Earthstone Energy (ESTE) Update - Oct 11

[dan_s]

From RBC Capital Markets: Price target for ESTE is $13.00

Earthstone Energy, Inc.
Quarterly Check-Up: 3Q21
Our view: We have updated our 3Q21 estimates to reflect final commodity
prices and made other tweaks to our model based on our channel checks,
data analytics, and conversations with the company. Building scale and
reducing debt remain the top priorities with FCF, but discussions on
shareholder returns could occur later next year if the current strip holds
and leverage trends toward long-term targets.

Key points:
• Our 3Q21E EPS/CFPS increased by $0.03/$0.06 to $0.24/$0.72,reflecting
final 3Q21 benchmark commodity prices and other tweaks to our model. < My Q3 forecast is EPS of $0.19 and operating CFPS of $0.67.
Our estimates are above Consensus at $0.21/$0.70 estimates.
• We model production at 26 Mboe/d (11.9 Mb/d oil), a touch lower
than Consensus estimates of 26.5 Mboe/d (12.1 Mb/d oil). The company
guides production at 25.5-27.0 Mboe/d (11.7-12.7 Mb/d oil) for 2H21.
• Capital spending should near $45 million and FCF generation is $17
million for the quarter.
• We think LOE costs will increase a bit sequentially with higher workover
activity occurring at stronger oil prices. We model LOE costs close $6/
boe, towards the upper end of $5.75-6.00/boe guidance for 2H21.
Channel checks & investment themes:
• Consolidation for operational and economic scale remains a strategic
focus. The recent Midland Basin bolt-on acquisition earlier this week was
its 4th transaction this year and done at levels below PDP valuation.
• We assume the recent acquisition closes 4Q21 and starts contributing
4 Mboe/d (17% oil). Total consideration is $73 million composed of $49
million in cash and the rest in equity similar to how previous M&A deals
were structured.
• Leverage should increase slightly post deal closing however management
reiterated its confidence in achieving sub-1.25x leverage by YE21.
• The long-term leverage target remainssub-1.0x however as evidenced in
the past, ESTE is comfortable flexing leverage in the near term to finance
the right accretive M&A opportunity. Such situations need to provide the
opportunity to hedge out returns and give a line of sight to deleveraging.
We get a sense that 1.75x is likely a hard-cap to management's comfort
level with flexing leverage.
• We expect ESTE recently layered in additional oil & gas hedges for next
year's program given the move in the strip and recent bolt-on acquisition
when ESTE historically hedges a larger portion of PDP volumes around
M&A deals.
• We expect ESTE still to target a 2 rig program next year translating to
double-digit FCF yields and production growth. We think a discussion on
adding a third rig could come at 3Q21 earnings given where the strip sits
and the now larger asset base.
• Service and raw materials cost inflation should get readdressed at
earnings. Management at last update commented it was present across
the business but to that point remained manageable with offsetting
efficiency gains.