Permian Scale Supports Free Cash Flow Capacity



KEY POINTS
  • Acquisitions have positioned Earthstone to generate significant free cash flow. 4Q22 financial and operating results will be the first to include the cumulative effect of three major acquisitions that closed in the first eight months of 2022.
  • The midpoint of 4Q22 production guidance (98-102 MBOE/d) reflects a ~230% Y/Y increase from 4Q21. Our 4Q22 EBITDA estimate reflects a near 300% Y/Y increase from 4Q21.
  • Earthstone’s Permian Basin asset base provides the flexibility to allocate development capital across a deep inventory, depending on the prevailing cost and commodity price environment. Management estimates its ~256,000 net acres in the basin expose the company to 890 gross operated development locations, including 528 acquired during 2022 in the Delaware Basin.
  • Results from 3Q22 development drilling met or exceeded management’s estimates. Earthstone operates five rigs across its acreage, including three in the Delaware Basin and two in the Midland Basin.
  • We expect Earthstone to provide operating and financial guidance for 2023 in 1Q23. The current five-rig pace is expected to sustain production level with 4Q22.
  • Our FY23 earnings and cash flow estimates are predicated on 100 MBOE/d of production and costs similar to 4Q22. We estimate FY23 EBITDA of $1,378 million. Estimated free cash flow could be used to reduce borrowings, fund incremental acquisitions, and possibly a cash-return-to-shareholders’ scheme at some point next year.
  • On an adjusted EV/EBITDA basis, Earthstone is trading at 1.7x our FY23 estimates.
ESTIMATES

Acquisitions have positioned Earthstone to generate significant free cash flow. 4Q22 financial and operating results will be the first to include the cumulative effect of three major acquisitions that closed in the first eight months of 2022.

DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.

WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information p...