Earthstone Energy (ESTE): Potential for virtual elimination of net debt by the end of 2023

0

Evgenii Mitroshin/iStock via Getty Images

Earth Stone Energy (NYSE:ESTE) may now be able to generate approximately $480 million in cash flow positive in 2022 at current strip prices. This positive cash flow would allow him to almost repay his loan facility debt by the end of 2022 when combined with proceeds from its recent unsecured note offering.

Based on current 2023 strip prices, Earthstone may be able to generate over $600 million in positive cash flow next year due to its increased production (with a full year of contributions from its Chisholm assets and Bighorn) as well as fewer covers.

If prices can hover around the current band for the next two years, Earthstone could end 2023 with near zero net debt if it doesn’t make additional acquisitions in the meantime.

Offer of unsecured notes

Earthstone recently announced a private placement of $550 million in 8.0% unsecured notes due 2027. Earthstone is using the net proceeds of this placement to repay a portion of its borrowings under the credit facility.

This increases Earthstone’s annual interest expense by approximately $27 million, as its credit facility borrowings had an interest rate of 3.11% at the end of 2021.

This gives Earthstone additional liquidity, as it had $1.082 billion in borrowings on its credit facilities (pro forma for its acquisitions) compared to a borrowing base of $1.325 billion.

Between the proceeds from the unsecured notes and the projected cash flows for 2022, Earthstone should be able to repay most of its borrowings on the credit facility by the end of 2022. This also gives Earthstone the flexibility to make more acquisitions, although it also bears the increase in interest costs.

2022 Outlook Update

At the current strip (approximately $97 WTI oil and $6.35 NYMEX gas) for 2022, Earthstone is now expected to generate $1.47 billion in oil and gas revenue before hedging. Earthstone’s 2022 hedges have an estimated value of negative $203 million at these oil and gas prices.

Type Units $/unit millions of dollars
Oil (Barrels) 9,876,900 $96.00 $948
NGL (barrels) 6,263,400 $41.00 $257
Natural gas [MCF] 47,698,200 $5.55 $265
Coverage value -$203
Total revenue $1,267

Source: Author’s work

Earthstone is expected to generate $480 million in cash flow positive in 2022 at current strip prices.

Expenses millions of dollars
Lease-operate $181
Production taxes $113
G&A in cash $33
Cash interest $35
Capital expenditure $425
Total expenses $787

This would translate to approximately $613 million in net debt at the end of 2022 if it made no further acquisitions. This also assumes that the net proceeds from its recent ticket offering are approximately $538 million after commissions and related expenses.

earth stone

Pro forma capitalization of Earthstone (earthstoneenergy.com)

Earthstone’s net debt at the end of 2022 would be approximately 0.65x EBITDAX, which would allow it to easily meet its leverage target of 1.0x.

Potential results 2023

The current band for 2023 involves WTI oil at $80 and NYMEX gas at $5.15. At 80,000 BOEPD (41% oil) in average production, Earthstone would be able to generate $1.565 billion in oil and gas revenue, while its 2023 hedges would have a negative estimated value of $40 million.

Type Units $/unit millions of dollars
Oil (Barrels) 11,972,000 $87.50 $1,048
NGL (barrels) 7,592,000 $35.00 $266
Natural gas [MCF] 57,816,000 $4.35 $251
Coverage value -$40
Total revenue $1,525

This would allow Earthstone to generate $606 million in cash flow positive in 2023 at current strip prices. I assumed that Earthstone spends $500 million in capex in 2023 due to cost inflation and support from a larger asset base after acquisitions.

Expenses millions of dollars
Lease-operate $219
Production taxes $120
G&A in cash $35
Cash interest $45
Capital expenditure $500
Total expenses $919

Evaluation

Due to the potential for significant positive cash flow over the next two years, I now estimate that Earthstone would be worth around $18 per share in a long term scenario (post 2023) WTI oil at $70 and NYMEX gas at $3.50. This assumes a current band for 2022 and 2023 before commodity prices return to these longer term prices.

In a scenario where prices were around the current band for 2022 only before returning to longer-term prices, Earthstone would be worth around $16 per share in a long-term scenario of WTI oil at $70 and NYMEX gas at $3.50.

Conclusion

Earthstone has issued high interest rate unsecured notes to help repay a portion of its credit facility. If Earthstone makes no more acquisitions in 2022, it should be able to largely repay its credit facility by the end of the year.

At current strip prices, Earthstone could also be able to generate over $600 million in positive cash flow in 2023. This could leave it with almost no net debt by the end of 2023 and would help give it value. estimated $18 per share in a longer term (post 2023) scenario of WTI oil at $70 and NYMEX gas at $3.50.


Source link

Share.

Comments are closed.