Reporting "Goof" Creates Opportunity at Earthstone Energy

10/03/2018 5:00 am EST

Focus: ENERGY

Vivian Lewis

Editor and Publisher, Global Investing

Earthstone Energy (ESTE), which operates in Texas, in the Midland Basin and the Eagle Ford Trend, is a new idea from Vivian Lewis, editor of Global Investing. We note that because her model portfolio does not include U.S. based stocks, she considers this a "bonus" stock pick rather than a specific buy recommendation.

The company got into a twist in August over misreporting to the SEC an increase in holdings of its shares by the EnCap Energy Capital Funding LP IX Fund. In fact there was no increase. The Woodlawn-headquartered stock fell 6.13% on this goof.

Insiders own 65% of the shares. Institutions including EnCap own 16.4% There are 64 million shares out. The total shares held by EnCap Energy Capital Funding LP IX Fund was 33.9 million rather than 36 million as ESTE misreported.

It last reported on its Q2 revenues of $37.2 million to produce 8,845 boe/d (barrels of oil equivalent per day) down 5% sequentially. The drop was costly, as net income came in at $1.472 million vs $12.2 million in Q1.

However Q2 net was comparable to a loss of $54.97 the prior Q2. Per share it earned 2 cents vs a loss of 75 cents. It actively hedges its future output of gas.

ESTE deliberately slowed its Midland production “as a result of industry and market conditions” according to President Robert Anderson.

This will result in new wells coming on elsewhere, but it guided down its estimated production for this year to 10,500-11,000 boe/d, but of course can switch if gas goes up. It also cut its capital budget for the year to $140 million.

It has $4.2 million in cash and long-term credits (for eventual borrowing) at $22.5 million, so is a highly leveraged play. The consensus forecast according to Fundamental Markets for 2018 full year is $1.10. It next reports Nov. 1 on Q3. Buy at around $9 a share.

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