In a Jan. 4 research note, ROTH Capital Partners analyst John White reported that ROTH Capital Partners is increasing its price target on Earthstone Energy Inc. (ESTE:NYSE.MKT) to $10.50 per share following its acquisition announcement. The current share price is about $6.26.
Earthstone Energy agreed to purchase Independence Resources Management for $185.9 million, composed of $135.2 million cash and 12.7 million common stock shares. Independence is a private, Texas-based, Midland Basin-focused explorer and producer (E&P).
Through the transaction Earthstone will gain an average production of 8,780 barrels of oil equivalent per day with 66% oil during Q3/20, 4,900 core net acres and 70 undeveloped horizontal locations.
White laid out why the acquisition is favorable for Earthstone.
For one, it will increase the Colorado-headquartered energy firm's size, resulting in a higher stock valuation in the intermediate and long term.
"The addition of Independence's production represents a 52% increase over Earthstone's actual Q3/20 production," White specified.
Because larger exploration and production companies typically trade at a higher valuation, and Earthstone's valuation is currently below that, there is "upside in the potential for multiple expansion," he added.
Another benefit is that the terms of the deal are attractive, the purchase price multiple being about 2.3x. Also, the value of Independence's proved reserves is such that Earthstone will essentially get them for free.
"All in all, [it was] an eye-catching act of deal making," commented White.
Third, the location of Independence's core properties, near Earthstone's assets, is ideal. Also, the acquiree's acreage is of high quality and with seemingly low risk for reserves and production, from the Middle Spraberry, Lower Spraberry and Wolfcamp A zones and, potentially, other locations in the Jo Mill, Wolfcamp B and Wolfcamp D formations.
ROTH Capital has a Buy rating on Earthstone.[NLINSERT]
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Disclosures from ROTH Capital Partners, Earthstone Energy Inc., Company Note, January 4, 2021
Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
ROTH makes a market in shares of Earthstone Energy, Inc. and as such, buys and sells from customers on a principal basis.
Shares of Earthstone Energy, Inc. may be subject to the Securities and Exchange Commission's Penny Stock Rules, which may set forth sales practice requirements for certain low-priced securities.
ROTH Capital Partners, LLC expects to receive or intends to seek compensation for investment banking or other business relationships with the covered companies mentioned in this report in the next three months.