Two-Pronged Growth: Acquisitions & Development Drilling



KEY POINTS
  • Earthstone Energy is a growth-oriented independent oil and gas company. The core asset base consists of ~137,400 net acres in the Permian Basin. The company also owns a smaller position in the Eagle Ford trend in south Texas.
  • Management’s approach to build value is to pursue accretive acquisitions that can enhance the company’s inventory of development drilling projects and position it to deliver capital-efficient growth while maintaining a strong balance sheet.
  • Earthstone closed out a transformational 2021 with the December 16 announcement of an agreement to acquire the assets of Chisholm Energy Holding, LLC in a cash and stock deal valued at $604 million. The acquisition, expected to close in 1Q22, adds scale and inventory by providing Earthstone with a Delaware Basin asset position and, importantly, is expected to increase free cash flow generation in 2022.
  • Earthstone plans to run four rigs in 2022, two each in the Midland and Delaware Basins. The company will control multi-year development inventories in both basins.
  • Earthstone’s preliminary FY22 estimates put production in a range of 44–48 MBOE/d, 88% above our FY21E of 24.5 MBOE/d. Actual FY22 production will differ subject to the Chisholm closing date.
  • We have laid out FY22 estimates based on a production profile of 42.8 MBOE/d (assuming a March 31, 2022 closing date for Chisholm), which is 75% higher than our FY21 estimate, on a capital program of $375 million. Using NYMEX reference prices of $70/bbl for oil and $3.75/MMBtu for natural gas, we estimate the company could generate $532 million of EBITDAX in FY22. Our estimates imply that the company could comfortably fund the capital program, generating excess cash flow and ending 2022 with a leverage ratio of 1.0x.
  • Earthstone is trading at 3.2x our FY22E EBITDAX, assuming a March 31, 2022 Chisholm close. Using a pro forma PV-10 (1) estimate prepared by management, which incorporated strip prices as of October 1, 2021, we estimate that Earthstone is trading at a 30% discount to a $16.52/share net asset value.
COMPANY OVERVIEW

Earthstone Energy, Inc. is an independent energy company headquartered in The Woodlands, Texas. The company is engaged in the acquisition, development, and operation of oil and natural gas properties. The company’s primary assets are in the Midland Basin of west Texas and in the Eagle Ford Trend of south Texas. 3Q21 production averaged 25.8 MBOE/d. In December 2021, Earthstone announced an agreement to acquire assets in the northern portion of the Delaware Basin in New Mexico. The acquisition is expected to close during 1Q22. The company’s website is www.earthstoneenergy.com.

(1) PV-10 value for the Chisholm assets includes value for proved developed reserves and wells in progress as of November 1, 2021 and excludes any value for proved undeveloped reserves.

    Earthstone Energy is a growth-oriented independent oil and gas company. The core asset base consists of ~137,400 net acres in the Permian Basin. The company also owns a smaller position in the Eagle Ford trend in south Texas.

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