Earthstone: Still Rolling Ahead of Expectations

Earthstone energy reported their quarterly figures this week and provided an update on their business. As you may recall, the Company announced a transformative acquisition late last year, buying BOLD Resources. BOLD is a Permian Basin producer with a large acreage position and existing production that basically doubled the combined Company production.

The Permian Basin is the best place in the US to drill for oil and, within that deposit, Earthstone has been a top pick here at Tailwinds. There are two reasons for this. Firstly, on a price to EBITDA or Price to production ratio, ESTE stock is one of the cheapest in the Permian Basin. Secondly, the company (and the street) have really lowballed production forecasts. During the balance of 2017, I expect Earthstone to report production figures at least 50% higher than street estimates. I also think they’ll announce more acquisitions; something this management has a proven longstanding ability to perform.

The result of all this is that I think ESTE shares will benefit doubly from the besting of expectations as well as garnering a more reasonable market-type multiple. ESTE stock could easily be up 50% or more by year end…as long as oil prices don’t collapse.

Here’s why we think ESTE will beat forecasts. During the first Q of 2017, Earthstone (BOLD’s current and future production will be included in all Earthstone comments going forward) had an average production of over 9,500 barrels per day. This exceeds company forecasts of 8,000-8,500 BPD for the average for all of 2017. It also exceeds Wall Street estimates which, shockingly, mimic the company’s guidance.

Rather than pay any attention to Company guidance for volumes, I like to look at drilling budgets, well success rates and current production to make my own estimates. The above table shows the 2017 capital budget for ESTE. As this clearly shows, we should be expecting over 15 net wells added during the year.

How have the wells performed? Not too shabby at all…as per the recent conference call, Bold Energy recorded six horizontal Wolfcamp wells during the first four months of 2017 with an average peak 30-day initial production rate of 992 BOE per day with 84% oil. 

The back of the envelope math here says that the new wells should produce about 15,000 BPD total when looking at the average 30 day peak. We all know this declines, so let’s just assume a 50% decline rate, you still get 7,500 BPD of new production added during the year. Add this to the current run rate of 9,500 BPD (which we can decline by a third as well), and it’s easy to see that Earthstone’s exit run rate could easily exceed 13,000 barrels per day.

Now, back to that guidance. Company estimates are for 2017 exit rate production of 10,500 to 11,500 BPD. Once again, the Street is in the same ballpark. Yawn…

All of which leads me to say that ESTE, based on their current production and their drilling budget, will easily beat their corporate guidance and Wall Street’s estimates during 2017.Will Earthstone hit our upside target of 20,000 BPD? Unlikely as they aren’t bringing on the second drill as fast as we’d hoped. However, with the Company set up to beat the Street, and undervalued relative to peers, we continue to have ESTE stock as a core piece of the Tailwinds Select Portfolio and expect the stock to do quite well for the rest of the year.