Steve Zachritz's  Instablog

This is a tiny Rockies focused E&P participant with toeholds in the Williston Basin (both the East Montana and North Dakota Bakken plays), the DJ Basin (Colorado, Codell / Niobrara) and in South Texas and along the Texas Gulf Coast  (see more property details below but when I say tiny, I mean tiny). Management is experienced (ex Amoco) and the firm, as small as it is, is profitable and not overly leveraged like many of the E&P minnows that simply should not be public.  When I look at the super small players within the single digit midget E&P universe I have to adjust my thinking on metrics of valuation and on what would normally seem inconsequential in terms of volumes from new projects. I also have to think about the fact that the shares are extremely thin and trade essentially by appointment. In other words, it would probably be difficult to obtain a position of size without moving the name and equally difficult to get out.

How the market views the company:

• Total Enterprise Value of $16.9 mm
• Working Capital = $4.7 mm
  • with $4.97 mm in cash ($0.29 / share)
• Debt = $3.9 mm
  • total debt to cap of 25%,
  • but with net debt to cap less than 0% due to the cash
• Nothing off balance sheet except for a small 5 year office lease.
• Credit Line
  • $20 mm with a borrowing based set to $4 mm currently
  • $0 drawn.
• Only 16.9 mm shares out
  • Insiders hold 28% with CEO Singleton holding 26%
  • Only trades 11,500 shares on average … again, truly tiny

Management:

• President and CEO Ray Singleton, petroleum engineer, former Amoco drilling, completion and production engineer. After that he ran a engineering consultancy before coming to Earthstone in 1988.
• Otherwise they have 8 other employees including a contractor for an accountant.
• G&A and salaries involved here are not high
• Instead of rushing out to lease acreage Singleton has seen fit to buy back shares and hoard a small amount of cash, without tapping his credit lines.
• They have maintained production but not managed to grow it either.

What have they been up to?

• Reserves:
  • 970,000 BOE; 84% oil
  • Reserves engineered by Ryder Scott which is the best in the business
  • On a TEV / Reserves basis, they are relatively cheap (especially given the oiliness of the reserves) at $13.—

• Production – drifting …

What is the plan now and where are they drilling?

• Looking for oily deals in the Rockies including acreage packages and auction in October. They have recently add some acreage and have a couple of bids out on asset packages.
• They continue to target DJ Basin gas and Bakken oil with smallish non-operated interests.
• They have a couple of wells we could get rates on in the near term, both in the Bakken.–

• Banks Prospect Area (McKensie County, North Dakota)
  • The first well is operated by ZEnergy, the Pederson 10-3H well, just to the east of BEXP's Rough Rider area, and gross production should be north of 500 boepd IP when it comes off confidential status.
  • This is where it is important to remember that scale comment above
  • ZEnergy also will spud a second well in the Banks area in October.
  • Brigham (BEXP) also bought out the acreage of one of their small, private partners who operated, and is planning to spud 1 or 2 wells prior to year end which would give BSIC a small interest in each.
  • BSIC has 13,000 gross (845) net acres in the area and the move by BEXP here will insure that they continue to develop it.

• Indian Hill Field (McKensie County, North Dakota)
  • The second soon to be announced well is a longer lateral Bakken test (probably 10,000 foot) operated by SM.  BSIC has a "small" interest here but we should get the results on or before SM's 3Q press release.
  • BSIC has 192 net acres here.
• Divide County, ND / Sheridan County, Montana
  • 2400 net acres in the way of the migration

• The Complete Acreage Snapshot

• They plan to get listed on a national exchange by year end … will require a reverse split to get there.