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Earthstone Energy: Reviewing The IRM Acquisition And Its 2021 Guidance

Mar. 07, 2021 12:55 PM ETEarthstone Energy, Inc. (ESTE) Stock6 Comments


  • Earthstone Energy appears to have gotten a good deal with its IRM acquisition, especially given the subsequent improvement in oil prices.
  • It appears to have added/acquired a substantial amount of additional hedges for 2021.  At strip prices, its hedges may have around $50 million in negative value.
  • This will reduce Earthstone's ability to pay down its debt in 2021, although its leverage should still be at a reasonable level.
  • Earthstone's production is expected to temporarily decline from pro forma Q4 2020 levels and its stock appears fairly expensive based on 2021 production levels.
  • Earthstone appears more fairly priced based on reserve values.
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Earthstone Energy's (NYSE:ESTE) may be able to deliver over $60 million in positive cash flow in 2021, although its average production during the year is expected to be below Q4 2020 levels (pro forma for the IRM acquisition). Earthstone's cash flow is negatively affected by its hedges.

At over $8 per share, Earthstone's shares look fairly expensive based on its 2021 production levels, although it appears more reasonably priced based on Earthstone's reserve value.

Midland Basin Acquisition

Earthstone acquired Independence Resources Management for approximately $182 million in cash and stock. This includes $131.2 million in cash (mostly funded by its credit facility) and 12.7 million Class A shares that were worth approximately $50.7 million at the time. This increases Earthstone's share count to approximately 77.9 million (42.9 million Class A shares and 35.0 million Class B shares).

Source: Earthstone Energy

The deal closed in January 2021 and also resulted in Earthstone's credit facility borrowing base increasing from $240 million to $360 million. The acquisition price looks pretty good given that IRM's proved reserves have a PV-10 of $304 million at $50 WTI oil and $2.50 natural gas, and the long-term oil strip is now consistently above that.

Source: Earthstone Energy

The acquisition also adds 70 gross locations (over 4,900 core net acres) with an estimated IRR of 45% at end of November strip prices (roughly $46 WTI oil). Earthstone also acquired 38,500 additional net acres (mostly in Irion, Tom Green and Sterling Counties), but those areas are considered fringe acreage that is not competitive for capital with Earthstone's legacy acreage or the core IRM acreage.

Source: Earthstone Energy

2021 Outlook At Strip Prices

Earthstone now expects to average approximately 20,250 BOEPD during 2021 (guidance range of 19,500 BOEPD to 21,000 BOEPD) with 53% of that production being oil.

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This article was written by

Elephant Analytics profile picture
Aaron Chow, aka Elephant Analytics has 15+ years of analytical experience and is a top rated analyst on TipRanks. Aaron previously co-founded a mobile gaming company (Absolute Games) that was acquired by PENN Entertainment. He used his analytical and modeling skills to design the in-game economic models for two mobile apps with over 30 million in combined installs. He is the author of the investing group Distressed Value Investing, which focuses on both value opportunities and distressed plays, with a significant focus on the energy sector. Learn more>>

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Comments (6)

What do you think of latest adds:

They just added acreage from Tracker Resource Development and related well-bore interests from Sequel Energy Group for $126.5M in cash and stock.
The fringe acreage in , Tom Green, Sterling and Irion counties alltogether 40.000 acres may be fringe in the sence that the majority of the contiguous 40.000 acres are not Tier 1 acreage, bus have numerous producing wells that with maintanance and modern updates can increase oil production at a very low cost. It is low hangiging fruit. New horizontal wells drilled close to the western boundary og the acreage next to Glasscock and Reagan counties contains Wolfcamp D judged from other operators.
BJA-2 profile picture
Regarding your comment that hedges may have around negative $50 million in value in 2021, the March 10 press release detailed the hedges. It appears the IRM impact on that hedge was substantial, "1,008,950 Bbls of oil at $41.07/Bbl."

Since the IRM acquisition included that low hedge, it would seem that was taken in account for with a lower acquisition cost. Therefore the $41 IRM hedge should not be seen as detrimental to 2021 operations.
BJA-2 profile picture
I have always believed energy companies should valued on reserve values as it represents the long term cash flow...That model has not worked over the last few years because reserve values kept declining....But nothing lasts forever. what is a good estimate for the value of ESTE reserves, including unproved reserves that are known to exist?
Arctic Fox Capital profile picture
Thanks! Would love your thoughts on PNRG?
keep on waiting for a better entry price, it may very well last a long time to get one! In the mean time let's go up, up, up!
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