Earthstone Energy In The Permian Basin: It's All About Location, Location, Location

| About: Earthstone Energy, (ESTE)

Summary

Earthstone Energy just entered the prolific Permian Basin, thanks to a transformational deal with Lynden Energy.

This junior producer has a healthy balance sheet, a management team with a proven track record, no liquidity problems, low key metrics and high insider ownership.

On top of that, it's exceptionally well positioned in the oil-rich Permian Basin.

The choosiest home hunters and the pickiest energy investors are always looking for the right spot. It's all about location, location, location. Actually, location is a very important ingredient for success for any business.

That said, this is a "show-me-your-Permian-neighbors" article, where I summarize lots of new information associated with Earthstone Energy (NASDAQ:ESTE) that was presented in my previous article here. And this overlooked, underfollowed and undervalued producer is exceptionally well positioned in the Permian Basin, as clearly shown in the next paragraphs.

Furthermore, and to the best of my knowledge, there isn't another article with this kind of "all-in-one" map information. Therefore, I believe the existing shareholders and the potential buyers of several other Permian producers will also find it very useful as part of their due diligence process.

Earthstone Energy's Permian Assets

If you want to produce oil while getting the best bang for your buck, you have to take a look at the Permian Basin, which is considered "the mother of the shale oil plays" in North America. This is the place where producers tap many layers of oil-bearing rock from a single location above ground, enhancing their operating efficiency and increasing their IRRs. Decades of drilling have also fostered an abundance of support businesses in the region, including new pipelines which have eliminated bottlenecks, helping Permian crude trade at a premium to oil extracted elsewhere and reversing a situation that until recently priced Permian oil at a discount. And thanks to this "black gold," many towns in the Permian Basin have been transformed from cow towns to boom towns.

It must also be noted that the oil production in the Permian Basin has been much more resilient in the face of the collapse in oil prices over the last two years. And this is why, shares of Permian energy producers are the top-performing energy stocks while shares of drilling contractors, midstream players and explorers operating elsewhere have been pummeled.

Specifically, and due to the fact that the number of drilling rigs which are drilling new wells has declined dramatically since 2014, oil production in the key shale areas has fallen significantly such as the Eagle Ford shale play, the Bakken formation and the Niobrara play, as illustrated below:

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and below:

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In contrast, data from the U.S. Energy Information Administration show that oil output in the Permian Basin has steadily grown despite the fact that the number of rigs operating in the Permian Basin has declined considerably since 2014, as illustrated below:

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Actually, many companies have pulled their horns in the other shale plays (Eagle Ford, Bakken) to concentrate on their prolific and highly-economic Permian assets. This is why Earthstone Energy's recent deal with Lynden Energy is transformational, while the newly-acquired Permian assets are the ace up Earthstone's sleeve. However, they are still largely unnoticed. And my article wants to change this while also helping the forward thinkers act accordingly.

Pro forma the Lynden deal, Earthstone Energy's Permian assets cover almost 58,000 net acres. Currently, this junior producer has almost 5,900 net acres in the Midland Basin (Martin, Howard, Midland, Glasscock counties) with 200 gross drilling locations, as illustrated below:

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Additionally, it has about 52,000 net acres in Coke, Mitchell and Sterling counties, as illustrated below:

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Earthstone Energy Is Dancing Among Elephants In The Permian Basin

Given that this article is for the forward thinkers, I will present in this paragraph the neighboring operators for two reasons:

1) Their proven success to-date further de-risks Earthstone's undeveloped acreage in the Permian Basin.

2) All of them are billion-dollar companies and therefore, they are potential suitors.

But, I will not include the privately-held neighbors such as Three Rivers Operating Company III, Ajax Resources, Rock Oil Holdings, American Energy Permian, Bold Energy III LLC, Broad Oak Energy, Element Petroleum, Elevation Resources, Fasken Oil & Ranch, Foreland Resources, HighMount Exploration & Production, Strand Energy, Henry Petroleum, High Sky Partners, Hunt Oil, Tall City Exploration and Reliance Energy, a subsidiary of India's Reliance Industries. I will focus only on the publicly-traded ones.

Additionally, I will not include the publicly-traded operators in the Delaware Basin such as Cimarex Energy (NYSE:XEC), WPX Energy (NYSE:WPX), Carrizo Oil & Gas (NASDAQ:CRZO), EOG Resources (NYSE:EOG) and Noble Energy (NYSE:NBL) to name a few, although their Permian expansion and entry into the prolific Midland Basin is not out of the question.

That said, I will start with Occidental Petroleum which is the largest producer of oil in the Permian Basin. The company has been producing for more than 30 years from every producible formation in the Basin. Its asset base covers nearly 5.4 million gross acres with Howard county being its focus area for 2016, as illustrated below:

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Acquisitive Encana Corporation (NYSE:ECA) has producing properties in Martin, Howard, Midland and Glasscock counties, as illustrated below:

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Source: Encana Corporation website

Pioneer Natural Resources (NYSE:PXD) is the largest Spraberry/Wolfcamp producer with properties in Martin, Midland, Glasscock, Upton and Reagan counties among others, as illustrated below:

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Energen Corporation (NYSE:EGN) has its producing assets in Martin, Howard, Midland and Glasscock counties, as illustrated below:

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RSP Permian (NYSE:RSPP) is another energy producer focused on horizontal drilling of multiple stacked pay zones in the oil-rich Permian Basin with 47,000 net acres in Martin, Midland and Glasscock counties, as illustrated below:

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Concho Resources (NYSE:CXO) has its producing assets in Andrews, Midland and Upton counties, as illustrated below:

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Laredo Petroleum (NYSE:LPI) has producing assets in Howard, Glasscock and Reagan counties, where it has been successful in delivering repeatable results through internally generated vertical and horizontal drilling programs, as illustrated below:

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Parsley Energy (NYSE:PE) has producing acreage in Martin, Midland and Glasscock counties among others, as illustrated below:

Diamondback Energy (NASDAQ:FANG) has its properties in Martin, Howard, Midland and Glasscock counties, as illustrated below:

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Callon Petroleum (NYSE:CPE) has producing properties in Howard and Midland counties, as illustrated below:

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Apache (NYSE:APA) controls over 3.3 million gross acres with exposure to many plays across the Permian Basin. It's one of the largest operators in the Permian Basin and has been running a streamlined capital program that focuses on efficiency improvements, downspacing and other strategic tests to further delineate its plays. Part of its acreage is located in Midland, Glasscock, Upton and Reagan counties, as illustrated below:

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SM Energy (NYSE:SM) has producing assets in Midland and Upton counties, as illustrated below:

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Aside the Delaware Basin, Matador Resources (NYSE:MTDR) has producing assets in Howard county too, as illustrated below:

Source: Matador Resources website

EP Energy's (NYSE:EPE) Permian assets are located a few miles south of Earthstone's ones in Reagan, Irion and Crockett counties, as illustrated below:

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Lastly, Devon Energy's (NYSE:DVN) production in Midland Basin is approximately 25,000 boepd and holds 15,000 net undeveloped acres in Martin County, among others. But, Devon has been trying to reduce its financial leverage and therefore, these assets are being marketed. It will be very interesting to see who will be Earthstone Energy's new neighbor along with the key acquisition metrics of this deal, once this sale is completed successfully.

Takeaway

There is a tendency for investors to lump all energy companies together. But all fingers are not created equal. Aside its key advantages relative to the peer group as mentioned in my previous article, Earthstone Energy is exceptionally well positioned in the Permian Basin.

I must also point out that Earthstone Energy's current valuation at about $13/share doesn't incorporate any "management premium," although this is a proven management team with deep, basin-focused operating expertise who has created and sold profitably five companies thus far.

And it seems this management team isn't done with the Permian Basin with more deals being on the horizon, as quoted below:

Finally, we continue to actively pursue acquisitions that might be transformational for the Company and smaller acquisitions which complement our present holdings."

This is why I included it at $11.24/share into my subscription-based Premium Research, which is focused on underfollowed/overlooked stocks that can generate significant returns with low risk thanks to their healthy balance sheets, among others. Therefore, forward thinkers coupled with investors who have become increasingly discriminating in their capital allocations due to the numerous bankruptcies in the energy sector, must check Earthstone Energy at $13/share before it's too late.

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Disclaimer: The opinions expressed here are solely my opinion and should not be construed in any way, shape, or form as a formal investment recommendation. Investors are reminded that before making any securities and/or derivatives transaction, you should perform your own due diligence. Investors should also consider consulting with their broker and/or a financial adviser before making any investment decisions.

Disclosure: I am/we are long ESTE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.