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Earthstone to Run One Rig in 2019, Eyes Free Cash Flow Neutrality in 2020

Earthstone Energy Inc., a Texas-based independent focused on the Permian Basin’s Midland sub-basin and the Eagle Ford Shale, said it plans to run a one-rig operated drilling program in 2019, as it looks achieve free cash flow neutrality in 2020.

Earthstone, headquartered in The Woodlands north of Houston, unveiled a capital budget of $190 million for 2019 in an operations update Wednesday, of which $118 million is earmarked for the single rig in the Midland. The company plans to spud 13.5 net wells and bring 13 gross (11.2 net) wells online in the Midland this year. First production from three gross wells is expected in 1Q2019, with another five gross wells coming online in 3Q2019 and the remaining five gross wells in 4Q2019.

Of the remaining capital, $47 million is being devoted to nonoperated activities in the Midland, which include plans to spud five net wells and bring 5.6 net wells online. Earthstone said it also anticipates activity on its operated acreage in the Eagle Ford in 2019, and allocated $10 million to spud and bring online 1.5 net wells in the play.

The nonoperated budget includes about $17 million for wells that would be completed in late 2019 or early 2020.

Average daily production is estimated to range from 11,000-12,000 boe/d in 2019, of which 69% would be oil, 19% natural gas liquids (NGL) and 16% natural gas.

The operations update comes less than four weeks after Earthstone terminated its plans to acquire Sabalo Energy LLC for $950 million, citing a decline in commodity prices and its impact on debt and equity markets. The cash-and-stock deal was first announced last October and would have included 20,800 net acres in the Midland.

Earthstone estimates that its 4Q2018 oil and gas sales volumes totaled about 959,000 boe, of which 69% was oil. The company said it had around 1,100 boe/d of production shut-in from 11 gross operated and three gross nonoperated wells during 4Q2019 due to offset completion activity. For the full-year 2018, Earthstone estimates annual sales volumes totaled 3.62 million boe (9,930 boe/d), a 26.2% increase from 2017 (7,869 boe/d).

Earthstone said it recently completed drilling the second of a two-well pad in its Ratliff Unit in Upton County, TX, and is currently moving the rig to neighboring Midland County in order to drill five wells in its Mid-States Unit. The company holds a 100% working interest (WI) in Ratliff and a 67% WI in Mid-States.

The company drilled 16 wells in 2018, with an average WI of 89%. Earthstone also completed 19 wells during the year, including three Midland wells that came online at the end of December. Wells completed in 2018 were spread across Midland, Reagan and Upton counties and were drilled into multiple targets, including the Permian's Lower Spraberry formation and the A, B and C intervals of the Wolfcamp formation.

In the Eagle Ford, Earthstone drilled five wells (17% WI) in southern Gonzales County in 2018 and completed 11 wells in the area during the year. The company expects to drill seven wells in the area during 2019 with an average WI of 22% and may consider additional drilling if commodity prices improve.

Although Earthstone's capital budget for 2019 doesn't include funds for acquisitions, the company said it continues to "focus on trades and acquisitions that will enhance our existing operated acreage and production," and specifically mentioned the southern Midland. Earthstone said after one pending lease acquisition, it will hold about 30,200 net acres in the Midland, including about 23,300 net operated acres. Earthstone currently holds 13,700 net acres in the Eagle Ford.

"Our strong balance sheet, favorable hedge position and liquidity will enable us to have flexibility in our 2019 drilling program," said President Robert Anderson. "While we will maintain the current one-rig plan in the Midland Basin, we will opportunistically consider acquisitions of additional leasehold and producing assets, trades, and additional drilling expenditures as prospects present themselves."

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