Energy Prospectus

We will be updating our profile on Earthstone Energy on August 31. Somehow it slipped thru the cracks because I thought I assigned it to one of our MBAs to update, but I did not. I just finished going over my forecast/valuation model and I will be sticking with my valuation of $18.00.

ESTE closed on August 30 at $8.21
First Call's price target is $14.75
TipRanks: "In the last 3 months, 5 ranked analysts set 12-month price targets for ESTE. The average price target among the analysts is $14.58. With three analysts' price target updates since Earthstone released Q2 results $10, $13 and $17."

Earthstone has closed two significant acquisitions this year that have them on track to a 2021 production exit rate of 27,000 Boepd, up from production of 14,809 Boepd in Q4 2020. Today the stock is trading for less than 3.5 X operating cash flow per share and there is no justification for such a low valuation.

Earthstone increased their production by 35.1% year-over-year in 2019 and another 13.8% in 2020 through acquisitions and strong well completions. Their January 2021 acquisition of Independence Resources Management, LLC (IRM) and the July 2021 Tracker Acquisition put Earthstone on a path to over 55% production growth in 2021 when combined with a two-rig drilling program in 2H 2021 that will be fully funded by operating cash flow.

Winter Storm Uri did impact Earthstone’s production in the first quarter, but all of the shut-in wells were back on-line early in the second quarter. Higher natural gas and NGL prices will give Earthstone a revenue boost in 2H 2021. The Company’s 2H 2021 production mix s/b approximately 46% oil, 27% natural gas and 27% NGLs.

Earthstone does have some "Bad Hedges" to work off in 2H 2021, but none of their NGLs are hedged. Based on my forecast/valuation model the Company should generate approximately $205 million ($2.51/share) of operating cash flow in 2021 and $280 million ($3.29/share) in 2022. A reasonable valuation for a company of this size with a strong balance sheet, more than enough operating cash flow to fund a 2 to 3 rig drilling program, and lots of high ROR / low-risk drilling locations is 5X to 6X operating cash flow per share. My current valuation of $18/share is what I think Earthstone would sell for today.

I've known this management team for over a decade. Earthstone is being built for sale in about 3 years or earlier if an aggressive bidder comes calling.