Analysts Still Bullish On Earthstone Energy After Sabalo Acquisition Terminated

Shares of Earthstone Energy (ESTE) are under pressure after the company recently announced the termination of the pending acquisition of Sabalo. Following the news, Imperial Capital analyst Jason Wangler lowered his price target on the stock to $8, while his peer at Roth Capital called the news "positive" for Earthstone as it will avoid trying to execute a large high-yield financing in a difficult market.

TERMINATION OF SABALO ACQUISITION: Earthstone Energy announced on December 22 that due to the recent significant decline in commodity prices and the related adverse effect on the debt and equity markets, the company and Sabalo Holdings have entered into an agreement to terminate the pending acquisition by the company of Sabalo Energy, under a contribution agreement dated as of October 17, 2018, effective immediately. In addition, the special meeting of Earthstone stockholders scheduled for January 3, 2019, to approve the acquisition has been canceled. As part of the mutual termination agreement, Earthstone will reimburse Sabalo Holdings for transaction related expenses up to approximately $3.1M, including costs incurred related to the acquisition of well-bore interests held by Shad Permian.

CANCELLATION A 'POSITIVE' FOR EARTHSTONE: In a research note following the news, Roth Capital analyst John White told investors that he views the cancellation of the Sabalo acquisition and related financings as positive, as Earthstone will avoid trying to execute a large high-yield financing in a difficult credit and commodity market. The analyst reiterated a Buy rating and $15.50 price target on the shares.

EARTHSTONE TARGET CUT AT IMPERIAL: While reiterating an Outperform rating on Earthstone Energy shares, Imperial Capital's Wangler lowered his price target on the stock to $8 from $12 after the company announced the termination of the Sabalo acquisition. While the benefits of the deal included essentially doubling Earthstone's production and reserves, the significant drop in oil prices since the deal was announced in October and the subsequent tightening of the debt and equity capital markets made the transaction too difficult to complete, the analyst noted. Further, Wangler pointed out the issues were "too significant, extend into the entire industry, and likely cause the company to slow down its M&A strategy until firmer footing in the oil market is discovered". 

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