Earthstone Energy (ESTE) Valuation Update - Mar 9

Fraser921
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Joined: Mon Mar 22, 2021 11:48 am

Re: Earthstone Energy (ESTE) Valuation Update - Mar 9

Post by Fraser921 »

Great work and super helpful!

May I suggest a worst case scenario. Actually this would be my base case. Worst case might be 20 % lower prices.

1. Ignore 2022 cash flows. Reasoning coming off covid and Ukraine spiked rates and NG shortage in Europe. None of those will repeat in 2023.

2, Just use 2023 cash flows. Ignore 2024 too

3. Use a 3 x on the ocf instead of 4 -6 x. Reasoning current deals are being consummated at 3 x and that's with higher prices. Now with weaker prices , deals will not even be done at 3 x

Please repost your output with these numbers.

Many Thanks. This shows great value in Dan's model, we can model anything we want and he has done the heavy lifting in creating the model.

Dan's model, imho, has too many positives piled on each other to get what it should be and not what thing's are trading at.

Respectively submitted .

Now where do I find green beer?
aja57
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Re: Earthstone Energy (ESTE) Valuation Update - Mar 9

Post by aja57 »

Great post Ray. Thanks
JBtheBrit
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Joined: Sun Jul 10, 2022 8:23 pm

Re: Earthstone Energy (ESTE) Valuation Update - Mar 9

Post by JBtheBrit »

@Fraser - each to his own. I am sure your approach works fine for you... if I tried it I would have even more grey hair than I do. My approach is to develop a thesis (for example in my view over the next 3-4 years oil demand will exceed supply due to the lack of production investment, due in part to the media driven view that oil is going away rapidly), pick names that align well with that and invest for the medium term. Sure I pay attention to whats going on, listen to the quarterly calls etc, but I don't trade day to day on that - I suck at timing and would undoubtedly make poor trade decisions. What I do on a monthly basis is review every name and consider whether my overall thesis remains in tack - if it does, I stick with it. If it doesnt I decide whether to leg down out of the position or dump it... noting I usually leg into positions as well (back to my timing point). The other thing I would add is that I never have concentrations in one specific area - for example I would never go 100% in on my oil thesis - but rather I try to limit my equity exposure to one thesis to 20-25% of my total equity holdings. I will say however that as of now I probably 65-70 % of my equity holdings aligned with the broader resources are going to be in short supply thesis (be that Oil, Copper, NG and Fertilizers).... as such... its been a rough 2 weeks... but so be it... not changing my approach which has served me well over many years.
Ray_M
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Joined: Thu Jan 12, 2023 2:52 pm

Re: Earthstone Energy (ESTE) Valuation Update - Mar 9

Post by Ray_M »

Thanks Roadster, Fraser921 and Aja57!

Fraser - I believe this is what you were requesting.
Prices are 20% lower: Oil is $48.00 and Gas is $2.00
1 & 2. Weighting factors for 2022 and 2024 are 0.00
3. Fair Value Est Factor for all companies is set to 3.00

Please note two things about this model:
1. I'm assuming that the hedges do not change in the model (I believe this assumption is correct, but someone more familiar could probably weigh in). The models also don't take into account what the business would do with such low prices over an extended time, such as shutting in wells or reducing volumes. At the end, I did include a screenshot of SBOW showing where the updated oil/gas prices are being updated in the spreadsheet.
2. The CAD to USD conversion for prices for Crescent Point may be off. I'm having some challenges tracing through the Excel formulas for that spreadsheet.

Pricing Table:
Scenario 2 Prices - Screenshot 2023-03-17 155812.jpg
Scenario 2 Prices - Screenshot 2023-03-17 155812.jpg (56.78 KiB) Viewed 1789 times
Model Results:
For reference, I'm also including the EPG estimates (purple background) showing the impact due to only the price changes. Also included in the last column is the date of each individual model found on each spreadsheet that Dan publishes.
Scenario 2 Screenshot 2023-03-17 155906.jpg
Scenario 2 Screenshot 2023-03-17 155906.jpg (186.82 KiB) Viewed 1789 times
SBOW Pricing Examples:
This is the example mentioned above from SBOW (I'm using the same approach on all models). Any changes I have made to a model are in dark blue. In the case of the prices, I replaced the price values in each spreadsheet with a formula that references the appropriate cell in the pricing table (I make the price change in one place and all of the models recalculate).
Scenario 2 SBOW Screenshot 2023-03-17 160034.jpg
Scenario 2 SBOW Screenshot 2023-03-17 160034.jpg (157.86 KiB) Viewed 1789 times
dan_s
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Joined: Fri Apr 23, 2010 8:22 am

Re: Earthstone Energy (ESTE) Valuation Update - Mar 9

Post by dan_s »

Thank you Ray!
Dan Steffens
Energy Prospectus Group
knusser58
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Joined: Wed Feb 22, 2023 7:39 am

Re: Earthstone Energy (ESTE) Valuation Update - Mar 9

Post by knusser58 »

Thank you Ray. This is very helpful.
Roadster
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Joined: Tue Dec 14, 2010 7:34 pm

Re: Earthstone Energy (ESTE) Valuation Update - Mar 9

Post by Roadster »

Ray So interesting. The ultimate : What is the Breakeven Oil and Gas price for each of the Sweet 16 ?
ChuckGeb
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Re: Earthstone Energy (ESTE) Valuation Update - Mar 9

Post by ChuckGeb »

Looks like Ray has done a lot of work including calculations not illustrated. Kudos. Do usually happen to know the rate of vanishing FCF ie the point where cash flow equals capex? I know this won’t apply to SBOW as they are in an acquire and exploit growth mode but most of S16 were FCF positive in 22.
Ray_M
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Joined: Thu Jan 12, 2023 2:52 pm

Re: Earthstone Energy (ESTE) Valuation Update - Mar 9

Post by Ray_M »

Hi Roadster and Chuck. The workbook I’m using is a top-down approach that supports defining variables such as price forecasts in one sheet, then consolidating the results from each of Dan’s models based on those common inputs.

Both of your questions would benefit from a bottoms-up approach instead since the input variables (in this case the price of oil and gas) would be different for each company. By the way, I think both of these are great examples of what Dan suggests in his weekly webinar discussions about using the individual models and exploring the impact of changing the various assumptions such as prices or weightings.

For both of these questions, I would start with using Excel’s built-in What-If Analysis functionality. I did a quick test with RRC. Since RRC primarily a Gas company, I used the What-if goal-seek option to find what price would result in a Fair Value of 0.00 (answer: 0.437). On the other hand, with two independent input variables such as Oil and Gas prices, the Data Table option could be used since there can exist multiple combinations of prices that result in an overall value of 0.00.

If you have any questions or ideas, let’s open a new thread in the ‘Other topics..’ section of the forum and go in more depth.

Ray.
dan_s
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Joined: Fri Apr 23, 2010 8:22 am

Re: Earthstone Energy (ESTE) Valuation Update - Mar 9

Post by dan_s »

To get breakeven for FCF for each company you need to use each company's forecast model.
> download it to Excel on your computer
> First see how their hedges impact the realized prices for oil and gas in the tables at the bottom far right.
> Change the oil and gas prices for each quarter in the table for the unhedged volumes. The models are macro driven, so they will update operating cash flow automatically.
> FCF = Operating Cash Flow - CapEx So, keep in mind that the companies will cut back on capex spending if oil and gas prices decline.

All of the Sweet 16 should be FCF in Q1 at today's prices.

Learning to use the forecast models is KEY to your fundamental due diligence.
Dan Steffens
Energy Prospectus Group
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