Earthstone Energy (ESTE) Q2 Results - Aug 6

[dan_s]

Second Quarter 2020 Highlights

Average daily production of 13,555 Boepd < My forecast was 13,600 Boepd.
Adjusted EBITDAX of $39.8 million ($32.30 per Boe) < Beat my forecast of $29.5 million.
All-in cash costs of $10.11 per Boe
Operating Margin of $11.83 per Boe ($35.64 including realized hedge settlements)
Free Cash Flow of $35.3 million < WAY OVER my forecast of ~$20 million.
Capital expenditures of $3.2 million
Net loss of $(35.9) million, or $(0.55) per Adjusted Diluted Share
Adjusted net income of $12.8 million, or $0.20 per Adjusted Diluted Share < Compares to my net income forecast of $4.4 million.

Management Comments

Mr. Robert J. Anderson, President and CEO of Earthstone, commented, "We had a good quarter against a difficult backdrop that was unprecedented in our industry with the second quarter of 2020 being hit with low commodity prices, reduced demand due to COVID-19 and threats of forced curtailments. Due to our strong hedge position and continued focus on reducing cash costs, we achieved both significant Adjusted EBITDAX of almost $40 million, and generated $35 million of Free Cash Flow. We expect to continue to generate Free Cash Flow for the remainder of the year which will be used to reduce our borrowings and, additionally, we expect this reduction to assist us in achieving our target of being below 1x net debt to Adjusted EBITDAX at year-end."

Mr. Anderson continued, "We executed our voluntary shut-in / curtailment program successfully in the second quarter without production complications or additional expense. Our continued focus on operating expense reduction was evident during the quarter as expenses were reduced by 40% compared to the first quarter, which was partially driven by shut-ins during May. All of our wells have been returned to full production and based on our recently announced updated production guidance, we expect to average 13,000 - 14,000 Boepd for the full year and therefore have relatively flat production from 2019 to 2020 with our previously guided capital expenditures of $50-60 million. With the vast majority of our capital program for 2020 completed in the first half of the year, we now have 11 wells drilled but uncompleted. Depending on completion timing, these 11 wells should allow us to maintain production relatively flat in 2021 with net capital expenditures presently estimated at $30 million. For the remainder of 2020 we will continue to focus on cost control and generating Free Cash Flow while considering various consolidation opportunities that are a direct result of the current environment."

[dan_s]

Note from John White at Roth Capital 8/6/2020

Our valuation of ESTE 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: Big Beat on Strong Hedge Revenues, Lower Expenses: Very Positive

ESTE reported 2Q Adjusted EPS/EBITDA of $0.20/$39.8 million, in line with our EPS estimate of $0.22 and solidly beating our EBITDA estimate of $35.6 million. ESTE’s results trounced the consensus figures for EPS/EBITDA of $0.07/$28.4 million. ESTE’s production of 13,555 BOE per day was in line with the previously announced figure of approximately 13,600 BOE per day. The strong performance was driven by strong hedge revenue and lower than expected LOE and interest expense.

Actual LOE was $5.6 million compared to our estimate of $8.1 million and actual interest expense was $1.3 million compared to our figure of $2.1 million. Capex was minimal, resulting in free cash flow of $35.3 million for the quarter.

ESTE reported all wells have been returned to full production and the recent production guidance of 13,000 to 14,000 BOE per day for the full year is unchanged.

ESTE further advised it has 11 wells drilled but uncompleted. Depending on completion timing, these 11 wells should allow ESTE to maintain production relatively flat in 2021 with capital expenditures presently estimated at $30 million

We took a look at the August 3 earnings press release from Continental Resources (CLR-NC) which reported 2Q 2020 EBITDA of $36.0 million compared to ESTE’s 2Q 2020 EBITDA of $39.8 million. CLR’s production in 2Q 2020 was 202,815 BOE per day and CLR has a recent market capitalization of $6.1 billion. ESTE’s management demonstrated the large amount of value that can be generated when correctly employing a crude oil price hedging strategy. < KEEP IN MIND that none of CLR's oil production was hedged.

We will further review these results and revise our estimates accordingly.