Earthstone Energy (ESTE) Update - Jan 12

[dan_s]

New report from RBC Capital dated 1/11/2021 RBC's price target is $8.00/share.

Earthstone Energy, Inc.
Quarterly Check-Up: 4Q20
Our view: We updated our 4Q20 estimates to reflect final commodity
prices and made other changes to our model based on our channel checks,
data analytics, and conversations with the company. The 2021 operational
plan should come in a few weeks and demonstrate a path to organic
growth and FCF generation. ESTE shares provide an attractive balance of
small-cap oil beta coupled with a peer-leading balance sheet and strong
margins.
Key points:
• Our 4Q20 EPS/CFPS decreased by $0.03/share to $0.05/$0.40, reflecting
higher final commodity prices offset by a slight uptick in LOE costs
following record lows in 3Q20. We also see G&A slightly above guidance.
We do not anticipate any material surprises with commodity price
differentials or operations for 4Q20.
• Our estimates are slightly below Consensus $0.07/$0.43, respectively;
however, we expect this could narrow as models are updated.
• We expect 4Q20 production of 12 Mboe/d (7 Mb/d oil), inline with
Consensus expectations. A 6-well pad came online late in December
consistent with prior commentary. These wells should have a minimal
impact on quarterly production.
• We slightly reduce our 4Q20 capital spending expectations to $17
million to account for lower expected well costs. We now model ESTE
generating roughly $9 million FCF in 4Q20.
Channel Checks & Investment Themes:
• As released ESTE closed its acquisition of IRM on 1/7/21. Consistent
with its past actions, the 2021 outlook should occur by early February,
separate from 4Q20 earnings.
• We expect management to remain disciplined but with higher FCF under
our oil price expectations, we think ESTE moves back to (adds) one rig
in late March. There are five new well completions planned for 1Q21
and the next new completions could occur in late summer. A second
operated rig might be in the cards by very late 2021, supported by $80
million of FCF in our model.
• Production should flatten out by 4Q21 and pivot to a healthy low
double-digit growth rate along with FCF moving forward. We expect FCF
to reduce bank debt over the coming quarters.
• Our 2021 EPS/CFPS estimates decrease by 38%/7% as the result of
recent hedge book additions prior to recent oil price strength using
RBC's 2021E $52/bbl (WTI) price deck.
• We think ESTE is positioned to evaluate additional consolidation
opportunities like the recent IRM transaction. We believe that
acquisition was highly accretive and added scale for improved
operational and market relevance.