Earthstone Energy (ESTE) Q2 Results

[dan_s]

ESTE reported actual 2Q 2018 production of 8,845 BOE per day, under my forecast of 10,100 BOE per day and lower than the consensus figure of 10,110 BOE per day.
> ESTE has decided to slow the pace of its drilling & completion program primarily as a result of takeaway capacity issue in the Permian Basin and increasing Midland Basin oil price differentials.
> Q2 EBITDA was $20.5 million, in line with my forecast.

ESTE temporarily delayed certain completion activities and focused its activity on locations with drilling obligations. ESTE also had certain land trades in progress during 2Q that will ultimately provide for longer laterals. ESTE further commented that the economic returns from its operations are very attractive at current levels and the wells are meeting or exceeding type curves. Nonetheless, it decided to slow activity due to the impact of the negative oil price differentials in the Midland Basin which averaged ($5.15)/bbl in 2Q 2018.

Due to the slower pace of activity, production guidance for 2018 is being pulled lower, from the previous range of 12,000 BOE per day to 12,500 BOE per day to a range of 10,500 BOE per day to 11,000 BOE per day. The new range is lower than my current estimate for 2018 production of 11,904 BOE per day.
ESTE estimated exit rate for 2018 average daily production figure of 13,500 BOE per day - 14,000 BOE per day as part of the new guidance.
The commodity mix is unchanged with oil at 64%, natural gas at 17% and NGL at 19%.

Capital Expenditure guidance for 2018 also moves lower, from $170 million to $140 million.
Total debt at June 30, 2018 was $22.5 million, slightly lower than the $25.0 million as at December 31, 2017.

"We have currently reduced our estimated 2018 capital budget to approximately $140 million, which assumes a continuing one-rig program for our operated acreage in the Midland Basin and a 10 well program for our operated Eagle Ford acreage. At present, we are planning for a second operated rig in the Midland Basin in late 2018 or early 2019." < From an exit rate of 14,000 Boepd at the end of this year, Earthstone's production should ramp up to over 20,000 Boepd by the end of 2019. I am going to assume 16,000 Boepd of production (60% crude oil) in 2019 for modeling purposes.

I am updating my forecast/valuation model for ESTE and will post it to the EPG website later today.

[dan_s]

All Earthstone has done is push their growth plan out six months because of the takeaway capacity issues / lower oil prices in the Midland Basin. To hit the bottom of their revised production forecast for 2018, Q3 production s/b ~11,000 Boepd and Q4 production s/b ~12,500 Boepd. They are expecting to exit the year with production of ~14,000 Boepd.

I think they are making the wise decision to push the addition of another rig into 2019. Why complete high decline rate horizontal wells into a low oil price environment if you don't need to do it? Pushing completions into the second half of 2019 (when Midland Basin oil prices will rebound) will increase the ROR on those wells. BTW I think a lot more Permian Basin companies should be doing the same thing.

I have updated my forecast/valuation model for ESTE and it will be posted to the EPG website later today. My valuation dips by $3.00 to $15.00/share.

[jb2257]

This was your rising star that I got burned on.

[dan_s]

Hang tough on this one. Earthstone has a great team and all they've done is push things out a few months, which is the "right thing" to do since Midland Basin oil price differentials will be high until mid-2019.

To hit the low end of their new production guidance for 2018 here is what the rest of 2018 and 2019 should look like:
Production:
2017A = 7,852 Boepd
2018
Q1 A = 9,664 Boepd
Q2 A = 8,845 Boepd
Q3 E = 11,000 Boepd < See note below
Q4 E = 12,500 Boepd
2019 E = 16,000 Boepd with an exit rate of more than 20,000 Boepd (60% crude oil, 23% NGLs and 17% natural gas)

"Our recent eight-well completion program concluded in July. Accordingly, production from newly completed wells will be mostly reflected in the third quarter. We currently estimate July production at approximately 11,460 Boepd."

[wilmawatts]

Frank and Bob have made me a lot of money Dan, and I expect they will again with ESTE

Asset is still there, in the ground, development pushed out a bit. If you put on the expected higher oil price deck for 2019 and 2020 this delay might even INCREASE the cash flow valuation all else equal, even with discounting.