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Earthstone Energy: Capex Reductions Should Allow It To Generate Plenty Of Positive Cash Flow – Earthstone Energy, Inc. (NYSE:ESTE)

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Earthstone Energy (NYSE:ESTE) has cut its 2020 capex budget by 67% in response to the oil price crash. This should allow it to significantly reduce its credit facility debt by the end of 2020 due to its strong hedge position, helping it deliver $68 million in positive cash flow at $33 WTI oil.

Earthstone’s production may drop below 13,000 BOEPD by the end of 2020 now, but it will have a significant number of DUCs ready for improved oil prices. Earthstone’s debt situation remains quite decent, and with its projected debt paydown during 2020, it should be well equipped to handle a significant borrowing base reduction.

A return to more normalized oil prices ($45 to $50 WTI oil) should make its stock worth at least $3 to $4.

Updated Guidance

Earthstone is cutting its capital expenditure budget from around $165 million to $55 million. Now it expects to put 3.0 net operated wells and 3.1 net non-operated wells online in 2020 compared to prior expectations for 16.2 net operated wells and 3.1 net non-operated wells. Earthstone will also now have 9.7 net operated DUCs for when oil prices recover.

Source: Earthstone Energy

The capex cuts are only resulting in an expected 11% reduction in total production and a 14% reduction in oil production compared to Earthstone’s original guidance for 2020, although the effect on 2020 exit rates is likely substantially larger (2020 exit rate production probably ends up under 13,000 BOEPD now).

The reduced production also increases Earthstone’s lease operating expenses by $0.50 per BOE due to the relative lack of new wells coming online that provide significant production (and thus low lease operating expenses per BOE).

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2020 Model

With 14,250 BOEPD in 2020 production now, Earthstone is projected to generate $110 million in oil and gas revenue at $33 WTI oil (current strip). Earthstone’s very strong hedge position contributes an estimated $76 million in positive value at current strip.

Earthstone’s strong 2020 hedges allowed it to reduce its 2020 swaps in favor of additional 2021 swaps. It reduced its March to December 2020 hedges from 8,000 to 7,000 barrels of oil production hedged per day, as its reduced development plans would probably result in its oil production dropping below 8,000 barrels per day by late 2020 anyway.

Source: Earthstone Energy

The reduced 2020 hedges allowed it to add 1,000 barrels per day in 2021 oil swaps, bringing its 2021 hedges up to 45% of 2020 oil production levels.

Type Units $/Unit $ Million
Oil (Barrels) 3,224,775 $30.00 $97
NGLs (Barrels) 1,040,250 $11.00 $11
Natural Gas [MCF] 5,617,350 $0.40 $2
Hedge Value $76
Total Revenue $186

With its reduced $55 million capital expenditure budget, Earthstone is now projected to have $118 million in cash expenditures during the year. Its interest costs are also helped by its debt paydown during 2020 combined with lower interest rates.

Expenses $ Million
Lease Operating And Workover $33
Production Taxes $7
Cash G&A $18
Cash Interest $5
CapEx $55
Total Expenses $118

Earthstone is thus projected to end up with around $68 million in positive cash flow during 2020 despite very low oil prices. This is due to its hedges and its greatly reduced capex budget.

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Debt And Valuation

The company had $170 million in credit facility debt at the end of 2019. It also had around a $40 million working capital deficit. The positive cash flow from 2020 will result in its credit facility debt plus working capital deficit being reduced to a combined $142 million. Earthstone should still have sufficient liquidity under its credit facility even if the borrowing base gets slashed significantly from $325 million.

With its reduced production levels, Earthstone should still be worth $3 to $4 per share based on longer-term WTI oil prices returning to $45 to $50. It does have work to do in building up its production levels in the future, as it commented that its fixed cost structure is designed to be most efficient at 20,000 BOEPD and now it may exit 2020 with under 13,000 BOEPD. Earthstone’s 9.7 net operated DUCs will help with that production rebuild though.


Earthstone has taken the prudent step of greatly reducing capex due to very low oil prices. Its hedges will then allow it to generate around $68 million in positive cash flow at $33 WTI oil in 2020, helping it to pay down its credit facility and avoid the potential for tight liquidity if there is a major borrowing base reduction.

Earthstone’s production will take a significant hit (showing up more later in 2020), and it may exit 2020 with under 13,000 BOEPD in production. It should be in solid shape for 2021 though, with a decent amount of hedges in place there and the ability to bring 9.7 net DUCs online when oil prices recover.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ESTE over the next 72 hours. 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.

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