Earthstone Energy (ESTE) Update - Oct 4

[dan_s]

I am updating my forecast/valuation model for ESTE. It will be posted to the EPG website this afternoon. As you can tell from the spike in the stock price, the market likes the deal. It will add a significant amount of daily production.

Earthstone Energy Announces Bolt-On Acquisition
Mon, October 4, 2021, 5:00 AM
Share price for ESTE is up 13.43%

Acquiring Privately Held Midland Basin Assets for Cash and Stock

THE WOODLANDS, Texas, Oct. 4, 2021 /PRNewswire/ -- Earthstone Energy, Inc. (NYSE: ESTE) ("Earthstone", the "Company", "we", "our" or "us") today announced that it has entered into definitive agreements to acquire privately held operated assets located in the Midland Basin (the "Bolt-On Acquisition") from two sellers unaffiliated with Earthstone. The aggregate purchase price of the Bolt-On Acquisition is approximately $73.2 million consisting of $49.2 million in cash, subject to customary purchase price adjustments, and approximately 2.6 million shares of Earthstone's Class A common stock valued at $24.0 million based on a closing share price of $9.20 on September 30, 2021. The Bolt-On Acquisition is expected to close by the middle of the fourth quarter of 2021 with an effective date of July 1, 2021.

Highlights of the acquired asset base and operations include:
> Average daily production of 4,400 Boepd (26% oil, 52% liquids) during September 2021
> Projected next twelve months Adjusted EBITDAX of approximately $42 million
> $116.0 million PDP PV-10 as of 7/1/21 with associated reserves of approximately 13.3 MMBoe (11% oil, 31% NGL, 58% natural gas) based on NYMEX strip pricing as of September 30, 2021
> Low operating cost, high margin asset base with operating synergies when added to Earthstone's existing assets

Expected impact on Earthstone includes:
> Purchase price of ~1.7x estimated next twelve months Adjusted EBITDAX based on NYMEX strip pricing as of September 30, 2021
> Bolt-On Acquisition expected to be accretive on all key financial metrics
> Earthstone maintains target of achieving sub-1.25x leverage at year-end 2021
> Approximate 4,000 Boepd (17% oil, 47% liquids) impact on production from date of close (expected by the middle of the fourth quarter) through end of 2021 < This will push Earthstone's production over 31,000 Boepd in December, which compares to 14,809 Boepd in December, 2020.

Management Comments

Mr. Robert J. Anderson, President and CEO of Earthstone, commented, "This transaction will be our fourth acquisition this year as we continue to advance our consolidation strategy and enhance our Midland Basin footprint with additional scale. The acquisition of these low operating cost, high margin, producing assets at an attractive valuation is a nice addition to our production and cash flow base. The Bolt-On Acquisition also includes approximately ~10,000 net acres (100% operated; 67% held by production) in Irion County. We expect to benefit from additional operating synergies when production operations are combined with other assets in the area. As we have done in prior acquisitions, we look forward to applying our operating approach to these assets in order to reduce costs and maximize production and cash flows.

"The mix of consideration between cash and equity in accordance with our focus on maintaining a strong balance sheet positions us well to continue our consolidation efforts. We are pleased to continue to add incremental scale in an accretive manner without sacrificing our balance sheet or free cash flow generation."

Acquisition Consideration and Sources

The consideration for the transaction consists of 2,611,111 shares of Earthstone's Class A common stock, which represents approximately 3.0% of the total outstanding Class A and Class B common stock on a pro forma basis, and approximately $49.2 million of cash, subject to customary purchase price adjustments from the July 1, 2021 effective date to closing. Earthstone intends to fund the cash portion of the consideration and fees and expenses with cash on hand and borrowings under its revolving credit facility, which currently has a borrowing base of $650 million. As of August 31, 2021, and adjusting for the current borrowing base of $650 million, Earthstone had liquidity of approximately $365 million based on the $363.4 million of undrawn borrowing base capacity and $1.2 million in cash.

About Earthstone Energy, Inc.

Earthstone Energy, Inc. is a growth-oriented, independent energy company engaged in the acquisition, development and operation of oil and natural gas properties. Its primary assets are located in the Midland Basin of west Texas and the Eagle Ford Trend of south Texas. Earthstone is listed on the New York Stock Exchange under the symbol "ESTE." For more information, visit the Company's website at www.earthstoneenergy.com.

[dan_s]

I have updated my forecast model for the acquisition based on the assumption that it will close by the end of November.

Earthstone is the smallest company in the Sweet 16, but it is the fastest growing.
> Production increased 13.8% in 2020, they are on-track for 59% production growth in 2021 and 36% production growth in 2022 even if they don't make anymore acquisitions.
> Revenues: $200.6 million in 2020, estimated at $331.3 million in 2021 and $502.0 million in 2022 using prices of $70/bbl for WTI and $3.50/mcf for HH gas.

My valuation of ESTE increases by $1.00 to $19.50 per share.

It will take a few days for the Wall Street Gang to update their models.