Energy Prospectus

Earthstone Energy, Inc. Reports First Quarter 2020 Financial Results

Earthstone Energy, Inc. (NYSE: ESTE) today announced financial and operating results for the three months ended March 31, 2020.

First Quarter 2020 Highlights

Average daily production of 15,767 Boepd < Compares to my forecast of 16,100 Boepd.
Adjusted EBITDAX of $38.2 million ($26.63 per Boe)
All-in cash costs of $12.92 per Boe
Capital expenditures of $41.8 million
Net income of $36.7 million, or $0.57 per Adjusted Diluted Share
Adjusted net income of $8.2 million, or $0.13 per Adjusted Diluted Share < Compares to my forecast of $10.1 million net income, $0.15 per share.

Management Comments

Mr. Robert J. Anderson, President and CEO of Earthstone, commented, "We had a good quarter despite the current economic environment facing our industry by hitting on our internal targets for production, Adjusted EBITDAX and cash costs. Our low-cost business practices continue to serve us well, especially in this environment. Although our industry is facing unprecedented challenges due to both the COVID-19 pandemic and low oil prices, we have executed our adjusted 2020 plan announced in March 2020 with dedication from our employees and service providers alike and we would like to recognize and thank them all for their diligent efforts."

Mr. Anderson commented further, "We are well positioned to endure this current oil price collapse as we maintain a strong hedge position and relatively low leverage, with ample liquidity, all of which affords us the ability to focus on free cash flow generation for the remainder of 2020. Due to the low oil prices expected in May, we are voluntarily reducing our operated production by 70-80% and estimate total Company production curtailed by 55-70% for the month. Based on oil prices in future months, we will determine curtailments as necessary, therefore, we expect to update our guidance for the remainder of 2020 in the near future. We are now focused on maintaining a strong balance sheet throughout the year and expect our leverage to be below 1x net debt to Adjusted EBITDAX at year-end 2020. In order to achieve this, we are targeting a cash-based general and administrative expense reduction of approximately 25% compared to our prior guidance by focusing on cost control. We are looking to the future as a healthy company with consolidation in mind."
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I will update my forecast/valuation model on Thursday morning, May 7.

From John White at Roth Capital on May 7, 2020

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: Free Cash Flow Despite Production Curtailments: Positive

ESTE reported its 1Q capex was $41.8 million, and with full year guide of $50 million to $60 million this means a very minimal amount of capex for the remainder of 2020, which is positive. ESTE reported excellent liquidity, with $123 million of revolver availability (borrowing base already redetermined) and $5.1 million of cash. ESTE estimates total production will be curtailed by 55% to 70% for the month of May.

In our opinion, ESTE is very well positioned given the current environment. Our curtailment analysis follows.

Production curtailments of between 55% and 70% for the month of May sound pretty negative but due to the contribution of the hedge book we still estimate significant free cash flow for 2020. In our note dated 4/2/202, we modeled 2Q 2020 production of 14,252 BOE per day and $94 million of free cash flow for 2020 using a WTI crude oil price estimate of $31.34/bbl for the full year.

In the 55% curtailment case for the month of May, our 2Q 2020 production estimate in our note dated 4/1/2020 of 1,297 MBOE is reduced to 1,102 MBOE, which is a reduction of 195 MBOE, which is a reduction of 6,500 BOE per day for the month of May, approximately equal to the 55% curtailment. This yields 2Q 2020 production of 12,114 BOE per day and $87 million of free cash flow for 2020 using a WTI crude oil price estimate of $31.34/bbl for the full year.

In the 70% curtailment case for the month of May, our 2Q 2020 production estimate in our note dated 4/1/2020 of 1,297 MBOE is reduced to 999 MBOE, which is a reduction of 298 MBOE, which is a reduction of 9,933 BOE per day for the month of May, approximately equal to the 70% curtailment. This yields 2Q 2020 production of 10,974 BOE per day and $80 million of free cash flow for 2020 using a WTI crude oil price estimate of $31.34/bbl for the full year

As a result of the curtailed production and ongoing uncertainty in the commodity markets, ESTE is withdrawing the annual production and operating cost guidance, however ESTE will determine curtailments as necessary, and expects to update its guidance for the remainder of 2020 in the near future. ESTE did reaffirm capex guidance with full year guide of $50 million to $60 million. ESTE also provided a cash-based general and administrative expense guidance range for 2020 of $15.5 million to $16.5 million. The low end of this range approximates a targeted 25% reduction compared to the midpoint of initial guidance, which ESTE plans to achieve primarily through a reduction in executive compensation, but also through broader cost control initiatives which include professional service providers.
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I have updated my forecast/valuation model for ESTE and it will be posted to the EPG website this afternoon. I am increasing my valuation by $0.40 to $4.75.
> Despite lower production due to shut-ins for a few months, Earthstone is in great shape because they now have ~95% of their Q2 to Q4 2020 oil hedged at $57.00/bbl with Swaps.
> By lowering cash G&A and cutting back CapEx spending, they now have free cash flow for 2020 locked in.
> ESTE definitely meets my goal of finding upstream companies that will "Survive 2020 to Thrive in 2021".
> If oil prices do rebound as I'm expecting, ESTE should quickly ramp production up to more than my 2021 forecast, so there is significant upside to my valuation.