Earthstone Energy (ESTE) Update - Nov 9

[dan_s]

Earthstone's Q3 production came in a bit under my forecast, but higher NGL prices made up for it and revenues were very close to my forecast. The company accrued a $4.8 million expense for "Litigation Settlement" so the quarter had only a small net income. The settlement is related to the Bold Acquisition and IMO could have been capitalized as part of the acquisition.

Q4 production will need to be 12,500 Boepd (compared to 10,766 Boepd in Q3) to hit the low end of their production guidance.

The Big Ticket Item for Earthstone is the acquisition of Sabalo Energy. If the deal closes in January it will more than double the company's production and give them a lot of running room. If all goes as planned, my valuation of ESTE has a lot of upside. When the deal closes, ESTE will be a Prime Takeover Target.

I have updated my forecast/valuation model and my value of $16.50/share looks reasonable. I do have a large cushion in the model just in case the deal does not close. My valuation compares to First Call's price target of $15.07. John White over at Roth Capital recently updated his valuation to $15.50/share.

The forecast will be posted to the EPG website this afternoon.