Energy Prospectus

This is very good news from one of our Sweet 16 Growth Portfolio companies that is positioned to survive in 2020 and thrive in 2021. Our updated profile and forecast/valuation model for ESTE can be downloaded from the EPG website. Log on and click on the Sweet 16 tab.

Earthstone Energy Announces Results of Borrowing Base Redetermination and Updates Debt Balance

Borrowing Base set at $275 million;

Total debt outstanding reduced by 11% to $152 million

Earthstone Energy, Inc. (NYSE: ESTE) ("Earthstone", the "Company", "our" or "we") announced today that the regularly scheduled redetermination of the borrowing base under its senior secured revolving credit facility ("Credit Facility") has been completed with the borrowing base now set at $275 million, representing a 15% decrease from the previous borrowing base of $325 million. The next regularly scheduled redetermination of the borrowing base is on or around November 1, 2020.

The Company also has provided an update on its debt balance. As of March 31, 2020, the Company had outstanding borrowings under its Credit Facility of $152 million, which represents a reduction of 11% compared to the $170 million in outstanding borrowings as of December 31, 2019. The Company’s only debt is borrowings under the Credit Facility.

Management Comments

Robert J. Anderson, President and Chief Executive Officer of Earthstone, stated, "Earthstone remains well positioned in terms of liquidity and debt levels despite the recent dramatic drop in commodity prices. As recently announced, we have reduced our 2020 capital program by 67% and expect to generate free cash flow beginning in the second quarter that we will use to reduce borrowings under our credit facility. We continue to carefully manage our financial position and operations in this challenging time within our industry and beyond. We are very appreciative to have the continued support of our bank syndicate and look forward to continuing our partnership with them."

John White at Roth Capital sent out this note on April 2:

"Our valuation is based on a net asset value (NAV) analysis which produced $6.22 per share which we rounded lower to our $6.20 price target."

ESTE: Upgrading to Buy: Good Free Cash Flow, Industry Leading Credit Profile

In the current environment we are focused on free cash flow, credit strength and a high percentage of hedged production. Are you ready for this? We estimate ESTE will generate $94 million of free cash flow (FCF) in 2020 with WTI oil/Henry Hub gas averaging $31.34/bbl/$1.90/MMBtu. ESTE intends to use this FCF for debt reduction. This will allow a reduction of the bank revolver from $170 million as of 12/31/2019 to $79 million as of 12/31/2020.

On March 13, for all of our U.S. E&P and U.S. Oilfield Service coverage, we temporarily suspended our target prices, our estimates and moved all of our ratings to Neutral. This was in response to the tremendous decrease in crude oil prices and to a lesser extent, natural gas prices. Also, certain of our coverage had issued 2020 guidance prior to the downturn and others had yet to issue 2020 guidance. Thus, we wanted to pause and await revised guidance, post-crash new guidance and evaluate our coverage with an emphasis on free cash flow, credit strength and a high percentage of hedged production.

Our target price of $6.20 is in line with our PV10% NAV valuation and is supported by ESTE’s free cash flow of $94 million and our estimated Debt/2020 EBITDA of 0.5x versus our Super E&P peer group’s median of 2.4x. Our PV10% NAV valuation is based on proved reserves only with no amounts of probable or possible reserve categories.

Borrowing Base and Credit Profile: ESTE recently announced that the regularly scheduled redetermination of the borrowing base under its senior secured revolving credit facility has been completed with the borrowing base now set at $275 million. ESTE also provided an update on its debt balance. As of March 31, 2020, ESTE had outstanding borrowings under its credit facility of $152 million. Our estimated Debt/2020 EBITDA of 0.5x is very favorable compared to our Super E&P peer group’s median of 2.4x. We note many of the companies in the Super E&P peer group have investment grade credit ratings.

Hedges: ESTE has hedged approximately 80% of our estimated crude oil volumes for 2020 at a blended average price of $58.90/bbl which we view as very favorable in the current environment.