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<h2>KEY POINTS</h2>
<ul>
<li>Earthstone closed the previously announced acquisition of southern Midland Basin assets from Bighorn Permian Resources on April 14, 2022. The adjusted consideration was $639 million in cash and ~5.7 million shares of Class A common stock.</li>
<li>Coupled with Delaware Basin assets acquired in 1Q22, pro forma 4Q21 production was ~84.8 MBOE/d compared to actual 4Q21 production of 30.2 MBOE/d</li>
<li>The Delaware Basin acquisition added 414 gross horizontal development locations that have been largely de-risked by the prior owners and other offset operators. Combined with 362 gross Midland Basin locations, Earthstone’s visible inventory stretches more than 13 years at its current four-rig development pace.</li>
<li>Earthstone is executing a FY22 capital program of $410–440 million built around two operated rigs in both the Midland and Delaware basins. The $365–390 million of operated drilling and completion capital is roughly split 70% / 30% Midland / Delaware.</li>
<li>Pro forma long-term debt, was $1,013 million as of March 31, 2022. Debt included $550 million of 8.0% senior unsecured notes issued in April 2022 and $463 million of RBL borrowings. Earthstone had $337 million of undrawn RBL capacity.</li>
<li>Our updated FY22 EBITDAX is $968 million. Our estimates suggest Earthstone could generate significant free cash in 2H22 and into 2023. We estimate a YE22 leverage ratio of 0.6x annualized 4Q22E EBITDAX. We have formulated a FY23 EBITDAX estimate of ~$1.0 billion based on a 79.5 MBOE/d production estimate.</li>
<li>Excess cash flow could be used for some combination of value enhancing acquisitions and/or future returns to shareholders.</li>
<li>Earthstone is trading at 1.9x our FY23 EBITDAX estimate.</li>
<li>COMPANY OVERVIEW</li>
</ul>
<div></div>
<p>Earthstone is a growth-oriented independent energy company engaged in acquisitions and the development and operation of oil and natural gas properties. The company’s primary assets are concentrated in the Permian Basin of west Texas and New Mexico. Pro forma for the closings of the Chisholm and Bighorn acquisitions, 4Q21 production averaged ~84.8 MBOE/d. Pro forma proved reserves as of January 1, 2022 were ~411 MMBOE. Earthstone’s corporate home page is&nbsp;www.earthstoneenergy.com.</p>
<h2>A PLATFORM WITH SCALE</h2>
<h2>Permian Acquisitions Add Substantial Scale</h2>
<p>Earthstone has closed two acquisitions in recent months, which have transformed the company’s Permian Basin platform (see Figure 1). Beginning in 2021 and culminating in April 2022, Earthstone closed five property acquisitions for aggregate consideration of ~$1.8 billion (63% cash / 37% stock). The cash/equity funding mix allowed the company to expand the asset base without stressing the balance sheet. The two largest asset packages added a core area in the southeast New Mexico portion of the Delaware Basin which brings a deep inventory of future development locations and a proved developed position in the southern portion of the Midland Basin that adds a source of free cash flow. Management estimates the combined PV-10 for the five acquisitions was ~$1.9 billion using proved reserves and NYMEX strip pricing in effect when the transactions were announced.</p>
<p>On February 15, 2022 the company completed an acquisition of assets in the Delaware Basin from Chisholm Energy. More recently, the company completed the acquisition of the assets in the southern Midland Basin of Bighorn Permian Resources on April 14, 2022. The combined acquisitions add substantial scale to Earthstone’s proved reserves, production, and development inventory in the Permian Basin. Pro forma proved reserves as of December 31, 2021 are estimated at ~411 MMBOE, a 179% increase from the actual year-end total. The pro forma PV-10 value using strip pricing as of March 15, 2022 was ~$5.5 billion.</p>
<p>Management estimates 1Q22 production averaged 35.5 MBOE/d, including roughly a half-quarter contribution from the Chisholm assets. 2Q22 production is expected to fall in the range of 70 MBOE/d to 74 MBOE/d with a partial contribution from the Bighorn assets. 2H22 estimated production is in the range of 76 MBOE/d to 80 MBOE/d.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/271/083/original/image_7100935321651189152401.png?1651189155" class="editor-image img-responsive" data-smartkarma-image-id="271083"></figure>
<p>Earthstone’s Permian centered asset base provides growth opportunities in both the Midland and Delaware Basins. Figure 2 summarizes some of the key attributes of the company’s three operating areas. Earthstone now controls ~209,000 net acres in the Midland Basin and ~38,000 net acres in the Delaware Basin. For context, at year-end 2020 (preceding the closing of the Independence Resources Management acquisition in 1Q21) the company owned ~27,900 net acres in the Midland Basin and zero in the Delaware Basin.</p>
<p>Earthstone is pursuing growth opportunities through asset acquisitions and leasing around its existing acreage positions in the Midland and Delaware basins. Management will entertain asset or corporate acquisitions that would increase Earthstone’s scale in a value-accretive manner without altering leverage metrics in relation to cash flow and the capital structure. Management’s targeted leverage ratio is &lt;1.0x annualized EBITDAX. Scale added by the recent acquisitions could open new opportunities to add bolt-on properties that leverage the company’s operating base. Leasing efforts are directed to blocking up acreage in the Midland and Delaware basins to allow for longer-lateral horizontal development, which could increase capital efficiency.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/271/084/original/image_75463923731651189175039.png?1651189177" class="editor-image img-responsive" data-smartkarma-image-id="271084"></figure>
<h2>Midland Basin</h2>
<p>Earthstone has closed four acquisitions since January 2021that have built substantial scale in the Midland Basin. The latest was the $860 million purchase of producing assets from Bighorn Permian Resources, which closed April 18, 2022. That transaction added ~106,400 net acres, mostly in Reagan and Irion Counties in the southern portion of the basin. Proved developed producing reserves (as of January 1, 2022) were pegged at 136 MMBOE. Production in 4Q21 averaged ~41.2 MBOE/d, consisting of 25% oil and 57% total liquids. Fully 100% of the acreage was held by production and 98% is Earthstone-operated. The acreage fits well with Earthstone’s existing footprint in Reagan and Irion counties, lending to potential cost savings through more efficient field operations (see Figure 3).</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/271/085/original/image_34787053341651189194176.png?1651189196" class="editor-image img-responsive" data-smartkarma-image-id="271085"></figure>
<h2>Delaware Basin</h2>
<p>Earthstone acquired its acreage position in Lea and Eddy Counties, New Mexico through the Chisholm acquisition. The position consists of ~38,100 net acres, of which ~85% is held by production and ~92% is Earthstone-operated. Approximately 55% of the leases are on Federal lands. During 4Q21, production averaged 13.3 MBOE/d from roughly 333 gross (168.6 net) producing wells. Approximately 75% of the production came from the acreage in Lea County. Earthstone operated 190 gross (149.5 net) wells on the acreage.</p>
<p>The Delaware Basin is a target-rich environment. At the time of the acquisition, management had identified 414 gross (237.1 net) potential drilling locations on its Delaware Basin acreage. Prospective formations that have been de-risked across the acreage include the Wolfcamp A and the First, Second, and Third Bone Spring sand intervals. Near-term development is concentrated on the Wolfcamp A/XY, and the Second and Third Bone Spring formations in Lea County. Earthstone currently has 79 Federal and State drilling permits with 52 in process. The existing permit inventory can support the company’s two-rig development pace for several years.</p>
<h3>A Decade Plus of Permian Development Inventory</h3>
<p>As noted in Figure 2, Earthstone’s inventory of potential development drilling locations in the Permian Basin is 776 gross locations. At a development pace of 60 wells per year based on an activity level of four rigs, the inventory stretches to more than 13 years. The inventory assessment is based on three to four wells per formation across a one mile wide drilling unit. Figure 4 summarizes the inventory distribution by area and across target formation. Management estimates that ~85% of the operated development inventory generates greater than an 25% IRR (see Figure 5).</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/271/086/original/image_23137779651651189221121.png?1651189223" class="editor-image img-responsive" data-smartkarma-image-id="271086"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/271/087/original/image_91724914761651189234742.png?1651189236" class="editor-image img-responsive" data-smartkarma-image-id="271087"></figure>
<p>The Permian inventory is well-suited to long-lateral horizontal development. In the Midland Basin, management estimates 98% of the gross inventory can be developed with greater than 1.5 mile laterals. In the Delaware Basin, management estimates 61% of the inventory can be developed with greater than 1.5 mile laterals. Blocking and tackling in the ground game could allow the company to extend Delaware Basin laterals.</p>
<h2>Eagle Ford Trend</h2>
<p>As of December 31, 2021, Earthstone owned ~12,700 net acres primarily in the Eagle Ford Trend. The acreage is primarily located in the crude oil window in Fayette, Gonzales, and Karnes Counties, Texas. Prospective formations include the Eagle Ford, Austin Chalk, and Upper Eagle Ford. The company’s working interests range from ~15% to 100%.</p>
<p>There were 37 gross (32 net) operated producing wells and 83 gross (36 net) non-operated producing wells on the acreage. Management estimates Earthstone’s acreage position holds 24 gross potential drilling locations.</p>
<h2>2022 Capital Program and Operating Guidance</h2>
<p>Earthstone provided its 2022 capital program and operating guidance on February 16, 2022 in tandem with closing the Chisholm acquisition. Management estimated $365–390 million of full-year drilling and completion capital split ~70% / 30% between the Midland and Delaware Basins. Earthstone is running two drilling rigs in each basin. The program includes spudding 40 gross wells in the Midland Basin with ~9,500 foot average laterals and an average ~90% working interest. In the Delaware Basin, management plans to spud 20 gross wells with ~8,750 foot average laterals and an average ~60% working interest.</p>
<p>On April 14, 2022 management provided a 1Q22 production estimate of 35.5 MBOE/d against the guidance range of 35.0 – 37.0 MBOE/d. The guidance and capital program are summarized in Figure 6.</p>
<p>Figure 6: 2022 Operating Guidance&nbsp;(1)</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/271/088/original/image_28393859871651189269824.png?1651189271" class="editor-image img-responsive" data-smartkarma-image-id="271088"></figure>
<p>(1) Guidance as of February 16, 2022</p>
<p>Source: Company reports</p>
<h2>EBITDAX Estimates and Valuation</h2>
<p>Our summary EBITDAX estimates are shown in Figure 7. We have updated our model to reflect the issuance of $550 million principal amount of 8.00% senior unsecured notes on April 7, 2022. Our EBITDAX estimate for FY22 is $968 million based on FY22 average production of 66.0 MBOE/d and average NYMEX oil and natural gas prices of $97.32/bbl and $5.89/MMBtu, respectively. Our estimates suggest Earthstone’s leverage ratio will end the year at 0.6x using our 4Q22E annualized EBITDAX.</p>
<p>We have formulated FY23 EBITDAX estimates based on a production estimate of 79.5 MBOE/d, ~3% above our 4Q22E figure, and NYMEX average prices of $80.00/bbl for oil and $4.25/MMBtu for natural gas. Assuming some inflationary pressure on cost items, our FY23 EBITDAX estimate is ~$1.01 billion. Earthstone could be in position to generate substantial free cash late this year and into 2023. Free cash could be used for some combination of funding incremental acquisitions and/or returns to shareholders.</p>
<p>Figure 7: Summary EBITDAX Model</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/271/091/original/image_80596654681651189315160.png?1651189317" class="editor-image img-responsive" data-smartkarma-image-id="271091"></figure>
<p>Source: Company reports and Water Tower Research estimates</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/271/092/original/image_82851473391651189345399.png?1651189347" class="editor-image img-responsive" data-smartkarma-image-id="271092"></figure>
<p>Pro forma for the Bighorn closing and the issuance of $550 million principal amount of senior unsecured notes (due 2027), long-term debt was ~$1.1 billion as of March 31, 2022. Earthstone had $463 million of borrowings drawn on its RBL which has a borrowing base of $825 million and an elected commitment amount of $800 million. Our updated EBITDAX model estimates YE22 net debt of ~$617 million, implying the company remains financially well positioned to execute on incremental value-accretive acquisitions.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/271/093/original/image_355555564101651189369435.png?1651189372" class="editor-image img-responsive" data-smartkarma-image-id="271093"></figure>
<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Jeff Robertson, who is the writer of this report, covers the Natural Resources sector for WTR. Mr. Robertson and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY POINTS

Earthstone closed the previously announced acquisition of southern Midland Basin assets from Bighorn Permian Resources on April 14, 2022. The adjusted consideration was $639 million in cash and ~5.7 million shares of Class A common stock.
Coupled with Delaware Basin assets acquired in 1Q22, pro forma 4Q21 production was ~84.8 MBOE/d compared to actual 4Q21 production of 30.2 MBOE/d
The Delaware Basin acquisition added 414 gross horizontal development locations that have been largely de-risked by the prior owners and other offset operators. Combined with 362 gross Midland Basin locations, Earthstone’s visible inventory stretches more than 13 years at its current four-rig development pace.
Earthstone is executing a FY22 capital program of $410–440 million built around two operated rigs in both the Midland and Delaware basins. The $365–390 million of operated drilling and completion capital is roughly split 70% / 30% Midland / Delaware.
Pro forma long-term debt, was $1,013 million as of March 31, 2022. Debt included $550 million of 8.0% senior unsecured notes issued in April 2022 and $463 million of RBL borrowings. Earthstone had $337 million of undrawn RBL capacity.
Our updated FY22 EBITDAX is $968 million. Our estimates suggest Earthstone could generate significant free cash in 2H22 and into 2023. We estimate a YE22 leverage ratio of 0.6x annualized 4Q22E EBITDAX. We have formulated a FY23 EBITDAX estimate of ~$1.0 billion based on a 79.5 MBOE/d production estimate.
Excess cash flow could be used for some combination of value enhancing acquisitions and/or future returns to shareholders.
Earthstone is trading at 1.9x our FY23 EBITDAX estimate.
COMPANY OVERVIEW


Earthstone is a growth-oriented independent energy company engaged in acquisitions and the development and operation of oil and natural gas properties. The company’s primary assets are concentrated in the Permian Basin of west Texas and New Mexico. Pro forma for the closings of the Chisholm and Bighorn acquisitions, 4Q21 production averaged ~84.8 MBOE/d. Pro forma proved reserves as of January 1, 2022 were ~411 MMBOE. Earthstone’s corporate home page is&nbsp;www.earthstoneenergy.com.
A PLATFORM WITH SCALE
Permian Acquisitions Add Substantial Scale
Earthstone has closed two acquisitions in recent months, which have transformed the company’s Permian Basin platform (see Figure 1). Beginning in 2021 and culminating in April 2022, Earthstone closed five property acquisitions for aggregate consideration of ~$1.8 billion (63% cash / 37% stock). The cash/equity funding mix allowed the company to expand the asset base without stressing the balance sheet. The two largest asset packages added a core area in the southeast New Mexico portion of the Delaware Basin which brings a deep inventory of future development locations and a proved developed position in the southern portion of the Midland Basin that adds a source of free cash flow. Management estimates the combined PV-10 for the five acquisitions was ~$1.9 billion using proved reserves and NYMEX strip pricing in effect when the transactions were announced.
On February 15, 2022 the company completed an acquisition of assets in the Delaware Basin from Chisholm Energy. More recently, the company completed the acquisition of the assets in the southern Midland Basin of Bighorn Permian Resources on April 14, 2022. The combined acquisitions add substantial scale to Earthstone’s proved reserves, production, and development inventory in the Permian Basin. Pro forma proved reserves as of December 31, 2021 are estimated at ~411 MMBOE, a 179% increase from the actual year-end total. The pro forma PV-10 value using strip pricing as of March 15, 2022 was ~$5.5 billion.
Management estimates 1Q22 production averaged 35.5 MBOE/d, including roughly a half-quarter contribution from the Chisholm assets. 2Q22 production is expected to fall in the range of 70 MBOE/d to 74 MBOE/d with a partial contribution from the Bighorn assets. 2H22 estimated production is in the range of 76 MBOE/d to 80 MBOE/d.

Earthstone’s Permian centered asset base provides growth opportunities in both the Midland and Delaware Basins. Figure 2 summarizes some of the key attributes of the company’s three operating areas. Earthstone now controls ~209,000 net acres in the Midland Basin and ~38,000 net acres in the Delaware Basin. For context, at year-end 2020 (preceding the closing of the Independence Resources Management acquisition in 1Q21) the company owned ~27,900 net acres in the Midland Basin and zero in the Delaware Basin.
Earthstone is pursuing growth opportunities through asset acquisitions and leasing around its existing acreage positions in the Midland and Delaware basins. Management will entertain asset or corporate acquisitions that would increase Earthstone’s scale in a value-accretive manner without altering leverage metrics in relation to cash flow and the capital structure. Management’s targeted leverage ratio is &lt;1.0x annualized EBITDAX. Scale added by the recent acquisitions could open new opportunities to add bolt-on properties that leverage the company’s operating base. Leasing efforts are directed to blocking up acreage in the Midland and Delaware basins to allow for longer-lateral horizontal development, which could increase capital efficiency.

Midland Basin
Earthstone has closed four acquisitions since January 2021that have built substantial scale in the Midland Basin. The latest was the $860 million purchase of producing assets from Bighorn Permian Resources, which closed April 18, 2022. That transaction added ~106,400 net acres, mostly in Reagan and Irion Counties in the southern portion of the basin. Proved developed producing reserves (as of January 1, 2022) were pegged at 136 MMBOE. Production in 4Q21 averaged ~41.2 MBOE/d, consisting of 25% oil and 57% total liquids. Fully 100% of the acreage was held by production and 98% is Earthstone-operated. The acreage fits well with Earthstone’s existing footprint in Reagan and Irion counties, lending to potential cost savings through more efficient field operations (see Figure 3).

Delaware Basin
Earthstone acquired its acreage position in Lea and Eddy Counties, New Mexico through the Chisholm acquisition. The position consists of ~38,100 net acres, of which ~85% is held by production and ~92% is Earthstone-operated. Approximately 55% of the leases are on Federal lands. During 4Q21, production averaged 13.3 MBOE/d from roughly 333 gross (168.6 net) producing wells. Approximately 75% of the production came from the acreage in Lea County. Earthstone operated 190 gross (149.5 net) wells on the acreage.
The Delaware Basin is a target-rich environment. At the time of the acquisition, management had identified 414 gross (237.1 net) potential drilling locations on its Delaware Basin acreage. Prospective formations that have been de-risked across the acreage include the Wolfcamp A and the First, Second, and Third Bone Spring sand intervals. Near-term development is concentrated on the Wolfcamp A/XY, and the Second and Third Bone Spring formations in Lea County. Earthstone currently has 79 Federal and State drilling permits with 52 in process. The existing permit inventory can support the company’s two-rig development pace for several years.
A Decade Plus of Permian Development Inventory
As noted in Figure 2, Earthstone’s inventory of potential development drilling locations in the Permian Basin is 776 gross locations. At a development pace of 60 wells per year based on an activity level of four rigs, the inventory stretches to more than 13 years. The inventory assessment is based on three to four wells per formation across a one mile wide drilling unit. Figure 4 summarizes the inventory distribution by area and across target formation. Management estimates that ~85% of the operated development inventory generates greater than an 25% IRR (see Figure 5).


The Permian inventory is well-suited to long-lateral horizontal development. In the Midland Basin, management estimates 98% of the gross inventory can be developed with greater than 1.5 mile laterals. In the Delaware Basin, management estimates 61% of the inventory can be developed with greater than 1.5 mile laterals. Blocking and tackling in the ground game could allow the company to extend Delaware Basin laterals.
Eagle Ford Trend
As of December 31, 2021, Earthstone owned ~12,700 net acres primarily in the Eagle Ford Trend. The acreage is primarily located in the crude oil window in Fayette, Gonzales, and Karnes Counties, Texas. Prospective formations include the Eagle Ford, Austin Chalk, and Upper Eagle Ford. The company’s working interests range from ~15% to 100%.
There were 37 gross (32 net) operated producing wells and 83 gross (36 net) non-operated producing wells on the acreage. Management estimates Earthstone’s acreage position holds 24 gross potential drilling locations.
2022 Capital Program and Operating Guidance
Earthstone provided its 2022 capital program and operating guidance on February 16, 2022 in tandem with closing the Chisholm acquisition. Management estimated $365–390 million of full-year drilling and completion capital split ~70% / 30% between the Midland and Delaware Basins. Earthstone is running two drilling rigs in each basin. The program includes spudding 40 gross wells in the Midland Basin with ~9,500 foot average laterals and an average ~90% working interest. In the Delaware Basin, management plans to spud 20 gross wells with ~8,750 foot average laterals and an average ~60% working interest.
On April 14, 2022 management provided a 1Q22 production estimate of 35.5 MBOE/d against the guidance range of 35.0 – 37.0 MBOE/d. The guidance and capital program are summarized in Figure 6.
Figure 6: 2022 Operating Guidance&nbsp;(1)

(1) Guidance as of February 16, 2022
Source: Company reports
EBITDAX Estimates and Valuation
Our summary EBITDAX estimates are shown in Figure 7. We have updated our model to reflect the issuance of $550 million principal amount of 8.00% senior unsecured notes on April 7, 2022. Our EBITDAX estimate for FY22 is $968 million based on FY22 average production of 66.0 MBOE/d and average NYMEX oil and natural gas prices of $97.32/bbl and $5.89/MMBtu, respectively. Our estimates suggest Earthstone’s leverage ratio will end the year at 0.6x using our 4Q22E annualized EBITDAX.
We have formulated FY23 EBITDAX estimates based on a production estimate of 79.5 MBOE/d, ~3% above our 4Q22E figure, and NYMEX average prices of $80.00/bbl for oil and $4.25/MMBtu for natural gas. Assuming some inflationary pressure on cost items, our FY23 EBITDAX estimate is ~$1.01 billion. Earthstone could be in position to generate substantial free cash late this year and into 2023. Free cash could be used for some combination of funding incremental acquisitions and/or returns to shareholders.
Figure 7: Summary EBITDAX Model

Source: Company reports and Water Tower Research estimates

Pro forma for the Bighorn closing and the issuance of $550 million principal amount of senior unsecured notes (due 2027), long-term debt was ~$1.1 billion as of March 31, 2022. Earthstone had $463 million of borrowings drawn on its RBL which has a borrowing base of $825 million and an elected commitment amount of $800 million. Our updated EBITDAX model estimates YE22 net debt of ~$617 million, implying the company remains financially well positioned to execute on incremental value-accretive acquisitions.

DISCLOSURES

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Permian Acquisitions Add Substantial Scale

Earthstone Energy

Permian Acquisitions Add Substantial Scale