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Earthstone Energy (NYSE:ESTE) produced well above expectations in Q4 2022, with oil production that was 9% above its guidance midpoint. It also provided 2023 guidance for approximately 100,000 BOEPD in average production during 2023. At current high-$70s oil strip (and with weak near-term natural gas prices), Earthstone is projected to generate close to $300 million in free cash flow and end 2023 with 0.6x leverage.
Earthstone also provided information on its reserves, and updating that for current strip results in an estimated value of close to $16 per share using a 0.9x multiple to PD PV-10. Earthstone’s outlook for 2023 is fairly close to what I had modeled for it before. It is dealing with a bit of further cost inflation, but that is balanced out by its strong finish to 2022.
Q4 2022 Update
Earthstone’s Q4 2022 production was quite strong. It initially provided guidance for 98,000 to 102,000 BOEPD in average production for Q4 2022, with a 43% oil cut. Earthstone ended up with 104,766 BOEPD in production during Q4 2022, with a 45% oil cut. Thus its total production for Q4 2022 was 5% above the midpoint of its guidance and its oil production was 9% above the midpoint of its guidance. Earthstone’s capex for the quarter was within its guidance range.
This contributed to Earthstone ending 2022 with less debt than I had modeled. Earthstone reported having $1.07 billion in debt principal outstanding at the end of 2022, compared to my projection for $1.11 billion in net debt. Earthstone also reduced its debt a bit from a minor Midland Basin sale. It received $21 million in net proceeds from the divestiture of its Sugg Ranch assets, which included 850 BOEPD in 2022 production.
Notes On Sugg Ranch
The Sugg Ranch assets included over 30,000 net acres in Sterling, Tom Green and Irion Counties. These assets were acquired as part of the IRM acquisition back in 2021, but were the fringe acreage component of the deal. Earthstone added inventory from Midland and Ector Counties as part of that deal, but did not claim any inventory from Sugg Ranch, which nearly completely consists of low volume vertical wells. The $21 million sale price is a discount to PDP PV-10, which Earthstone estimated at $35 million at the time (for Sugg Ranch alone), albeit with forward year oil prices near $90, along with strong natural gas prices.
2023 Outlook
I had previously modeled a scenario where Earthstone maintained 2023 production at Q4 2022 levels. Earthstone previously expected to average approximately 100,000 BOEPD in Q4 2022, but ended up beating its guidance by approximately 5%.
Earthstone’s official 2023 guidance keeps production expectations at previous levels of approximately 100,000 BOEPD, but bumps up the oil cut slightly from 43% to 44%. Earthstone also divested a small amount of production in Q4 2022 as mentioned above.
At current strip of high-$70s WTI oil, Earthstone may generate around $1.615 billion in revenues before hedges now. Earthstone’s 2023 hedges appear to have roughly neutral value at current strip.
| Type | Units | $/Unit | $ Million |
| Oil (Barrels) | 16,060,000 | $79.00 | $1,269 |
| NGLs (Barrels) | 9,125,000 | $30.50 | $278 |
| Natural Gas [MCF] | 67,890,000 | $1.00 | $68 |
| Total Revenue | $1,615 |
Compare to when I modeled Earthstone’s 2023 results in December, it appears to expect slightly higher costs that are around mid-single digits percent higher than my model (which was done at low-$70s oil).
| Expenses | $ Million |
| Lease Operating | $315 |
| Production Taxes | $121 |
| Cash G&A | $52 |
| Cash Interest | $70 |
| Capital Expenditures | $750 |
| Cash Income Taxes | $20 |
| Total Expenses | $1,328 |
Earthstone is now projected to generate $287 million in positive cash flow at current strip prices in 2023, inclusive of the impact of cash income taxes.
Notes On Debt And Valuation
This would allow Earthstone to reduce its net debt to around $783 million at the end of 2023, assuming no further acquisitions or divestures and no further spending on share repurchases. This would give Earthstone leverage of approximately 0.6x at the end of 2023.
Earthstone reported having proved reserves with a PV-10 of $7.79 billion, including PD reserves with a PV-10 of $5.84 billion at the end of 2022. This was based on SEC pricing though, which included $93.67 oil and $6.36 natural gas as benchmark prices though.
Earthstone also provided reserve valuations at strip prices (from the end of 2022), which is more relevant. This included proved reserves with a PV-10 of $4.56 billion and PD reserves with a PV-10 of $3.62 billion.
The current oil strip is pretty similar to what it was at the end of 2022, but natural gas prices have slumped a fair bit from the $4.30 in 2023 and $4.28 in 2024 that Earthstone used in its calculations. The current natural gas strip is approximately $3.00 in 2023 and $3.63 in 2024.
Adjusting for current strip results in a PV-10 estimate of $3.3 billion to $3.4 billion for Earthstone’s PD reserves.
If we use a 0.9x multiple to $3.35 billion, that results in an estimated value of $3.015 billion for Earthstone. Subtracting the projected year-end 2023 net debt of $783 million results in an estimated value of $15.94 per share for Earthstone assuming 140 million outstanding shares.
Conclusion
Earthstone’s Q4 2022 production was quite strong, at 5% above guidance midpoint for total production and 9% above guidance midpoint for oil production.
Going forward into 2023, Earthstone is aiming to average around 100,000 BOEPD. At that production level it should be able to generate around $287 million in free cash flow after the impact of cash income taxes. This would reduce its leverage to around 0.6x by the end of 2023.
Earthstone is affected by weak Permian natural gas prices more than average due to 31% of its production being natural gas. It had added some fairly gassy assets before.
Based on current strip though (which incorporates weaker near-term gas prices), Earthstone should still be worth close to $16 per share assuming a 0.9x multiple to PDP PV-10.
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