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Earthstone Energy: The Management Treadmill Continues

Mar. 02, 2020 7:08 AM ETEarthstone Energy, Inc. (ESTE)10 Comments


  • Management has built and sold 5 previous companies successfully.
  • This business cycle has been far more challenging than in the past.
  • Both cash operating costs and finding and development costs are extremely low.
  • The stage is set to unleash a lot of future profitability.
  • The low financial leverage and low stock price probably predict low downside risk.
  • This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Get started today »

Earthstone Energy's (NYSE:ESTE) management had a good thing going. They would start a company, and then go bargain hunting to produce good results. Usually within five years that company was sold for an excellent profit. This sixth time around at replicating previous efforts has proved challenging. But now investors can get in at about 25% of the original cost of the institutions that backed the company as a startup.

Things began well enough as the current management took control of Earthstone through a reverse acquisition right around the time that oil prices began their big decline. But instead of oil prices rallying to previous highs in a cyclical recovery, the industry surprised pundits with a cost declining profit recovery instead. That led to repeating rounds of overproduction as ever declining costs led many industry players to produce those new wells with lower costs. The hope was that newer production would lift the company out of financial straits. Instead, ever lower costs kept a lid on oil price rallies as production relentlessly grew.

Now the market is finally accepting steadily declining costs while demanding companies profit from those declining costs now. The result is spending within cash flow rather than gambling on a bunch of new lower cost wells providing endless future profits. Ironically, this newfound discipline may finally provide a floor to oil and gas prices even though technology changes and operational improvements continue to sweep the industry.

Earthstone Energy is in a position to take advantage of this newfound market attitude because this management always believed that operating leverage would produce superior returns to financial leverage. The result is very low debt levels and a strong balance sheet that allows management many options going forward.

This debt averse management is very unlikely to reverse its attitude on debt fueled

I analyze oil and gas companies like Earthstone Energy and related companies in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. I break down everything you need to know about these companies -- the balance sheet, competitive position and development prospects. This article is an example of what I do. But for Oil & Gas Value Research members, they get it first and they get analysis on some companies that is not published on the free site. Interested? Sign up here for a free two-week trial.

This article was written by

Long Player profile picture

Long Player believes oil and gas is a boom-bust, cyclical industry. It takes patience, and it certainly helps to have experience. He has been focusing on this industry for years. He is a retired CPA, and holds an MBA and MA.

He leads the investing group Oil & Gas Value Research. He looks for under-followed oil companies and out-of-favor midstream companies that offer compelling opportunities. The group includes an active chat room in which Oil & Gas investors discuss recent information and share ideas. Learn more.

Analyst’s 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.

Disclaimer: I am not an investment advisor and this is not a recommendation to buy or sell a security. Investors are recommended to read all of the company's filings and press releases as well as do their own research to determine if the company fits their own investment objectives and risk portfolios.

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Comments (10)

Worth the buy now?
Long Player profile picture
That is always up to you. This is a well run low debt company. Therefore you have to decide if it fits your parameters
Thermalsight profile picture
Finally, someone else has noticed this company. I have been in them since $9.00 (mid 2017), which has been quite painful. Their PE is less than 4 and they are growing profits. In addition, they trade at 33% of book value and, lastly, debt to equity is <16% (Warren Buffet recommends <25%). But, if we are to be honest, their so-called leverage discipline was not their prudent choice, but the practical result of getting the borrowing window slammed closed in their face. They tried to do the same over-leverage, over-expand move back in October 2018 when they tried to buy Sabalo Energy for a ridiculous $950M. If you research this you will find that the VC guys that own Sabalo are the same VC guys that own the bulk of ESTE. They were using ESTE as an ATM to withdraw cash and pay themselves. I wrote ESTE Management and begged them not to do this and explained what a bad deal it was. Silly me....these Executives work directly for the VC guys and must do as they say. By December of 2018 this horrible deal was cancelled because "...the drastic change in commodity prices and in the debt and equity markets has negatively affected the significant merits of the acquisition". Thank God oil crashed from $76 to $45 in 2 months and saved us from this disastrous decision that was so bad Ray Charles could see it. Since then, the company has performed well but continues to be punished along with the rest of the industry. I am currently over allocated, so I will not be buying more. If not for the Coronavirus, this would have been back to $9 (it was $7 in early Jan). Don't use leverage and the patient investor will be rewarded. I just got in too early.
Chancer profile picture
@ Thermalsight:

I feel your pain even greater as I own ESTE at higher cost- but fortunately only a small position. I have been wanting out for a long time, but the price just got worse. I also agree that I am glad that acquisition got killed.

I could buy now to average down, but been there and done that; and I do not want to put in one more penny. If I doubled my investment, my average cost would only drop to $6. Just holding now until oil price increases in hopes I can reduce the certain loss in selling.
Hubens Capital profile picture
ESTE seems really undervalued indeed. Lets see if the Corona virus can slowly fade to the background and oil can recover towards $60.
Nice thing is that ESTE is drilling on private lands, so a Sanders presidency might not even be that bad as oil spikes up and Sanders cannot do much with private land. ESTEs land then get very valuable.
But better 4 years Trump for ESTE
Thermalsight profile picture
And here is more data that I posted elsewhere: They forecast 16,000 Boepd at 64% oil. That works out to 3.74 million Bbls. They have 2.93 million Bbls hedged at $60.31. That's 78% of total oil production. To panic because oils has dropped to $45 per Bbl does not make sense on this stock. Just the oil revenue alone will be greater than $213M, which is 20% more than total 2019 revenue. Add in another $18M in revenue for Natural gas and NGL, making 2020 revenue more like $230M (at least) for 35% revenue growth. This thing should be trading well above $10 just based on today's price. A recovery is just gravey.
would you prefer este over rei?
Long Player profile picture
I own both for diversification purposes
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