Earthstone Energy (ESTE) Price Target - Aug 4
Posted: Fri Aug 04, 2023 12:22 pm
Note from Neal Dingmann at Truist Financial this morning. He rates ESTE a BUY with a price target of $25.
Earthstone Energy, Inc. (ESTE)
Legacy and New Assets Making Quite the Combination
Earthstone has completely reshaped the company the past several quarters not only with
its materially larger size/scale, but also adding some of the highest return assets in the
portfolio that have already seen notable operating efficiencies. While the company will not
be able to exclusively drill just the highest return Titus (private), Novo (private) or other
relatively recently added assets, the much larger base will provide material optionality. ESTE
continues to trade at a very low valuation we believe largely due to the private equity
overhang. We rate the shares Buy and raise our PT to $25 from $24.
We note large sales very recently and some weeks ago appeared to have little impact on
the stock price leading us to believe the PE ownership is not nearly as onerous as investors
are making it out to be.
Fruits of A&D Labor Already Being Seen
The recent acquisition of Novo (private) serves a number of strategic purposes for the
company as the acquisition strengthens ESTE’s market position in the Northern Delaware
through a consolidated capital and cost base. Upon the expected close of the Novo
transaction, the five-rig program will see one of the Midland rigs migrate full-time to the Novo
asset potentially leading to even more DE operating efficiencies given the larger program.
From an inventory perspective the Novo acreage brings over 1,000 future well locations
which equates to 13+ years of inventory while also allowing the company to high grade
its inventory. From a divestment standpoint, ESTE’s management team divested ~$50MM
in acreage during 2Q23 and we expect the shifted focus to the Northern Delaware should
potentially result in an additional ~$100MM in divestments through to YE24.
Novo Acquisition Extends Contiguous Acreage for D&C Efficiencies
We expect the Novo addition will help ESTE’s operational efficiencies as the new assets
are integrated into the company’s 2024 plans. In particular, the lack of contiguous acreage
presents a future bottleneck for some Delaware-based producers that lack the acreage or
spacing to effectively improve D&C and production efficiencies gains through longer lateral
lengths. ESTE is further advantaged by its acreage base to scale its wellsite infrastructure
through larger lift systems to further enhance its productions flow, though we do point out
that ESTE’s lack of infrastructure capital represents an area for improvement heading into
the back-end of this year and into 2024.
Updating Estimates, Increasing PT to $25 from $24
Earthstone reported higher 2Q23 earnings/FCF than Truist Securities and Consensus
estimates driven primarily by lower spending and higher than expected three-stream
quarterly production, as a result of improving well results and a better base decline on the
legacy assets. We have updated our estimates to account for 2Q23 actuals along with adjust
for drilling and production cadence as well as increased production step-up following further
details related to the Novo acquisition. Our $25 price target is derived from two equally
weighted methodologies, with the first being our ’24 EV/EBITDAX multiple of 3.0x applied
to our 2024E EBITDAX estimate of $1,564MM (consensus of $1,397MM) and the second
being a FCF/EV Yield assumption of 15.0
---------------------------
Note that Neal's valuation multiple is just 3X EBITDA, which is a very low multiple for a company of this size that has a lot of high-quality low-risk "running room".
Earthstone Energy, Inc. (ESTE)
Legacy and New Assets Making Quite the Combination
Earthstone has completely reshaped the company the past several quarters not only with
its materially larger size/scale, but also adding some of the highest return assets in the
portfolio that have already seen notable operating efficiencies. While the company will not
be able to exclusively drill just the highest return Titus (private), Novo (private) or other
relatively recently added assets, the much larger base will provide material optionality. ESTE
continues to trade at a very low valuation we believe largely due to the private equity
overhang. We rate the shares Buy and raise our PT to $25 from $24.
We note large sales very recently and some weeks ago appeared to have little impact on
the stock price leading us to believe the PE ownership is not nearly as onerous as investors
are making it out to be.
Fruits of A&D Labor Already Being Seen
The recent acquisition of Novo (private) serves a number of strategic purposes for the
company as the acquisition strengthens ESTE’s market position in the Northern Delaware
through a consolidated capital and cost base. Upon the expected close of the Novo
transaction, the five-rig program will see one of the Midland rigs migrate full-time to the Novo
asset potentially leading to even more DE operating efficiencies given the larger program.
From an inventory perspective the Novo acreage brings over 1,000 future well locations
which equates to 13+ years of inventory while also allowing the company to high grade
its inventory. From a divestment standpoint, ESTE’s management team divested ~$50MM
in acreage during 2Q23 and we expect the shifted focus to the Northern Delaware should
potentially result in an additional ~$100MM in divestments through to YE24.
Novo Acquisition Extends Contiguous Acreage for D&C Efficiencies
We expect the Novo addition will help ESTE’s operational efficiencies as the new assets
are integrated into the company’s 2024 plans. In particular, the lack of contiguous acreage
presents a future bottleneck for some Delaware-based producers that lack the acreage or
spacing to effectively improve D&C and production efficiencies gains through longer lateral
lengths. ESTE is further advantaged by its acreage base to scale its wellsite infrastructure
through larger lift systems to further enhance its productions flow, though we do point out
that ESTE’s lack of infrastructure capital represents an area for improvement heading into
the back-end of this year and into 2024.
Updating Estimates, Increasing PT to $25 from $24
Earthstone reported higher 2Q23 earnings/FCF than Truist Securities and Consensus
estimates driven primarily by lower spending and higher than expected three-stream
quarterly production, as a result of improving well results and a better base decline on the
legacy assets. We have updated our estimates to account for 2Q23 actuals along with adjust
for drilling and production cadence as well as increased production step-up following further
details related to the Novo acquisition. Our $25 price target is derived from two equally
weighted methodologies, with the first being our ’24 EV/EBITDAX multiple of 3.0x applied
to our 2024E EBITDAX estimate of $1,564MM (consensus of $1,397MM) and the second
being a FCF/EV Yield assumption of 15.0
---------------------------
Note that Neal's valuation multiple is just 3X EBITDA, which is a very low multiple for a company of this size that has a lot of high-quality low-risk "running room".