be $550 to $600 million for this year.

There is no justification for ESTE to be trading for less than 2.2 X CFPS.

If WTI averages $100/bbl and HH natural gas averages $7.00/MMBtu during 2H 2022, Earthstone's PV10 Net Asset Value of just P1 reserves should be over $30/share at year-end. With production over 100,000 Boepd and lots of low-risk / high-return drilling inventory, Earthstone should be a "Screaming Takeover Target" within six months.

[dan_s]

Earthstone Energy, Inc. (ESTE, $14.68, Buy with Price Target of $35.00)
Latest Accretive Deal Comes with “Free” Drilling Inventory Pushing our PT Higher​

Earthstone announced its 7th acquisition since early '21 with the latest deal appearing reasonably priced based on all metrics (even factoring in flush production). We suggest the company is paying virtually nothing for the undrilled assets even after assuming a lower than normal cost per flowing barrel. In our
view, today’s transaction is yet another in a string of successful deals that has transformed ESTE into one of the premiere SMID cap E&Ps. We continue to believe investors are materially underappreciating the organic and external growth as judged by the current ~2x earnings valuation.
Neal Dingmann, Truist Financial 6-29-2022

Neal's price target was $30.00 before this note.