UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________
FORM 10-Q
_________________________________________________________
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 20212022
Or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 001-35049
_________________________________________________________
EARTHSTONE ENERGY, INC.
(Exact name of registrant as specified in its charter)
_________________________________________________________
| | | | | | | | |
Delaware | | 84-0592823 |
(State or other jurisdiction | | (I.R.SI.R.S. Employer |
of incorporation or organization) | | Identification No.) |
1400 Woodloch Forest Drive, Suite 300
The Woodlands, Texas 77380
(Address of principal executive offices)
Registrant’s telephone number, including area code: (281) 298-4246
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock, $0.001 par value per share | ESTE | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to thesuch filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☐ | | Accelerated filer | | ☒ |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☒☐ |
Emerging growth company | | ☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 2, 2021, 53,305,168October 27, 2022, there were 139,678,567 shares of common stock outstanding, including 105,416,926 shares of Class A Common Stock, $0.001 par value per share, and 34,351,99534,261,641 shares of Class B Common Stock, $0.001 par value per share, were outstanding.share.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
| | | | September 30, | | December 31, | | | September 30, | | December 31, |
ASSETS | ASSETS | | 2021 | | 2020 | ASSETS | | 2022 | | 2021 |
Current assets: | Current assets: | | | | | Current assets: | | | | |
Cash | Cash | | $ | 441 | | | $ | 1,494 | | Cash | | $ | — | | | $ | 4,013 | |
Accounts receivable: | Accounts receivable: | | Accounts receivable: | |
Oil, natural gas, and natural gas liquids revenues | Oil, natural gas, and natural gas liquids revenues | | 45,076 | | | 16,255 | | Oil, natural gas, and natural gas liquids revenues | | 196,941 | | | 50,575 | |
Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2021 and December 31, 2020, respectively | | 3,058 | | | 7,966 | | |
Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2022 and December 31, 2021, respectively | | Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2022 and December 31, 2021, respectively | | 20,328 | | | 2,930 | |
Derivative asset | Derivative asset | | 17 | | | 7,509 | | Derivative asset | | 14,950 | | | 1,348 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 1,565 | | | 1,509 | | Prepaid expenses and other current assets | | 19,089 | | | 2,549 | |
Total current assets | Total current assets | | 50,157 | | | 34,733 | | Total current assets | | 251,308 | | | 61,415 | |
| Oil and gas properties, successful efforts method: | Oil and gas properties, successful efforts method: | | Oil and gas properties, successful efforts method: | |
Proved properties | Proved properties | | 1,487,362 | | | 1,017,496 | | Proved properties | | 3,832,991 | | | 1,625,367 | |
Unproved properties | Unproved properties | | 235,232 | | | 233,767 | | Unproved properties | | 290,111 | | | 222,025 | |
Land | Land | | 5,382 | | | 5,382 | | Land | | 5,482 | | | 5,382 | |
Total oil and gas properties | Total oil and gas properties | | 1,727,976 | | | 1,256,645 | | Total oil and gas properties | | 4,128,584 | | | 1,852,774 | |
| Accumulated depreciation, depletion and amortization | Accumulated depreciation, depletion and amortization | | (367,000) | | | (291,213) | | Accumulated depreciation, depletion and amortization | | (516,662) | | | (395,625) | |
Net oil and gas properties | Net oil and gas properties | | 1,360,976 | | | 965,432 | | Net oil and gas properties | | 3,611,922 | | | 1,457,149 | |
| Other noncurrent assets: | Other noncurrent assets: | | Other noncurrent assets: | |
| Office and other equipment, net of accumulated depreciation and amortization of $4,323 and $3,675 at September 30, 2021 and December 31, 2020, respectively | | 1,730 | | | 931 | | |
Office and other equipment, net of accumulated depreciation and amortization of $5,059 and $4,547 at September 30, 2022 and December 31, 2021, respectively | | Office and other equipment, net of accumulated depreciation and amortization of $5,059 and $4,547 at September 30, 2022 and December 31, 2021, respectively | | 5,070 | | | 1,986 | |
Derivative asset | Derivative asset | | 453 | | | 396 | | Derivative asset | | 5,526 | | | 157 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | | 1,963 | | | 2,450 | | Operating lease right-of-use assets | | 2,255 | | | 1,795 | |
Other noncurrent assets | Other noncurrent assets | | 9,694 | | | 1,315 | | Other noncurrent assets | | 16,216 | | | 33,865 | |
TOTAL ASSETS | TOTAL ASSETS | | $ | 1,424,973 | | | $ | 1,005,257 | | TOTAL ASSETS | | $ | 3,892,297 | | | $ | 1,556,367 | |
LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | | LIABILITIES AND EQUITY | | | | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | | $ | 33,602 | | | $ | 6,232 | | Accounts payable | | $ | 75,162 | | | $ | 31,397 | |
Revenues and royalties payable | Revenues and royalties payable | | 30,139 | | | 27,492 | | Revenues and royalties payable | | 158,867 | | | 36,189 | |
Accrued expenses | Accrued expenses | | 20,620 | | | 16,504 | | Accrued expenses | | 105,623 | | | 31,704 | |
| Asset retirement obligation | Asset retirement obligation | | 543 | | | 447 | | Asset retirement obligation | | 941 | | | 395 | |
Derivative liability | Derivative liability | | 67,575 | | | 1,135 | | Derivative liability | | 28,404 | | | 45,310 | |
Advances | Advances | | 1,325 | | | 2,277 | | Advances | | 15,405 | | | 4,088 | |
Operating lease liabilities | Operating lease liabilities | | 732 | | | 773 | | Operating lease liabilities | | 869 | | | 681 | |
Finance lease liabilities | Finance lease liabilities | | — | | | 69 | | Finance lease liabilities | | 784 | | | — | |
Other current liabilities | Other current liabilities | | 634 | | | 565 | | Other current liabilities | | 4,105 | | | 851 | |
Total current liabilities | Total current liabilities | | 155,170 | | | 55,494 | | Total current liabilities | | 390,160 | | | 150,615 | |
| Noncurrent liabilities: | Noncurrent liabilities: | | Noncurrent liabilities: | |
Long-term debt | | 278,253 | | | 115,000 | | |
| Long-term debt, net | | Long-term debt, net | | 1,174,549 | | | 320,000 | |
Deferred tax liability | Deferred tax liability | | 13,764 | | | 14,497 | | Deferred tax liability | | 93,322 | | | 15,731 | |
Asset retirement obligation | Asset retirement obligation | | 14,965 | | | 2,580 | | Asset retirement obligation | | 35,837 | | | 15,471 | |
Derivative liability | Derivative liability | | 7,730 | | | 173 | | Derivative liability | | 7,840 | | | 571 | |
| Operating lease liabilities | Operating lease liabilities | | 1,394 | | | 1,840 | | Operating lease liabilities | | 1,549 | | | 1,276 | |
Finance lease liabilities | Finance lease liabilities | | — | | | 5 | | Finance lease liabilities | | 1,003 | | | — | |
Other noncurrent liabilities | Other noncurrent liabilities | | 3,803 | | | 132 | | Other noncurrent liabilities | | 13,574 | | | 6,442 | |
Total noncurrent liabilities | Total noncurrent liabilities | | 319,909 | | | 134,227 | | Total noncurrent liabilities | | 1,327,674 | | | 359,491 | |
| Commitments and Contingencies (Note 13) | Commitments and Contingencies (Note 13) | | 0 | | 0 | Commitments and Contingencies (Note 13) | |
| Equity: | Equity: | | Equity: | |
Preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued or outstanding | Preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued or outstanding | | — | | | — | | Preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued or outstanding | | — | | | — | |
| Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 50,692,057 and 30,343,421 issued and outstanding at September 30, 2021 and December 31, 2020, respectively | | 51 | | | 30 | | |
Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,353,995 and 35,009,371 issued and outstanding at September 30, 2021 and December 31, 2020, respectively | | 34 | | | 35 | | |
Series A Convertible Preferred Stock, $0.001 par value, none authorized, issued or outstanding | | Series A Convertible Preferred Stock, $0.001 par value, none authorized, issued or outstanding | | — | | | — | |
Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 108,416,926 and 53,467,307 issued and outstanding at September 30, 2022 and December 31, 2021, respectively | | Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 108,416,926 and 53,467,307 issued and outstanding at September 30, 2022 and December 31, 2021, respectively | | 108 | | | 53 | |
Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,261,641 and 34,344,532 issued and outstanding at September 30, 2022 and December 31, 2021, respectively | | Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,261,641 and 34,344,532 issued and outstanding at September 30, 2022 and December 31, 2021, respectively | | 34 | | | 34 | |
Additional paid-in capital | Additional paid-in capital | | 690,739 | | | 540,074 | | Additional paid-in capital | | 1,382,026 | | | 718,181 | |
Accumulated deficit | | (199,544) | | | (195,258) | | |
Retained earnings (accumulated deficit) | | Retained earnings (accumulated deficit) | | 163,089 | | | (159,774) | |
| Total Earthstone Energy, Inc. equity | Total Earthstone Energy, Inc. equity | | 491,280 | | | 344,881 | | Total Earthstone Energy, Inc. equity | | 1,545,257 | | | 558,494 | |
Noncontrolling interest | Noncontrolling interest | | 458,614 | | | 470,655 | | Noncontrolling interest | | 629,206 | | | 487,767 | |
Total equity | Total equity | | 949,894 | | | 815,536 | | Total equity | | 2,174,463 | | | 1,046,261 | |
| TOTAL LIABILITIES AND EQUITY | TOTAL LIABILITIES AND EQUITY | | $ | 1,424,973 | | | $ | 1,005,257 | | TOTAL LIABILITIES AND EQUITY | | $ | 3,892,297 | | | $ | 1,556,367 | |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, | | | September 30, | | September 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 |
REVENUES | REVENUES | | | | | REVENUES | | | | |
Oil | Oil | | $ | 74,051 | | | $ | 33,158 | | | $ | 205,788 | | | $ | 93,017 | | Oil | | $ | 332,036 | | | $ | 74,051 | | | $ | 756,420 | | | $ | 205,788 | |
Natural gas | Natural gas | | 14,368 | | | 2,642 | | | 26,910 | | | 4,855 | | Natural gas | | 113,937 | | | 14,368 | | | 233,020 | | | 26,910 | |
Natural gas liquids | Natural gas liquids | | 21,965 | | | 5,247 | | | 42,929 | | | 9,976 | | Natural gas liquids | | 85,522 | | | 21,965 | | | 210,756 | | | 42,929 | |
Total revenues | Total revenues | | 110,384 | | | 41,047 | | | 275,627 | | | 107,848 | | Total revenues | | 531,495 | | | 110,384 | | | 1,200,196 | | | 275,627 | |
| OPERATING COSTS AND EXPENSES | OPERATING COSTS AND EXPENSES | | OPERATING COSTS AND EXPENSES | |
Lease operating expense | Lease operating expense | | 12,983 | | | 7,044 | | | 35,579 | | | 21,971 | | Lease operating expense | | 75,829 | | | 12,983 | | | 147,974 | | | 35,579 | |
Production and ad valorem taxes | Production and ad valorem taxes | | 7,225 | | | 2,696 | | | 17,428 | | | 7,198 | | Production and ad valorem taxes | | 40,219 | | | 7,225 | | | 87,729 | | | 17,428 | |
Rig termination expense | | — | | | — | | | — | | | 426 | | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | | 27,059 | | | 28,538 | | | 77,493 | | | 76,096 | | Depreciation, depletion and amortization | | 90,880 | | | 27,059 | | | 191,669 | | | 77,493 | |
Impairment expense | | — | | | 2,115 | | | — | | | 62,548 | | |
| General and administrative expense | General and administrative expense | | 7,650 | | | 5,796 | | | 25,200 | | | 19,615 | | General and administrative expense | | 14,188 | | | 7,650 | | | 40,571 | | | 25,200 | |
Transaction costs | Transaction costs | | 293 | | | (705) | | | 2,906 | | | (324) | | Transaction costs | | 1,778 | | | 293 | | | 12,118 | | | 2,906 | |
Accretion of asset retirement obligation | Accretion of asset retirement obligation | | 323 | | | 47 | | | 916 | | | 137 | | Accretion of asset retirement obligation | | 758 | | | 323 | | | 1,863 | | | 916 | |
Exploration expense | Exploration expense | | 296 | | | — | | | 326 | | | 298 | | Exploration expense | | 2,248 | | | 296 | | | 2,340 | | | 326 | |
Total operating costs and expenses | Total operating costs and expenses | | 55,829 | | | 45,531 | | | 159,848 | | | 187,965 | | Total operating costs and expenses | | 225,900 | | | 55,829 | | | 484,264 | | | 159,848 | |
| Gain on sale of oil and gas properties | Gain on sale of oil and gas properties | | 392 | | | — | | | 740 | | | 198 | | Gain on sale of oil and gas properties | | 14,803 | | | 392 | | | 14,803 | | | 740 | |
| Income (loss) from operations | | 54,947 | | | (4,484) | | | 116,519 | | | (79,919) | | |
Income from operations | | Income from operations | | 320,398 | | | 54,947 | | | 730,735 | | | 116,519 | |
| OTHER INCOME (EXPENSE) | OTHER INCOME (EXPENSE) | | OTHER INCOME (EXPENSE) | |
Interest expense, net | Interest expense, net | | (3,050) | | | (1,186) | | | (7,668) | | | (4,207) | | Interest expense, net | | (20,988) | | | (3,050) | | | (42,931) | | | (7,668) | |
| (Loss) gain on derivative contracts, net | | (33,128) | | | (6,040) | | | (117,566) | | | 73,065 | | |
Gain (loss) on derivative contracts, net | | Gain (loss) on derivative contracts, net | | 60,286 | | | (33,128) | | | (141,101) | | | (117,566) | |
| Other income, net | Other income, net | | 520 | | | (18) | | | 823 | | | 120 | | Other income, net | | 134 | | | 520 | | | 430 | | | 823 | |
Total other income (expense) | Total other income (expense) | | (35,658) | | | (7,244) | | | (124,411) | | | 68,978 | | Total other income (expense) | | 39,432 | | | (35,658) | | | (183,602) | | | (124,411) | |
| Income (loss) before income taxes | Income (loss) before income taxes | | 19,289 | | | (11,728) | | | (7,892) | | | (10,941) | | Income (loss) before income taxes | | 359,830 | | | 19,289 | | | 547,133 | | | (7,892) | |
Income tax (expense) benefit | Income tax (expense) benefit | | (451) | | | (130) | | | 343 | | | (112) | | Income tax (expense) benefit | | (60,518) | | | (451) | | | (81,673) | | | 343 | |
Net income (loss) | Net income (loss) | | 18,838 | | | (11,858) | | | (7,549) | | | (11,053) | | Net income (loss) | | 299,312 | | | 18,838 | | | 465,460 | | | (7,549) | |
| Less: Net income (loss) attributable to noncontrolling interest | Less: Net income (loss) attributable to noncontrolling interest | | 8,420 | | | (6,413) | | | (3,263) | | | (5,977) | | Less: Net income (loss) attributable to noncontrolling interest | | 87,856 | | | 8,420 | | | 142,597 | | | (3,263) | |
| Net income (loss) attributable to Earthstone Energy, Inc. | Net income (loss) attributable to Earthstone Energy, Inc. | | $ | 10,418 | | | $ | (5,445) | | | $ | (4,286) | | | $ | (5,076) | | Net income (loss) attributable to Earthstone Energy, Inc. | | $ | 211,456 | | | $ | 10,418 | | | $ | 322,863 | | | $ | (4,286) | |
| Net income (loss) per common share attributable to Earthstone Energy, Inc.: | Net income (loss) per common share attributable to Earthstone Energy, Inc.: | | Net income (loss) per common share attributable to Earthstone Energy, Inc.: | |
Basic | Basic | | $ | 0.21 | | | $ | (0.18) | | | $ | (0.09) | | | $ | (0.17) | | Basic | | $ | 2.01 | | | $ | 0.21 | | | $ | 3.91 | | | $ | (0.09) | |
Diluted | Diluted | | $ | 0.20 | | | $ | (0.18) | | | $ | (0.09) | | | $ | (0.17) | | Diluted | | $ | 1.94 | | | $ | 0.20 | | | $ | 3.61 | | | $ | (0.09) | |
| Weighted average common shares outstanding: | Weighted average common shares outstanding: | | Weighted average common shares outstanding: | |
Basic | Basic | | 49,243,185 | | | 30,073,635 | | | 45,406,952 | | | 29,810,705 | | Basic | | 105,254,778 | | | 49,243,185 | | | 82,483,635 | | | 45,406,952 | |
Diluted | Diluted | | 52,662,942 | | | 30,073,635 | | | 45,406,952 | | | 29,810,705 | | Diluted | | 109,278,661 | | | 52,662,942 | | | 92,844,854 | | | 45,406,952 | |
|
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(In thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued Shares | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Earthstone Energy, Inc. Equity | | Noncontrolling Interest | | Total Equity |
At December 31, 2020 | 30,343,421 | | | 35,009,371 | | | $ | 30 | | | $ | 35 | | | $ | 540,074 | | | $ | (195,258) | | | $ | 344,881 | | | $ | 470,655 | | | $ | 815,536 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,605 | | | — | | | 2,605 | | | | | 2,605 | |
Shares issued in connection with the IRM Acquisition | 12,719,594 | | | — | | | 13 | | | — | | | 76,559 | | | — | | | 76,572 | | | — | | | 76,572 | |
Vesting of restricted stock units and performance units, net of taxes paid | 463,495 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Vested restricted stock units and performance units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 257,764 | | | — | | | — | | | — | | | (2,080) | | | — | | | (2,080) | | | — | | | (2,080) | |
Cancellation of treasury shares | (257,764) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 578,031 | | | (578,031) | | | 1 | | | (1) | | | 7,758 | | | — | | | 7,758 | | | (7,758) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | (5,833) | | | (5,833) | | | (4,723) | | | (10,556) | |
At March 31, 2021 | 44,104,541 | | | 34,431,340 | | | $ | 44 | | | $ | 34 | | | $ | 624,916 | | | $ | (201,091) | | | $ | 423,903 | | | $ | 458,174 | | | $ | 882,077 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,175 | | | — | | | 2,175 | | | — | | | 2,175 | |
Vesting of restricted stock units, net of taxes paid | 155,058 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 66,343 | | | — | | | — | | | — | | | (741) | | | — | | | (741) | | | — | | | (741) | |
Cancellation of treasury shares | (66,343) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 33,463 | | | (33,463) | | | — | | | — | | | 441 | | | — | | | 441 | | | (441) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | (8,871) | | | (8,871) | | | (6,960) | | | (15,831) | |
At June 30, 2021 | 44,293,062 | | | 34,397,877 | | | $ | 44 | | | $ | 34 | | | $ | 626,791 | | | $ | (209,962) | | | $ | 416,907 | | | $ | 450,773 | | | $ | 867,680 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,161 | | | — | | | 2,161 | | | — | | | 2,161 | |
Shares issued in connection with the Tracker/Sequel Acquisitions | 6,200,000 | | | — | | | 6 | | | — | | | 61,808 | | | — | | | 61,814 | | | — | | | 61,814 | |
Vesting of restricted stock units, net of taxes paid | 155,113 | | | — | | | 1 | | | — | | | (1) | | | — | | | — | | | — | | | — | |
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 65,106 | | | — | | | — | | | — | | | (599) | | | — | | | (599) | | | — | | | (599) | |
Cancellation of treasury shares | (65,106) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 43,882 | | | (43,882) | | | — | | | — | | | 579 | | | — | | | 579 | | | (579) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | 10,418 | | | 10,418 | | | 8,420 | | | 18,838 | |
At September 30, 2021 | 50,692,057 | | | 34,353,995 | | | $ | 51 | | | $ | 34 | | | $ | 690,739 | | | $ | (199,544) | | | $ | 491,280 | | | $ | 458,614 | | | $ | 949,894 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued Shares | | | | | | | | | | | | | | | | |
| Series A Convertible Preferred Stock | | Class A Common Stock | | Class B Common Stock | | Series A Conv Pref Stock | | Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | (Accumulated Deficit) Retained Earnings | | Total Earthstone Energy, Inc. Equity | | Noncontrolling Interest | | Total Equity |
At December 31, 2021 | — | | | 53,467,307 | | | 34,344,532 | | | $ | — | | | $ | 53 | | | $ | 34 | | | $ | 718,181 | | | $ | (159,774) | | | $ | 558,494 | | | $ | 487,767 | | | $ | 1,046,261 | |
Stock-based compensation expense - equity portion | — | | | — | | | — | | | — | | | — | | | — | | | 2,301 | | | — | | | 2,301 | | | — | | | 2,301 | |
Shares issued in connection with Chisholm Acquisition | — | | | 19,417,476 | | | — | | | — | | | 19 | | | — | | | 249,496 | | | — | | | 249,515 | | | — | | | 249,515 | |
Vesting of restricted stock units, net of taxes paid | — | | | 483,251 | | | — | | | — | | | 1 | | | — | | | (1) | | | — | | | — | | | — | | | — | |
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings | — | | | 286,892 | | | — | | | — | | | — | | | — | | | (3,898) | | | — | | | (3,898) | | | — | | | (3,898) | |
Cancellation of Treasury shares | — | | | (286,892) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | — | | | 72,766 | | | (72,766) | | | — | | | — | | | — | | | 1,014 | | | — | | | 1,014 | | | (1,014) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (33,478) | | | (33,478) | | | (18,399) | | | (51,877) | |
At March 31, 2022 | — | | | 73,440,800 | | | 34,271,766 | | | — | | | $ | 73 | | | $ | 34 | | | $ | 967,093 | | | $ | (193,252) | | | $ | 773,948 | | | $ | 468,354 | | | $ | 1,242,302 | |
Stock-based compensation expense - equity portion | — | | | — | | | — | | | — | | | — | | | — | | | 2,693 | | | — | | | 2,693 | | | — | | | 2,693 | |
Issuance of Series A Convertible Preferred Stock, net of offering costs of $674 | 280,000 | | | — | | | — | | | — | | | — | | | — | | | 279,326 | | | — | | | 279,326 | | | — | | | 279,326 | |
Shares issued in connection with Bighorn Acquisition | — | | | 5,650,977 | | | — | | | — | | | 6 | | | — | | | 77,751 | | | — | | | 77,757 | | | — | | | 77,757 | |
Vesting of restricted stock units, net of taxes paid | — | | | 115,521 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings | — | | | 48,232 | | | — | | | — | | | — | | | — | | | (719) | | | — | | | (719) | | | — | | | (719) | |
Cancellation of Treasury shares | — | | | (48,232) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | — | | | 10,125 | | | (10,125) | | | — | | | — | | | — | | | 149 | | | — | | | 149 | | | (149) | | | — | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 144,885 | | | 144,885 | | | 73,140 | | | 218,025 | |
At June 30, 2022 | 280,000 | | | 79,217,423 | | | 34,261,641 | | | — | | | $ | 79 | | | $ | 34 | | | $ | 1,326,293 | | | $ | (48,367) | | | $ | 1,278,039 | | | $ | 541,345 | | | $ | 1,819,384 | |
Stock-based compensation expense - equity portion | — | | | — | | | —�� | | | — | | | — | | | — | | | 2,745 | | | — | | | 2,745 | | | — | | | 2,745 | |
Conversion of Series A Convertible Preferred Stock | (280,000) | | | 25,225,225 | | | — | | | — | | | 25 | | | — | | | (25) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued in connection with Titus Acquisition | — | | | 3,857,015 | | | — | | | — | | | 4 | | | — | | | 53,570 | | | — | | | 53,574 | | | — | | | 53,574 | |
Vesting of restricted stock units, net of taxes paid | — | | | 117,263 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings | — | | | 48,073 | | | — | | | — | | | — | | | — | | | (552) | | | — | | | (552) | | | — | | | (552) | |
Cancellation of treasury shares | — | | | (48,073) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | — | | | — | | | — | | | — | | | — | | | — | | | (5) | | | — | | | (5) | | | 5 | | | — | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 211,456 | | | 211,456 | | | 87,856 | | | 299,312 | |
At September 30, 2022 | — | | | 108,416,926 | | | 34,261,641 | | | — | | | $ | 108 | | | $ | 34 | | | $ | 1,382,026 | | | $ | 163,089 | | | $ | 1,545,257 | | | $ | 629,206 | | | $ | 2,174,463 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued Shares | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Earthstone Energy, Inc. Equity | | Noncontrolling Interest | | Total Equity |
At December 31, 2019 | 29,421,131 | | | 35,260,680 | | | $ | 29 | | | $ | 35 | | | $ | 527,246 | | | $ | (181,711) | | | $ | 345,599 | | | $ | 490,152 | | | $ | 835,751 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,694 | | | — | | | 2,694 | | | | | 2,694 | |
Vesting of restricted stock units, net of taxes paid | 231,834 | | | — | | | 1 | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 75,695 | | | — | | | — | | | — | | | (214) | | | — | | | (214) | | | — | | | (214) | |
Cancellation of treasury shares | (75,695) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 199,993 | | | (199,993) | | | — | | | — | | | 2,897 | | | — | | | 2,897 | | | (2,897) | | | — | |
Net income | — | | | — | | | — | | | — | | | — | | | 16,708 | | | 16,708 | | | 20,006 | | | 36,714 | |
At March 31, 2020 | 29,852,958 | | | 35,060,687 | | | $ | 30 | | | $ | 35 | | | $ | 532,623 | | | $ | (165,003) | | | $ | 367,685 | | | $ | 507,261 | | | $ | 874,946 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,568 | | | — | | | 2,568 | | | — | | | 2,568 | |
Vesting of restricted stock units, net of taxes paid | 165,399 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 57,810 | | | — | | | — | | | — | | | (170) | | | — | | | (170) | | | — | | | (170) | |
Cancellation of treasury shares | (57,810) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 2,000 | | | (2,000) | | | — | | | — | | | 28 | | | — | | | 28 | | | (28) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | (16,339) | | | (16,339) | | | (19,570) | | | (35,909) | |
At June 30, 2020 | 30,020,357 | | | 35,058,687 | | | $ | 30 | | | $ | 35 | | | $ | 535,049 | | | $ | (181,342) | | | $ | 353,772 | | | $ | 487,663 | | | $ | 841,435 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,403 | | | — | | | 2,403 | | | — | | | 2,403 | |
Vesting of restricted stock units, net of taxes paid | 141,076 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 54,268 | | | — | | | — | | | — | | | (147) | | | — | | | (147) | | | — | | | (147) | |
Cancellation of treasury shares | (54,268) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 49,316 | | | (49,316) | | | — | | | — | | | 685 | | | — | | | 685 | | | (685) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | (5,445) | | | (5,445) | | | (6,413) | | | (11,858) | |
At September 30, 2020 | 30,210,749 | | | 35,009,371 | | | $ | 30 | | | $ | 35 | | | $ | 537,990 | | | $ | (186,787) | | | $ | 351,268 | | | $ | 480,565 | | | $ | 831,833 | |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued Shares | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Earthstone Energy, Inc. Equity | | Noncontrolling Interest | | Total Equity |
At December 31, 2020 | 30,343,421 | | | 35,009,371 | | | $ | 30 | | | $ | 35 | | | $ | 540,074 | | | $ | (195,258) | | | $ | 344,881 | | | $ | 470,655 | | | $ | 815,536 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,605 | | | — | | | 2,605 | | | — | | | 2,605 | |
Shares issued in connection with the IRM Acquisition | 12,719,594 | | | — | | | 13 | | | — | | | 76,559 | | | — | | | 76,572 | | | — | | | 76,572 | |
Vesting of restricted stock units and performance units, net of taxes paid | 463,495 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Vested restricted stock units and performance units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 257,764 | | | — | | | — | | | — | | | (2,080) | | | — | | | (2,080) | | | — | | | (2,080) | |
Cancellation of treasury shares | (257,764) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 578,031 | | | (578,031) | | | 1 | | | (1) | | | 7,758 | | | — | | | 7,758 | | | (7,758) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | (5,833) | | | (5,833) | | | (4,723) | | | (10,556) | |
At March 31, 2021 | 44,104,541 | | | 34,431,340 | | | $ | 44 | | | $ | 34 | | | $ | 624,916 | | | $ | (201,091) | | | $ | 423,903 | | | $ | 458,174 | | | $ | 882,077 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,175 | | | — | | | 2,175 | | | — | | | 2,175 | |
Vesting of restricted stock units, net of taxes paid | 155,058 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 66,343 | | | — | | | — | | | — | | | (741) | | | — | | | (741) | | | — | | | (741) | |
Cancellation of treasury shares | (66,343) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 33,463 | | | (33,463) | | | — | | | — | | | 441 | | | — | | | 441 | | | (441) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | (8,871) | | | (8,871) | | | (6,960) | | | (15,831) | |
At June 30, 2021 | 44,293,062 | | | 34,397,877 | | | $ | 44 | | | $ | 34 | | | $ | 626,791 | | | $ | (209,962) | | | $ | 416,907 | | | $ | 450,773 | | | $ | 867,680 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,161 | | | — | | | 2,161 | | | — | | | 2,161 | |
Shares issued in connection with the Tracker/Sequel Acquisitions | 6,200,000 | | | — | | | 6 | | | — | | | 61,808 | | | — | | | 61,814 | | | — | | | 61,814 | |
Vesting of restricted stock units, net of taxes paid | 155,113 | | | — | | | 1 | | | — | | | (1) | | | — | | | — | | | — | | | — | |
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 65,106 | | | — | | | — | | | — | | | (599) | | | — | | | (599) | | | — | | | (599) | |
Cancellation of treasury shares | (65,106) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 43,882 | | | (43,882) | | | — | | | — | | | 579 | | | — | | | 579 | | | (579) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | 10,418 | | | 10,418 | | | 8,420 | | | 18,838 | |
At September 30, 2021 | 50,692,057 | | | 34,353,995 | | | $ | 51 | | | $ | 34 | | | $ | 690,739 | | | $ | (199,544) | | | $ | 491,280 | | | $ | 458,614 | | | $ | 949,894 | |
(In thousands)
| | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2021 | | 2020 |
Cash flows from operating activities: | | |
Net loss | | $ | (7,549) | | | $ | (11,053) | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | |
Depreciation, depletion and amortization | | 77,493 | | | 76,096 | |
Impairment of proved and unproved oil and gas properties | | — | | | 44,928 | |
Impairment of goodwill | | — | | | 17,620 | |
Accretion of asset retirement obligations | | 916 | | | 137 | |
Settlement of asset retirement obligations | | (103) | | | — | |
(Gain) on sale of oil and gas properties | | (740) | | | (198) | |
(Gain) on sale of office and other equipment | | (114) | | | — | |
| | | | |
Total loss (gain) on derivative contracts, net | | 117,566 | | | (73,065) | |
Operating portion of net cash (paid) received in settlement of derivative contracts | | (46,311) | | | 47,599 | |
Stock-based compensation | | 10,621 | | | 7,665 | |
Deferred income taxes | | (343) | | | 112 | |
| | | | |
Amortization of deferred financing costs | | 581 | | | 241 | |
| | | | |
Changes in assets and liabilities: | | | | |
(Increase) decrease in accounts receivable | | (12,238) | | | 12,102 | |
(Increase) decrease in prepaid expenses and other current assets | | 900 | | | (264) | |
Increase (decrease) in accounts payable and accrued expenses | | 6,090 | | | 1,976 | |
Increase (decrease) in revenues and royalties payable | | 2,556 | | | (7,768) | |
Increase (decrease) in advances | | (2,015) | | | (11,412) | |
| | | | |
Net cash provided by operating activities | | 147,310 | | | 104,716 | |
Cash flows from investing activities: | | | | |
Acquisition of oil and gas properties, net of cash acquired | | (240,431) | | | — | |
Additions to oil and gas properties | | (65,074) | | | (72,869) | |
Additions to office and other equipment | | (886) | | | (111) | |
Proceeds from sales of oil and gas properties | | 975 | | | 409 | |
Net cash used in investing activities | | (305,416) | | | (72,571) | |
Cash flows from financing activities: | | | | |
Proceeds from borrowings | | 503,734 | | | 93,923 | |
Repayments of borrowings | | (340,482) | | | (133,923) | |
Cash paid related to the exchange and cancellation of Class A Common Stock | | (3,420) | | | (531) | |
Cash paid for finance leases | | (70) | | | (125) | |
Deferred financing costs | | (2,709) | | | — | |
Net cash provided by (used in) financing activities | | 157,053 | | | (40,656) | |
Net decrease in cash | | (1,053) | | | (8,511) | |
Cash at beginning of period | | 1,494 | | | 13,822 | |
Cash at end of period | | $ | 441 | | | $ | 5,311 | |
Supplemental disclosure of cash flow information | | | | |
Cash paid for: | | | | |
Interest | | $ | 7,126 | | | $ | 3,613 | |
Income taxes | | $ | 687 | | | $ | — | |
Non-cash investing and financing activities: | | | | |
Class A Common Stock issued in IRM Acquisition | | $ | 76,572 | | | $ | — | |
Class A Common Stock issued in Tracker/Sequel Acquisitions | | $ | 61,814 | | | $ | — | |
Accrued capital expenditures | | $ | 18,971 | | | $ | 2,213 | |
| | | | |
Asset retirement obligations | | $ | 242 | | | $ | 44 | |
| | | | |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2022 | | 2021 |
Cash flows from operating activities: | | |
Net income (loss) | | $ | 465,460 | | | $ | (7,549) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Depreciation, depletion and amortization | | 191,669 | | | 77,493 | |
| | | | |
| | | | |
Accretion of asset retirement obligations | | 1,863 | | | 916 | |
Settlement of asset retirement obligations | | (664) | | | (103) | |
Gain on sale of oil and gas properties | | (14,803) | | | (740) | |
Gain on sale of office and other equipment | | (152) | | | (114) | |
| | | | |
Total loss on derivative contracts, net | | 141,101 | | | 117,566 | |
Operating portion of net cash paid in settlement of derivative contracts | | (169,708) | | | (46,311) | |
Stock-based compensation - equity and liability awards | | 15,112 | | | 10,621 | |
Deferred income taxes | | 77,591 | | | (343) | |
| | | | |
Amortization of deferred financing costs | | 3,723 | | | 581 | |
| | | | |
Changes in assets and liabilities: | | | | |
(Increase) decrease in accounts receivable | | (189,504) | | | (12,238) | |
(Increase) decrease in prepaid expenses and other current assets | | (16,546) | | | 900 | |
Increase (decrease) in accounts payable and accrued expenses | | 92,450 | | | 6,090 | |
Increase (decrease) in revenues and royalties payable | | 94,260 | | | 2,556 | |
Increase (decrease) in advances | | 11,317 | | | (2,015) | |
| | | | |
Net cash provided by operating activities | | 703,169 | | | 147,310 | |
Cash flows from investing activities: | | | | |
Acquisition of oil and gas properties, net of cash acquired | | (1,518,269) | | | (240,431) | |
Additions to oil and gas properties | | (325,109) | | | (65,074) | |
Additions to office and other equipment | | (1,694) | | | (886) | |
Proceeds from sales of oil and gas properties | | 26,165 | | | 975 | |
Net cash used in investing activities | | (1,818,907) | | | (305,416) | |
Cash flows from financing activities: | | | | |
Proceeds from borrowings under Credit Agreement | | 2,348,728 | | | 503,734 | |
Repayments of borrowings under Credit Agreement | | (2,276,996) | | | (340,482) | |
Proceeds from issuance of 8% Senior Notes due 2027, net | | 537,256 | | | — | |
Proceeds from term loan | | 244,209 | | | — | |
Proceeds from issuance of Series A Convertible Preferred Stock, net of offering costs of $674 | | 279,326 | | | — | |
Cash paid related to the exchange and cancellation of Class A Common Stock | | (5,168) | | | (3,420) | |
Cash paid for finance leases | | (408) | | | (70) | |
Deferred financing costs | | (15,222) | | | (2,709) | |
Net cash provided by financing activities | | 1,111,725 | | | 157,053 | |
Net decrease in cash | | (4,013) | | | (1,053) | |
Cash at beginning of period | | 4,013 | | | 1,494 | |
Cash at end of period | | $ | — | | | $ | 441 | |
Supplemental disclosure of cash flow information | | | | |
Cash paid for: | | | | |
Interest | | $ | 17,485 | | | $ | 7,126 | |
Income taxes | | $ | 625 | | | $ | 687 | |
Non-cash investing and financing activities: | | | | |
Class A Common Stock issued in IRM Acquisition | | $ | — | | | $ | 76,572 | |
Class A Common Stock issued in Tracker/Sequel Acquisitions | | $ | — | | | $ | 61,814 | |
Class A Common Stock issued in Chisholm Acquisition | | $ | 249,515 | | | $ | — | |
Class A Common Stock issued in Bighorn Acquisition | | $ | 77,757 | | | $ | — | |
Class A Common Stock issued in Titus Acquisition | | $ | 53,574 | | | $ | — | |
Accrued capital expenditures | | $ | 40,969 | | | $ | 18,971 | |
Lease asset additions - ASC 842 | | $ | 3,111 | | | $ | — | |
Asset retirement obligations | | $ | 722 | | | $ | 242 | |
| | | | |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with its consolidated subsidiaries, the “Company”), is a growth-oriented independent oil and natural gas development and production company. In addition, the Company is active in corporate mergers and the acquisition of oil and natural gas properties that have production and future development opportunities. The Company's operations are all in the upstream segment of the oil and natural gas industry and all its properties are onshore in Texas.Texas and New Mexico.
Earthstone is the sole managing member of Earthstone Energy Holdings, LLC, a Delaware limited liability company (together with its wholly-owned consolidated subsidiaries, “EEH”), with a controlling interest in EEH. Earthstone, together with its wholly-owned subsidiary, Lynden Energy Corp., a corporation organized under the laws of British Columbia (“Lynden Corp”), and Lynden Corp’s wholly-owned consolidated subsidiary, Lynden USA Inc., a Utah corporation (“Lynden US”) and also a member of EEH, consolidates the financial results of EEH and records a noncontrolling interest in the Condensed Consolidated Financial Statements representing the economic interests of EEH's members other than Earthstone and Lynden US.
The accompanying unaudited Condensed Consolidated Financial Statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The accompanying unaudited Condensed Consolidated Financial Statements and notes should be read in conjunction with the financial statements and notes included in Earthstone’s 20202021 Annual Report on Form 10-K.
The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for the fair presentation of the Company's financial position, results of operations and cash flows for the periods presented. Any such adjustments are of a normal, recurring nature. The Company’s Condensed Consolidated Balance Sheet at December 31, 20202021 is derived from the audited Consolidated Financial Statements at that date.
Recently Issued Accounting Standards
Income Taxes - In December 2019, the FASB issued an update that simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and early adoption is permitted. The Company adopted the update effective January 1, 2021 and the impact was not material to the Consolidated Financial Statements.
Reference Rate Reform - In March 2020, the FASB issued an update that provides optional guidance for a limited period of time to ease the transition from LIBOR to an alternative reference rate. The ASU intends to address certain concerns relating to accounting for contract modifications and hedge accounting. These optional expedients and exceptions to applying GAAP, assuming certain criteria are met, are allowed through December 31, 2022. The Company is currently evaluating the provisions of this update and has not yet determined whether it will elect the optional expedients. The Company does not expect the transition to an alternative rate to have a material impact on its business, operations or liquidity.
Note 2. Fair Value Measurements
FASB Accounting Standards Codification (“ASC”) Topic 820, defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. ASC 820 provides a framework for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the counterparty’s creditworthiness when valuing certain assets.
The three-level fair value hierarchy for disclosure of fair value measurements defined by ASC 820 is as follows:
Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Inputs, other than quoted prices within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Level 3 – Prices or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation under Level 3 generally involves a significant degree of judgment from management.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level. There were no transfers between fair value hierarchy levels for the nine months ended September 30, 2021.2022.
Fair Value on a Recurring Basis
Derivative Financial Instruments
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative financial instruments are carried at fair value and measured on a recurring basis. The derivative financial instruments consist of swaps andfixed price swap agreements, costless collars, for crude oil and natural gasdeferred premium put options and interest rate swaps. The Company’s commodity price hedges and interest rate swaps are valued based on discounted future cash flow models that are primarily based on published forward commodity price curves and published LIBOR forward curves; thus, these inputs are designated as Level 2 within the valuation hierarchy.
The fair values of derivative instruments in asset positions include measures of counterparty nonperformance risk, and the fair values of derivative instruments in liability positions include measures of the Company’s nonperformance risk. These measurements were not material to the Condensed Consolidated Financial Statements.
Share-based Compensation Liability
Certain of our performance-based stock awards (“PSUs” or “performance units”) may be payable in cash. The Company classifies the awards that may be settled in cash as liability awards. These awards are valued quarterly utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes grant date fair value based on the most likely outcome. The inputs for the Monte Carlo model are designated as Level 2 within the valuation hierarchy. The share-based compensation liability related to the PSU liability awards is included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of September 30, 2021.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2022.The following table summarizes the fair value of the Company’s financial assets and liabilities, by level within the fair-value hierarchy (in thousands):
| September 30, 2021 | | Level 1 | | Level 2 | | Level 3 | | Total | |
September 30, 2022 | | September 30, 2022 | | Level 1 | | Level 2 | | Level 3 | | Total |
Financial assets | Financial assets | | | | | | | | | Financial assets | | | | | | | | |
Derivative asset - current | Derivative asset - current | | $ | — | | | $ | 17 | | | $ | — | | | $ | 17 | | Derivative asset - current | | $ | — | | | $ | 14,950 | | | $ | — | | | $ | 14,950 | |
Derivative asset - noncurrent | Derivative asset - noncurrent | | — | | | 453 | | | — | | | 453 | | Derivative asset - noncurrent | | — | | | 5,526 | | | — | | | 5,526 | |
Total financial assets | Total financial assets | | $ | — | | | $ | 470 | | | $ | — | | | $ | 470 | | Total financial assets | | $ | — | | | $ | 20,476 | | | $ | — | | | $ | 20,476 | |
| Financial liabilities | Financial liabilities | | Financial liabilities | |
Derivative liability - current | Derivative liability - current | | $ | — | | | $ | 67,575 | | | $ | — | | | $ | 67,575 | | Derivative liability - current | | $ | — | | | $ | 28,404 | | | $ | — | | | $ | 28,404 | |
Derivative liability - noncurrent | Derivative liability - noncurrent | | — | | | 7,730 | | | — | | | 7,730 | | Derivative liability - noncurrent | | — | | | 7,840 | | | — | | | 7,840 | |
Share-based compensation liability - noncurrent | Share-based compensation liability - noncurrent | | — | | | 3,680 | | | — | | | 3,680 | | Share-based compensation liability - noncurrent | | — | | | 13,474 | | | — | | | 13,474 | |
Total financial liabilities | Total financial liabilities | | $ | — | | | $ | 78,985 | | | $ | — | | | $ | 78,985 | | Total financial liabilities | | $ | — | | | $ | 49,718 | | | $ | — | | | $ | 49,718 | |
| December 31, 2020 | | |
December 31, 2021 | | December 31, 2021 | |
Financial assets | Financial assets | | | | | | | | | Financial assets | | | | | | | | |
Derivative asset - current | Derivative asset - current | | $ | — | | | $ | 7,509 | | | $ | — | | | $ | 7,509 | | Derivative asset - current | | $ | — | | | $ | 1,348 | | | $ | — | | | $ | 1,348 | |
Derivative asset - noncurrent | Derivative asset - noncurrent | | — | | | 396 | | | — | | | 396 | | Derivative asset - noncurrent | | — | | | 157 | | | — | | | 157 | |
Total financial assets | Total financial assets | | $ | — | | | $ | 7,905 | | | $ | — | | | $ | 7,905 | | Total financial assets | | $ | — | | | $ | 1,505 | | | $ | — | | | $ | 1,505 | |
| Financial liabilities | Financial liabilities | | Financial liabilities | |
Derivative liability - current | Derivative liability - current | | $ | — | | | $ | 1,135 | | | $ | — | | | $ | 1,135 | | Derivative liability - current | | $ | — | | | $ | 45,310 | | | $ | — | | | $ | 45,310 | |
Derivative liability - noncurrent | Derivative liability - noncurrent | | — | | | 173 | | | — | | | 173 | | Derivative liability - noncurrent | | — | | | 571 | | | — | | | 571 | |
Share-based compensation liability - current | | Share-based compensation liability - current | | — | | | 7,835 | | | — | | | 7,835 | |
Share-based compensation liability - noncurrent | | Share-based compensation liability - noncurrent | | — | | | 6,324 | | | — | | | 6,324 | |
Total financial liabilities | Total financial liabilities | | $ | — | | | $ | 1,308 | | | $ | — | | | $ | 1,308 | | Total financial liabilities | | $ | — | | | $ | 60,040 | | | $ | — | | | $ | 60,040 | |
|
Other financial instruments include cash, accounts receivable and payable, and revenue royalties. The carrying amount of these instruments approximates fair value because of their short-term nature. The Company’s long-term debt obligation bears interest at floating market rates, therefore carrying amounts and fair value are approximately equal.
Fair Value on a Nonrecurring Basis
The Company applies the provisions of the fair value measurement standard on a non-recurring basis to its non-financial assets and liabilities, including oil and gas properties, goodwill, business combinations and asset retirement obligations. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments if events or changes in
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
certain circumstances indicate that adjustments may be necessary. Due to significant declines in commodity prices and global demand for oil and natural gas products resulting from the COVID-19 pandemic, the Company assessed the fair values of its oil and natural gas properties and goodwill resulting in non-cash impairment charges during the three months ended March 31, 2020. Since then, commodity prices have recovered and no other suchNo triggering events that require further assessment were observed during the nine months ended September 30, 2021.2022. See further discussion in Note 5. Oil and Natural Gas Properties.
Items Not Recorded at Fair Value
The carrying amounts reported on the unaudited consolidated balance sheets for cash, accounts receivable, prepaid expenses, other current assets accounts payable, revenues and royalties payable, accrued expenses and other current liabilities approximate their fair values.
The Company has not elected to account for its debt instruments at fair value. Borrowings under the revolving tranche and term loan tranche of the Company’s credit facility bear interest at floating market rates, therefore the carrying amounts and fair values were approximately equal as of September 30, 2022 and December 31, 2021. The carrying value of EEH’s 8.000% Senior Notes due 2027, net of $11.6 million deferred financing costs, of $538.4 million and accrued interest of $20.7 million had an estimated fair value of $518.9 million as of September 30, 2022. There were no other debt instruments outstanding at December 31, 2021.
Note 3. Derivative Financial Instruments
Commodity Derivative Instruments
The Company’s hedging activities primarily consist of derivative instruments entered into in order to hedge against changes in oil and natural gas prices through the use of fixed price swap agreements, costless collars and costless collars.deferred premium put options. Swaps exchange floating price risk in the future for a fixed price at the time of the hedge. Costless collars set both a maximum (sold ceiling) and a minimum (bought floor) future price. A deferred premium put option represents a bought floor except, unlike a standard put option, the premium is not paid until the expiration of the option. Consistent with its hedging policy, the Company has entered into a series of derivative instruments to hedge a significant portion of its expected oil and natural gas production through December 31, 2022.2024. Typically, these derivative instruments require payments to (receipts from) counterparties based on specific indices as required by the derivative agreements. Although not risk free, the Company believes these instruments reduce its exposure to oil and natural gas price fluctuations and, thereby, allow the Company to achieve a more predictable cash flow. The Company does not enter into derivative instruments for trading or other speculative purposes.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
These transactions are recorded in the Condensed Consolidated Financial Statements in accordance with FASB ASC Topic 815. The Company has accounted for these transactions using the mark-to-market accounting method. Generally, the Company incurs accounting losses on derivatives during periods where prices are rising and gains during periods where prices are falling which may cause significant fluctuations in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations.
The Company nets its derivative instrument fair value amounts executed with each counterparty pursuant to an International Swap Dealers Association Master Agreement (“ISDA”), which provides for net settlement over the term of the contract. The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.
The Company had the following open crude oil and natural gas derivative contracts as of September 30, 2021:2022:
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q4 2021 | | Crude Oil | | 941,475 | | | $ | 50.63 | |
Q1 - Q4 2022 | | Crude Oil | | 2,462,250 | | | $ | 56.31 | |
Q4 2021 | | Crude Oil Basis Swap (1) | | 757,475 | | | $ | 0.80 | |
Q4 2021 | | Crude Oil Roll Swap (2) | | 228,475 | | | $ | (0.27) | |
Q1 - Q4 2022 | | Crude Oil Basis Swap (1) | | 2,007,500 | | | $ | 0.68 | |
Q4 2021 | | Natural Gas | | 2,576,000 | | | $ | 2.87 | |
Q1 - Q4 2022 | | Natural Gas | | 4,295,000 | | | $ | 2.92 | |
Q4 2021 | | Natural Gas Basis Swap (3) | | 2,698,000 | | | $ | (0.29) | |
Q1 - Q4 2022 | | Natural Gas Basis Swap (3) | | 9,100,000 | | | $ | (0.26) | |
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q4 2022 | | Crude Oil | | 1,081,000 | | | $ | 66.70 | |
Q1 - Q4 2023 | | Crude Oil | | 1,277,500 | | | $ | 76.20 | |
Q4 2022 | | Crude Oil Basis Swap (1) | | 3,128,000 | | | $ | 0.89 | |
Q1 - Q4 2023 | | Crude Oil Basis Swap (1) | | 9,488,500 | | | $ | 0.92 | |
Q4 2022 | | Natural Gas | | 1,893,500 | | | $ | 3.33 | |
Q1 - Q4 2023 | | Natural Gas | | 3,670,000 | | | $ | 3.35 | |
Q4 2022 | | Natural Gas Basis Swap (2) | | 1,840,000 | | | $ | (0.33) | |
Q1 - Q4 2023 | | Natural Gas Basis Swap (2) | | 36,500,000 | | | $ | (1.47) | |
Q1 - Q4 2024 | | Natural Gas Basis Swap (2) | | 36,600,000 | | | $ | (1.05) | |
(1)The basis differential price is between WTI Midland Crude and the WTI NYMEX.
(2)The swap is between WTI Roll and the WTI NYMEX.
(3)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) |
Q1 - Q4 2022 | | Crude Oil Costless Collar | | 365,000 | | | $ | 68.75 | | | $ | 55.00 | |
Q4 2021 | | Natural Gas Costless Collar | | 122,000 | | | $ | 4.10 | | | $ | 3.50 | |
Q1 - Q4 2022 | | Natural Gas Costless Collar | | 2,905,000 | | | $ | 4.00 | | | $ | 3.06 | |
Interest Rate Swaps
At times, the Company’s hedging activities include the use of interest rate swaps entered into in order to manage cash flow variability resulting from changes in interest rates. These derivative instruments are not accounted for under hedge accounting.
The Company had the following interest rate swaps as of September 30, 2021:
| | | | | | | | | | | | | | |
Effective Dates | | Notional Amount | | Fixed Rate |
May 5, 2020 to May 5, 2022 | | $125,000,000 | | 0.286 | % |
May 5, 2022 to May 5, 2023 | | $100,000,000 | | 0.286 | % |
May 5, 2023 to May 7, 2024 | | $75,000,000 | | 0.286 | % |
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(2)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) |
Q4 2022 | | Crude Oil Costless Collar | | 805,000 | | | $ | 73.14 | | | $ | 96.49 | |
Q1 - Q4 2023 | | Crude Oil Costless Collar | | 1,715,500 | | | $ | 62.98 | | | $ | 80.34 | |
Q4 2022 | | Natural Gas Costless Collar | | 8,686,500 | | | $ | 4.57 | | | $ | 10.17 | |
Q1 - Q4 2023 | | Natural Gas Costless Collar | | 17,298,000 | | | $ | 3.77 | | | $ | 7.49 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Deferred Premium Puts |
Period | | Commodity | | Volume (Bbls / MMBtu) | | $/Bbl (Put Price) | | $/Bbl (Net of Premium) |
Q4 2022 | | Crude Oil | | 253,000 | | | $ | 80.00 | | | $ | 75.79 | |
Q1 - Q4 2023 | | Crude Oil | | 1,750,500 | | | $ | 70.00 | | | $ | 64.53 | |
The following table summarizes the location and fair value amounts of all derivative instruments in the Condensed Consolidated Balance Sheets as well as the gross recognized derivative assets, liabilities, and amounts offset in the Condensed Consolidated Balance Sheets (in thousands):
| | | | | | September 30, 2021 | | December 31, 2020 | | | | | September 30, 2022 | | December 31, 2021 |
Derivatives not designated as hedging contracts under ASC Topic 815 | Derivatives not designated as hedging contracts under ASC Topic 815 | | Balance Sheet Location | | Gross Recognized Assets / Liabilities | | Gross Amounts Offset | | Net Recognized Assets / Liabilities | | Gross Recognized Assets / Liabilities | | Gross Amounts Offset | | Net Recognized Assets / Liabilities | Derivatives not designated as hedging contracts under ASC Topic 815 | | Balance Sheet Location | | Gross Recognized Assets / Liabilities | | Gross Amounts Offset | | Net Recognized Assets / Liabilities | | Gross Recognized Assets / Liabilities | | Gross Amounts Offset | | Net Recognized Assets / Liabilities |
Commodity contracts | Commodity contracts | | Derivative asset - current | | $ | 1,340 | | | $ | (1,323) | | | $ | 17 | | | $ | 11,071 | | | $ | (3,562) | | | $ | 7,509 | | Commodity contracts | | Derivative asset - current | | $ | 53,601 | | | $ | (38,651) | | | $ | 14,950 | | | $ | 3,191 | | | $ | (1,843) | | | $ | 1,348 | |
Commodity contracts | Commodity contracts | | Derivative liability - current | | $ | 68,707 | | | $ | (1,323) | | | $ | 67,384 | | | $ | 4,492 | | | $ | (3,562) | | | $ | 930 | | Commodity contracts | | Derivative liability - current | | $ | 67,055 | | | $ | (38,651) | | | $ | 28,404 | | | $ | 47,153 | | | $ | (1,843) | | | $ | 45,310 | |
Interest rate swaps | | Derivative liability - current | | $ | 191 | | | $ | — | | | $ | 191 | | | $ | 205 | | | $ | — | | | $ | 205 | | |
| Commodity contracts | Commodity contracts | | Derivative asset - noncurrent | | $ | 285 | | | $ | (277) | | | $ | 8 | | | $ | 396 | | | $ | — | | | $ | 396 | | Commodity contracts | | Derivative asset - noncurrent | | $ | 12,941 | | | $ | (7,415) | | | $ | 5,526 | | | $ | 2,721 | | | $ | (2,564) | | | $ | 157 | |
Commodity contracts | Commodity contracts | | Derivative liability - noncurrent | | $ | 8,007 | | | $ | (277) | | | $ | 7,730 | | | $ | — | | | $ | — | | | $ | — | | Commodity contracts | | Derivative liability - noncurrent | | $ | 15,255 | | | $ | (7,415) | | | $ | 7,840 | | | $ | 3,135 | | | $ | (2,564) | | | $ | 571 | |
Interest rate swaps | | Derivative asset - noncurrent | | $ | 445 | | | — | | | 445 | | | $ | — | | | $ | — | | | $ | — | | |
Interest rate swaps | | Derivative liability - noncurrent | | $ | — | | | $ | — | | | $ | — | | | $ | 173 | | | $ | — | | | $ | 173 | | |
|
The following table summarizes the location and amounts of the Company’s realized and unrealized gains and losses on derivatives instruments in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging contracts under ASC Topic 815 | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | Statement of Cash Flows Location | | Statement of Operations Location | | 2021 | | 2020 | | 2021 | | 2020 |
Unrealized (loss) gain | | Not separately presented | | Not separately presented | | $ | (12,244) | | | $ | (14,543) | | | $ | (71,255) | | | $ | 25,466 | |
Realized (loss) gain | | Operating portion of net cash (paid) received in settlement of derivative contracts | | Not separately presented | | (20,884) | | | 8,503 | | | (46,311) | | | 47,599 | |
| | Total (loss) gain on derivative contracts, net | | (Loss) gain on derivative contracts, net | | $ | (33,128) | | | $ | (6,040) | | | $ | (117,566) | | | $ | 73,065 | |
| | | | | | | | | | | | |
Included in Accounts receivable under the subheading of Joint interest billings and other in the Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 are $0.01 million and $2.3 million, respectively, related to commodity hedge contracts settled as of that date for which the cash has not been received. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging contracts under ASC Topic 815 | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | Statement of Cash Flows Location | | Statement of Operations Location | | 2022 | | 2021 | | 2022 | | 2021 |
Unrealized gain (loss) | | Not separately presented | | Not separately presented | | $ | 119,209 | | | $ | (12,244) | | | $ | 28,607 | | | $ | (71,255) | |
Realized loss | | Operating portion of net cash paid in settlement of derivative contracts | | Not separately presented | | (58,923) | | | (20,884) | | | (169,708) | | | (46,311) | |
| | Total (gain) loss on derivative contracts, net | | Gain (loss) on derivative contracts, net | | $ | 60,286 | | | $ | (33,128) | | | $ | (141,101) | | | $ | (117,566) | |
| | | | | | | | | | | | |
Note 4. Acquisitions and Divestitures
IRM AcquisitionTitus Agreement
As part of the execution of its growth strategy to further increase its scale, on January 7, 2021, the Company completed the acquisition (the “IRM Acquisition”) of all of the issuedOn June 27, 2022, Earthstone and outstandingEEH, together as buyer, and Titus Oil & Gas Production, LLC, a Delaware limited liability company, interests in Independence Resources Management,Titus Oil & Gas Corporation, a Delaware corporation, Lenox Minerals, LLC, (“IRM”)a Delaware limited liability company and certain wholly owned subsidiaries for consideration consisting of the following: (i) net cash of approximately $140.4 million (the “Cash Consideration”Lenox Mineral Title Holdings, Inc., a Delaware corporation (collectively, “Titus I”) and (ii) 12,719,594 shares of the Company’s Class A common stock, $0.001 par value per share (“Class A Common Stock”). The fair value of each share of Class A Common Stock was determined using the closing price of $6.02 per share on January 7, 2021. The, as seller, entered into a purchase agreement contains customary representations and warranties for transactions of this nature. The Company has obtained representation and warranty insurance to provide coverage in the event of certain breaches of representations and warranties of the seller contained in the purchase agreement, which will be subject to various exclusions, deductibles and other terms and conditions set forth therein.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
sale agreement (the “Titus I Purchase Agreement”) which provided that EEH or its designated wholly-owned subsidiary would acquire (the “Titus I Acquisition”) interests in oil and gas leases and related property of Titus I located in the Northern Delaware Basin of New Mexico (the “Titus I Assets”). Also on June 27, 2022, Earthstone and EEH, as buyer, and Titus Oil & Gas Production II, LLC, a Delaware limited liability company, Lenox Minerals II, LLC, a Delaware limited liability company and Lenox Mineral Holdings II, Inc., a Delaware limited liability company (collectively, “Titus II” and together with Titus I, “Titus”), as seller, entered into a purchase and sale agreement (the “Titus II Purchase Agreement” and together with the Titus I Purchase Agreement, the “Titus Purchase Agreements”) which provided that EEH or its designated wholly-owned subsidiary would acquire (the “Titus II Acquisition” and together with the Titus I Acquisition, the “Titus Acquisition”) interests in oil and gas leases and related property of Titus II located in the Northern Delaware Basin of New Mexico (the “Titus II Assets” and together with the Titus I Assets, the “Titus Assets”).
On August 10, 2022, the transactions contemplated in the Titus Purchase Agreements were consummated whereby EEH acquired the Titus Assets for aggregate consideration of approximately $565.8 million in cash, net of preliminary and customary purchase price adjustments and remains subject to final post-closing settlement between EEH and Titus, and 3,857,015 shares Class A Common Stock (the “Titus Acquisition”).
The IRMTitus Acquisition has been accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer. The preliminary allocation of the total purchase price in the IRMTitus Acquisition is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the Company’s estimates of the acquired oil and gas properties resulting in changes to the purchase price allocation. These amounts will be finalized no later than one year from the acquisition date. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):
| | | | | | | | |
Consideration: | | |
Shares of Class A Common Stock issued | | 3,857,015 | |
Class A Common Stock price as of August 10, 2022 | | $ | 13.89 | |
Class A Common Stock consideration | | 53,574 | |
Cash consideration | | 565,777 | |
Total consideration transferred | | $ | 619,351 | |
| | |
Fair value of assets acquired: | | |
Oil and gas properties | | $ | 623,119 | |
Amount attributable to assets acquired | | $ | 623,119 | |
| | |
Fair value of liabilities assumed: | | |
Current liabilities | | $ | 2,854 | |
Noncurrent liabilities - ARO | | 914 | |
Amount attributable to liabilities assumed | | $ | 3,768 | |
| | |
Bighorn Acquisition
On January 30, 2022, Earthstone, EEH, and Bighorn Asset Company, LLC, a Delaware limited liability company (“Bighorn”), as seller, entered into a purchase and sale agreement (the “Bighorn Agreement”). Pursuant to the Bighorn Agreement, EEH acquired (the “Bighorn Acquisition”) interests in oil and gas leases and related property of Bighorn located in the Midland Basin, Texas (the “Bighorn Assets”).
On April 14, 2022, Earthstone, EEH and Bighorn consummated the transactions contemplated in the Bighorn Agreement whereby EEH acquired the Bighorn Assets for aggregate consideration of approximately $627.8 million in cash, net of preliminary and customary purchase price adjustments and remains subject to final post-closing settlement between EEH and Bighorn, and 5,650,977 shares Class A Common Stock.
The Bighorn Acquisition was accounted for as an asset acquisition. The fair value of the consideration paid by us and allocation of that amount to the underlying assets acquired, on a relative fair value basis, was recorded on our books as of the date of the closing of the Bighorn Acquisition. Additionally, costs directly related to the Bighorn Acquisition were capitalized as a component of the purchase price. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the Company’s estimates of the acquired oil and gas properties resulting in changes to the
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
purchase price allocation, on a relative fair value basis. These amounts will be finalized no later than one year from the acquisition date. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):
| | | | | | | | |
Consideration: | | |
Shares of Class A Common Stock issued | | 5,650,977 | |
Class A Common Stock price as of April 14, 2022 | | $ | 13.76 | |
Class A Common Stock consideration | | 77,757 | |
Cash consideration | | 625,801 | |
Direct transaction costs (1) | | 2,048 | |
Total consideration transferred | | $ | 705,606 | |
| | |
Fair value of assets acquired: | | |
Current assets | | $ | 770 | |
Oil and gas properties | | 746,825 | |
Amount attributable to assets acquired | | $ | 747,595 | |
| | |
Fair value of liabilities assumed: | | |
Suspense payable | | 25,710 | |
Other current liabilities | | 3,085 | |
Noncurrent liabilities - ARO | | 13,194 | |
Amount attributable to liabilities assumed | | $ | 41,989 | |
| | |
(1)Represents $2.0 million of estimated transaction costs associated with the Bighorn Acquisition which have been capitalized in accordance with ASC 805-50.
Chisholm Acquisition
On December 15, 2021, Earthstone, EEH, as buyer, Chisholm Energy Operating, LLC (“OpCo”) and Chisholm Energy Agent, Inc. (“Agent” and collectively with OpCo, “Chisholm”), collectively as seller, entered into a Purchase and Sale Agreement (the “Chisholm Agreement”), which provided that EEH would acquire (the “Chisholm Acquisition”) interests in oil and gas leases and related property of Chisholm located in Lea County and Eddy County, New Mexico (the “Chisholm Assets”).
On February 15, 2022, Earthstone, EEH and Chisholm consummated the transactions contemplated in the Chisholm Agreement whereby EEH acquired the Chisholm Assets for aggregate consideration consisting of: (i) approximately $313.9 million in cash, net of customary purchase price adjustments, paid at the closing of the Chisholm Acquisition, (ii) $70 million in cash paid on April 15, 2022 and (iii) 19,417,476 shares of the Class A Common Stock. The fair value of each share of Class A Common Stock was determined using the closing sales price of $12.85 per share on February 15, 2022. A Significant Shareholder, as identified below, was the majority shareholder of Chisholm as of the closing of the Chisholm Acquisition. See Note 12. Related Party Transactions for further discussion.
The Chisholm Acquisition has been accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer. The preliminary allocation of the total purchase price in the Chisholm Acquisition is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the Company’s estimates of the acquired oil and gas properties resulting in changes to the purchase price allocation. These amounts will be finalized no later than one year from the acquisition date. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
Consideration: | |
Shares of Class A Common Stock issued | 19,417,476 | |
Class A Common Stock price as of February 15, 2022 | $ | 12.85 | |
Class A Common Stock consideration | 249,515 | |
Cash consideration | 383,938 | |
| |
Total consideration transferred | $ | 633,453 | |
| |
Fair value of assets acquired: | |
Oil and gas properties | $ | 641,494 | |
Amount attributable to assets acquired | $ | 641,494 | |
| |
Fair value of liabilities assumed: | |
Other current liabilities | $ | 2,070 | |
Asset retirement obligation - noncurrent | 5,971 | |
Amount attributable to liabilities assumed | $ | 8,041 | |
IRM Acquisition
On January 7, 2021, the Company completed the acquisition (the “IRM Acquisition”) of all of the issued and outstanding limited liability company interests of Independence Resources Management, LLC (“IRM”) and certain of its wholly owned subsidiaries for consideration consisting of the following: (i) net cash of approximately $140.5 million (the “Cash Consideration”) and (ii) 12,719,594 shares of Class A Common Stock. The fair value of each share of Class A Common Stock was determined using the closing price of $6.02 per share on January 7, 2021.
The IRM Acquisition has been accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer. The allocation of the total purchase price in the IRM Acquisition is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
Consideration: | |
Shares of Class A Common Stock issued | 12,719,594 | |
Earthstone Class A Common Stock price as of January 7, 2021 | $ | 6.02 | |
Class A Common Stock consideration | 76,572 | |
Cash consideration(1) | 140,366140,507 | |
| |
Total consideration transferred | $ | 216,938217,079 | |
| |
Fair value of assets acquired: | |
Cash | $ | 4,763 | |
Other current assets | 11,524 | |
Oil and gas properties | 226,178224,112 | |
Other non-current assets | 252 | |
Amount attributable to assets acquired | $ | 242,717240,651 | |
| |
Fair value of liabilities assumed: | |
Derivative liability | $ | 10,177 | |
Other current liabilities | 5,3145,196 | |
Asset retirement obligation - noncurrent | 10,2888,199 | |
Amount attributable to liabilities assumed | $ | 25,77923,572 | |
Tracker/Sequel Acquisitions
On March 31, 2021, Earthstone, EEH, Tracker Resource Development III, LLC, a Delaware limited liability company (“Tracker”), and TRD III Royalty Holdings (TX), LP, a Delaware limited partnership (“RoyaltyCo” and collectively with Tracker, the “Seller”), entered into a purchase and sale agreement (the “Tracker Agreement”), which provided that EEH would acquire (the “Tracker Acquisition”) interests in oil and gas leases and related property of Tracker located in Irion County, Texas (the “Tracker Assets”). Also on March 31, 2021, Earthstone, EEH, SEG-TRD LLC, a Delaware limited liability company (“SEG-I”), and SEG-TRD II LLC, a Delaware limited liability company (“SEG-II” and collectively with SEG-I, “Sequel”) entered into a purchase and sale agreement (the “Sequel Agreement” and collectively with the Tracker Agreement, the “Tracker/Sequel Purchase Agreements”), which provided that EEH would acquire (the “Sequel Acquisition” and collectively with the Tracker Acquisition, the “Tracker/Sequel Acquisitions”) certain well-bore interests and related equipment (the “Sequel Assets”).
On July 20, 2021, Earthstone, EEH and the Seller consummated the transactions contemplated in the Tracker Agreement. At the closing of the Tracker Agreement, among other things, EEH acquired the Tracker Assets for aggregate consideration consisting of: (i) $22.5$18.8 million in cash, net of preliminary and customary purchase price adjustments, that remains subject to final post-closing settlement between EEH and the Seller, and (ii) 4.7 million shares of Class A Common Stock. Also, on July 20, 2021, Earthstone, EEH and Sequel consummated the transactions contemplated in the Sequel Agreement. At the closing of the Sequel Agreement, among other things, EEH acquired the Sequel Assets for aggregate consideration consisting of: (i) $45.3$41.4 million in cash, net of preliminary and customary purchase price adjustments, that remains subject to final post-closing settlement between EEH and the Seller, and (ii) 1.5 million shares of Class A Common Stock valued at $9.97 per share at the closing of the transaction. TheStock. A Significant Shareholder, as describedidentified below, owned approximately 49% of Tracker as of the closing of the Tracker Acquisition. See Note 12. Related Party Transactions for further discussion.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Tracker/Sequel Acquisitions have been accounted for as asset acquisitions in accordance with ASC Topic 805, Business Combinations (referred to as “ASC 805”).acquisitions. The preliminary allocation of the total purchase price in the Tracker/Sequel Acquisitions is based upon management’s estimates of and assumptions related to the relative fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the Company’s oil and natural gas properties. These amounts will be finalized no later than one year from the acquisition date. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | |
| | | | | | Total |
Consideration: | | | | | | |
Shares of Earthstone Class A Common Stock issued | | | | | | 6,200,000 | |
Earthstone Class A Common Stock price as of July 20, 2021 | | | | | | $ | 9.97 | |
Class A Common Stock consideration | | | | | | 61,814 | |
Cash consideration | | | | | | 60,159 | |
Direct transaction costs (1) | | | | | | 59,569 | |
Direct transaction costs (2)
| | | | | | 1,5501,715 | |
Total consideration transferred | | | | | | $ | 122,933123,688 | |
| | | | | | |
Fair value of assets acquired: | | | | | | |
Oil and gas properties | | | | | | $ | 123,533124,288 | |
Amount attributable to assets acquired | | | | | | $ | 123,533124,288 | |
| | | | | | |
Fair value of liabilities assumed: | | | | | | |
Noncurrent liabilities - AROasset retirement obligations | | | | | | 600 | |
Amount attributable to liabilities assumed | | | | | | $ | 600 | |
| | | | | | |
(1)Includes customary purchase price adjustments.
(2)Represents $1.6$1.7 million of transaction costs associated with the Tracker Acquisition and the Sequel Acquisition that have been capitalized in accordance with ASC 805-50.
The following unaudited supplemental pro forma condensed results of operations present consolidated information as though the Titus Acquisition, Bighorn Acquisition, Chisholm Acquisition, IRM Acquisition and Tracker/Sequel Acquisitions had been completed as of January 1, 2020.2021. The unaudited supplemental pro forma financial information was derived from the historical statements of revenues and direct operating expenses of Titus and the historical consolidated and combined statements of operations for Bighorn, Chisholm, IRM, Tracker, Sequel and Earthstone and adjusted to include depletion expense applied to the adjusted basis of the properties acquired. These unaudited supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future. Future results may vary significantly from the results reflected in this unaudited supplemental pro forma financial informationresults of operations (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Revenue | | $ | 115,331 | | | $ | 79,345 | | | $ | 316,932 | | | $ | 215,504 | |
Income (loss) before taxes | | 22,647 | | | (2,656) | | | 17,660 | | | 49,461 | |
Net income (loss) | | 22,196 | | | (2,840) | | | 18,003 | | | 48,962 | |
Less: Net income (loss) attributable to noncontrolling interest | | 9,921 | | | (1,182) | | | 7,782 | | | 20,372 | |
Net income (loss) attributable to Earthstone Energy, Inc. | | 12,275 | | | (1,658) | | | 10,222 | | | 28,589 | |
Pro forma net income (loss) per common share attributable to Earthstone Energy, Inc.: | | | | | | | | |
Basic | | $ | 0.25 | | | $ | (0.03) | | | $ | 0.23 | | | $ | 0.59 | |
Diluted | | $ | 0.23 | | | $ | (0.03) | | | $ | 0.23 | | | $ | 0.59 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Revenue | | $ | 1,016,529 | | | $ | 450,618 | | | $ | 1,910,133 | | | $ | 963,414 | |
Income before taxes | | 671,440 | | | 53,933 | | | 1,004,806 | | | 41,410 | |
Net income | | 610,922 | | | 53,127 | | | 923,133 | | | 40,808 | |
Less: Net income attributable to noncontrolling interest | | 179,944 | | | 23,093 | | | 282,808 | | | 17,639 | |
Net income attributable to Earthstone Energy, Inc. | | 430,978 | | | 30,034 | | | 640,325 | | | 23,169 | |
Pro forma net income per common share attributable to Earthstone Energy, Inc.: | | | | | | | | |
Basic | | $ | 3.98 | | | $ | 0.29 | | | $ | 5.92 | | | $ | 0.24 | |
Diluted | | $ | 3.85 | | | $ | 0.28 | | | $ | 5.52 | | | $ | 0.24 | |
| | | | | | | | |
The Company has included in its Condensed Consolidated Statements of Operations, revenues of $20.8$88.9 million and operating expenses of $9.6$39.7 million for the three months endedperiod from August 10, 2022 to September 30, 2021 and2022 related to the Titus Acquisition. The Company has included in its Condensed Consolidated Statements of Operations, revenues of $65.1$338.7 million and operating expenses of $33.7$112.0 million for the period January 7, 2021from April 14, 2022 to September 30, 20212022 related to the IRMBighorn Acquisition. The Company has included in its Condensed Consolidated Statements of Operations, revenues of $219.8 million and operating expenses of $86.7 million for the period from February 15, 2022 to September 30, 2022 related to the Chisholm Acquisition. During the three and nine months ended September 30, 2022, the Company recorded $0.3 million and $10.6 million, respectively, of legal and professional fees related to the Chisholm Acquisition which are included in Transaction costs in the Condensed Consolidated Statements of Operations. The Company recorded $0.7 million of legal and professional fees related
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
to the Titus Acquisition during the three and nine months ended September 30, 2021, the Company recorded $0.1 million and $3.9 million, respectively, of legal and professional fees, and employee severance costs related to the IRM Acquisition2022 which are included in Transaction costs in the Condensed Consolidated Statements of Operations.
Additionally,Foreland-BCC Acquisition
On November 2, 2021, Earthstone, EEH and Foreland Investments LP, a Delaware limited partnership (“Foreland”), consummated the Company has includedtransactions contemplated in its Condensed Consolidated Statementsthe Purchase and Sale Agreement dated as of Operations, revenues of $16.6 million and operating expenses of $5.6 million for the period July 20, 2021 to September 30, 2021 related to the Tracker/Sequel Acquisitions.
The fair value measurementsby and among Earthstone, EEH and Foreland (the “Foreland Purchase Agreement”). Net of assetscustomary purchase price adjustments, EEH acquired and liabilities assumed are based on inputs that are not observable(the “Foreland Acquisition”) interests in the market and therefore represent Level 3 inputs. The fair value of oil and gas propertiesleases and asset retirement obligations were measured using the discounted cash flow techniquerelated property of valuation.
Significant inputs to the valuation of oilForeland located in Irion County and gas properties include estimatesCrockett County, Texas, for a purchase price consisting of: (i) reserves,$13.4 million in cash and (ii) future operating2,611,111 shares of Class A Common Stock.
Also, on November 2, 2021, Earthstone, EEH and BCC-Foreland LLC, a Delaware limited liability company (“BCC”), consummated the transactions contemplated in the Purchase and Sale Agreement dated as of September 30, 2021 by and among Earthstone, EEH and BCC (the “BCC Purchase Agreement”). Net of customary purchase price adjustments, EEH acquired (the “BCC Acquisition” and with the Foreland Acquisition, the “Foreland-BCC Acquisition”) certain well-bore interests and related equipment held by BCC that were part of a joint development costs, (iii) future commodity prices, (iv) future pluggingagreement between Foreland, Foreland Operating, LLC, and abandonment costs, (v) estimated future cash flows, and (vi)BCC involving portions of the acreage covered by the Foreland Purchase Agreement for a market-based weighted average costpurchase price of capital rate. These inputs require significant judgments and estimates and are the most sensitive and subject to change.$20.5 million in cash.
Eagle Ford Acquisitions
In May and June 2021, the Company completed acquisitions of working interests in certain assets it operates located in southern Gonzales County, Texas (collectively, the “Eagle Ford Acquisitions”) from 4four separate sellers. The aggregate purchase price of the Eagle Ford Acquisitions was approximately $48.0$45.2 million. One of the 4four separate sellers was a related party. See Note 12. Related Party Transactions for further discussion. The Eagle Ford Acquisitions have been accounted for as asset acquisitions in accordance with ASC 805. The preliminary allocation of each purchase was based upon management’s estimates of and assumptions related to the relative fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the Company’sacquired oil and natural gas properties. These amounts will be finalized no later than one year from the acquisition date.
Foreland AcquisitionEagle Ford Divestiture
On September 30, 2021, EarthstoneJuly 1, 2022, the Company sold certain non-operated oil and EEH, as buyer,gas properties located in Fayette and Foreland Investments LP, a Delaware limited partnership (“Foreland”), as seller, entered into a Purchase and Sale Agreement (the “Foreland Purchase Agreement”). Also, on September 30, 2021, Earthstone and EEH, as buyer, and BCC-Foreland LLC, a Delaware limited liability company (“BCC”), as seller, entered into a Purchase and Sale Agreement (the “BCC Purchase Agreement”)(collectivelyGonzales Counties of Texas. In connection with the “Foreland Acquisition”),sale, the Company received preliminary cash consideration of approximately $25.6 million which is subject to customary final purchase price adjustments with an effective date of July 1, 2021.
A $6.1 million deposit related to the Foreland Acquisition became payable on September 30, 2021. As such, $6.1 million was recorded in both Other noncurrent assets and Accrued expenses in the Condensed Consolidated Balance Sheet as of September 30, 2021.
On November 2, 2021, the Foreland Acquisition was consummated. Among other things, EEH acquired interests in oil and gas leases and related property located in Irion County and Crockett County, Texas, including certain well-bore interests and related equipment held under a joint development agreement, for a collective purchase price of $49.2 million in cash, net of preliminary and customary purchase price adjustments and remains subject to final post-closing settlement between EEH and Foreland or BCC, as applicable, and 2,611,111 shares of Class A Common Stock valued at $10.77 per share at the closing of the transaction.adjustments.
Note 5. Oil and Natural Gas Properties
The Company follows the successful efforts method of accounting for its oil and natural gas properties. Under this method, costs to acquire oil and natural gas properties, drill and equip exploratory wells that find proved reserves, and drill and equip development wells are capitalized. Exploration costs, including unsuccessful exploratory wells and geological and geophysical costs, are charged to operations as incurred. Upon sale or retirement of oil and natural gas properties, the costs and related accumulated depreciation, depletion and amortization are eliminated from the accounts and the resulting gain or loss is recognized.
Costs incurred to maintain wells and related equipment, lease and well operating costs, and other exploration costs are charged to expense as incurred. Gains and losses arising from the sale of properties are included in Income from operations in the Condensed Consolidated Statements of Operations.
The Company’s lease acquisition costs and development costs of proved oil and natural gas properties are amortized using the units-of-production method, at the field level, based on total proved reserves and proved developed reserves, respectively. For
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
the three and nine months ended September 30, 2022, depletion expense for oil and gas producing property and related equipment was $90.4 million and $190.8 million, respectively. For the three and nine months ended September 30, 2021, depletion expense for oil and gas producing property and related equipment was $26.9 million and $77.0 million, respectively. For the three and nine months ended September 30, 2020, depletion expense for oil and gas producing property and related equipment was $28.4 million and $75.7 million, respectively.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our accrual basis capital expenditures for the three and nine months ended September 30, 20212022, were as follows (in thousands):
| | | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
Drilling and completions | | $ | 42,179 | | | $ | 74,346 | | |
Development costs | | Development costs | | $ | 146,845 | | | $ | 348,145 | |
Leasehold costs | Leasehold costs | | 1,990 | | | 2,444 | | Leasehold costs | | 307 | | | 567 | |
Total capital expenditures | Total capital expenditures | | $ | 44,169 | | | $ | 76,790 | | Total capital expenditures | | $ | 147,152 | | | $ | 348,712 | |
|
Proved Properties
Proved oil and natural gas properties are reviewed for impairment on a nonrecurring basis. The impairment charge reduces the carrying values to their estimated fair values. These fair value measurements are classified as Level 3 measurements and include many unobservable inputs. Fair value is calculated as the estimated discounted future net cash flows attributable to the assets. The Company’s primary assumptions in preparing the estimated discounted future net cash flows to be recovered from oil and gas properties are based on (i) proved reserves, (ii) forward commodity prices and assumptions as to costs and expenses, and (iii) the estimated discount rate that would be used by potential purchasers to determine the fair value of the assets.
Unproved Properties
Unproved properties consist of costs incurred to acquire undeveloped leases. Unproved oil and gas leases are generally for a primary term of three to five years. In most cases, the term of the unproved leases can be extended by paying a lease renewal fee, meeting contractual drilling obligations, or by the presence of producing wells on the leases. Unproved costs related to successful drilling on unproved leases are reclassified to proved properties.
The Company reviews its unproved properties periodically for impairment. In determining whether an unproved property is impaired, the Company considers numerous factors including, but not limited to, current exploration and development plans, favorable or unfavorable exploration activity on the property being evaluated and/or adjacent properties, the Company’s geologists' evaluation of the property, and the remaining months in the lease term for the property.
Impairments to Oil and Natural Gas Properties
No impairments were recorded to the Company's oil and natural gas properties during the three and nine months ended September 30, 2022 and 2021.
During the three months ended September 30, 2020, the Company recorded non-cash impairment charges of $2.1 million to its oil and natural gas properties due to acreage expirations. During the nine months ended September 30, 2020, as a result of the decline in crude oil price futures at the time, the Company recorded the following non-cash impairment charges:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Eagle Ford Trend | | Midland Basin | | Corporate | | Total |
Proved properties | | $ | 25,252 | | | $ | — | | | $ | — | | | $ | 25,252 | |
Unproved properties | | 11,311 | | | — | | | — | | | 11,311 | |
Acreage expirations (1) | | 450 | | | 7,915 | | | — | | | 8,365 | |
Goodwill | | — | | | — | | | 17,620 | | | 17,620 | |
| | $ | 37,013 | | | $ | 7,915 | | | $ | 17,620 | | | $ | 62,548 | |
(1)Impairments in unproved properties resulting from acreage deemed expired (not planned to be renewed).
Note 6. Noncontrolling Interest
Earthstone consolidates the financial results of EEH and its subsidiaries and records a noncontrolling interest for the economic interest in Earthstone held by the members of EEH other than Earthstone and Lynden US. Net income (loss) attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 20212022 and 20202021 represents the portion of net income (loss) attributable to the economic interest in the Company held by the members of EEH other than Earthstone and Lynden US. Noncontrolling interest in the Condensed Consolidated Balance Sheets as of September 30, 20212022 and December 31, 20202021 represents the portion of net assets of the Company attributable to the members of EEH other than Earthstone and Lynden US. The term “EEH Unit” means the units of limited liability company interests of EEH denominated as common units.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the changes in noncontrolling interest for the nine months ended September 30, 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | EEH Units Held By Earthstone and Lynden US | | % | | EEH Units Held By Others | | % | | Total EEH Units Outstanding |
As of December 31, 2020 | | 30,343,421 | | | 46.4 | % | | 35,009,371 | | | 53.6 | % | | 65,352,792 | |
EEH Units issued in connection with the IRM Acquisition | | 12,719,594 | | | | | — | | | | | 12,719,594 | |
EEH Units issued in connection with the Tracker/Sequel Acquisitions | | 6,200,000 | | | | | — | | | | | 6,200,000 | |
EEH Units and Class B Common Stock converted to Class A Common Stock | | 655,376 | | | | | (655,376) | | | | | — | |
EEH Units issued in connection with the vesting of restricted stock units and performance-based units | | 773,666 | | | | | — | | | | | 773,666 | |
As of September 30, 2021 | | 50,692,057 | | | 59.6 | % | | 34,353,995 | | | 40.4 | % | | 85,046,052 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | EEH Units Held By Earthstone and Lynden US | | % | | EEH Units Held By Others | | % | | Total EEH Units Outstanding |
As of December 31, 2021 | | 53,467,307 | | | 60.9 | % | | 34,344,532 | | | 39.1 | % | | 87,811,839 | |
EEH Units issued in connection with the Chisholm Acquisition | | 19,417,476 | | | | | — | | | | | 19,417,476 | |
EEH Units issued in connection with the Bighorn Acquisition | | 5,650,977 | | | | | — | | | | | 5,650,977 | |
EEH Units issued in connection with the Conversion of Preferred Stock | | 25,225,225 | | | | | — | | | | | 25,225,225 | |
EEH Units issued in connection with the Titus Acquisition | | 3,857,015 | | | | | — | | | | | 3,857,015 | |
EEH Units and Class B Common Stock converted to Class A Common Stock | | 82,891 | | | | | (82,891) | | | | | — | |
EEH Units issued in connection with the vesting of restricted stock units and performance-based units | | 716,035 | | | | | — | | | | | 716,035 | |
As of September 30, 2022 | | 108,416,926 | | | 76.0 | % | | 34,261,641 | | | 24.0 | % | | 142,678,567 | |
| | | | | | | | | | |
Note 7. Net Income (Loss) Per Common Share
Net income (loss) per common share—basic is calculated by dividing Net income (loss) by the weighted average number of shares of common stock outstanding during the period. Net income (loss) per common share—diluted assumes the conversion of all potentially dilutive securities and is calculated by dividing Net income (loss) by the sum of the weighted average number of shares of common stock, as defined above, outstanding plus potentially dilutive securities. Net income (loss) per common share—diluted considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares, as defined above, would have an anti-dilutive effect.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
A reconciliation of Net income (loss) per common share is as follows:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands, except per share amounts) | (In thousands, except per share amounts) | | 2021 | | 2020 | | 2021 | | 2020 | (In thousands, except per share amounts) | | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) attributable to Earthstone Energy, Inc. | Net income (loss) attributable to Earthstone Energy, Inc. | | $ | 10,418 | | | $ | (5,445) | | | $ | (4,286) | | | $ | (5,076) | | Net income (loss) attributable to Earthstone Energy, Inc. | | $ | 211,456 | | | $ | 10,418 | | | $ | 322,863 | | | $ | (4,286) | |
| Net income (loss) attributable to Earthstone Energy, Inc. from assumed conversion of Series A Convertible Preferred Stock (2) | | Net income (loss) attributable to Earthstone Energy, Inc. from assumed conversion of Series A Convertible Preferred Stock (2) | | 1,068 | | | — | | | 12,388 | | | — | |
| Net income (loss) attributable to Earthstone Energy, Inc. - Diluted | | Net income (loss) attributable to Earthstone Energy, Inc. - Diluted | | $ | 212,524 | | | $ | 10,418 | | | $ | 335,251 | | | $ | (4,286) | |
| Net income (loss) per common share attributable to Earthstone Energy, Inc.: | Net income (loss) per common share attributable to Earthstone Energy, Inc.: | | Net income (loss) per common share attributable to Earthstone Energy, Inc.: | |
Basic | Basic | | $ | 0.21 | | | $ | (0.18) | | | $ | (0.09) | | | $ | (0.17) | | Basic | | $ | 2.01 | | | $ | 0.21 | | | $ | 3.91 | | | $ | (0.09) | |
Diluted | Diluted | | $ | 0.20 | | | $ | (0.18) | | | $ | (0.09) | | | $ | (0.17) | | Diluted | | $ | 1.94 | | | $ | 0.20 | | | $ | 3.61 | | | $ | (0.09) | |
| Weighted average common shares outstanding | Weighted average common shares outstanding | | Weighted average common shares outstanding | |
Basic | Basic | | 49,243,185 | | | 30,073,635 | | | 45,406,952 | | | 29,810,705 | | Basic | | 105,254,778 | | | 49,243,185 | | | 82,483,635 | | | 45,406,952 | |
Add potentially dilutive securities: | Add potentially dilutive securities: | | | | | | | | | Add potentially dilutive securities: | | | | | | | | |
Unvested restricted stock units (1) | Unvested restricted stock units (1) | | 525,475 | | | — | | | — | | | — | | Unvested restricted stock units (1) | | 353,889 | | | 525,475 | | | 466,453 | | | — | |
Unvested performance units (1) | Unvested performance units (1) | | 2,894,282 | | | — | | | — | | | — | | Unvested performance units (1) | | 2,024,871 | | | 2,894,282 | | | 2,133,158 | | | — | |
Series A Convertible Preferred Stock (2) | | Series A Convertible Preferred Stock (2) | | 1,645,123 | | | — | | | 7,761,608 | | | — | |
Diluted weighted average common shares outstanding | Diluted weighted average common shares outstanding | | 52,662,942 | | | 30,073,635 | | | 45,406,952 | | | 29,810,705 | | Diluted weighted average common shares outstanding | | 109,278,661 | | | 52,662,942 | | | 92,844,854 | | | 45,406,952 | |
|
(1)For the three months ended September 30, 2021, theThe 1,099,800 performance units granted on January 27, 2021 were excluded for all periods presented due to an assumed settlement in cash and the liability treatment described in Note 9. Stock-Based Compensation.Compensation. For the nine months ended September 30, 2021, there waswere no dilutive effect related to unvested restricted stock units or performance units due to the loss for the period. For the three and nine months ended September 30, 2020, there was no dilutive effecteffects related to unvested restricted stock units or performance units due to the loss for the period.
(2)On April 14, 2022, Earthstone issued 280,000 shares of Series A Convertible Preferred Stock which automatically converted into 25,225,225 shares of Class A Common Stock on July 6, 2022. Under the “If-Converted” method, the shares would have been assumed issued on April 14, 2022, which would have resulted in an additional allocation of Net income (loss) attributable to Earthstone Energy, Inc. of $1.1 million and $12.4 million for the three and nine months ended September 30, 2022, respectively.
The Class B common stock, $0.001Common Stock, par value $0.001 per share of Earthstone (the “Class B Common Stock” and with the Class A Common Stock, the “Common Stock”), has been excluded, as its conversion would eliminate noncontrolling interest and net income attributable to noncontrolling interest of $87.9 million for the three months ended September 30, 2022 and net income attributable to noncontrolling interest of $142.6 million for the nine months ended September 30, 2022 would be added back to Net income attributable to Earthstone Energy, Inc. for the periods then ended, having an antidilutive effect on Net income per common share attributable to Earthstone Energy, Inc.
The Class B Common Stock has been excluded, as its conversion would eliminate noncontrolling interest and net income attributable to noncontrolling interest of $8.4 million for the three months ended September 30, 2021 and net loss attributable to noncontrolling interest of $3.3 million for the nine months ended September 30, 2021 would be added back to Net loss attributable to Earthstone Energy, Inc. for the periods then ended, having an antidilutive effect on Net loss per common share attributable to Earthstone Energy, Inc.
Note 8. Common Stock and Preferred Stock
Class A Common Stock
At September 30, 2022 and December 31, 2021, there were 108,416,926 and 53,467,307 shares of Class A Common Stock issued and outstanding, respectively. In connection with the Chisholm Acquisition, on February 15, 2022, Earthstone issued 19,417,476 shares of Class A Common Stock valued at approximately $249.5 million on that date. In connection with the Bighorn Acquisition, on April 14, 2022, Earthstone issued 5,650,977 shares of Class A Common Stock valued at approximately $77.8 million on that date. In connection with the Titus Acquisition, on August 10, 2022, Earthstone issued 3,857,015 shares of Class A Common Stock valued at approximately $53.6 million on that date.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
ended September 30, 2021 would be added back to Net income (loss) attributable to Earthstone Energy, Inc. for the periods then ended, having no dilutive effect on Net income (loss) per common share attributable to Earthstone Energy, Inc.
The Class B Common Stock has been excluded, as its conversion would eliminate noncontrolling interest and net loss attributable to noncontrolling interest of $6.4 million for the three months ended September 30, 2020 and net income attributable to noncontrolling interest of $6.0 million for the nine months ended September 30, 2020 would be added back to Net (loss) income attributable to Earthstone Energy, Inc. for the periods then ended, having no dilutive effect on Net (loss) income per common share attributable to Earthstone Energy, Inc.
Note 8. Common Stock
Class A Common Stock
At September 30, 2021 and December 31, 2020, there were 50,692,057 and 30,343,421 shares of Class A Common Stock issued and outstanding, respectively. In connection with the IRM Acquisition, on January 7, 2021, Earthstone issued 12,719,594 shares of Class A Common Stock valued at approximately $76.6 million on that date. Additionally, in connection with the Tracker/Sequel Acquisitions, on July 20, 2021, Earthstone issued 6,200,000 shares of Class A Common Stock valued at approximately $61.8 million on that date.
During the three and nine months ended September 30, 2021,2022, as a result of the vesting and settlement of performance units and restricted stock units under the Earthstone Energy, Inc. Amended and Restated 2014 Long-Term Incentive Plan, as amended (the “2014 Plan”), Earthstone 220,219issued 165,336 and 1,162,8791,099,232 shares, respectively, of Class A Common Stock, of which 65,10648,073 and 389,213383,197 shares, respectively, of Class A Common Stock were retained as treasury stock and canceled to satisfy the related employee income tax liability. For further discussion, see Note 9. Stock-Based Compensation.
During the three and nine months ended September 30, 2020,2021, (1) in connection with the IRM Acquisition, on January 7, 2021, Earthstone issued 12,719,594 shares of Class A Common Stock valued at approximated $76.6 million on that date, (2) as a result of the vesting and settlement of performance units and restricted stock units under the 2014 Plan, Earthstone issued 195,344220,219 and 726,0821,162,879 shares, respectively, of Class A Common Stock, of which 54,26865,106 and 187,773389,213 shares, respectively, of Class A Common Stock were retained as treasury stock and canceled to satisfy the related employee income tax liability. Additionally,liability and (3) as discussed below, shares of Class A Common Stock were issued as the result of conversions of Class B Common Stock.
Class B Common Stock
At September 30, 20212022 and December 31, 2020,2021, there were 34,353,99534,261,641 and 35,009,37134,344,532 shares of Class B Common Stock issued and outstanding, respectively. Each share of Class B Common Stock, together with 1one EEH Unit, is convertible into 1one share of Class A Common Stock. There were no conversions of shares of Class B Common Stock during the three months ended September 30, 2022. During the nine months ended September 30, 2022, 82,891 shares of Class B Common Stock and EEH Units were exchanged for an equal number of shares of Class A Common Stock. During the three and nine months ended September 30, 2021, 43,882 and 655,376 shares, respectively, of Class B Common Stock and EEH Units were exchanged for an equal number of shares of Class A Common Stock. During
Series A Convertible Preferred Stock
On January 30, 2022, Earthstone entered into a securities purchase agreement (the “SPA”) with EnCap Energy Capital Fund XI, L.P. (“EnCap Fund XI”), an affiliate of EnCap Investments L.P. (“EnCap”), and Cypress Investments, LLC, a fund managed by Post Oak Energy Capital, LP (“Post Oak” and collectively with EnCap Fund XI, the three and nine months ended September 30, 2020, 49,316 and 251,309“Investors”) to sell, in a private placement (the “Private Placement”), 280,000 shares respectively, of Class B Common Stock and EEH Units were exchanged for an equal numbernewly authorized convertible preferred stock, $0.001 par value per share (the “Series A Convertible Preferred Stock”), each share of which would be convertible into 90.0900900900901 shares of Class A Common Stock for anticipated gross proceeds of $280.0 million, at a price of $1,000.00 per share of Series A Convertible Preferred Stock (or $11.10 per share of Class A Common Stock on an as-converted basis). The Private Placement was contingent upon the closing of the Bighorn Acquisition. The Company used the net proceeds from the sale of the Series A Convertible Preferred Stock to partially fund the Bighorn Acquisition. See Note 12. Related Party Transactions for further discussion.
On April 14, 2022, Earthstone, EnCap Fund XI and Cypress consummated the sale and issuance of 280,000 shares of Series A Convertible Preferred Stock pursuant to the SPA in exchange for cash proceeds of $279.3 million, net of offering costs.
On July 6, 2022, the Series A Convertible Preferred Stock automatically converted into 25,225,225 shares of Class A Common Stock. As such, the Series A Convertible Preferred Stock is no longer outstanding and the Investors were issued the 25,225,225 shares of Class A Common Stock upon the conversion of the Series A Convertible Preferred Stock.
On July 15, 2022, Earthstone filed a certificate of elimination with the Secretary of State of the State of Delaware eliminating all provisions of the certificate of designations previously filed by Earthstone with the Secretary of State of the State of Delaware on April 13, 2022 related to the Series A Convertible Preferred Stock.
At September 30, 2022 and December 31, 2021, there were no shares of Series A Convertible Preferred Stock issued or outstanding.
Note 9. Stock-Based Compensation
Restricted Stock Units
The 2014 Plan, allows, among other things, for the grant of restricted stock units (“RSUs”). As of September 30, 2021,2022, the maximum number of shares of Class A Common Stock that may be issued under the 2014 Plan was 12.0 million shares.
Each RSU represents the contingent right to receive 1one share of Class A Common Stock. The holders of outstanding RSUs do not receive dividends or have voting rights prior to vesting and settlement. The Company determines the fair value of granted RSUs based on the market price of the Class A Common Stock on the date of the grant. Compensation expense for granted RSUs is recognized on a straight-line basis over the vesting period and is net of forfeitures, as incurred. Stock-based
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
compensation is included in General and administrative expense in the Condensed Consolidated Statements of Operations and is recorded with a corresponding increase in Additional paid-in capital within the Condensed Consolidated Balance Sheets.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The table below summarizes RSU award activity for the nine months ended September 30, 2021:2022:
| | | | Shares | | Weighted-Average Grant Date Fair Value | | | Shares | | Weighted-Average Grant Date Fair Value |
Unvested RSUs at December 31, 2020 | | 1,050,908 | | | $ | 5.55 | | |
Unvested RSUs at December 31, 2021 | | Unvested RSUs at December 31, 2021 | | 771,817 | | | $ | 5.91 | |
Granted | Granted | | 553,100 | | | $ | 5.38 | | Granted | | 511,615 | | | $ | 13.75 | |
Forfeited | Forfeited | | (15,333) | | | $ | 5.13 | | Forfeited | | (14,934) | | | $ | 7.93 | |
Vested | Vested | | (707,879) | | | $ | 5.75 | | Vested | | (491,107) | | | $ | 7.77 | |
Unvested RSUs at September 30, 2021 | | 880,796 | | | $ | 5.30 | | |
Unvested RSUs at September 30, 2022 | | Unvested RSUs at September 30, 2022 | | 777,391 | | | $ | 9.86 | |
|
As of September 30, 2021,2022, there was $4.6$7.2 million of unrecognized compensation expense related to the RSU awards which will be recognized over a weighted average period of 0.871.28 years.
For the three and nine months ended September 30, 2022, Stock-based compensation related to RSUs was $1.5 million and $4.2 million, respectively. For the three and nine months ended September 30, 2021, Stock-based compensation related to RSUs was $1.2 million and $3.9 million, respectively. For the three and nine months ended September 30, 2020, Stock-based compensation related to RSUs was $1.2 million and $4.2 million, respectively.
Performance Units
The table below summarizes PSU activity for the nine months ended September 30, 2021:2022:
| | | | Shares | | Weighted-Average Grant Date Fair Value | | | Shares | | Weighted-Average Grant Date Fair Value |
Unvested PSUs at December 31, 2020 | | 1,879,425 | | | $ | 7.65 | | |
Unvested PSUs at December 31, 2021 | | Unvested PSUs at December 31, 2021 | | 2,751,725 | | | $ | 8.42 | |
Granted | Granted | | 1,099,800 | | | $ | 10.85 | | Granted | | 472,485 | | | $ | 19.42 | |
| Vested | Vested | | (227,500) | | | $ | 13.75 | | Vested | | (608,125) | | | $ | 9.30 | |
Unvested PSUs at September 30, 2021 | | 2,751,725 | | | $ | 8.42 | | |
Unvested PSUs at September 30, 2022 | | Unvested PSUs at September 30, 2022 | | 2,616,085 | | | $ | 10.20 | |
|
On January 27, 2021,30, 2020, the Board of Directors of Earthstone (the “Board”) granted 1,099,8001,043,800 PSUs (the “2021“2020 PSUs”) to certain officers pursuant to the 2014 Plan. The 2020 PSUs are expected to be paid in shares of Class A Common Stock upon the achievement by Earthstone over a period commencing on February 1, 2020 and ending on January 31, 2023 (the “2020 Performance Period”) of certain performance criteria established by the Board.
On February 1, 2022, the Board granted 472,485 PSUs (the “2022 PSUs”) to certain officers pursuant to the 2014 Plan. The 2022 PSUs are expected to be paid in shares of Class A Common Stock upon the achievement by Earthstone over a period commencing on January 1, 2022 and ending on December 31, 2024 (the “2022 Performance Period”) of certain performance criteria established by the Board.
The Company classifies 2020 PSUs and 2022 PSUs as equity awards as they are expected to be settled in shares. In the event that a PSU grant is expected to be settled in cash, it is alternatively classified as a liability award.
The 2020 PSUs and 2022 PSUs are eligible to be earned based on the annualized Total Shareholder Return (“TSR”) of the Class A Common Stock during 2020 Performance Period and 2022 Performance Period, respectively. Between 0x to 2.0x of the Performance Units are eligible to be earned based on Earthstone achieving an annualized TSR based on the following pre-established goals:
| | | | | | | | |
Earthstone’s Annualized TSR | | TSR Multiplier |
23.9% or greater | | 2 |
14.5% | | 1 |
8.4% | | 0.5 |
Less than 8.4% | | 0 |
The Company accounts for 2020 PSUs and 2022 PSUs as market-based awards which were valued utilizing the Monte Carlo Simulation pricing model, which calculated multiple potential outcomes for an award and established grant date fair value
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
based on the most likely outcome. For the 2020 PSUs, assuming a risk-free rate of 1.4% and volatility of 62.0%, the Company calculated the weighted average grant date fair value per PSU to be $5.36. For the 2022 PSUs, assuming a risk-free rate of 1.4% and volatility of 86.0%, the Company calculated the weighted average grant date fair value per PSU to be $19.42.
On January 27, 2021, the Board granted 1,099,800 PSUs to certain officers pursuant to the 2014 Plan (the “2021 Grant”PSUs”). The 2021 PSUs are payable in cash or shares of Class A Common Stock upon the achievement by the Company over a period commencing on January 1, 2021 and ending on December 31, 2023 (the “Performance Period”) of certain performance criteria established by the Board. The Company classifies these awards that will be settled in cash as liability awards. All previous PSU grants will be settled in shares andawards as they are classified as equity awards.
The 2021 PSUs are eligibleexpected to be earned based on the annualized Total Shareholder Return (“TSR”)paid in cash. As of the Class A Common Stock during a three-year period beginning on February 1, 2021. Between 0x to 2.0x of the Performance Units are eligible to be earned based on Earthstone achieving an annualized TSR based on the following pre-established goals:
| | | | | | | | |
Earthstone’s Annualized TSR | | TSR Multiplier |
20.5% or greater | | 2 |
14.5% | | 1 |
7.7% | | 0.5 |
Less than 7.7% | | 0 |
The Company accounts for these awards as market-based awards which are valued quarterly utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an awardSeptember 30, 2022 and establishes grant date fair value based on the most likely outcome. For theDecember 31, 2021, PSUs, assuming a risk-free rate of 0.3% and volatility of 86.0%, the Company calculated the weighted average grant date fair value per PSU to be $10.85. Based on the fair value of the 2021 PSUs, the Company recorded stock-based compensation expense of $0.7$13.5 million and $3.7$6.3 million, during the three and nine months ended September 30, 2021, respectively. A corresponding liability of $3.7 million related to the 2021 PSUs isrespectively, have been included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of September 30, 2021.Sheets related to the 2021 PSUs.
On FebruaryJanuary 28, 2018,2019, the Board granted 252,500669,550 PSUs to certain named executive officers pursuant to the 2014 Plan.Plan (the “2019 PSUs”). The 2019 PSUs were payable in shares of Class A Common Stock based upon the achievement by the CompanyEarthstone over a period commencing on February 28, 20181, 2019 and ending on February 28, 2021January 31, 2022 of performance criteria established by the Board. On March 18, 2021,January 31, 2022, the Company settled the remaining 227,500608,125 PSUs, net of forfeitures, based on the achievementat a rate of the 200% target, resulting in1.97x. 1.0x was settled through the issuance of 455,000608,125 shares of Class A Common Stock.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock and the remainder was settled in cash.As of September 30, 2021,2022, there was $15.3$17.7 million of unrecognized compensation expense related to all PSU awards which will be amortized over a weighted average period of 1.051.10 years.
For the three and nine months ended September 30, 2022, Stock-based compensation related to all PSUs was approximately $1.8 million and $10.9 million, respectively. For the three and nine months ended September 30, 2021, Stock-based compensation related to all PSUs was approximately $1.7 million and $6.7 million, respectively. ForA liability of $13.5 million related to the three and nine months endedPSU liability awards is included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of September 30, 2020, Stock-based compensation related to all PSUs was approximately $1.2 million and $3.5 million, respectively.2022.
Note 10. Long-Term Debt
The Company's long-term debt consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
Revolving credit facility(1) | | $ | 391,732 | | | $ | 320,000 | |
Term loan under credit facility due 2027 | | 250,000 | | | — | |
8.000% Senior notes due 2027 | | 550,000 | | | — | |
| | 1,191,732 | | | 320,000 | |
Unamortized debt issuance costs on term loan | | (5,591) | | | — | |
Unamortized debt issuance costs on 8.000% Senior notes | | (11,592) | | | — | |
Long-term debt, net | | $ | 1,174,549 | | | $ | 320,000 | |
| | | | |
(1)Related to the revolving credit facility borrowings, the Company had debt issuance costs of $16.2 million and $6.7 million, net of accumulated amortization of $5.7 million and $3.3 million, as of September 30, 2022 and December 31, 2021, respectively. Unamortized deferred financing costs on the revolving credit facility borrowings are included in Other noncurrent assets in the Condensed Consolidated Balance Sheets.
Credit FacilityAgreement
On November 21, 2019, Earthstone, EEH (the “Borrower”), Wells Fargo Bank, National Association, as Administrative Agent and Issuing Bank (“Wells Fargo”), Royal Bank of Canada, as Syndication Agent, BOKF, NA dba Bank of Texas (“BOKF”) as Issuing Bank with respect to Existing Letters of Credit, SunTrust Bank, as Documentation Agent, and the lenders party thereto (the “Lenders”) entered into a credit agreement (the(together with all amendments or other modifications, the “Credit Facility”Agreement”), which replaced the prior credit facility, which was terminated on November 21, 2019.
On December 17, 2020,January 30, 2022, Earthstone, EEH, as Borrower, Wells Fargo as Administrative Agent, the guarantors party thereto, and the lenders party thereto (the “Lenders”) entered into an amendment (the “Second Amendment”) to the credit agreement dated November 21, 2019, by and among EEH, as Borrower, Earthstone, as Parent, Wells Fargo, as Administrative Agent and Issuing Bank, BOKF, NA dba Bank of Texas, as Issuing Bank with respect to Existing Letters of Credit, Royal Bank of Canada, as Syndication Agent, Truist Bank, as successor by merger to SunTrust Bank, as Documentation Agent, and the Lenders party thereto (collectively, the “Parties”) to the Credit Agreement. The Second Amendment was effective upon the closing of the IRM Acquisition described in Note 4. Acquisitions. Among other things, the Second Amendment (i) joined certain financial institutions as additional lenders, increased the borrowing base from $240.0 million to $360.0 million, (ii) increased the interest rate on outstanding borrowings; and (iii) adjusted some of the financial covenants.
On April 20, 2021, the Parties entered into an amendment (the “Third Amendment”) to the Credit Agreement under which the borrowing base increased from $360 million to $475 million in connection with its regularly scheduled redetermination. Further, the Third Amendment provided for an increase in the borrowing base from $475 million to $550 million which became effective on July 20, 2021 upon closing of the Tracker/Sequel Purchase Agreements described in Note 4. Acquisitions.
On September 17, 2021, Earthstone, EEH, as Borrower, Wells Fargo as Administrative Agent and Issuing Bank, the lenders party thereto (the “Lenders”) and the guarantors party thereto entered into an amendmentamended and restated Fifth Amendment (the “Fourth“Fifth Amendment”) to the Credit Agreement. Among other things, the FourthFifth Amendment increased the borrowing base and corresponding elected commitments from $650 million to $825 million upon the closing of the Chisholm Agreement.
On April 12, 2022, EEH issued $550.0 million aggregate principal amount of unsecured 8.000% senior notes due 2027 (the “Notes”). EEH received net proceeds from the offering (the “Notes Offering”) which reduced the elected commitments by $500 million.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
On April 14, 2022, in connection with the Notes Offering, the Company voluntarily elected to reduce commitments under the borrowing base of the Credit Agreement to $800 million.
On June 2, 2022, the Company, EEH, Wells Fargo, the Lenders and the guarantors party thereto entered into an amendment (the “Sixth Amendment”) to the Credit Agreement. Among other things, the Sixth Amendment extended the maturity of the Credit Agreement to June 2027, increased the borrowing base from $1.325 billion to $1.4 billion and reduced the interest rate for amounts outstanding. Elected commitments under the Credit Agreement remained at $800 million.
On August 10, 2022, Earthstone, EEH, Wells Fargo as Administrative Agent, the Lenders and the guarantors party thereto entered into an amendment (the “Seventh Amendment”) to the Credit Agreement. Among other things, the Seventh Amendment increased the borrowing base from $550$1.4 billion to $1.7 billion and increased elected commitments from $800 million to $650$1.2 billion.
The Seventh Amendment also established a fully funded $250 million in connection with its regularly scheduled semi-annual redetermination, added provisions to provide for the eventual replacement of LIBORterm loan tranche as a benchmark interest rate, made certain changes toportion of the lenders$1.2 billion of available commitments under the Credit Agreement and made certain other administrative changes(the “Term Loan”), with the remaining $950 million of commitments in the form of revolving commitments. The Term Loan is fully pre-payable without premium or penalty, subject to the satisfaction of certain specified conditions, and bears an interest rate of Term SOFR (as defined in the Credit Agreement.Agreement) plus 3.25%, increasing by 0.25% each 180-day period following the Term Loan funding. The Term Loan is co-terminus with the revolving loans' maturity date of June 2, 2027, subject to the Springing Maturity Date (as defined in the Credit Agreement) applicable to revolving loans and term loans. The interest rate applicable to revolving loans remains a rate of Term SOFR plus an applicable margin between 2.25% and 3.25%, depending upon borrowing base utilization.
On September 29, 2022, in connection with a regularly scheduled borrowing base redetermination, the borrowing base increased from $1.7 billion to $1.85 billion.
The next regularly scheduled redetermination of the borrowing base is expected to occur on or around May 1, 2022.2023. Subsequent redeterminations are expected to occur on or about each November 1st and May 1st thereafter. The amounts borrowed under the Credit FacilityAgreement bear annual interest rates at either (a) the adjusted LIBOSOFR Rate (as customarily defined) (the “Adjusted LIBOTerm SOFR Rate”) plus 2.50%2.25% to 3.75%3.25% or (b) the sum of (i) the greatest of (A) the prime rate of Wells Fargo, (B) the federal funds rate plus ½ of 1.0%, and (C) the Adjusted LIBOTerm SOFR Rate for an interest rate period of one month plus 1.0%, (ii) plus 1.50%1.25% to 2.75%2.25%, depending on the amount borrowed under the Credit Facility.Agreement. Principal amounts outstanding under the Credit FacilityAgreement are due and payable in full at maturity on November 21, 2024.June 2, 2027. All of the obligations under the Credit Facility,Agreement, and the guarantees of those obligations, are secured by substantially all of EEH’s assets. Additional payments due under the Credit FacilityAgreement include paying a commitment fee of 0.375% to 0.50% per year, depending on the amount borrowed under the Credit Facility,Agreement, to the Lenders in respect of the unutilized commitments thereunder. EEH is also required to pay customary letter of credit fees.
Effective May 2020, the Company entered into certain interest rate swaps, exchanging the LIBO Rate for a fixed rate of 0.286% (the “Swap”). The initial notional amount of the Swap is $125 million through May 2022 and decreases to $100 million through May 2023 and $75 million through May 2024.
The Credit FacilityAgreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, EEH’s ability to incur additional indebtedness, create liens on assets, make investments, pay dividends and distributions or repurchase its limited liability interests, engage in mergers or consolidations, sell certain assets, sell or discount any notes receivable or accounts receivable and engage in certain transactions with affiliates.
In addition, the Credit FacilityAgreement requires EEH to maintain the following financial covenants: a current ratio, (as such term is defined in the Credit Agreement) of not less than 1.0 to 1.0 and a consolidated leverage ratio of not greater than 3.5 to 1.0. Consolidated leverage ratio means the ratio of (i) the aggregate debt of EEH and its consolidated subsidiaries as at the last day
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
of the fiscal quarter to (ii) EBITDAX for the applicable period, which, for the period ended September 30, 2022, was calculated asby multiplying EBITDAX for the fourtwo consecutive fiscal quarters ending on such date.date by two. The term “EBITDAX” means, for any period, the sum of consolidated net income (loss) for such period plus (a) the following expenses or charges to the extent deducted from consolidated net income (loss) in such period: (i) interest, (ii) taxes, (iii) depreciation, (iv) depletion, (v) amortization, (vi) certain distributions to employees related to the stock compensation, (vii) certain transaction related expenses, (viii) reimbursed indemnification expenses related to certain dispositions and investments, (ix) non-cash extraordinary, usual, or nonrecurring expenses or losses, (x) other non-cash charges and minus (b) to the extent included in consolidated net income (loss) in such period: (i) non-cash income, (ii) gains on asset dispositions, disposals and abandonments outside of the ordinary course of business and (iii) to the extent not otherwise deducted from consolidated net income (loss), the aggregate amount of any pass-through cash distributions received by Borrower during such period in an amount equal to the aggregate amount of pass-through cash distributions actually made by Borrower during such period.
The Credit FacilityAgreement contains customary affirmative covenants and defines events of default to include failure to pay principal or interest, breach of covenants, breach of representations and warranties, insolvency, judgment default and a change in control. Upon the occurrence and continuance of an event of default, the Lenders have the right to accelerate repayment of the loans and exercise their remedies with respect to the collateral. As of September 30, 2021,2022, EEH was in compliance with the covenants under the Credit Facility.Agreement.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of September 30, 2021, $278.32022, $391.7 million and $250.0 million of borrowings were outstanding under the revolving tranche and the term loan tranche of the Credit Agreement, respectively, bearing annual interest of 3.153%5.824% and 6.100%, respectively, resulting in an additional $371.7$558.3 million of borrowing base availability under the Credit Facility.Agreement. At December 31, 2020,2021, there were $115.0$320.0 million of borrowings outstanding under the Credit Facility.Agreement.
For the three and nine months ended September 30, 2021,2022, interest on borrowings under the revolving tranche of the Credit Facility, the Company had borrowingsAgreement averaged 4.75% and 4.29% per annum, respectively, which excluded commitment fees of $503.7$1.0 million and $340.5$1.1 million, in repaymentsrespectively, and amortization of borrowings.
deferred financing costs of $0.8 million and $2.4 million, respectively. For the three and nine months ended September 30, 2022, interest on borrowings under the term loan tranche of the Credit Agreement averaged 6.01% and 6.01% per annum, respectively, which excluded amortization of deferred financing costs of $0.2 million and $0.2 million, respectively. For the three and nine months ended September 30, 2021, interest on borrowings under the Credit FacilityAgreement averaged 3.66% and 3.47% per annum, respectively, which excluded commitment fees of $0.2 million and $0.6 million, respectively, and amortization of deferred financing costs of $0.2 million and $0.6 million, respectively. For
During the three and nine months ended September 30, 2020, interest on borrowings under2022, the Credit Facility averaged 2.48% and 2.89% per annum, respectively, which excluded commitment fees of $0.2Company capitalized $3.6 million and $0.5$15.2 million, respectively, and amortization of deferred financing costs of $0.1 million and $0.2 million, respectively.
The Company’s policy is to capitalize the financing costs associated with its debtthe revolving tranche of the Credit Agreement and amortize those costs on a straight-line basis over$5.8 million and $5.8 million, respectively, associated with the term loan tranche of the associated debt. These capitalized costs are included in Other noncurrent assets in the Condensed Consolidated Balance Sheets.Credit Agreement. During the three and nine months ended September 30, 2021, the Company capitalized $1.0 million and $2.8 million, respectively, of costs associated with the Credit Facility.Agreement. The Company’s policy is to capitalize the financing costs associated with the Credit Agreement and amortize those costs on a straight-line basis over the term of the associated debt.
8.000% Senior Notes
EEH received net proceeds from the Notes Offering of approximately $537.2 million (after deducting underwriting discounts and commissions) which was used primarily to fund the Bighorn Acquisition and the remainder for general corporate purposes.
On April 12, 2022, in connection with the completion of the Notes Offering, EEH entered into an indenture, dated as of April 12, 2022 (the “Indenture”), among EEH, the guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee.
The Notes will mature on April 15, 2027 with interest accruing at a rate of 8.000% per annum payable semi-annually in cash in arrears on April 15 and October 15 of each year, commencing October 15, 2022. Before April 15, 2024, EEH may redeem some or all of the Notes at a redemption price equal to 100% of the aggregate principal amount of the Notes redeemed plus the “applicable premium” as of and accrued and unpaid interest, if any, to, but excluding, the date of redemption. EEH may redeem, at its option, all or part of the Notes at any time on or after April 15, 2024, at the applicable redemption price plus accrued and unpaid interest to, but not including, the date of redemption. Further, before April 15, 2024, EEH may on one or more occasions redeem up to 35% of the aggregate principal amount of the Notes in an amount not exceeding the net proceeds from one or more private or public equity offerings at a redemption price of 108.000% of the principal amount of the Notes, plus accrued and unpaid interest to the date of redemption, if at least 65% of the aggregate principal amount of the Notes remains outstanding immediately after such redemption and the redemption occurs within 180 days of the closing date of each such equity offering. Upon a Change of Control (as defined in the Indenture) EEH must offer to repurchase the Notes on terms and conditions set forth in detail in the Indenture.
The Notes are guaranteed on a senior unsecured basis by the Company and its subsidiaries (the “Guarantors”) and may be guaranteed by certain of EEH’s future restricted subsidiaries. The Notes are unsecured, rank equally in right of payment with all existing and future senior unsecured indebtedness of EEH and the Guarantors and rank senior in right of payment to any future subordinated indebtedness of EEH and the Guarantors. The Notes will rank effectively junior to all secured indebtedness of EEH and the Guarantors, including indebtedness under EEH’s revolving credit facility, to the extent of the value of the assets securing such indebtedness. The Notes will rank structurally junior in right of payment to all indebtedness and other liabilities, including trade payables, of any future subsidiary of EEH that are not guarantors.
The Indenture restricts EEH’s ability and the ability of its Restricted Subsidiaries (as defined in the Indenture), including the Guarantors, to: (i) incur or guarantee additional indebtedness or issue certain types of preferred stock; (ii) pay dividends on capital stock or redeem, repurchase or retire its capital stock or subordinated indebtedness; (iii) transfer or sell assets; (iv) make investments; (v) create certain liens; (vi) enter into agreements that restrict dividends or other payments from its Restricted Subsidiaries to EEH; (vii) consolidate, merge or transfer all or substantially all of its assets; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries. These covenants are subject to important exceptions and qualifications set forth in the Indenture. If the Notes achieve an Investment Grade Rating (as defined in the Indenture) or better from two of three of Moody’s Investors Service, Inc., S&P Global Ratings, or Fitch Ratings, Inc., many of these covenants will be suspended.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Indenture contains customary events of default (each an “Event of Default”). If an Event of Default occurs and is continuing, the Trustee or the holders of not less than 25% in aggregate principal amount of the outstanding Notes may declare the unpaid principal of, premium, if any, and accrued but unpaid interest on, all the Notes then outstanding to be due and payable. Upon such a declaration, such principal, premium, if any, and interest will be due and payable immediately. If an Event of Default relating to certain events of bankruptcy or insolvency of EEH or any Significant Subsidiary (as defined in the Indenture) occurs, the principal of, premium, if any, and the interest on, all the Notes will become immediately due and payable without any declaration or other act on the part of the Trustee or any holders of the Notes. Under certain circumstances, the holders of a majority in principal amount of the outstanding Notes may rescind any such acceleration with respect to the Notes and its consequences.
During the three and nine months ended September 30, 2022, the Company capitalized $12.7 million of costs associated with the Notes. No costs associated with the Credit FacilityNotes were capitalized during the three and nine months ended September 30, 2020.2021. The Company’s policy is to capitalize the debt issuance costs associated with the Notes and amortize those costs on a straight-line basis over the term of the Notes.
As of September 30, 2022, accrued interest of $20.7 million associated with the Notes was included in Accrued expenses in the Condensed Consolidated Balance Sheets.
Note 11. Asset Retirement Obligations
The Company has asset retirement obligations associated with the future plugging and abandonment of oil and gas properties and related facilities. Revisions to the liability typically occur due to changes in the estimated abandonment costs, well economic lives, and the discount rate.
The following table summarizes the Company’s asset retirement obligation transactions recorded during the nine months ended September 30, 2022 (in thousands):
| | | | | | | | | | |
| | 20212022 | | |
Beginning asset retirement obligations | | $ | 3,02715,866 | | | |
Liabilities incurred | | 103342 | | | |
Liabilities settled | | (103)(665) | | | |
Acquisitions | | 11,46620,078 | | | |
Accretion expense | | 9161,863 | | | |
Divestitures | | (41)(1,087) | | | |
Revision of estimates | | 140381 | | | |
Ending asset retirement obligations | | $ | 15,50836,778 | | | |
| | | | |
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 12. Related Party Transactions
FASB ASC Topic 850,, Related Party Disclosures,, requires that information about transactions with related parties that would make a difference in decision making shall be disclosed so that users of the financial statements can evaluate their significance. The Audit Committee of the Board of Directors of Earthstone independently reviews and approves all related party transactions.
Earthstone has two significant shareholders that consist of various investment funds managed by each of the two private equity firms who may manage other investments in entities with which the Company interacts in the normal course of business. Onbusiness (the “Significant Shareholders” or separately, each a “Significant Shareholder”).
As discussed in Note 4. Acquisitions, the Chisholm Acquisition was consummated on February 12, 2020,15, 2022, whereby the Company sold certainacquired the Chisholm Assets for a purchase price of its interests$377.5 million in oilcash, net of customary purchase price adjustments, and natural gas leases and wells in an arm’s length transaction to a portfolio companyapproximately 19.4 million shares of oneClass A Common Stock. A Significant Shareholder was the majority owner of Chisholm as of the aforementioned shareholder (not under common control) (the “Significant Shareholder”) for cash considerationclosing of the Chisholm Acquisition. The deferred payment of $70 million as of March 31, 2022 was paid on April 15, 2022 and included in Deferred acquisition payment – Chisholm in the Condensed Consolidated Balance Sheet as of March 31, 2022. The issuance of approximately $0.4 million.
In19.4 million shares of Class A Common Stock in connection with the Olenik v. Lodzinski et al. lawsuit described below in Note 13. Commitmentsclosing of the Chisholm Agreement was (1) approved by a majority of the voting power of all outstanding disinterested shares of the Common Stock and Contingencies,(2) increased the Significant Shareholder was also named in the lawsuit. As a resultStockholder's beneficial ownership of a settlement agreement relatingClass A Common Stock from approximately 25% to the lawsuit, the Company agreed with its insurance carrier regarding an allocation36% as of defense costs and settlement contributions above its deductible for all the parties named in the lawsuit. In connection with the Court approved settlement, the Significant Shareholder was billed approximately $1.1 millionin fiscal 2020 and all amounts have been received.February 15, 2022.
As discussed in Note 4. Acquisitions,, on March 31, 2021, the CompanyEarthstone and EEH entered into the Tracker/Sequel Purchase Agreements. The Tracker/Sequel Acquisitions were consummated on July 20, 2021, whereby the Company acquired the
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Tracker Assets for a purchase price of $22.5$18.8 million in cash and 4.7 million shares of Earthstone’s Class A Common Stock. TheA Significant Shareholder owned approximately 49% of Tracker as of the closing of the Tracker Acquisition. A majority of the non-affiliated stockholders of Earthstone approved the issuance of 6.2 million shares of Class A Common Stock in connection with the closing of the Tracker/Sequel Purchase Agreements at Earthstone’s Annual Meeting of Stockholders held on July 20, 2021.
As discussed in Note 4. Acquisitions, during the second quarter of 2021, the Company completed the Eagle Ford Acquisitions for a purchase price of approximately $48.0$45.2 million in cash. TheA Significant Shareholder controlled one of the 4four sellers. After participating in a competitive sales process, the Company acquired the aforementioned assets for $8.2 million in cash from that related party entity.
As described in Note 8. Common Stock and Preferred Stock, on January 30, 2022, Earthstone entered into the SPA with certain affiliates of EnCap and Post Oak (collectively, the “Investors”) to issue 220,000 shares and 60,000 shares, respectively, of the Series A Convertible Preferred Stock. On April 14, 2022, the SPA was consummated resulting in the issuance of the total of 280,000 shares of the Series A Convertible Preferred Stock in exchange for cash proceeds of $279.3 million, net of offering costs.
On July 6, 2022, the Series A Convertible Preferred Stock automatically converted into 25,225,225 shares of Class A Common Stock.
The Company paid $0.2 million to one of our Significant Shareholders for reimbursement of certain costs associated with the aforementioned SPA.
On October 11, 2022, Earthstone repurchased an aggregate of 3,000,000 shares of Class A Common Stock, held by affiliates of Warburg Pincus LLC (“Warburg”) in a private transaction, for an aggregate purchase price of approximately $43.7 million, or $14.58 per share (the “Repurchase”). Additionally, on October 11, 2022, Warburg sold 3,750,000 shares of Class A Common Stock to an unrelated party for $14.58 per share (collectively with the Repurchase, the “Warburg Sales”). Immediately preceding the Warburg Sales, Warburg owned approximately 18.7% of our outstanding Class A Common Stock and 14.1% of our Class A Common Stock and Class B Common Stock combined. Immediately following the Warburg Sales and through the date of this filing, Warburg owned approximately 12.3% of our Class A Common Stock and 9.3% of our Class A Common Stock and Class B Common Stock combined.
Note 13. Commitments and Contingencies
Legal
George Assad, et. al. v. EnCap Investments L.P., et. al.: On September 12, 2022, a complaint (the “Complaint”) styled as a “derivative action” was filed in the Delaware Court of Chancery (the “Court”) by George Assad (the “plaintiff”) a purported holder of a small number of shares of Class A Common Stock against Earthstone, six of its 10 directors and EnCap, a principal stockholder. The Complaint alleges that a majority of Earthstone’s directors were conflicted and, along with EnCap, breached their fiduciary duties in approving the sale of shares of Series A Convertible Preferred Stock that is convertible into Class A Common Stock pursuant to the SPA. The plaintiff requested the Court to declare that the defendants breached their fiduciary duties, award of unspecified monetary damages, including interest and costs, and/ or rescind the stock purchase transaction. On October 14, 2022, the defendants filed a motion to dismiss the amended Complaint. Earthstone believes the Complaint is completely without merit and intends to contest vigorously the allegations made therein and to seek reimbursement for its costs and expenses in so doing. Earthstone carries insurance for the claims asserted against it and the officer and director defendants in the Complaint, and the carrier has accepted coverage subject to applicable self-retentions and limits of liability. The Company does not expect this case to have a material adverse effect on the results of operations, financial position or cash flows of the Company.
From time to time, Earthstone and its subsidiariesthe Company may be involved in other various legal proceedings and claims in the ordinary course of business.
Olenik v. Lodzinski et al.: On June 2, 2017, a purported shareholder class and derivative action in the Delaware Court of Chancery was filed against Earthstone’s Chief Executive Officer, along with other members of the Board, EnCap Investments L.P. (“EnCap”), Bold Energy Holdings, LLC (“Bold Holdings”), and Bold Energy III LLC (“Bold”) and Oak Valley Resources, LLC. Commitment to Purchase Materials
The complaint alleged that Earthstone’s directors breached their fiduciary duties in connection with the contribution agreement dated as of November 7, 2016 and as amended on March 21, 2017 (the “Bold Contribution Agreement”), by and among Earthstone, EEH, Lynden US, Lynden USA Operating, LLC, Bold Holdings and Bold. The Plaintiff asserted that the directors negotiated the business combination pursuant to the Bold Contribution Agreement (the “Bold Transaction”) to the detriment of the Earthstone stockholders who were not affiliated with EnCap or Earthstone management, did not follow an adequate process in negotiating and approving the Bold Transaction and made materially misleading or incomplete proxy disclosures in connection with the Bold Transaction. On July 20, 2018, the Delaware Court of Chancery granted the defendants’ motion to dismiss and entered an order dismissing the action in its entirety with prejudice. The Plaintiff filed an appeal with the Delaware Supreme Court. On April 5, 2019, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s dismissal of the proxy disclosure claims but reversed the Delaware Court of Chancery’s dismissal of the other claims, holding that the allegations with respect to those claims were sufficient for pleading purposes. After engaging in extensive pre-trial discovery, the partiesCompany entered into a settlementan agreement that was approved byto purchase certain materials related to its drilling and completion activities through 2024 (the “Materials Purchase Agreement”). The Company has already fulfilled its 2022 financial obligation under the Delaware Court of Chancery on March 31, 2021. The principal terms of the settlement agreement are: (i) a $3.5 million all-in cash settlement payment (the “Fund”) to be funded by defendants and/or their insurers into an escrow account, (ii) a bi-lateral complete and full release of all claims against defendants and plaintiffs, and (iii) 55% of the Fund (the derivative payment) be paid to Earthstone to be used as determined by management, 45% of the Fund (the class payment) be paid to members of the class or current stockholders of Earthstone. Earthstone paid the $3.5 million settlement in April 2021Materials Purchase Agreement and the insurance carriers reimbursed their agreed upon allocationCompany has committed to payments of the settlement totaling $2.8 million. In addition, Earthstone has received $1.3$29.8 million from the derivative portion of the settlement, which was included as a reduction of Transaction costs in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2021.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2023 and $6.9 million in 2024.Environmental and Regulatory
As of September 30, 2021,2022, there were no known environmental or other regulatory matters related to the Company’s operations that are reasonably expected to result in a material liability to the Company.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 14. Income Taxes
The Company’s corporate structure requires the filing of two separate consolidated U.S. Federal income tax returns and one Canadian income tax return which include Lynden US, Earthstone, and Lynden Corp.Corp, respectively. As such, taxable income of Earthstone cannot be offset by tax attributes, including net operating losses, of Lynden US, nor can taxable income of Lynden US be offset by tax attributes of Earthstone. Earthstone and Lynden US record a tax provision, respectively, for their share of the book income or loss of EEH, net of the non-controlling interest. As EEH is treated as a partnership for U.S. Federal income tax purposes, it is not subject to income tax at the federal level and only recognizes the Texas Margin Tax.
On February 15, 2022, the Company completed the Chisholm Acquisition which included the issuance of 19,417,476 shares of Class A Common Stock, which resulted in an ownership change within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). As a result of the ownership change, the Company’s ability to utilize net operating losses (“NOLs”) and credits generated prior to the ownership change date may be limited to offset taxable income incurred after the ownership change date (the “382 Limitation”).
As of September 30, 20212022 and December 31, 2020, a2021, current liabilityliabilities of $0.6$4.1 million and $0.6$0.9 million, respectively, isare included in Other current liabilities in the Condensed Consolidated Balance Sheets. TheAs of September 30, 2022, amount includes $2.0 million current federal income tax payable and $2.1 million current Texas Margin Tax payable. As of December 31, 2021, the amounts solely represent current Texas Margin Tax payable.
During the nine months ended September 30, 2022, the Company recorded income tax expense of approximately $81.7 million comprised of (1) income tax expense for Earthstone of $70.0 million, which included a deferred income tax expense of $74.5 million and a current income tax expense of $2.0 million, resulting from its share of the distributable income from EEH, offset by a $6.5 million release of valuation allowance, (2) a deferred income tax expense for Lynden US of $5.5 million as a result of its share of the distributable loss from EEH and (3) income tax expense of $6.2 million related to state taxes, which included a deferred income tax expense of $4.1 million and a current income tax expense of $2.1 million. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the nine months ended September 30, 2022.
During the nine months ended September 30, 2021, the Company recorded income tax benefit of approximately $0.3 million which includedcomprised of (1) a deferred income tax benefit for Lynden US of $0.1 million as a result of its share of the distributable loss from EEH, (2) no net income tax benefit for Earthstone as the $0.8 million income tax benefit resulting from its share of the distributable loss from EEH had a full valuation allowance recorded against it as future realization of the net deferred tax asset cannot be assured and (3) deferred income tax benefit of $0.8 million related to the Texas Margin Tax, offset by (4) current income tax expense of $0.6 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the nine months ended September 30, 2021.
During the nine months ended September 30, 2020, the Company recorded income tax expense of approximately $0.1 million which included (1) no income tax expense for Lynden US as a result of its share of the distributable income from EEH, (2) a deferred income tax benefit for Earthstone of $0.8 million as a result of its share of the distributable income from EEH, which was used to reduce the valuation allowance recorded against its deferred tax asset which was previously recorded as future realization of the net deferred tax asset cannot be assured and (3) deferred income tax expense of $0.1 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the nine months ended September 30, 2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Statement Regarding Forward-Looking Information
This discussion and other items in this Quarterly Report on Form 10-Q contain forward-looking statements and information that are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this document, the words “believe,” “anticipate,” “estimate,” “expect,” “intend,” “may,” “will,” “project,” “forecast,” “plan,” and similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. These statements are subject to numerous risks, uncertainties and assumptions. Certain of these risks are summarized under “Item 1A. Risk Factors” in our 20202021 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), which you should read carefully in connection with our forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. We undertake no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
You should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in conjunction with the corresponding sections and our audited consolidated financial statements for the year ended December 31, 2020,2021, which are included in our 20202021 Annual Report on Form 10-K.
Overview
Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with ourits consolidated subsidiaries, the “Company,” “our,” “we,” “us,” or similar terms), is a growth-oriented independent oil and gas company engaged in the acquisition and development of oil and gas reserves through activities that include the acquisition, drilling and development of undeveloped leases, asset and corporate acquisitions and mergers. Our operations are all in the upstream segment of the oil and natural gas industry and all our properties are onshore in the United States. At present, our assets are located in the Midland Basin of westin West Texas, and the Eagle Ford Trend of south Texas.
Our primary focus is concentrated in South Texas and the MidlandDelaware Basin of west Texas, a high oil and liquids rich resource basin which provides us with multiple horizontal targets with proven production results, long-lived reserves and historically high drilling success rates.in New Mexico.
Recent Developments
ForelandShare Repurchase
On October 11, 2022, Earthstone repurchased an aggregate of 3,000,000 shares of Class A Common Stock, held by affiliates of Warburg Pincus LLC in a private transaction, for an aggregate purchase price of approximately $43.7 million, or $14.58 per share.
Titus Acquisition
On September 30, 2021,August 10, 2022, Earthstone Energy, Inc. (“Earthstone”), Earthstone Energy Holdings, LLC, a subsidiary of Earthstone (“EEH”), as buyer, and Foreland Investments LP, a Delaware limited partnership (“Foreland”), as seller, entered into a Purchase and Sale Agreement (the “Foreland Purchase Agreement”). Also, on September 30, 2021, Earthstone and EEH, as buyer, and BCC-ForelandTitus Oil & Gas Production, LLC, a Delaware limited liability company (“BCC”TOGI”), Titus Oil & Gas Corporation, a Delaware corporation, Lenox Minerals, LLC, a Delaware limited liability company, and Lenox Mineral Title Holdings, Inc., a Delaware corporation (collectively, “Titus I”), as seller, entered into aconsummated the transactions contemplated in that certain Purchase and Sale Agreement (the “BCC Purchase Agreement”).
On November 2, 2021,dated June 27, 2022, by and among Earthstone, EEH and ForelandTitus I (the “Titus I Purchase Agreement”) that was previously reported on Form 8-K filed on June 29, 2022 with the Securities and Exchange Commission (“SEC”). Also on August 10, 2022, Earthstone, EEH, as buyer, and Titus Oil & Gas Production II, LLC, a Delaware limited liability company (“TOGII”), Lenox Minerals II, LLC, a Delaware limited liability company, and Lenox Mineral Holdings II, LLC, a Delaware limited liability company (collectively, “Titus II” and together with Titus I, “Titus”), as seller, consummated the transactions contemplated in that certain Purchase and Sale Agreement dated June 27, 2022, by the Forelandand among Earthstone, EEH and Titus II (the “Titus II Purchase Agreement, whereby” and together with the Titus I Purchase Agreement, the “Purchase Agreements”) that was previously reported on Form 8-K filed on June 29, 2022 with the SEC. At the closing of the Purchase Agreements, among other things, EEH acquired (the “Foreland“Titus Acquisition”) interests in oil and gas leases and related property of ForelandTitus I and Titus II located in Irion County and Crockett County, Texas,the Delaware Basin, New Mexico, for aan aggregate purchase price (the “Foreland Purchase“Purchase Price”) of: (i) $23.5of approximately $565.8 million in cash (“Cash Consideration”), net of preliminary and customary purchase price adjustments that remainsand subject to final post-closing settlement between EEH and Foreland,Titus, and (ii) 2,611,111an aggregate 3,857,015 shares (the “Foreland Shares”“Shares” and such issuance, the “Stock Issuance”) of Class A common stock of Earthstone (the “Class A Common Stock”) valued at $10.77 per share at the closing of the transaction. The cash portion of the Foreland Purchase Price is subject to customary purchase price adjustments with an effective date of July 1, 2021.
On November 2, 2021, Earthstone, EEH and BCC consummated the transactions contemplated by the BCC Purchase Agreement, whereby EEH acquired (the “BCC Acquisition” and with the Foreland Acquisition, the “Foreland-BCC Acquisition”) certain well-bore interests and related equipment held by BCC that are part of a joint development agreement between Foreland, Foreland Operating, LLC, and BCC involving portions of the acreage covered by the Foreland Purchase Agreement for a purchase price (the “BCC Purchase Price”) of $25.7 million in cash,Stock, net of preliminary and customary purchase price adjustments that remains subjectadjustments. At the closing of the Titus Acquisition, $64.5 million of the Cash Consideration was deposited in an escrow account to final post-closing settlement between EEHsupport Titus’ indemnity obligations under the Purchase Agreements, 1,811,132 of the Shares (the “Titus I Closing Shares”) were issued to Titus Oil & Gas, LLC, an affiliate of TOGI (“Titus O&G”), and BCC, with2,045,883 of the Shares (the “Titus II Closing Shares”) were issued to Titus Oil & Gas Investments II, LLC, an effective dateaffiliate of July 1, 2021.TOGII (“Titus O&G II”). On August 10, 2022, in
connection with the closing of the ForelandTitus Purchase Agreement,Agreements, Earthstone entered into a customary registration rights agreement with ForelandTitus I and Titus II and their respective equity holders containing provisions under whichrelating to the Titus Shares.
Conversion of Series A Convertible Preferred Stock
On July 6, 2022, the 280,000 shares of Series A Convertible Preferred Stock, par value $0.001 per share of Earthstone will, among other things, file(the “Series A Convertible Preferred Stock”) automatically converted into 25,225,225 shares of Class A Common Stock. As such, the Series A Convertible Preferred Stock is no longer outstanding and the Investors were issued the 25,225,225 shares of Class A Common Stock upon the conversion of the Series A Convertible Preferred Stock.
On July 15, 2022, Earthstone filed a
registration statement on Form S-3elimination with the Securities and Exchange Commission (“SEC”) providing for the registrationSecretary of State of the Foreland Shares and cooperate in certain as yet undetermined underwritten offerings thereof.
In connectionState of Delaware eliminating all provisions of the certificate of designations previously filed by Earthstone with the closingSecretary of State of the Foreland Purchase Agreement, Earthstone entered into a customary lock-up agreement with Foreland and its equity holders providing that such holders will not transfer a portionState of Delaware on April 13, 2022 related to the Foreland Shares for 60 days after the closing of the Foreland Acquisition (25% of the Foreland Shares), a portion of the Foreland Shares for 90 days after the closing of the Foreland Acquisition (25% of the Foreland Shares), and a portion of the Foreland Shares for 120 days after the closing of the Foreland Acquisition (50% of the Foreland Shares).Series A Convertible Preferred Stock.
Fourth Amendment to Credit Agreement
On September 17, 2021,29, 2022, in connection with a regularly scheduled borrowing base redetermination, the borrowing base increased from $1.7 billion to $1.85 billion.
On August 10, 2022, Earthstone, and EEH, (collectively the “Borrower”),as Borrower, Wells Fargo Bank, National Association (“Wells Fargo”) as Administrative Agent, and Issuing Bank, the lenders party thereto (the “Lenders”) and the guarantors party thereto entered into an amendment (the “Fourth“Seventh Amendment”) to the Credit Agreementcredit agreement dated November 21, 2019, by and among EEH, as Borrower, Earthstone, as Parent, Wells Fargo, as Administrative Agent and Issuing Bank, Royal Bank of Canada, as Syndication Agent, Truist Bank, as successor by merger to SunTrustCitizens Bank, N.A., KeyBank National Association, U.S. Bank National Association, Fifth Third Bank, PNC Bank, National Association, and Bank of America, N.A., as Documentation Agent,Agents, and the Lenders party thereto (together with all amendments or other modifications, the “Credit Agreement”). Among other things, the FourthSeventh Amendment increased the borrowing base from $550$1.4 billion to $1.7 billion and increased elected commitments from $800 million to $650$1.2 billion. The Seventh Amendment also established a fully funded $250 million added provisions to provide for the eventual replacement of LIBORterm loan tranche as a benchmark interest rate, made certain changes toportion of the lenders$1.2 billion of available commitments under the Credit Agreement (the “Term Loan”), with the remaining $950 million of commitments in the form of revolving commitments. The Term Loan is fully pre-payable without premium or penalty, subject to the satisfaction of certain specified conditions, and made certain other administrative changesbears an interest rate of Term SOFR plus 3.25%, increasing by 0.25% each 180-day period following the Term Loan funding. The Term Loan is co-terminus with the revolving loans' maturity date of June 2, 2027, subject to the Springing Maturity Date (as defined in the Credit Agreement) applicable to revolving loans and term loans. The interest rate applicable to revolving loans remains a rate of Term SOFR plus an applicable margin between 2.25% and 3.25%, depending upon borrowing base utilization.
On June 2, 2022, the Company, EEH, Wells Fargo, the Lenders and the guarantors party thereto entered into an amendment (the “Sixth Amendment”) to the Credit Agreement. Among other things, the Sixth Amendment extended the maturity of the Credit Agreement to June 2027, increased the borrowing base from $1.325 billion to $1.4 billion and reduced the interest rate for amounts outstanding. Elected commitments under the Credit Agreement remained at $800 million.
IRMOn April 14, 2022, in connection with the Notes Offering, the Company voluntarily elected to reduce commitments under the borrowing base of the Credit Agreement to $800 million.
On January 30, 2022, Earthstone, EEH as Borrower, Wells Fargo as Administrative Agent, the Lenders and the guarantors party thereto entered into an amended and restated Fifth Amendment (the “Fifth Amendment”) to the Credit Agreement. Among other things, the Fifth Amendment increased the borrowing base and corresponding elected commitments from $650 million to $825 million upon the closing of the Chisholm Agreement.
Bighorn Acquisition
On January 7, 2021,April 14, 2022, Earthstone, EEH, and EEH (collectively with Earthstone, the “Buyer”), Independence Resources Holdings,Bighorn Asset Company, LLC (“Independence”Bighorn”), and Independence Resources Manager, LLC (“Independence Manager” and collectively with Independence, the “Seller”) as seller, consummated the transactions contemplated in the Purchase and Sale Agreement dated December 17, 2020 (the “IRM Purchase Agreement”) that was previously reported in our Current Report on Form 8-K filed with the SEC on December 22, 2020. The Seller was unaffiliated with the Company. At the closing of the IRM Purchase Agreement, EEH acquired (the “IRM Acquisition”) all of the issued and outstanding limited liability company interests in certain wholly owned subsidiaries of Independence and Independence Manager for aggregate consideration consisting of: (i) cash of approximately $140.4 million (the “Cash Consideration”) and (ii) 12,719,594 shares of Class A Common Stock (such shares, the “Acquisition Shares,” and such issuance, the “Stock Issuance”). As a result of the Stock Issuance, Earthstone is no longer considered a controlled company within the meaning of the listing standards of the NYSE.
In order to fund the cash consideration for the IRM Acquisition, on December 17, 2020, Earthstone, EEH, as Borrower, Wells Fargo Bank, National Association (“Wells Fargo”), as Administrative Agent, the guarantors party thereto, and the lenders party thereto (the “Lenders”) entered into an amendment (the “Second Amendment”) to the Credit Agreement. The Second Amendment was effective upon the closing of the IRM Acquisition. Among other things, the Second Amendment (i) joined certain financial institutions as additional lenders, increased the borrowing base from $240.0 million to $360.0 million, (ii) increased the interest rate on outstanding borrowings; and (iii) adjusted some of the financial covenants.
Eagle Ford Acquisitions
During the second quarter of 2021, we acquired working interests in certain assets we operate in southern Gonzales County, Texas (the “Eagle Ford Acquisitions”) from four separate sellers for approximately $48.0 million in cash. We funded the Eagle Ford Acquisitions with cash on hand and borrowings under our senior secured revolving credit facility. The effective date of the Eagle Ford Acquisitions was April 1, 2021. One of the four sellers is a related party entity. See further discussion in Note 4. Acquisitions and Note 12. Related Party Transactions in the Notes to Unaudited Condensed Consolidated Financial Statements.
Tracker/Sequel Acquisitions
On July 20, 2021, Earthstone, EEH, Tracker Resource Development III, LLC (“Tracker”), and TRD III Royalty Holdings (TX), LP (“RoyaltyCo” and collectively with Tracker, the “Seller”) consummated the transactions contemplated in the Purchase and Sale Agreement dated March 31, 2021January 30, 2022, by and among Earthstone, EEH and SellerBighorn (the “Tracker“Bighorn Purchase Agreement”) that was previously reported on Form 8-K filed on April 5, 2021.February 2, 2022 with the SEC. At the closing of the TrackerBighorn Purchase Agreement, among other things, EEH acquired (the “Tracker“Bighorn Acquisition”) interests in oil and gas leases and related property of TrackerBighorn located in Irion County,the Midland Basin, Texas, for a purchase price (the “Tracker Assets”“Purchase Price”) for aggregate consideration consisting of: (i) $22.5of approximately $641.8 million in cash, net of customary purchase price adjustments, and (ii) 4.7 million5,650,977 shares (the “Bighorn Shares”) of Class A Common Stock. At the closing of the Bighorn Acquisition, 510,638 of the Bighorn Shares were deposited in a stock escrow account for Bighorn’s indemnity obligations and 5,140,339 of the Bighorn Shares (the “Closing Shares”) were issued to Bighorn Permian Resources, LLC, an affiliate of Bighorn (“Bighorn Permian”). On April 14, 2022, in connection with the closing of the Bighorn Purchase Agreement, Earthstone and Bighorn Permian entered into a customary registration rights agreement relating to the Bighorn Shares.
Securities Purchase Agreement
Also, on July 20, 2021,April 14, 2022, Earthstone, EEH, SEG-TRD LLCEnCap Energy Capital Fund XI, L.P. (“SEG-I”EnCap Fund XI”), an affiliate of EnCap Investments L.P. (“EnCap”), and SEG-TRD IICypress Investments, LLC (“SEG-II”Cypress” and collectively with SEG-I, “Sequel”EnCap Fund XI, the “Investors”), a fund managed by Post Oak Energy Capital, LP (“Post Oak”), consummated the transactions contemplated in thesale and issuance of 280,000 shares of Series A Convertible Preferred Stock pursuant to that certain Securities Purchase and Sale Agreement dated March 31, 2021as of January 30, 2022, by and among Earthstone EEH and Sequelthe Investors (the “SPA”) that was previously reported on Form 8-K filed on February 2, 2022 with the SEC. At the closing of the SPA, Earthstone issued 280,000 shares (the “PIPE Shares”) of Series A Convertible Preferred Stock in exchange for gross cash proceeds of $280 million (the “Private Placement”).
On July 6, 2022, all of the PIPE Shares were converted into 25,225,225 shares of Class A Common Stock. The Series A Convertible Preferred Stock is no longer outstanding and the Investors were issued 25,225,225 shares of Class A Common Stock upon the conversion of the Series A Convertible Preferred Stock.
On April 5,14, 2022, in connection with the closing of the SPA, Earthstone and the Investors entered into a customary registration rights agreement relating to the shares of Class A Common Stock underlying the PIPE Shares. On July 15, 2022, a registration statement on Form S-3 with respect to the resale of the PIPE shares was declared effective by the SEC.
Notes Offering
On April 7, 2022, EEH and four of its wholly-owned subsidiaries, Earthstone Operating, LLC, a Texas limited liability company (“Earthstone Operating”), Earthstone Permian LLC, a Texas limited liability company (“Earthstone Permian”), Sabine River Energy, LLC, a Texas limited liability company (“Sabine River Energy”), and Independence Resources Technologies, LLC, a Delaware limited liability company (“Independence Technology” and, together with Earthstone Operating, Earthstone Permian, Sabine River Energy and Earthstone, the “Guarantors”), entered into a purchase agreement (the “Purchase Agreement”) with RBC Capital Markets, LLC, as representative of the several initial purchasers named in the Purchase Agreement (together, the “Initial Purchasers”), providing for the private offer and sale by EEH (the “Notes Offering”) of $550.0 million aggregate principal amount of EEH’s 8.000% senior notes due 2027 (the “Notes”), along with related guarantees (the “Guarantees”) of the Notes.
The Notes Offering closed on April 12, 2022. EEH received net proceeds from the Notes Offering of approximately $537.2 million (after deducting underwriting discounts and commissions) which was used primarily to fund the Bighorn Acquisition and the remainder for general corporate purposes.
Chisholm Acquisition
On February 15, 2022, Earthstone, EEH, and Chisholm, as seller, consummated the transactions contemplated in the Chisholm Agreement that was previously reported on Form 8-K filed with the SEC on December 17, 2021. At the closing of the SequelChisholm Agreement, among other things, EEH acquired certain well-bore(the “Chisholm Acquisition”) interests in oil and gas leases and related equipment held by Sequel that were partproperty of a joint development agreement between TrackerChisholm located in Lea County and Sequel involving portions of the acreage covered by the Tracker AgreementEddy County, New Mexico, for
aggregate consideration, as adjusted for preliminary and customary purchase price adjustments, consisting of: (i) $45.3approximately $313.8 million in cash that continues to remain subject to post-closing settlement adjustments between EEH and Chisholm paid at the closing of the Chisholm Acquisition, (ii) 1.5$70 million in cash paid on April 15, 2022; and (iii) 19,417,476 shares of Class A Common Stock. See further discussion in Note 4. Acquisitions and Note 12. Related Party Transactionsin the Notes to Unaudited Condensed Consolidated Financial Statements.
Cash consideration for the Tracker/Sequel AcquisitionsChisholm Acquisition was funded by borrowings under our senior secured revolving credit facility whose borrowing base was increased from $475$650 million to $550$825 million on July 20, 2021.upon consummation of the Chisholm Acquisition.
Inflation
Inflation has begun to impact our operations. We have already experienced increases in the costs of certain materials, equipment and services used in our business processes. We continue to closely monitor these costs and work to minimize additional potential increases when possible.
COVID-19
Despite the recoveries in commodity prices from 2020 lows, recent surges from COVID-19 variants continue to negatively impact the global economy, disrupt global supply chains and may create significant volatility and disruption of financial and commodity markets. The extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, is uncertain and depends on various factors, including how the pandemic and measures taken in response to its impact on demand for oil and natural gas, the availability of personnel, equipment and services critical to our ability to operate our properties and the impact of potential governmental restrictions on travel, transports and operations. There is uncertainty around the extent and duration of disruption, including any
resurgence, and we expect that the longer the duration of any such disruption, the greater the adverse impact may be on our business.
Operational Status
As a producer of oil, natural gas and NGLs, we are recognized as an essential business under various federal, state and local regulations related to the COVID-19 pandemic. We have continued to operate as permitted under these regulations while taking mitigation efforts and steps to protect the health and safety of our employees. The safety of our employees is paramount, and In 2022, we have emphasized the respective guidelines to support our mitigation efforts. Our field personnel are performing their job responsibilities and practicing mitigation guidelines with no issues to date. Our non-field personnel have returned to the office but we remain flexible to working remotely, using information technology in which we previously invested if needed. We have managed and conducted both field and non-field functions effectively thus far, including our day-to-day operations, our accounting and financial reporting systems and our internal control over financial reporting. We will continue to focus on the health and safety of our employees in conformity with the applicable jurisdictional mitigation guidelines. We will continue to monitor CDC guidelines and respond appropriately.
Commodity Market Impacts and Response
During the course of 2020, commodity prices declined significantly, negatively impacting producers of oil, natural gas and NGLs. We significantly curtailed our capital expenditures in response and, in the spring of 2020, voluntarily curtailed up to 60% of total net production. In June 2020, we returned to operating at full production capacity as oil prices began to recover. Additionally, based on recovered commodity price levels in late 2020, we resumed our operated well completions activities in the fourth quarter of 2020 and commenced a drilling program late in the first quarter of 2021. As commodity prices have continued to increase in 2021, we have enhanced our drilling program in the third quarter of 2021 to include a second drilling rig.
Operational/Financial Challenges
It is difficult to model and predict how our operations and financial status may change as a result of COVID-19. In our industry, any forecast, plans and changes to operations and financial status are a function of commodity prices. If oil prices decline due to a resurgence of COVID-19, we believe we can continue to operate and produce our properties at a minimum in a cash flow neutral position for the next 12 months. A significant driver in the future may be the financial institutions’ view on commodity prices with respect to borrowing base redeterminations. If a resurgence of COVID-19 triggers additional volatility in our business or global economies, our borrowing base, recently increased to $650 million in September 2021, could be reduced. Significant reductions in the borrowing base under our Credit Agreement could create a borrowing base deficiency depending on our loans then outstanding which may lead to a default. We believe global, as well as national, mitigation efforts currently being implemented to fight COVID-19 have had, and may continue to have,not experienced a material impact on commodity prices and may continue to present significant challengesdate to our industry.business processes, but our management team continues to evaluate COVID-19 factors as they occur.
The effects
Areas of COVID-19, including a substantial decrease in economic activity, have contributed to significant credit, debt and equity market volatility. Similar to other producers in our business, we experienced volatilityOperation
Our primary focus is concentrated in the price of our Class A Common Stock.Midland Basin in West Texas and the Delaware Basin in New Mexico, both containing high oil and liquids rich resources which provides us with multiple horizontal targets with proven production results, long-lived reserves and historically high drilling success rates.
Consolidation Focus
We believe that the current industry environment will move to more consolidations; however, execution may be hampered by producers with high debt levels. We continue to pursue value-accretive and scale-enhancing consolidation opportunities, as we
believe we are in a position to operate effectively despite the COVID-19 induced volatility in oil price.commodity prices. We are focusing our attention on acquisition and corporate merger opportunities that would increase the scale of our operations. In addition, we believe the current industry environment presents unique opportunities which could provide us the potential for further consolidation because of our financial strength. At the same time, we will seek to block up acreage in close proximity to our existing acreage that would allow for longer horizontal laterals that would provide forproviding higher economic returns.returns, increased operated inventory and greater operating efficiency. In short, we believe we are well qualified to continue to be a consolidator which could increase the scale of our operations and add value to our shareholders.
Operations Update
AreasDuring the third quarter of Operation2022, for our Company-operated activity, we commenced drilling 12 gross (12.0 net) wells and brought seven gross (6.3 net) wells online in the Midland Basin. We began drilling six gross (3.3 net) wells in the Delaware Basin and brought 12 gross (10.5 net) wells online.
Our primary focus is concentratedIn the Midland Basin, the Barnhart five-well pad in Irion County came online in August 2022 and had peak IP-30 average production of ~1,170 Boepd (~81% oil) per well. These wells averaged a completed lateral length of ~10,000 ft per well and are producing from the Wolfcamp B interval.
In the Delaware Basin, the Cletus and Salt Draw pads in Eddy County commenced production in early September. The two-well Cletus pad had peak IP-30 average production of ~1,350 Boepd (69% oil) per well, and both wells have completed lateral length of approximately 9,750 ft and are producing from the Wolfcamp A interval. The two-well Salt Draw pad had a peak IP-30 average production of ~1,570 Boepd (77% oil) per well from the Second Bone Springs interval. The two wells have a completed lateral length of approximately 4,700 ft per well. Additionally, in early September, the six drilled but uncompleted wells (Lonesome Dove and Cattlemen pads) acquired in the Titus acquisition in Lea County came online and had peak IP-30 average production of ~1,400 Boepd (72% oil) per well. All six wells had completed lateral length of approximately 7,700 ft per well and are producing from the First and Second Bone Springs interval.
We operated a four-rig drilling program in the third quarter with two rigs in each of the Midland and Delaware basins. We have recently added our fifth rig in the Delaware Basin and expect to continue a five-rig operated drilling program in 2023 with two rigs in the Midland Basin of west Texas, a high oil and liquids rich resource which provides us with multiple horizontal targets with proven production results, long-lived reservesthree rigs in the Delaware Basin. For full year 2022 and historically high drilling success rates.
During the first quarter of 2021,only for our Company-operated activity, we completed and turned to sales fiveanticipate spudding 36 gross (3.7(32.4 net) wells on the Hamman 30 pad in Upton County and commenced drilling threebringing 34 gross (2.1(30.7 net) wells on the Hamman 45 pad in Midland County. During the second quarter, we completed the wells on the Hamman 45 pad in Midland County and drilled four gross (3.8 net) wells on the Pearl Jam pad on the recently acquired IRM Spanish Pearl project. During the third quarter, we completed the wells on the four-well Pearl Jam pad and moved the rig to western Reagan County where we drilled four gross (3.5 net) wells on the Hartgrove West pad before moving to Upton County to drill five gross (5.0 net) wells on the Nickel Saloon pad. Completions are currently underway on the four-well Hartgrove West pad and we expect to have these wells online in November. Additionally, we expect to be in the process of completing the five-well Nickel Saloon pad around year-end and expect those wells to be online early in the first quarter of 2022.
We have operated one drilling rig in the Midland Basin. In the Delaware Basin, since the first quarter of 2021 and added a second drilling rig in the third quarter. Currently both rigs are drilling in Upton County, Texas. One rig is on our Nickel Saloon five-well pad where we have 100% working interest and will average approximately 10,000-foot laterals. The other rig is on our Benedum six-well pad where we hold 100% working interest and will average 7,500-foot laterals. We expect to spud one additional pad before year-end with one of these rigs which will bring our operated programanticipate spudding to 2928 gross (25.4(18.2 net) wells for the year. We expect to bring our final pad online near year-end which will be threeand bringing 27 gross (2.3(19.3 net) wells fromonline. Actual results of our Hamman 30 pad in Upton County bringing our total completed wells brought online for the year to 19 gross (15.4 net).drilling activities are as follows:
Despite the commodity price volatility, we continue to seek acreage trades and acquisition opportunities in the Midland Basin which would allow for longer laterals, increased operated inventory and greater operating efficiency. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Wells Spud in the Period January 1, 2022 through September 30, 2022 | | Wells Brought Online in the Period January 1, 2022 through September 30, 2022 |
| | Gross | | Net | | Gross | | Net |
Midland Basin in West Texas | | | | | | | | |
Operated | | 30 | | | 25.6 | | | 28 | | | 24.4 | |
Non-operated | | 17 | | | 3.5 | | | 2 | | | 0.3 | |
Total | | 47 | | | 29.1 | | | 30 | | | 24.7 | |
Delaware Basin in New Mexico | | | | | | | | |
Operated | | 21 | | | 12.7 | | | 18 | | | 14.0 | |
Non-operated | | 2 | | | — | | | 4 | | | 0.7 | |
Total | | 23 | | | 12.7 | | | 22 | | | 14.7 | |
| | | | | | | | |
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to use our judgment to make estimates and assumptions that affect certain amounts reported in our financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. Critical accounting policies are those accounting policies that involve judgment and uncertainties affecting the application of those policies and the likelihood that materially different amounts would be reported under different conditions or using differing assumptions. We periodically update our estimates used in the preparation of the financial statements based on our latest assessment of the current and projected business and general economic environment. There have been no significant changes to our critical accounting policies during the nine months ended September 30, 2021.2022.
Recent Accounting Pronouncements
There are no recent accounting pronouncements that are expected to have a material impact on our financial statements.
Results of Operations
Three Months Ended September 30, 2021,2022, compared to the Three Months Ended September 30, 20202021
| | | | Three Months Ended September 30, | | | | | Three Months Ended September 30, | | |
| | | 2021 | | 2020 | | Change | | | 2022 | | 2021 | | Change |
Sales volumes: | Sales volumes: | | | | | | | Sales volumes: | | | | | | |
Oil (MBbl) | Oil (MBbl) | | 1,055 | | | 839 | | | 26 | % | Oil (MBbl) | | 3,566 | | | 1,055 | | | 238 | % |
Natural gas (MMcf) | Natural gas (MMcf) | | 4,119 | | | 2,010 | | | 105 | % | Natural gas (MMcf) | | 16,514 | | | 4,119 | | | 301 | % |
Natural gas liquids (MBbl) | Natural gas liquids (MBbl) | | 636 | | | 386 | | | 65 | % | Natural gas liquids (MBbl) | | 2,360 | | | 636 | | | 271 | % |
Barrels of oil equivalent (MBoe) | Barrels of oil equivalent (MBoe) | | 2,377 | | | 1,560 | | | 52 | % | Barrels of oil equivalent (MBoe) | | 8,678 | | | 2,377 | | | 265 | % |
Average Daily Production (Boepd) | Average Daily Production (Boepd) | | 25,836 | | | 16,959 | | | 52 | % | Average Daily Production (Boepd) | | 94,329 | | | 25,836 | | | 265 | % |
| Average prices: | Average prices: | | | | | | Average prices: | | | | | |
Oil (per Bbl) | Oil (per Bbl) | | $ | 70.20 | | | $ | 39.50 | | | 78 | % | Oil (per Bbl) | | $ | 93.12 | | | $ | 70.20 | | | 33 | % |
Natural gas (per Mcf) | Natural gas (per Mcf) | | $ | 3.49 | | | $ | 1.31 | | | 166 | % | Natural gas (per Mcf) | | $ | 6.90 | | | $ | 3.49 | | | 98 | % |
Natural gas liquids (per Bbl) | Natural gas liquids (per Bbl) | | $ | 34.56 | | | $ | 13.60 | | | 154 | % | Natural gas liquids (per Bbl) | | $ | 36.23 | | | $ | 34.56 | | | 5 | % |
| Average prices adjusted for realized derivatives settlements: | Average prices adjusted for realized derivatives settlements: | | Average prices adjusted for realized derivatives settlements: | |
Oil ($/Bbl) | Oil ($/Bbl) | | $ | 52.94 | | | $ | 49.34 | | | 7 | % | Oil ($/Bbl) | | $ | 83.75 | | | $ | 52.94 | | | 58 | % |
Natural gas ($/Mcf) | Natural gas ($/Mcf) | | $ | 2.85 | | | $ | 1.45 | | | 97 | % | Natural gas ($/Mcf) | | $ | 5.36 | | | $ | 2.85 | | | 88 | % |
Natural gas liquids ($/Bbl) | Natural gas liquids ($/Bbl) | | $ | 34.56 | | | $ | 13.60 | | | 154 | % | Natural gas liquids ($/Bbl) | | $ | 36.23 | | | $ | 34.56 | | | 5 | % |
| (In thousands) | (In thousands) | | | | | | (In thousands) | | | | | |
Oil revenues | Oil revenues | | $ | 74,051 | | | $ | 33,158 | | | 123 | % | Oil revenues | | $ | 332,036 | | | $ | 74,051 | | | 348 | % |
Natural gas revenues | Natural gas revenues | | $ | 14,368 | | | $ | 2,642 | | | 444 | % | Natural gas revenues | | $ | 113,937 | | | $ | 14,368 | | | 693 | % |
Natural gas liquids revenues | Natural gas liquids revenues | | $ | 21,965 | | | $ | 5,247 | | | 319 | % | Natural gas liquids revenues | | $ | 85,522 | | | $ | 21,965 | | | 289 | % |
| Lease operating expense | Lease operating expense | | $ | 12,983 | | | $ | 7,044 | | | 84 | % | Lease operating expense | | $ | 75,829 | | | $ | 12,983 | | | 484 | % |
Production and ad valorem taxes | Production and ad valorem taxes | | $ | 7,225 | | | $ | 2,696 | | | 168 | % | Production and ad valorem taxes | | $ | 40,219 | | | $ | 7,225 | | | 457 | % |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | | $ | 27,059 | | | $ | 28,538 | | | (5) | % | Depreciation, depletion and amortization | | $ | 90,880 | | | $ | 27,059 | | | 236 | % |
| General and administrative expense (excluding stock-based compensation) | General and administrative expense (excluding stock-based compensation) | | $ | 4,770 | | | $ | 3,393 | | | 41 | % | General and administrative expense (excluding stock-based compensation) | | $ | 10,866 | | | $ | 4,770 | | | 128 | % |
Stock-based compensation | | $ | 2,880 | | | $ | 2,403 | | | 20 | % | |
Stock-based compensation - equity and liability awards | | Stock-based compensation - equity and liability awards | | $ | 3,322 | | | $ | 2,880 | | | 15 | % |
General and administrative expense | General and administrative expense | | $ | 7,650 | | | $ | 5,796 | | | 32 | % | General and administrative expense | | $ | 14,188 | | | $ | 7,650 | | | 85 | % |
| Transaction costs | Transaction costs | | $ | 293 | | | $ | (705) | | | NM | Transaction costs | | $ | 1,778 | | | $ | 293 | | | NM |
| Gain (loss) on sale of oil and gas properties | | Gain (loss) on sale of oil and gas properties | | $ | 14,803 | | | $ | 392 | | | NM |
Interest expense, net | Interest expense, net | | $ | (3,050) | | | $ | (1,186) | | | 157 | % | Interest expense, net | | $ | (20,988) | | | $ | (3,050) | | | 588 | % |
| | Unrealized loss on derivative contracts | | $ | (12,244) | | | $ | (14,543) | | | (16) | % | |
Realized (loss) gain on derivative contracts | | $ | (20,884) | | | $ | 8,503 | | | (346) | % | |
Loss on derivative contracts, net | | $ | (33,128) | | | $ | (6,040) | | | 448 | % | |
Unrealized gain (loss) on derivative contracts | | Unrealized gain (loss) on derivative contracts | | $ | 119,209 | | | $ | (12,244) | | | (1,074) | % |
Realized (loss) on derivative contracts | | Realized (loss) on derivative contracts | | $ | (58,923) | | | $ | (20,884) | | | 182 | % |
Gain (loss) on derivative contracts, net | | Gain (loss) on derivative contracts, net | | $ | 60,286 | | | $ | (33,128) | | | (282) | % |
| | Income tax expense | Income tax expense | | $ | (451) | | | $ | (130) | | | 247 | % | Income tax expense | | $ | (60,518) | | | $ | (451) | | | NM |
NM – Not Meaningful
Results of Operations Highlights
The IRMTitus Acquisition, the Eagle Ford AcquisitionsBighorn Acquisition, Chisholm Acquisition, Foreland Acquisition, and the Tracker/Sequel Acquisitions (collectively, the “Acquisitions”) have had a significant and pervasive impact on our results of operations when compared tofor the prior year corresponding periodsthree and as it relates to the nine months ended September 30, 2020, diminished operating results due2022 as compared to voluntary production shut-ins resulting from low commodity prices.the corresponding periods of 2021. In addition, commodity prices have improved, compared to the prior corresponding periods further impacting our results of operations. Below is a detailed discussion further highlighting the impact of our recent acquisitions.
Oil revenues
For the three months ended September 30, 2021,2022, oil revenues increased by $40.9$258.0 million, or 123%348%, relative to the comparable period in 2020.2021. Of the increase, $25.8$233.8 million was attributable to an increase in sales volume and $24.2 million was attributable to an increase in our realized price and $15.1 million was attributable to an increase in sales volume.price. Our average realized price per Bbl increased from $39.50$70.20 for the three months ended September 30, 20202021 to $70.20$93.12, or 78%33%, for the three months ended September 30, 2021.2022. Additionally, we had a net increase in the volume of oil sold of 2162,511 MBbls, or 26%238%, which included an increase of 3972,457 MBbls related to the wells acquired in the Acquisitions offset by a decreaseand an increase of 18154 MBbls in our other wells primarily resulting from natural declines, partially offset by new wells coming online related to our 20212022 drilling program.
Natural gas revenues
For the three months ended September 30, 2021,2022, natural gas revenues increased by $11.7$99.6 million, or 444%693%, relative to the comparable period in 2020.2021. Of the increase, $7.3$85.5 million was due to increased sales volume and $4.4$14.1 million was attributable to an increase in realized price. Our average realized price per Mcf increased 166%98% from $1.31 for the three months ended September 30, 2020 to $3.49 for the three months ended September 30, 2021.2021 to $6.90 for the three months ended September 30, 2022. The total volume of natural gas produced and sold increased 2,10812,396 MMcf, or 105%301%, which included an increase of 1,85212,870 MMcf related to the wells acquired in the Acquisitions, and an increasepartially offset by a decrease of 256474 MMcf in our other wells primarily resulting from a higher mix of natural gas from existing wells and new wells coming online related to our 2021 drilling program.declines.
Natural gas liquids revenues
For the three months ended September 30, 2021,2022, natural gas liquids revenues increased by $16.7$63.6 million, or 319%289%, relative to the comparable period in 2020.2021. Of the increase, $8.1$1.1 million was attributable to an increase in our realized price and $8.6$62.5 million was attributable to increased volume. The volume of natural gas liquids produced and sold increased by 2501,725 MBbls, or 65%271%, which includedprimarily resulting from an increase of 263 MMcf1,776 MBbls related to the wells acquired in the Acquisitions, partially offset by a decrease of 1351 MBbls in our other wells primarily resulting from natural declines, partially offset by new wells coming online related to our 2021 drilling program.declines.
Lease operating expense (“LOE”)
LOE increased by $5.9$62.8 million, or 84%484%, for the three months ended September 30, 20212022 relative to the comparable period in 2020,2021, due to a $5.7$56.0 million increase resulting from the LOE of the properties acquired in the Acquisitions and a $0.2$6.8 million increase primarily resulting from workovers.additional well count as a result of our 2022 drilling program and inflationary factors experienced in the current year period.
Production and ad valorem taxes
Production and ad valorem taxes for the three months ended September 30, 20212022 increased by $4.5$33.0 million, or 168%457%, relative to the comparable period in 20202021 due to a $3.0$30.7 million increase resulting from the properties acquired in the Acquisitions and a $1.5$2.3 million increase related to our other wells resulting from improved commodity prices.
Depreciation, depletion and amortization (“DD&A”)
DD&A for the three months ended September 30, 2021 decreased2022 increased by $1.5$63.8 million, or 5%236%, relative to the comparable period in 2020,2021, primarily due to a $7.6$61.9 million increase in DD&A related to the assets acquired in the Acquisitions offset byand a $9.1$1.9 million decreaseincrease in DD&A driven by higher production volumes and increased depletable costs related to our other wells primarily resulting from additional volumes added to the depletable basedevelopment of our properties resulting from the impact of improved commodity prices on our estimated proved reserves.which were also affected by inflationary factors.
General and administrative expense (“G&A”)
G&A for the three months ended September 30, 20212022 increased by $1.9$6.5 million, or 32%85%, relative to the comparable period in 2020,2021, primarily due to ana $4.5 million increase of $0.5in payroll and employee costs associated with increased headcount, a $1.6 million increase primarily due to higher professional fees resulting from overall increased operating activity and a $0.4 million increase in non-cash performance-based stock-based compensation expense resultingof which $0.3 million related to performance-based equity awards and $0.2 million related to non-performance based equity awards, both due to an increased award base from increasesthe prior year period,
partially offset by a $0.1 million decrease in performance-based liability awards due to a decrease in the market value of our Class A Common Stock an increase of $0.7 million resulting from the reinstatement
of certain cash-based compensation expenses which were suspended in the prior year period and an increase of $0.2 million related to professional fees and lower administrative overhead reimbursements.three months ended September 30, 2022.
Transaction costsCosts
For the three months ended September 30, 2021, there were no material2022, transaction costs.costs consisted of $1.8 million in legal and professional fees associated with certain of our acquisition and divestiture transactions, including $0.7 million associated with the Titus Acquisition and $0.3 million associated with the Chisholm Acquisition. For the three months ended September 30, 2020,2021, transaction costs were a benefit resulting from reimbursementsincluded legal and professional fees of $0.2 million associated with the anticipated settlementIRM Acquisition and $0.1 million associated with other acquisition target companies.
Gain on sale of oil and gas properties
During the Olenik litigation.three months ended September 30, 2022, we sold certain non-operated oil and gas properties located in Fayette and Gonzales Counties of Texas. In connection with these sales, we recorded gains totaling $14.8 million. See Note 4. Acquisitions and Divestitures in the Notes to Unaudited Condensed Consolidated Financial Statements.
Interest expense, net
Interest expense increased from $1.2 million for the three months ended September 30, 2020 to $3.1 million for the three months ended September 30, 2021 to $21.0 million for the three months ended September 30, 2022, due to higher average borrowings outstanding compared to the prior year period primarily resulting from borrowings related to the Acquisitions.Acquisitions and higher effective interest rates resulting from the issuance of the 8.000% Senior Notes. See Note 10. Long-Term Debtin the Notes to Unaudited Condensed Consolidated Financial Statements.
LossGain (loss) on derivative contracts, net
For the three months ended September 30, 2022, we recorded a net gain on derivative contracts of $60.3 million, consisting of unrealized mark-to-market gains of $119.2 million related to our commodity hedges, offset by net realized losses on settlements of our commodity hedges of $58.9 million. For the three months ended September 30, 2021, we recorded a net loss on derivative contracts of $33.1 million, consisting of unrealized mark-to-market losses of $12.2 million related to our commodity hedges along with net realized losses on settlements of our commodity hedges of $20.8 million and net realized losses on our interest rate swap of $0.1 million. For
Income tax expense
During the three months ended September 30, 2020, we recorded a net loss on derivative contracts of $6.0 million, consisting of unrealized mark-to-market losses of $14.6 million related to our commodity hedges and unrealized gains of $0.1 million related to our interest rate swap, partially offset by net realized gains on settlements of our commodity hedges of $8.5 million.
Income tax expense
For2022, the three months ended September 30, 2021, weCompany recorded income tax expense of approximately $0.5$60.5 million which included (1) a deferred income tax expense for oneEarthstone of our subsidiaries,$52.1 million, which included a deferred income tax expense of $50.2 million and a current income tax expense of $2.0 million, resulting from its share of the distributable income from EEH, offset by a $0.1 million release of valuation allowance, (2) a deferred income tax expense for Lynden USA Inc. (“Lynden US”),US of $0.3$3.5 million as a result of its share of the distributable loss from EEH (2) no netand (3) income tax expense for Earthstone as the $1.8of $4.9 million related to state taxes, which included a deferred income tax expense resulting from its share of the distributable income from EEH had a full valuation allowance recorded against it as future realization of the net deferred tax asset cannot be assured$3.6 million and (3) a current income tax expense of $0.2 million related to the Texas Margin Tax. One of our subsidiaries, Lynden Energy Corp. (“Lynden Corp”), incurred no material income or loss, or related income tax expense or benefit, for the three months ended September 30, 2021.
For the three months ended September 30, 2020, we recorded an income tax expense of approximately $0.1 million which included (1) no income tax expense for Lynden US as a result of its share of the distributable income from EEH, (2) deferred income tax benefit for Earthstone of $0.9 million as a result of its share of the distributable income from EEH, which was used to reduce the valuation allowance recorded against its deferred tax asset which was previously recorded as future realization of the net deferred tax asset cannot be assured and (3) deferred income tax expense of $0.1 million related to the Texas Margin Tax.$1.3 million. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the threenine months ended September 30, 2020.2022. The combined Earthstone and Lynden deferred income tax expense amounts of $53.7 million in the period were deferred as a result of substantial forecasted current year income tax deductions generated by the Acquisitions, as well as forecasted intangible drilling cost income tax deductions resulting from our drilling program.
Results of Operations
Nine Months Ended September 30, 2022, compared to the Nine Months Ended September 30, 2021
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2022 | | 2021 | | Change |
Sales volumes: | | | | | | |
Oil (MBbl) | | 7,569 | | | 3,195 | | | 137 | % |
Natural gas (MMcf) | | 36,567 | | | 9,490 | | | 285 | % |
Natural gas liquids (MBbl) | | 5,229 | | | 1,497 | | | 249 | % |
Barrels of oil equivalent (MBoe) | | 18,892 | | | 6,273 | | | 201 | % |
Average Daily Production (Boepd) | | 69,203 | | | 22,978 | | | 201 | % |
| | | | | | |
Average prices: | | | | | | |
Oil (per Bbl) | | $ | 99.93 | | | $ | 64.42 | | | 55 | % |
Natural gas (per Mcf) | | $ | 6.37 | | | $ | 2.84 | | | 124 | % |
Natural gas liquids (per Bbl) | | $ | 40.31 | | | $ | 28.69 | | | 41 | % |
| | | | | | |
Average prices adjusted for realized derivatives settlements: | | | | | | |
Oil ($/Bbl) | | $ | 83.44 | | | $ | 51.01 | | | 64 | % |
Natural gas ($/Mcf) | | $ | 5.15 | | | $ | 2.49 | | | 107 | % |
Natural gas liquids ($/Bbl) | | $ | 40.31 | | | $ | 28.69 | | | 41 | % |
| | | | | | |
(In thousands) | | | | | | |
Oil revenues | | $ | 756,420 | | | $ | 205,788 | | | 268 | % |
Natural gas revenues | | $ | 233,020 | | | $ | 26,910 | | | 766 | % |
Natural gas liquids revenues | | $ | 210,756 | | | $ | 42,929 | | | 391 | % |
| | | | | | |
Lease operating expense | | $ | 147,974 | | | $ | 35,579 | | | 316 | % |
Production and ad valorem taxes | | $ | 87,729 | | | $ | 17,428 | | | 403 | % |
| | | | | | |
| | | | | | |
Depreciation, depletion and amortization | | $ | 191,669 | | | $ | 77,493 | | | 147 | % |
| | | | | | |
General and administrative expense (excluding stock-based compensation) | | $ | 25,459 | | | $ | 14,579 | | | 75 | % |
Stock-based compensation - equity and liability awards | | $ | 15,112 | | | $ | 10,621 | | | 42 | % |
General and administrative expense | | $ | 40,571 | | | $ | 25,200 | | | 61 | % |
| | | | | | |
Transaction costs | | $ | 12,118 | | | $ | 2,906 | | | 317 | % |
Gain (loss) on sale of oil and gas properties | | $ | 14,803 | | | $ | 740 | | | 1900 | % |
Interest expense, net | | $ | (42,931) | | | $ | (7,668) | | | 460 | % |
| | | | | | |
| | | | | | |
Unrealized gain (loss) on derivative contracts | | $ | 28,607 | | | $ | (71,255) | | | (140) | % |
Realized loss on derivative contracts | | $ | (169,708) | | | $ | (46,311) | | | 266 | % |
Loss on derivative contracts, net | | $ | (141,101) | | | $ | (117,566) | | | 20 | % |
| | | | | | |
| | | | | | |
Income tax (expense) benefit | | $ | (81,673) | | | $ | 343 | | | (23,911) | % |
Nine Months Ended September 30, 2021, compared to the Nine Months Ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2021 | | 2020 | | Change |
Sales volumes: | | | | | | |
Oil (MBbl) | | 3,195 | | | 2,520 | | | 27 | % |
Natural gas (MMcf) | | 9,490 | | | 5,031 | | | 89 | % |
Natural gas liquids (MBbl) | | 1,497 | | | 870 | | | 72 | % |
Barrels of oil equivalent (MBoe) | | 6,273 | | | 4,229 | | | 48 | % |
Average Daily Production (Boepd) | | 22,978 | | | 15,433 | | | 49 | % |
| | | | | | |
Average prices: | | | | | | |
Oil (per Bbl) | | $ | 64.42 | | | $ | 36.92 | | | 74 | % |
Natural gas (per Mcf) | | $ | 2.84 | | | $ | 0.96 | | | 196 | % |
Natural gas liquids (per Bbl) | | $ | 28.69 | | | $ | 11.46 | | | 150 | % |
| | | | | | |
Average prices adjusted for realized derivatives settlements: | | | | | | |
Oil ($/Bbl) | | $ | 51.01 | | | $ | 55.14 | | | (7) | % |
Natural gas ($/Mcf) | | $ | 2.49 | | | $ | 1.31 | | | 90 | % |
Natural gas liquids ($/Bbl) | | $ | 28.69 | | | $ | 11.46 | | | 150 | % |
| | | | | | |
(In thousands) | | | | | | |
Oil revenues | | $ | 205,788 | | | $ | 93,017 | | | 121 | % |
Natural gas revenues | | $ | 26,910 | | | $ | 4,855 | | | 454 | % |
Natural gas liquids revenues | | $ | 42,929 | | | $ | 9,976 | | | 330 | % |
| | | | | | |
Lease operating expense | | $ | 35,579 | | | $ | 21,971 | | | 62 | % |
Production and ad valorem taxes | | $ | 17,428 | | | $ | 7,198 | | | 142 | % |
| | | | | | |
Impairment expense | | $ | — | | | $ | 62,548 | | | NM |
Depreciation, depletion and amortization | | $ | 77,493 | | | $ | 76,096 | | | 2 | % |
| | | | | | |
General and administrative expense (excluding stock-based compensation) | | $ | 14,579 | | | $ | 11,950 | | | 22 | % |
Stock-based compensation | | $ | 10,621 | | | $ | 7,665 | | | 39 | % |
General and administrative expense | | $ | 25,200 | | | $ | 19,615 | | | 28 | % |
| | | | | | |
Transaction costs | | $ | 2,906 | | | $ | (324) | | | NM |
| | | | | | |
Interest expense, net | | $ | (7,668) | | | $ | (4,207) | | | 82 | % |
| | | | | | |
| | | | | | |
Unrealized (loss) gain on derivative contracts | | $ | (71,255) | | | $ | 25,466 | | | (380) | % |
Realized (loss) gain on derivative contracts | | $ | (46,311) | | | $ | 47,599 | | | (197) | % |
(Loss) gain on derivative contracts, net | | $ | (117,566) | | | $ | 73,065 | | | (261) | % |
| | | | | | |
| | | | | | |
Income tax benefit (expense) | | $ | 343 | | | $ | (112) | | | NM |
NM – Not Meaningful
Oil revenues
For the nine months ended September 30, 2021,2022, oil revenues increased by $112.8$550.6 million, or 121%268%, relative to the comparable period in 2020.2021. Of the increase, $69.3$437.2 million was attributable to an increase in volume and $113.4 million was attributable to an increase in our realized price and $43.5 million was attributable to an increase in volume.price. Our average realized price per Bbl increased from $36.92$64.42 for the nine months ended September 30, 20202021 to $64.42$99.93, or 74%55%, for the nine months ended September 30, 2021.2022. Additionally, we had a net increase in the volume of oil sold of 6754,374 MBbls, or 27%137%, which included an increase of 1,0294,292 MBbls related to the wells acquired in the Acquisitions offset by a decreaseand an increase of 35482 MBbls in our other wells primarily resulting from natural declines, partially offset by new wells comingbrought online related to our 2021 drilling program.since the third quarter of 2021.
Natural gas revenues
For the nine months ended September 30, 2021,2022, natural gas revenues increased by $22.1$206.1 million, or 454%766%, relative to the comparable period in 2020.2021. Of the increase, $12.6$172.5 million was due to increased sales volume and $9.4$33.6 million was attributable to an increase in realized price. Our average realized price per Mcf increased 196%124% from $0.96 for the nine months ended September 30, 2020 to $2.84 for the nine months ended September 30, 2021.2021 to $6.37 for the nine months ended September 30, 2022. The total volume of natural gas produced and sold increased 4,45927,077 MMcf, or 89%285%, which included an increase of 3,02227,618 MMcf related to the wells acquired in the Acquisitions, and an increasepartially offset by a decrease of 1,437541 MMcf in our other wells primarily resulting from a higher mix of natural gas in the wells brought on in the current year, as well as prior year period volumes being impacted by voluntary production shut-ins.declines.
Natural gas liquids revenues
For the nine months ended September 30, 2021,2022, natural gas liquids revenues increased by $33.0$167.8 million, or 330%391%, relative to the comparable period in 2020.2021. Of the increase, $15.0$150.4 million was attributable to increased volume and $17.4 million was attributable to an increase in our realized price and $18.0 million was attributable to increased volume.price. The volume of natural gas liquids produced and sold increased by 6263,732 MBbls, or 72%249%, which includedprimarily resulting from an increase of 477 MMcf3,745 MBbls related to the wells acquired in the Acquisitions, and an increasepartially offset by a decrease of 14913 MBbls in our other wells primarily resulting from new wells coming online related to our 2021 drilling program, as well as prior year period volumes being impacted by voluntary production shut-ins.natural declines.
Lease operating expense (“LOE”)
LOE increased by $13.6$112.4 million, or 62%316%, for the nine months ended September 30, 20212022 relative to the comparable period in 2020,2021, due to a $12.5$100.0 million increase resulting from the LOE of the properties acquired in the Acquisitions and a $1.1$12.4 million increase resulting from both higher production volumes from new wells coming online related to our 2021 drilling program, as well as priorand inflationary factors experienced in the current year period volumes being impacted by voluntary production shut-ins.period.
Production and ad valorem taxes
Production and ad valorem taxes for the nine months ended September 30, 20212022 increased by $10.2$70.3 million, or 142%403%, relative to the comparable period in 20202021 due to a $5.9$59.9 million increase resulting from the properties acquired in the Acquisitions and a $4.3$10.4 million increase related to our other wells resulting from improved commodity prices, as well as prior year period volumes being impacted by voluntary production shut-ins.
Impairment expense
During the prior year period, we recorded non-cash impairments totaling $62.5 million, which consisted of $25.3 million to proved oil and natural gas properties, $19.7 million to unproved oil and natural gas properties and $17.6 million to goodwill. No such impairments were recorded during the nine months ended September 30, 2021.prices.
Depreciation, depletion and amortization (“DD&A”)
DD&A for the nine months ended September 30, 20212022 increased by $1.4$114.2 million, or 2%147%, relative to the comparable period in 20202021 primarily due to a $19.2$106.5 million increase in DD&A related to the assets acquired in the Acquisitions offset byand a $17.8$7.7 million decreaseincrease in DD&A driven by higher production volumes and increased depletable costs related to our other wells primarily resulting from lower prior year period volumes due to the impact of voluntary production shut-ins, as well as additional volumes added to the depletable basedevelopment of our properties resulting from the impact of improved commodity prices on our estimated proved reserves.properties.
General and administrative expense (“G&A”)
G&A for the nine months ended September 30, 20212022 increased by $5.6$15.4 million, or 28%61%, relative to the comparable period in 2020, primarily2021, due to an increase of $7.9 million in payroll and employee costs associated with increased headcount, $3.0 million primarily related to an increase in non-cashprofessional fees due to overall increased operating activity of the Company and a $4.5 million increase in performance-based stock-based compensation expense resultingof which $0.6 million related to performance-based equity awards and $0.2 million related to non-performance based equity awards, both due to an increased award base from increasesthe prior year period, and a $3.7 million increase in performance-based liability awards due to an increase in the market value of our Class A Common Stock an increase of $2.1in the nine months ended September 30, 2022.
Transaction Costs
For the nine months ended September 30, 2022, transaction costs increased by $9.2 million resulting fromprimarily due to legal and professional fees associated with the reinstatementChisholm Acquisition.
Gain on sale of certain cash-based compensation expenses which were suspended in the prior year periodoil and an increase of $0.5 million related to professional fees and lower administrative overhead reimbursements.gas properties
Transaction costs
ForDuring the nine months ended September 30, 2021, transaction costs increased by $3.2 million primarily due2022, we sold certain non-operated oil and gas properties located in Fayette and Gonzales Counties of Texas. In connection with these sales, we recorded gains totaling $14.8 million. See Note 4. Acquisitions and Divestitures in the Notes to a $3.9 million increase in legal and professional fees, and severance costs primarily associated with the Acquisitions, partially offset by a decrease of $1.2 million primarily due to reimbursements received related to the Olenik litigation.Unaudited Condensed Consolidated Financial Statements.
Interest expense, net
Interest expense increased from $4.2 million for the nine months ended September 30, 2020 to $7.7 million for the nine months ended September 30, 2021 to $42.9 million for the nine months ended September 30, 2022, due to higher average borrowings outstanding compared to the prior year period primarily resulting from borrowings related to the Acquisitions.Acquisitions and higher effective interest rates resulting from the issuance of the 8.000% Senior Notes. See Note 10. Long-Term Debt in the Notes to Unaudited Condensed Consolidated Financial Statements.
(Loss) gainLoss on derivative contracts, net
For the nine months ended September 30, 2022, we recorded a net loss on derivative contracts of $141.1 million, consisting of unrealized mark-to-market gains of $28.6 million related to our commodity hedges, along with net realized losses on settlements of our commodity hedges of $169.7 million. For the nine months ended September 30, 2021, we recorded a net loss on derivative contracts of $117.6 million, consisting of unrealized mark-to-market losses of $71.9 million related to our commodity hedges, partially offset by unrealized mark-to-market gains of $0.6 million related to our interest rate swap, along with net realized losses on settlements of our commodity hedges of $46.1 million and net realized losses on our interest rate swap of $0.2 million. For
Income tax (expense) benefit
During the nine months ended September 30, 2020, we recorded a net gain on derivative contracts of $73.1 million, consisting of unrealized mark-to-market gains of $25.9 million related to our commodity hedges, unrealized mark-to-market losses of $0.4 million related to our interest rate swap and net realized gains on settlements of our commodity hedges of $47.6 million.
Income tax benefit (expense)
For2022, the nine months ended September 30, 2021, weCompany recorded income tax benefitexpense of approximately $0.3$81.7 million which included (1) income tax expense for Earthstone of $70.0 million, which included a deferred income tax benefitexpense of $74.5 million and a current income tax expense of $2.0 million, resulting from its share of the distributable income from EEH, offset by a $6.5 million release of valuation allowance, (2) a deferred income tax expense for Lynden US of $0.1$5.5 million as a result of its share of the distributable loss from EEH (2) no netand (3) income tax benefit for Earthstone as the $0.8expense of $6.2 million income tax benefit resulting from its share of the distributable loss from EEH had a full valuation allowance recorded against it as future realization of the net deferred tax asset cannot be assured and (3)related to state taxes, which included a deferred income tax benefitexpense of $0.8$4.1 million related to the Texas Margin Tax, offset by (4)and a current income tax expense of $0.6 million related to the Texas Margin Tax.$2.1 million. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the nine months ended September 30, 2021.2022. The combined Earthstone and Lynden deferred income tax expense amounts of $80.0 million in the period were deferred as a result of substantial forecasted current year income tax deductions generated by the Acquisitions, as well as forecasted intangible drilling cost income tax deductions resulting from our drilling program.
For
Liquidity and Capital Resources
Sources of Cash
With two drilling rigs operating in the Midland Basin, two additional rigs operating in the Delaware Basin and a third Delaware Basin rig expected to be added in the fourth quarter of 2022, we expect total 2022 drilling plan spending of $519-$534 million which we expect to be funded by cash flows from operations. During the nine months ended September 30, 2020,2022, we recorded income tax expensegenerated $703.2 million of approximately $0.1 million which included (1) no income tax expense for Lynden US as a result of its share of the distributable incomecash flows from EEH, (2) a deferred income tax benefit for Earthstone of $0.8 million as a result of its share of the distributable income from EEH, which was used to reduce the valuation allowance recorded against its deferred tax asset which was previously recorded as future realization of the net deferred tax asset cannot be assured and (3) deferred income tax expense of $0.1 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the nine months ended September 30, 2020.
Liquidity and Capital Resources
We have significant undeveloped acreage and future drilling locations. Drilling horizontal wells in the Midland Basin, generally consisting of 7,500 to 12,000-foot lateral lengths, is capital intensive.operating activities. As of September 30, 2021,2022, we had $0.4 million in cash and $278.3 million of long-term debt outstandingavailable borrowings under our Credit Agreement with a borrowing base of $650.0approximately $558.3 million. With the $371.7Additionally, on April 12, 2022, we issued $550.0 million of undrawn borrowing base capacity and $0.4 million in cash, we had total liquidity8.000% senior notes due 2027 for net proceeds of approximately $372.2$537.2 million and, on April 14, 2022, we issued 280,000 shares of Series A Convertible Preferred Stock for net proceeds of approximately $279.3 million.
With improvementAlthough we expect cash flows and capacity under our Credit Agreement to be sufficient to fund our expected 2022 capital program, we may also elect to raise funds through new debt or equity offerings or from other sources of financing. All of our sources of liquidity can be affected by the general conditions of the broader economy, the global pandemic, force majeure events, challenging environmental regulations and fluctuations in commodity prices, operating costs and volumes produced, all of which affect us and our industry. We have no control over market prices for natural gas, NGLs or oil, prices during 2021,although we resumed drilling operations withmay be able to influence the deploymentamount of a drilling rig inrealized revenues through the first quarteruse of 2021 while adding a second drilling rig in August. We expect to spend $130-$140 million based onderivative contracts as part of our current 2021 drilling plan. commodity price risk management.
We believe we will have sufficient liquidity with cash flows from operations and available borrowings under theour Credit Agreement to meet our cashcapital requirements for the next 12 months.
Working Capital
Working capital (presented below) was a deficit of $105.0$138.9 million as of September 30, 2021, compared to a2022. Of the $138.9 million working capital deficit, of $20.8$13.5 million as of December 31, 2020, representing an increase in the deficit of $84.3 million. Of the $84.3 million increase in the working capital deficit $73.9 million resulted from a decrease in the net fair value ofrelates to our derivative contracts expected to settle in the next 12 months subsequent(subsequent to September 30, 20212022) resulting from increased oil price futures as of September 30, 2021. The2022. However, commodity hedges are settled in proximity of the receipt of the revenues to which they relate. Additionally, we are hedged at less than 100% of our production. As such, our commodity hedges are expected to settle at an amount less than the additional revenues received as a result of increased commodity prices. When removed, the remaining decreaseworking capital deficit of $10.4$125.5 million primarily resulted from increased drilling in the current year.is $432.8 million less than our cash and available borrowings as of September 30, 2022 of $558.3 million. The components of working capital are presented below:
| | | | September 30, | | December 31, | | | September 30, | | December 31, |
(In thousands) | (In thousands) | | 2021 | | 2020 | (In thousands) | | 2022 | | 2021 |
Current assets: | Current assets: | | | | | Current assets: | | | | |
Cash | Cash | | $ | 441 | | | $ | 1,494 | | Cash | | $ | — | | | $ | 4,013 | |
Accounts receivable: | Accounts receivable: | | Accounts receivable: | |
Oil, natural gas, and natural gas liquids revenues | Oil, natural gas, and natural gas liquids revenues | | 45,076 | | | 16,255 | | Oil, natural gas, and natural gas liquids revenues | | 196,941 | | | 50,575 | |
Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2021 and December 31, 2020, respectively | | 3,058 | | | 7,966 | | |
Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2022 and December 31, 2021, respectively | | Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2022 and December 31, 2021, respectively | | 20,328 | | | 2,930 | |
Derivative asset | Derivative asset | | 17 | | | 7,509 | | Derivative asset | | 14,950 | | | 1,348 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 1,565 | | | 1,509 | | Prepaid expenses and other current assets | | 19,089 | | | 2,549 | |
Total current assets | Total current assets | | 50,157 | | | 34,733 | | Total current assets | | 251,308 | | | 61,415 | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | | $ | 33,602 | | | $ | 6,232 | | Accounts payable | | $ | 75,162 | | | $ | 31,397 | |
Revenues and royalties payable | Revenues and royalties payable | | 30,139 | | | 27,492 | | Revenues and royalties payable | | 158,867 | | | 36,189 | |
Accrued expenses | Accrued expenses | | 20,620 | | | 16,504 | | Accrued expenses | | 105,623 | | | 31,704 | |
| Asset retirement obligation | Asset retirement obligation | | 543 | | | 447 | | Asset retirement obligation | | 941 | | | 395 | |
Derivative liability | Derivative liability | | 67,575 | | | 1,135 | | Derivative liability | | 28,404 | | | 45,310 | |
Advances | Advances | | 1,325 | | | 2,277 | | Advances | | 15,405 | | | 4,088 | |
Operating lease liabilities | Operating lease liabilities | | 732 | | | 773 | | Operating lease liabilities | | 869 | | | 681 | |
Finance lease liabilities | Finance lease liabilities | | — | | | 69 | | Finance lease liabilities | | 784 | | | — | |
Other current liabilities | Other current liabilities | | 634 | | | 565 | | Other current liabilities | | 4,105 | | | 851 | |
Total current liabilities | Total current liabilities | | 155,170 | | | 55,494 | | Total current liabilities | | 390,160 | | | 150,615 | |
| Working Capital | Working Capital | | $ | (105,013) | | | $ | (20,761) | | Working Capital | | $ | (138,852) | | | $ | (89,200) | |
|
Cash Flows from Operating Activities
Cash flows provided by operating activities for the nine months ended September 30, 20212022 increased to $147.3$703.2 million compared to $104.7$147.3 million for the nine months ended September 30, 2020,2021, primarily due to the impact of oil and natural gas property acquisitions and the timing of payments and receipts partially offset by the cash settlement of derivative contracts as compared to the prior year period.
Cash Flows from Investing Activities
Cash flows used in investing activities for the nine months ended September 30, 20212022 increased to $305.4 million$1.8 billion from $72.6$305.4 million for the nine months ended September 30, 2020, primarily2021, due to acquisitionsapproximately $1.5 billion in acquisition of oil and gas properties, $325.1 million related to the execution of our drilling program and $1.7 million related to other property additions, partially offset by $26.2 million in proceeds from sales of oil and gas properties.
Cash Flows from Financing Activities
Cash flows provided by financing activities were $1.1 billion for the nine months ended September 30, 2022 compared to cash flows provided by financing activities of $157.1 million for the nine months ended September 30, 2021 as compared to cash flows used in financing activities of $40.7 million for the nine months ended September 30, 2020, primarily due to borrowings required to fund acquisitions of oil and gas properties.2021. On April 12, 2022, we
issued $550.0 million of 8.000% senior notes due 2027 for net proceeds of approximately $537.2 million. On April 14, 2022, we issued 280,000 shares of Series A Convertible Preferred Stock for net proceeds of approximately $279.3 million.
Capital Expenditures
Our accrual basis capital expenditures for the three and nine months ended September 30, 20212022 were as follows (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 |
Drilling and completions | | $ | 42,179 | | | $ | 74,346 | |
Leasehold costs | | 1,990 | | | 2,444 | |
Total capital expenditures | | $ | 44,169 | | | $ | 76,790 | |
| | | | |
Credit Facility
On September 17, 2021, the parties entered into an amendment (the “Fourth Amendment”) to the Credit Agreement. Among other things, the Fourth Amendment increased the borrowing base from $550 million to $650 million in connection with its regularly scheduled semi-annual redetermination, added provisions to provide for the eventual replacement of LIBOR as a benchmark interest rate, made certain changes to the lenders, and made certain other administrative changes to the Credit Agreement. The increase in our borrowing base is primarily the result of the previously discussed Acquisitions and improved commodity prices.
The next regularly scheduled redetermination of our borrowing base is expected to occur on or around May 1, 2022.
As of September 30, 2021, $278.3 million of borrowings were outstanding, bearing annual interest of 3.153%, resulting in an additional $371.7 million of borrowing base availability under the Credit Facility. As of December 31, 2020, the Company had a $240.0 million borrowing base under the Credit Agreement, of which $115.0 million was outstanding, bearing annual interest of 2.400%, resulting in an additional $125.0 million of borrowing base availability under the Credit Agreement. The increase in our borrowing base is a result of acquisitions, our drilling program in 2021 and an improvement in commodity prices.
Commodity Prices
There has been continued improvement in commodity prices compared to 2020, mostly resulting from improvements in oil demand as COVID-19 began to abate and actions taken by OPEC to reduce the worldwide supply of oil through production cuts. We can provide no assurances as to when or to what extent economic disruptions resulting from COVID-19 and the corresponding decrease in oil demand may continue to improve. Prices for natural gas and NGLs have also improved compared to 2020. | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
Drilling and completions | | $ | 146,845 | | | $ | 348,145 | |
Leasehold costs | | 307 | | | 567 | |
Total capital expenditures | | $ | 147,152 | | | $ | 348,712 | |
| | | | |
Hedging Activities
The following table sets forth our outstanding derivative contracts at September 30, 2021.2022. When aggregating multiple contracts, the weighted average contract price is disclosed.
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q4 2021 | | Crude Oil | | 941,475 | | | $ | 50.63 | |
Q1 - Q4 2022 | | Crude Oil | | 2,462,250 | | | $ | 56.31 | |
Q4 2021 | | Crude Oil Basis Swap (1) | | 757,475 | | | $ | 0.80 | |
Q4 2021 | | Crude Oil Roll Swap (2) | | 228,475 | | | $ | (0.27) | |
Q1 - Q4 2022 | | Crude Oil Basis Swap (1) | | 2,007,500 | | | $ | 0.68 | |
Q4 2021 | | Natural Gas | | 2,576,000 | | | $ | 2.87 | |
Q1 - Q4 2022 | | Natural Gas | | 4,295,000 | | | $ | 2.92 | |
Q4 2021 | | Natural Gas Basis Swap (3) | | 2,698,000 | | | $ | (0.29) | |
Q1 - Q4 2022 | | Natural Gas Basis Swap (3) | | 9,100,000 | | | $ | (0.26) | |
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q4 2022 | | Crude Oil | | 1,081,000 | | | $ | 66.70 | |
Q1 - Q4 2023 | | Crude Oil | | 1,277,500 | | | $ | 76.20 | |
Q4 2022 | | Crude Oil Basis Swap (1) | | 3,128,000 | | | $ | 0.89 | |
Q1 - Q4 2023 | | Crude Oil Basis Swap (1) | | 9,488,500 | | | $ | 0.92 | |
Q4 2022 | | Natural Gas | | 1,893,500 | | | $ | 3.33 | |
Q1 - Q4 2023 | | Natural Gas | | 3,670,000 | | | $ | 3.35 | |
Q4 2022 | | Natural Gas Basis Swap (2) | | 1,840,000 | | | $ | (0.33) | |
Q1 - Q4 2023 | | Natural Gas Basis Swap (2) | | 36,500,000 | | | $ | (1.47) | |
Q1 - Q4 2024 | | Natural Gas Basis Swap (2) | | 36,600,000 | | | $ | (1.05) | |
(1)The basis differential price is between WTI Midland Crude and the WTI NYMEX.
(2)The swap is between WTI Roll and the WTI NYMEX.
(3)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) |
Q4 2022 | | Crude Oil Costless Collar | | 805,000 | | | $ | 73.14 | | | $ | 96.49 | |
Q1 - Q4 2023 | | Crude Oil Costless Collar | | 1,715,500 | | | $ | 62.98 | | | $ | 80.34 | |
Q4 2022 | | Natural Gas Costless Collar | | 8,686,500 | | | $ | 4.57 | | | $ | 10.17 | |
Q1 - Q4 2023 | | Natural Gas Costless Collar | | 17,298,000 | | | $ | 3.77 | | | $ | 7.49 | |
37 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Premium Puts |
Period | | Commodity | | Volume (Bbls / MMBtu) | | $/Bbl (Put Price) | | $/Bbl (Net of Premium) |
Q4 2022 | | Crude Oil | | 253,000 | | | $ | 80.00 | | | $ | 75.79 | |
Q1 - Q4 2023 | | Crude Oil | | 1,750,500 | | | $ | 70.00 | | | $ | 64.53 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) |
Q1 - Q4 2022 | | Crude Oil Costless Collar | | 365,000 | | | $ | 68.75 | | | $ | 55.00 | |
Q4 2021 | | Natural Gas Costless Collar | | 122,000 | | | $ | 4.10 | | | $ | 3.50 | |
Q1 - Q4 2022 | | Natural Gas Costless Collar | | 2,905,000 | | | $ | 4.00 | | | $ | 3.06 | |
Obligations and Commitments
There have been no material changes from the obligations and commitments disclosed in the Obligations and Commitments section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 20202021 Annual Report on Form 10-K other than those described in Note 13. Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements.
Environmental Regulations
Our operations are subject to risks normally associated with the drilling for and the production of oil and natural gas, including blowouts, fires, and environmental risks such as oil spills or natural gas leaks that could expose us to liabilities associated with these risks.
In our acquisition of existing or previously drilled well bores, we may not be aware of prior environmental safeguards, if any, that were taken at the time such wells were drilled or during such time the wells were operated. We maintain comprehensive insurance coverage that we believe is adequate to mitigate the risk of any adverse financial effects associated with these risks.
However, should it be determined that a liability exists with respect to any environmental cleanup or restoration, the liability to cure or remediate such a violation could still accrue to us.us or our existing insurance may not be adequate to insure against such liabilities. No claim has been made, nor are we aware of any liability which we may have, as it relates to any environmental cleanup, restoration, or the violation of any rules or regulations relating thereto.
Recently Issued Accounting Standards
See Note 1. Basis of Presentation and Summary of Significant Accounting Policies in the NotesThere are no recent accounting pronouncements that are expected to Unaudited Condensed Consolidated Financial Statements in this report for discussion of recently issued and adopted accounting standards affecting us.have a material impact on our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks associated with interest rate risks, commodity price risk and credit risk. We have established risk management processes to monitor and manage these market risks.
Commodity Price Risk, Derivative Instruments and Hedging Activity
We are exposed to various risks including energy commodity price risk. When oil, natural gas and natural gas liquid prices decline significantly our ability to finance our capital budget and operations may be adversely impacted. We expect energy prices to remain volatile and unpredictable. Our hedging activities consist of derivative instruments entered into in order to hedge against changes in oil and natural gas prices through the use of fixed price swaps, basis swaps and costless collars. Swaps exchange floating price risk in the future for a smaller reporting company as defined by Rule 12b-2fixed price at the time of the Exchange Acthedge. Costless collars set both a maximum (sold ceiling) and thereforea minimum (bought floor) future price.
We have entered into a series of derivative instruments to hedge a significant portion of our expected oil and natural gas production through December 31, 2024. Typically, these derivative instruments require payments to (receipts from) counterparties based on specific indices as required by the derivative agreements. Although not risk free, we believe these instruments reduce our exposure to oil and natural gas price fluctuations and, thereby, allow us to achieve a more predictable cash flow.
The following is a summary of our open oil and natural gas derivative contracts as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q4 2022 | | Crude Oil | | 1,081,000 | | | $ | 66.70 | |
Q1 - Q4 2023 | | Crude Oil | | 1,277,500 | | | $ | 76.20 | |
Q4 2022 | | Crude Oil Basis Swap (1) | | 3,128,000 | | | $ | 0.89 | |
Q1 - Q4 2023 | | Crude Oil Basis Swap (1) | | 9,488,500 | | | $ | 0.92 | |
Q4 2022 | | Natural Gas | | 1,893,500 | | | $ | 3.33 | |
Q1 - Q4 2023 | | Natural Gas | | 3,670,000 | | | $ | 3.35 | |
Q4 2022 | | Natural Gas Basis Swap (2) | | 1,840,000 | | | $ | (0.33) | |
Q1 - Q4 2023 | | Natural Gas Basis Swap (2) | | 36,500,000 | | | $ | (1.47) | |
Q1 - Q4 2024 | | Natural Gas Basis Swap (2) | | 36,600,000 | | | $ | (1.05) | |
(1)The basis differential price is between WTI Midland Crude and the WTI NYMEX.
(2)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) |
Q4 2022 | | Crude Oil Costless Collar | | 805,000 | | | $ | 73.14 | | | $ | 96.49 | |
Q1 - Q4 2023 | | Crude Oil Costless Collar | | 1,715,500 | | | $ | 62.98 | | | $ | 80.34 | |
Q4 2022 | | Natural Gas Costless Collar | | 8,686,500 | | | $ | 4.57 | | | $ | 10.17 | |
Q1 - Q4 2023 | | Natural Gas Costless Collar | | 17,298,000 | | | $ | 3.77 | | | $ | 7.49 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Premium Puts |
Period | | Commodity | | Volume (Bbls / MMBtu) | | $/Bbl (Put Price) | | $/Bbl (Net of Premium) |
Q4 2022 | | Crude Oil | | 253,000 | | | $ | 80.00 | | | $ | 75.79 | |
Q1 - Q4 2023 | | Crude Oil | | 1,750,500 | | | $ | 70.00 | | | $ | 64.53 | |
Changes in fair value of commodity derivative instruments are not requiredreported in earnings in the period in which they occur. Our open commodity derivative instruments were in a net liability position with a fair value of $15.8 million at September 30, 2022. Based on the published commodity futures price curves for the underlying commodity as of September 30, 2022, a 10% increase in per unit commodity prices would cause the total fair value of our commodity derivative financial instruments to providedecrease by approximately $10.5 million to an overall net liability position of $5.3 million. A 10% decrease in per unit commodity prices would cause the total fair value of our commodity derivative financial instruments to increase by approximately $10.5 million to an overall net liability position of $26.3 million. There would also be a similar increase or decrease in loss on derivative contracts, net in the Condensed Consolidated Statements of Operations.
Interest Rate Sensitivity
We are also exposed to market risk related to adverse changes in interest rates. Our interest rate risk exposure results primarily from fluctuations in short-term rates, which are based on SOFRand the prime rate and may result in reductions of earnings or cash flows due to increases in the interest rates we pay on these obligations.
At September 30, 2022, the combined outstanding borrowings under the revolving tranche and term loan tranche of the Credit Agreement were $641.7 million bearing interest at rates described in Note 10. Long-Term Debt in the Notes to Unaudited Condensed Consolidated Financial Statements. Fluctuations in interest rates will cause our annual interest costs to fluctuate. At September 30, 2022, the weighted average interest rate on borrowings under the revolving tranche and term loan tranche of the Credit Agreement was 5.930% per year. If borrowings were to remain constant, a 10% change in interest rates would impact our future cash flows by approximately $3.8 million per year.
Disclosure of Limitations
Because the information required under this item. above included only those exposures that existed at September 30, 2022, it does not consider those exposures or positions which could arise after that date. As a result, our ultimate realized gain or loss with respect to interest rate and commodity price fluctuations will depend on the exposures that arise during future periods.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Securities Exchange Act, of 1934, as amended (the “Exchange Act”), Rules 13a-15(e) and 15d-15(e), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Principal Accounting Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Principal Accounting Officer concluded that our disclosure controls and procedures were effective as of September 30, 20212022 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in various legal proceedings and claims in the ordinary course of business. As of September 30, 2021,2022, and through the filing date of this report, we do not believe the ultimate resolution of any such actions or potential actions of which we are currently aware will have a material effect on our consolidated financial position or results of operations.
See Note 13. Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements under Part I, Item 1 of this report, for material matters that have occurred since the filing of our Annual Report on Form 10-K for the year ended December 31, 2020.2021.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risk factors and other cautionary statements described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020.2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sale of Equity Securities
Unregistered sales of equity securities during the threenine months ended September 30, 20212022 were reported in our Current ReportReports on Form 8-K filed with the SEC on July 23, 2021, which report is incorporated herein by reference.February 18, 2022, April 18, 2022 and August 11, 2022.
Repurchase of Equity Securities
The following table sets forth information regarding our acquisition of shares of Class A Common Stock for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan or Programs |
July 2021 | | — | | | $ | — | | | — | | | — | |
August 2021 | | — | | | — | | | — | | | — | |
September 2021 | | 65,106 | | | $ | 9.19 | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan or Programs |
July 2022 | | — | | | $ | — | | | — | | | — | |
August 2022 | | — | | | — | | | — | | | — | |
September 2022 | | 48,073 | | | $ | 12.21 | | | — | | | — | |
(1)All of the shares were surrendered by employees (via net settlement) in satisfaction of tax obligations upon the vesting of restricted stock unit awards and performance unit awards. The acquisition of the surrendered shares was not part of a publicly announced program to repurchase shares of our Class A Common Stock.
Additionally, on October 11, 2022, Earthstone repurchased an aggregate of 3,000,000 shares of Class A Common Stock, held by affiliates of Warburg Pincus LLC in a private transaction, for an aggregate purchase price of approximately $43.7 million, or $14.58 per share.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
| | | | | | | | | | | | | | | | | | | | |
Exhibit No. | | Description | | Filed Herewith | | Furnished Herewith |
31.1 | | | | X | | |
31.2 | | | | X | | |
32.1 | | | | | | X |
32.2 | | | | | | X |
101 | | Interactive Data Files (formatted as Inline XBRL). | | X | | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | | X | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | |
| | | | |
| | | | EARTHSTONE ENERGY, INC. |
| | | | |
Date: | November 3, 20212, 2022 | | By: | /s/ Tony Oviedo |
| | | Tony Oviedo |
| | | Executive Vice President – Accounting and Administration |