Earthstone Energy (ESTE) Price Target Update - June 20

[dan_s]

Neal Dingmann at Truist Financial rates ESTE a BUY with a price target of $32 < Compares to my current valuation of $33.50

Neal is a 5-Star energy sector analyst per TipRanks.

Earthstone Energy, Inc. (ESTE)
Call Highlights Deal’s Strong PDP and Inventory

Our Friday call with Earthstone highlighted what attracted the company to the Novo (Private)
assets along with the positive pro forma expectations. While we forecast little production
change in 2024 versus when the deal closes likely late this quarter, our 2024 earnings and
FCF estimates notably increase leading to our new higher PT of $32. While we anticipate
ESTE continuing to run the same five rigs going forward that the company is currently
running, we think there is potential for acceleration and/or shareholder return initiation,
depending on what happens to commodity prices and the company’s stock price among
other things.

Shareholder Return Initiatives Remain Largely Unchanged

We continue to forecast the majority of ESTE’s FCF to be used to repay debt as the number
one capital allocation priority going forward, ensuring that leverage goes back well below
1x. However, we believe the company will relatively soon be in a solid financial position to
consider a formal shareholder return plan that will consist primarily of a notable quarterly
dividend along with share buybacks. While ESTE certainly understands the importance of
a shareholder return plan to entice certain investors, additional acquisitions continue to
compete for FCF, as the company looks to scale the business even further.

Unchanged Plans To Run Five Rigs

We forecast future activity to consist of five continued rigs running for at least the next 9 to
12 months, and then determine what strategy makes most operational and financial sense.
However, ESTE suggested plans to move one current Midland Basin rig to the Delaware
Basin in the back half of this year post the Novo close. We also believe production, inclusive
of the Novo assets, will slightly sequentially ramp up in the back half of this year but could
begin to decline next year, resulting in lower 2H24 production versus 1H24 production as
flush Novo production continues to decline. We believe having a lower, steadier level of
production with the Novo assets is the appropriate strategy that will result in a leaner,
more capital efficient operation. We also highlight there could be some production overlap/
concentration between Novo assets and core assets in the near-term if/when the company
does move one rig to the Delaware basin. However, ESTE has experience working through
overlapping issues, most recently with the Titus acquired assets.

Incremental M&A Opportunities Appear To Be On Backburner

ESTE appeared to have suggested on the call that it would not likely pursue additional,
sizable M&A opportunities in the near-term as the primary focus will be to fully integrate the
acquired Novo assets. That said, we think ESTE will continue to look for accretive, small tack
on deals that could make operations even more efficient. In addition, we believe the company
could sell some non-core assets, stemming in part from either the recently acquired Titus
assets or perhaps even some non-core Novo assets to help accelerate leverage reduction
and create a leaner operation. For context, the company has already shed some non-core
assets this year for reasonable valuations to help with FCF driving leverage down.