Summary
- Earthstone Energy has proved its resilience throughout the COVID-19 pandemic, delivering a 3-bagger for us so far.
- On December 18, 2020, it acquired Independence Resources Management, boosting its landholdings, production, and PDP reserves for a dirt cheap price.
- The acquisition de-risks the medium-term growth runway without committing much capex, perfect in the current macro environment.
- On a pro-forma basis, Earthstone is deeply undervalued. Discerning investors may buy this hidden gem for its high-quality assets and superb management.
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Back in March 2020, when the COVID-driven chaos appeared to be finally coming, I told the members of The Natural Resources Hub that Earthstone Energy Inc. (ESTE) is one of the high-quality stocks to load up. Since then, Earthstone has tripled.
With some of the best acreage in the Midland Basin - the eastern depression of the wider Permian Basin - and more importantly, a management team that possesses an unparalleled technical capability and shareholder friendliness, Earthstone has rarely disappointed in operations, with the exception of its attempt to acquire Sabalo Holdings, LLC.
Buying Sabalo seems to be a great acquisition at the time, but the oil crash in late 2018 forced the management to abandon that deal. However, as it turned out, Earthstone was rewarded for its financial discipline in an unexpected way: For merely $3.1 million compensating Sabalo's transaction-related expenses, not only did Earthstone preserve its clean balance sheet but also did end up with a huge set of hedging contracts that it bought ahead of the anticipated merger. That hedge book served it extremely well in the ensuing down market. That reminds me of one of Samuel Goldwyn's sayings, "The harder you work, the luckier you get."
Earthstone never gave up its plan of inorganic growth, especially since WTI crashed again in 2020 to even lower levels. Lo and behold, on December 18, 2020, Earthstone entered into a definitive agreement to acquire Independence Resources Management, LLC (or IRM), a Warburg Pincus-backed private producer in the Midland Basin.
