Evgenii Mitroshin
Earthstone Energy (NYSE:ESTE) looks capable of generating close to $400 million in positive cash flow in 2023 at current strip prices if it attempts to maintain production at around 100,000 BOEPD. This would help reduce its leverage to around 0.6x by the end of 2023.
Earthstone’s projected near-term cash flow has been reduced substantially compared to when I looked at it several months ago mainly due to weaker commodity price expectations, but also due to cost inflation to a lesser extent. As a result, I now estimate that Earthstone is worth close to $16 per share in a long-term (after 2023) $70 WTI oil and $4 NYMEX gas scenario.
Share Repurchases
Earthstone repurchased part of Warburg Pincus’s ownership stake in early October. It repurchased 3 million Class A common shares for $43.74 million or $14.58 per share. Warburg Pincus also separately sold 3.75 million Class A common shares, reducing its ownership in Earthstone to 12.9 million Class A common shares (around 9.3% of Earthstone’s total shares).
Warburg Pincus had previously acquired a significant stake in Earthstone through Earthstone’s acquisitions of Warburg Pincus funded companies such as Independence Resources Management and Chisholm Energy.
The share repurchases appear to be beneficial for Earthstone since they occurred at a reasonable price and they reduce the future potential impact of Warburg Pincus selling off its stake in Earthstone.
2023 Outlook
Earthstone may choose to maintain production in 2023 at Q4 2022 levels. This would be approximately 100,000 BOEPD (43% oil, 26% NGLs and 31% natural gas).
This would result in Earthstone generating around $1.639 billion in revenues in 2023 at current strip prices (including low-$70s WTI oil) after hedges. Earthstone’s hedges only have a slight amount of negative value in 2023 at current strip, mainly from deferred put premiums.
| Type | Units | $/Unit | $ Million |
| Oil (Barrels) | 15,695,000 | $72.50 | $1,138 |
| NGLs (Barrels) | 9,490,000 | $28.00 | $266 |
| Natural Gas [MCF] | 67,890,000 | $3.50 | $244 |
| Hedge Value | -$9 | ||
| Total Revenue | $1,639 |
Earthstone mentioned that maintenance capex would generally require a five-rig development program. This may result in a $710 million capex budget for 2023 assuming relatively minimal cost inflation from Earthstone’s Q4 2022 (annualized) capex. I am assuming that cost inflation moderates in a low-$70s WTI scenario for 2022.
| Expenses | $ Million |
| Lease Operating | $301 |
| Production Taxes | $128 |
| Cash G&A | $44 |
| Cash Interest | $70 |
| Capital Expenditures | $710 |
| Total Expenses | $1,253 |
Thus Earthstone is projected to generate $386 million in positive cash flow in 2023 at current strip if it maintains production at around 100,000 BOEPD.
Projected Debt And Valuation
Earthstone had $1.192 billion in net debt at the end of Q3 2022. It also spent $44 million repurchasing shares in October and now may end up with around $1.11 billion in net debt by the end of 2022 based on its Q4 2022 guidance and current strip prices.
Earthstone is now projected to end up with approximately $725 million in net debt at the end of 2023 if it doesn’t make any more acquisitions or spend on share repurchases. This is around 0.6x Earthstone’s projected 2023 EBITDAX, so it should be okay from a leverage perspective.
I now estimate Earthstone’s value at close to $16 per share in a long-term (after 2023) $70 WTI oil and $4 NYMEX gas scenario. My outlook on longer-term commodity prices remains unchanged. Despite a significant drop in near-term oil futures, there has been much less movement in longer-term oil futures as the futures curve has flattened out.
Earthstone’s estimated value has been reduced due to the effect of cost inflation and lowered near-term commodity prices on its projected cash flow for the rest of 2022 and 2023.
Conclusion
Earthstone still looks capable of generating close to $400 million in positive cash flow in 2023 at current strip, despite the impact of lower commodity prices and cost inflation. This would put Earthstone’s leverage at approximately 0.6x by the end of 2023.
I am maintaining my outlook on long-term commodity prices, but Earthstone’s higher (than previously projected) net debt at the end of 2023 reduces its estimated value to close to $16 per share in a long-term $70 WTI oil environment.
Be the first to comment