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 June 30, ~~2022~~2023


☐			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.S. Employer
of incorporation or organization)						Identification No.)

1400 Woodloch Forest Drive, Suite 300

The Woodlands, Texas 77380

(Address of principal executive offices) (Zip Code)

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 such 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 ☐

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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

☐

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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 July ~~28, 2022, 104,442,648~~25, 2023, there were 140,588,696 shares of common stock outstanding, including 106,331,055 shares of Class A Common Stock, $0.001 par value per share, and ~~34,261,641~~34,257,641 shares of Class B Common Stock, $0.001 par value per ~~share, were outstanding.~~share.

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TABLE OF CONTENTS

Page

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of June 3 0 ~~, 2022~~ 30, 2023 and December 31, ~~2021~~2022

Condensed Consolidated Statements of Operations for the Three an dand Six Months Ended June 3 0 , ~~2022~~2023 and ~~2021~~2022

Condensed Consolidated Statements of Equity for the Three and S ix Months Ended June 3 0 30 , ~~2022~~2023 and ~~2021~~2022

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 3 0 ~~, 2022~~ 30, 2023 and ~~2021~~2022

Notes to Unaudited Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II – OTHER INFORMATION

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share amounts)


		June 30,		December 31,			June 30,		December 31,
ASSETS	ASSETS	2022		2021		ASSETS	2023		2022
Current assets:	Current assets:					Current assets:
Cash		$	—	$	4,013
Cash and cash equivalents						Cash and cash equivalents	$	49,500	$	—
Accounts receivable:	Accounts receivable:					Accounts receivable:
Oil, natural gas, and natural gas liquids revenues	Oil, natural gas, and natural gas liquids revenues	230,449		50,575		Oil, natural gas, and natural gas liquids revenues	111,436		161,531
Joint interest billings and other, net of allowance of $19 and $19 at June 30, 2022 and December 31, 2021, respectively		22,004		2,930
Joint interest billings and other, net of allowance of $19 and $19 at June 30, 2023 and December 31, 2022, respectively						Joint interest billings and other, net of allowance of $19 and $19 at June 30, 2023 and December 31, 2022, respectively	24,196		34,549
Derivative asset	Derivative asset	3,327		1,348		Derivative asset	7,106		31,331
Prepaid expenses and other current assets	Prepaid expenses and other current assets	13,646		2,549		Prepaid expenses and other current assets	19,658		18,854
Total current assets	Total current assets	269,426		61,415		Total current assets	211,896		246,265

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	3,167,140		1,625,367		Proved properties	4,348,453		3,987,901
Unproved properties	Unproved properties	282,569		222,025		Unproved properties	280,221		282,589
Land	Land	5,482		5,382		Land	5,482		5,482
Total oil and gas properties	Total oil and gas properties	3,455,191		1,852,774		Total oil and gas properties	4,634,156		4,275,972

Accumulated depreciation, depletion and amortization	Accumulated depreciation, depletion and amortization	(495,971)		(395,625)		Accumulated depreciation, depletion and amortization	(832,886)		(619,196)
Net oil and gas properties	Net oil and gas properties	2,959,220		1,457,149		Net oil and gas properties	3,801,270		3,656,776

Other noncurrent assets:	Other noncurrent assets:					Other noncurrent assets:

Office and other equipment, net of accumulated depreciation and amortization of $4,761 and $4,547 at June 30, 2022 and December 31, 2021, respectively		2,944		1,986
Office and other equipment, net of accumulated depreciation of $6,090 and $5,273 at June 30, 2023 and December 31, 2022, respectively						Office and other equipment, net of accumulated depreciation of $6,090 and $5,273 at June 30, 2023 and December 31, 2022, respectively	6,056		5,394
Derivative asset	Derivative asset	3,523		157		Derivative asset	2,284		9,117
Operating lease right-of-use assets	Operating lease right-of-use assets	2,423		1,795		Operating lease right-of-use assets	6,573		4,569
Other noncurrent assets	Other noncurrent assets	53,423		33,865		Other noncurrent assets	92,362		15,280
TOTAL ASSETS	TOTAL ASSETS	$	3,290,959	$	1,556,367	TOTAL ASSETS	$	4,120,441	$	3,937,401
LIABILITIES AND EQUITY	LIABILITIES AND EQUITY					LIABILITIES AND EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	80,386	$	31,397	Accounts payable	$	53,824	$	91,815
Revenues and royalties payable	Revenues and royalties payable	150,087		36,189		Revenues and royalties payable	166,380		163,368
Accrued expenses	Accrued expenses	72,168		31,704		Accrued expenses	102,201		80,942

Asset retirement obligation	Asset retirement obligation	390		395		Asset retirement obligation	860		948
Derivative liability	Derivative liability	122,067		45,310		Derivative liability	31,702		14,053
Advances	Advances	5,774		4,088		Advances	11,449		7,312
Operating lease liabilities	Operating lease liabilities	850		681		Operating lease liabilities	906		842

Finance lease liabilities						Finance lease liabilities	1,083		802
Other current liabilities	Other current liabilities	767		851		Other current liabilities	14,335		16,202
Total current liabilities	Total current liabilities	432,489		150,615		Total current liabilities	382,740		376,284

Noncurrent liabilities:	Noncurrent liabilities:					Noncurrent liabilities:
Revolving credit facility		395,000		320,000
8.000% Senior Notes due 2027, net		537,753		—

Long-term debt, net						Long-term debt, net	1,021,555		1,053,879
Deferred tax liability	Deferred tax liability	36,277		15,731		Deferred tax liability	174,565		138,336
Asset retirement obligation		35,555		15,471
Derivative liability		19,761		571

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Asset retirement obligation						Asset retirement obligation	29,695		29,611
Derivative liability						Derivative liability	10,624		—
Operating lease liabilities	Operating lease liabilities	1,736		1,276		Operating lease liabilities	3,524		3,889

Finance lease liabilities						Finance lease liabilities	1,151		876
Other noncurrent liabilities	Other noncurrent liabilities	13,004		6,442		Other noncurrent liabilities	4,760		10,509
Total noncurrent liabilities	Total noncurrent liabilities	1,039,086		359,491		Total noncurrent liabilities	1,245,874		1,237,100

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, 19,720,000 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	—		—

Series A Convertible Preferred Stock, $0.001 par value, 280,000 shares authorized, issued and outstanding at June 30, 2022. None authorized, issued or outstanding at December 31 2021		—		—
Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 79,217,423 and 53,467,307 issued and outstanding at June 30, 2022 and December 31, 2021, respectively		79		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 June 30, 2022 and December 31, 2021, respectively		34		34

Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 106,331,055 and 105,547,139 issued and outstanding at June 30, 2023 and December 31, 2022, respectively						Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 106,331,055 and 105,547,139 issued and outstanding at June 30, 2023 and December 31, 2022, respectively	106		106
Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,257,641 and 34,259,641 issued and outstanding at June 30, 2023 and December 31, 2022, respectively						Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,257,641 and 34,259,641 issued and outstanding at June 30, 2023 and December 31, 2022, respectively	34		34
Additional paid-in capital	Additional paid-in capital	1,326,293		718,181		Additional paid-in capital	1,345,657		1,346,463
Accumulated deficit		(48,367)		(159,774)
Retained earnings						Retained earnings	411,301		292,711

Total Earthstone Energy, Inc. equity	Total Earthstone Energy, Inc. equity	1,278,039		558,494		Total Earthstone Energy, Inc. equity	1,757,098		1,639,314
Noncontrolling interest	Noncontrolling interest	541,345		487,767		Noncontrolling interest	734,729		684,703
Total equity	Total equity	1,819,384		1,046,261		Total equity	2,491,827		2,324,017

TOTAL LIABILITIES AND EQUITY	TOTAL LIABILITIES AND EQUITY	$	3,290,959	$	1,556,367	TOTAL LIABILITIES AND EQUITY	$	4,120,441	$	3,937,401

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

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EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share amounts)


		Three Months Ended				Six Months Ended					Three Months Ended				Six Months Ended
		June 30,				June 30,					June 30,				June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
REVENUES	REVENUES									REVENUES
Oil	Oil	$	286,632	$	70,918	$	424,384	$	131,737	Oil	$	294,997	$	286,632	$	612,375	$	424,384
Natural gas	Natural gas	96,125		6,690		119,083		12,542		Natural gas	20,649		96,125		50,667		119,083
Natural gas liquids	Natural gas liquids	89,794		12,063		125,234		20,964		Natural gas liquids	54,362		89,794		120,102		125,234
Total revenues	Total revenues	472,551		89,671		668,701		165,243		Total revenues	370,008		472,551		783,144		668,701

OPERATING COSTS AND EXPENSES	OPERATING COSTS AND EXPENSES									OPERATING COSTS AND EXPENSES
Lease operating expense	Lease operating expense	50,514		11,747		72,145		22,596		Lease operating expense	87,602		50,514		175,580		72,145
Production and ad valorem taxes	Production and ad valorem taxes	34,195		5,176		47,510		10,203		Production and ad valorem taxes	31,805		34,195		64,958		47,510

Depreciation, depletion and amortization	Depreciation, depletion and amortization	66,463		26,027		100,789		50,434		Depreciation, depletion and amortization	109,990		66,463		220,740		100,789

Impairment expense										Impairment expense	854		—		854		—
General and administrative expense	General and administrative expense	14,077		9,170		26,383		17,550		General and administrative expense	19,992		14,077		37,571		26,383
Transaction costs	Transaction costs	(402)		507		10,340		2,613		Transaction costs	208		(402)		401		10,340
Accretion of asset retirement obligation	Accretion of asset retirement obligation	708		303		1,105		593		Accretion of asset retirement obligation	646		708		1,275		1,105
Exploration expense	Exploration expense	—		30		92		30		Exploration expense	6,082		—		6,548		92
Total operating costs and expenses	Total operating costs and expenses	165,555		52,960		258,364		104,019		Total operating costs and expenses	257,179		165,555		507,927		258,364

Gain on sale of oil and gas properties	Gain on sale of oil and gas properties	—		348		—		348		Gain on sale of oil and gas properties	49,254		—		46,114		—

Income from operations	Income from operations	306,996		37,059		410,337		61,572		Income from operations	162,083		306,996		321,331		410,337

OTHER INCOME (EXPENSE)	OTHER INCOME (EXPENSE)									OTHER INCOME (EXPENSE)
Interest expense, net	Interest expense, net	(16,625)		(2,401)		(21,943)		(4,618)		Interest expense, net	(22,092)		(16,625)		(44,948)		(21,943)

Write-off of deferred financing costs										Write-off of deferred financing costs	—		—		(5,109)		—
Loss on derivative contracts, net	Loss on derivative contracts, net	(49,907)		(51,175)		(201,387)		(84,438)		Loss on derivative contracts, net	(40,309)		(49,907)		(66,773)		(201,387)

Other income, net	Other income, net	249		200		296		303		Other income, net	819		249		812		296
Total other expense		(66,283)		(53,376)		(223,034)		(88,753)
Total other income (expense)										Total other income (expense)	(61,582)		(66,283)		(116,018)		(223,034)

Income (loss) before income taxes		240,713		(16,317)		187,303		(27,181)
Income tax (expense) benefit		(22,688)		486		(21,155)		794
Net income (loss)		218,025		(15,831)		166,148		(26,387)
Income before income taxes										Income before income taxes	100,501		240,713		205,313		187,303
Income tax expense										Income tax expense	(18,053)		(22,688)		(36,654)		(21,155)
Net income										Net income	82,448		218,025		168,659		166,148

Less: Net income (loss) attributable to noncontrolling interest		73,140		(6,960)		54,741		(11,683)
Less: Net income attributable to noncontrolling interest										Less: Net income attributable to noncontrolling interest	24,406		73,140		50,069		54,741

Net income (loss) attributable to Earthstone Energy, Inc.		$	144,885	$	(8,871)	$	111,407	$	(14,704)
Net income attributable to Earthstone Energy, Inc.										Net income attributable to Earthstone Energy, Inc.	$	58,042	$	144,885	$	118,590	$	111,407

Net income (loss) per common share attributable to Earthstone Energy, Inc.:
Net income per common share attributable to Earthstone Energy, Inc.:										Net income per common share attributable to Earthstone Energy, Inc.:
Basic	Basic	$	1.85	$	(0.20)	$	1.57	$	(0.34)	Basic	$	0.55	$	1.85	$	1.12	$	1.57
Diluted	Diluted	$	1.46	$	(0.20)	$	1.37	$	(0.34)	Diluted	$	0.54	$	1.46	$	1.10	$	1.37

Weighted average common shares outstanding:	Weighted average common shares outstanding:									Weighted average common shares outstanding:
Basic	Basic	78,291,037		44,127,718		70,909,353		43,457,043		Basic	106,209,657		78,291,037		106,091,850		70,909,353
Diluted	Diluted	102,410,036		44,127,718		84,266,422		43,457,043		Diluted	107,336,695		102,410,036		107,438,062		84,266,422

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

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EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

(In thousands, except share amounts)

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 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


	Issued Shares
	Series A Convertible Preferred Stock	Class A Common Stock	Class B Common Stock	Series A Convertible Preferred Stock		Class A Common Stock		Class B Common Stock		Additional Paid-in Capital		Retained Earnings		Total Earthstone Energy, Inc. Equity		Noncontrolling Interest		Total Equity
At December 31, 2022	—	105,547,139	34,259,641	$	—	$	106	$	34	$	1,346,463	$	292,711	$	1,639,314	$	684,703	$	2,324,017
Stock-based compensation expense	—	—	—	—		—		—		3,844		—		3,844		—		3,844
Vesting of restricted stock units, net of taxes paid	—	756,429	—	—		—		—		—		—		—		—		—
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings	—	460,473	—	—		—		—		(6,342)		—		(6,342)		—		(6,342)
Cancellation of Treasury shares	—	(460,473)	—	—		—		—		—		—		—		—		—

Net income	—	—	—	—		—		—		—		60,548		60,548		25,663		86,211
At March 31, 2023	—	106,303,568	34,259,641	—		$	106	$	34	$	1,343,965	$	353,259	$	1,697,364	710,366		$	2,407,730
Stock-based compensation expense	—	—	—	—		—		—		3,937		—		3,937		—		3,937
Vesting of restricted stock units, net of taxes paid	—	131,381	—	—		—		—		—		—		—		—		—
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings	—	56,683	—	—		—		—		(799)		—		(799)		—		(799)
Cancellation of Treasury shares	—	(56,683)	—	—		—		—		—		—		—		—		—
Class B Common Stock converted to Class A Common Stock	—	2,000	(2,000)	—		—		—		43		—		43		(43)		—
Settlement of Chisholm escrow shares	—	(105,894)	—	—		—		—		(1,489)		—		(1,489)		—		(1,489)
Net income	—	—	—	—		—		—		—		58,042		58,042		24,406		82,448
At June 30, 2023	—	106,331,055	34,257,641	—		$	106	$	34	$	1,345,657	$	411,301	$	1,757,098	734,729		$	2,491,827

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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


	Issued Shares
	Series A Convertible Preferred Stock	Class A Common Stock	Class B Common Stock	Series A Convertible Preferred 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, 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

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

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EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


		For the Six Months Ended June 30,					For the Six Months Ended June 30,
		2022		2021			2023		2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income (loss)		$	166,148	$	(26,387)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net income						Net income	$	168,659	$	166,148
Adjustments to reconcile net income to net cash provided by operating activities:						Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization	Depreciation, depletion and amortization	100,789		50,434		Depreciation, depletion and amortization	220,740		100,789

Impairment of oil and gas properties						Impairment of oil and gas properties	854		—

Accretion of asset retirement obligations	Accretion of asset retirement obligations	1,105		593		Accretion of asset retirement obligations	1,275		1,105
Settlement of asset retirement obligations	Settlement of asset retirement obligations	(475)		(53)		Settlement of asset retirement obligations	(1,036)		(475)
Gain on sale of oil and gas properties	Gain on sale of oil and gas properties	—		(348)		Gain on sale of oil and gas properties	(46,114)		—
Gain on sale of office and other equipment	Gain on sale of office and other equipment	(46)		(114)		Gain on sale of office and other equipment	(33)		(46)

Total loss on derivative contracts, net	Total loss on derivative contracts, net	201,387		84,438		Total loss on derivative contracts, net	66,773		201,387
Operating portion of net cash paid in settlement of derivative contracts	Operating portion of net cash paid in settlement of derivative contracts	(110,785)		(25,427)		Operating portion of net cash paid in settlement of derivative contracts	(7,443)		(110,785)
Stock-based compensation - equity portion		4,994		7,741
Stock-based compensation - equity and liability awards						Stock-based compensation - equity and liability awards	12,453		11,790
Deferred income taxes	Deferred income taxes	20,546		(794)		Deferred income taxes	36,229		20,546

Write-off of deferred financing costs						Write-off of deferred financing costs	5,109		—
Amortization of deferred financing costs	Amortization of deferred financing costs	2,069		339		Amortization of deferred financing costs	3,459		2,069

Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
(Increase) decrease in accounts receivable	(Increase) decrease in accounts receivable	(184,315)		(4,181)		(Increase) decrease in accounts receivable	63,303		(184,315)
(Increase) decrease in prepaid expenses and other current assets	(Increase) decrease in prepaid expenses and other current assets	(11,103)		(114)		(Increase) decrease in prepaid expenses and other current assets	(834)		(11,103)
Increase (decrease) in accounts payable and accrued expenses	Increase (decrease) in accounts payable and accrued expenses	71,454		8,352		Increase (decrease) in accounts payable and accrued expenses	(62,031)		64,658
Increase (decrease) in revenues and royalties payable	Increase (decrease) in revenues and royalties payable	85,570		1,795		Increase (decrease) in revenues and royalties payable	11,267		85,570
Increase (decrease) in advances	Increase (decrease) in advances	(9,661)		(2,830)		Increase (decrease) in advances	4,137		(9,661)

Net cash provided by operating activities	Net cash provided by operating activities	337,677		93,444		Net cash provided by operating activities	476,767		337,677
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Acquisition of oil and gas properties, net of cash acquired	Acquisition of oil and gas properties, net of cash acquired	(1,035,289)		(187,803)		Acquisition of oil and gas properties, net of cash acquired	(76,078)		(1,035,289)
Additions to oil and gas properties	Additions to oil and gas properties	(180,381)		(28,238)		Additions to oil and gas properties	(357,186)		(180,381)
Additions to office and other equipment	Additions to office and other equipment	(1,356)		(370)		Additions to office and other equipment	(482)		(1,356)
Proceeds from sales of oil and gas properties	Proceeds from sales of oil and gas properties	—		200		Proceeds from sales of oil and gas properties	56,062		—
Net cash used in investing activities	Net cash used in investing activities	(1,217,026)		(216,211)		Net cash used in investing activities	(377,684)		(1,217,026)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from borrowings under Credit Agreement	Proceeds from borrowings under Credit Agreement	1,471,572		360,078		Proceeds from borrowings under Credit Agreement	1,890,487		1,471,572
Repayments of borrowings under Credit Agreement	Repayments of borrowings under Credit Agreement	(1,396,572)		(233,718)		Repayments of borrowings under Credit Agreement	(2,160,624)		(1,396,572)
Proceeds from issuance of 8% Senior Notes due 2027, net		537,250		—
Proceeds from issuance of 8.000% Senior Notes due 2027, net						Proceeds from issuance of 8.000% Senior Notes due 2027, net	—		537,250
Proceeds from issuance of 9.875% Senior Notes due 2031, net						Proceeds from issuance of 9.875% Senior Notes due 2031, net	481,215		—

Repayment of term loan						Repayment of term loan	(250,000)		—
Proceeds from issuance of Series A Convertible Preferred Stock, net of offering costs of $674	Proceeds from issuance of Series A Convertible Preferred Stock, net of offering costs of $674	279,326		—		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	Cash paid related to the exchange and cancellation of Class A Common Stock	(4,617)		(2,821)		Cash paid related to the exchange and cancellation of Class A Common Stock	(7,141)		(4,617)
Cash paid for finance leases	Cash paid for finance leases	—		(70)		Cash paid for finance leases	(441)		—
Deferred financing costs	Deferred financing costs	(11,623)		(1,718)		Deferred financing costs	(3,079)		(11,623)
Net cash provided by financing activities		875,336		121,751
Net decrease in cash		(4,013)		(1,016)
Cash at beginning of period		4,013		1,494
Cash at end of period		$	—	$	478
Supplemental disclosure of cash flow information
Cash paid for:
Interest		$	9,468	$	4,272
Income taxes		$	625	$	797
Non-cash investing and financing activities:
Class A Common Stock issued in IRM Acquisition		$	—	$	76,572

Class A Common Stock issued in Chisholm Acquisition		$	249,515	$	—
Class A Common Stock issued in Bighorn Acquisition		$	77,757	$	—
Accrued capital expenditures		$	44,285	$	11,416
Lease asset additions - ASC 842		$	678	$	—
Asset retirement obligations		$	284	$	161

Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(49,583)		875,336
Net increase (decrease) in cash and cash equivalents						Net increase (decrease) in cash and cash equivalents	49,500		(4,013)
Cash and cash equivalents at beginning of period						Cash and cash equivalents at beginning of period	—		4,013
Cash and cash equivalents at end of period						Cash and cash equivalents at end of period	$	49,500	$	—

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

Table of Contents

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 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~~, collectively own a ~~member of EEH,~~75.6% interest in EEH. The Company consolidates the financial results of EEH and ~~records~~presents a noncontrolling interest in the Condensed Consolidated Financial Statements representing the economic interests of ~~EEH's~~EEH’s members other than Earthstone and Lynden US. Each of the outstanding shares of Class A common stock, $0.001 par value per share of Earthstone (the “Class A Common Stock”), has a corresponding unit of limited liability company interests denominated as a common unit in EEH (an “EEH Unit”). Each of the outstanding shares of Class B common stock, $0.001 par value per share of Earthstone (the “Class B Common Stock” and with the Class A Common Stock, “Common Stock”), has a corresponding EEH Unit and collectively represent the noncontrolling interests in the Condensed Consolidated Financial Statements.

At any time, at the holder’s discretion, a holder of an EEH Unit and a share of Class B Common Stock may receive a share of Class A Common Stock in exchange for an EEH Unit and a corresponding share of Class B Common Stock, resulting in the immediate cancellation of both the EEH Unit and share of Class B Common Stock exchanged. As of June 30, 2023, outstanding common shares of Earthstone, along with the equal number of corresponding outstanding EEH Units, were approximately 140.6 million, consisting of 106.3 million shares of Class A Common Stock and 34.3 million shares of Class B Common Stock.

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 ~~2021~~2022 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 atas of December 31, ~~2021~~2022 is derived from the audited Consolidated Financial Statements at that date.

For the purposes of these Condensed Consolidated Financial Statements, short-term investments, which have an original maturity of three months or less, are considered cash equivalents.

Note 2. ~~Fair Value Measurements~~Noncontrolling Interest

~~FASB Accounting Standards Codification (“ASC”) Topic 820, defines fair value as~~Earthstone consolidates the ~~price that would be received to sell an asset, or paid to transfer~~financial results of EEH and its subsidiaries and records 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 transactionsnoncontrolling interest for the ~~financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.~~

~~Level 2~~ ~~– Inputs,~~economic interest in Earthstone held by the members of EEH other than ~~quoted prices within Level 1, that are either directly or indirectly observable~~Earthstone and Lynden US. Net income attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations for the ~~asset or liability through correlation with market data at the measurement date~~three and ~~for the duration of the instrument’s anticipated life.~~

~~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 six months ended June 30, ~~2022.~~

~~Fair Value on a Recurring Basis~~

~~Derivative Financial Instruments~~2023 and 2022 represents the portion of net income 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 June 30, 2023 and December 31, 2022 represents the portion of net assets of the Company attributable to the members of EEH other than Earthstone and Lynden US.

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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 fixed price swap agreements, costless collars, deferred 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 June 30, 2022.

The following table ~~summarizes~~presents the ~~fair value of the Company’s financial assets and liabilities, by level within the fair-value hierarchy~~ ~~(in thousands)~~:

June 30, 2022 Level 1 Level 2 Level 3 Total
Financial assets
Derivative asset - current $ — $ 3,327 $ — $ 3,327
Derivative asset - noncurrent — 3,523 — 3,523
Total financial assets $ — $ 6,850 $ — $ 6,850
Financial liabilities
Derivative liability - current $ — $ 122,067 $ — $ 122,067
Derivative liability - noncurrent — 19,761 — 19,761
Share-based compensation liability - noncurrent — 12,898 — 12,898
Total financial liabilities $ — $ 154,726 $ — $ 154,726
December 31, 2021
Financial assets
Derivative asset - current $ — $ 1,348 $ — $ 1,348
Derivative asset - noncurrent — 157 — 157
Total financial assets $ — $ 1,505 $ — $ 1,505
Financial liabilities
Derivative liability - current $ — $ 45,310 $ — $ 45,310
Derivative liability - noncurrent — 571 — 571
Share-based compensation liability - current — 7,835 — 7,835
Share-based compensation liability - noncurrent — 6,324 — 6,324
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.~~

~~Fair Value on a Nonrecurring Basis~~

~~Table of Contents~~

~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~certain circumstances indicate that adjustments may be necessary. No triggering events that require assessment were observed during~~ noncontrolling interest for the six months ended June 30, ~~2022. See further discussion in~~ ~~Note 5. Oil and Natural Gas Properties~~.2023:

~~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 Company’s revolving credit facility bear interest at floating market rates, therefore the carrying amount and fair value were approximately equal as of June 30, 2022 and December 31, 2021. The carrying value of EEH’s 8.000% Senior Notes due 2027, net of $12.2 million deferred financing costs, of $537.8 million and accrued interest of $9.5 million had an estimated fair value of $521.2 million as of June 30, 2022. There were no other debt instruments outstanding at December 31, 2021.


	EEH Units Held By Earthstone and Lynden US	%		EEH Units Held By Others	%		Total EEH Units Outstanding
As of December 31, 2022	105,547,139	75.5	%	34,259,641	24.5	%	139,806,780
EEH Units exchanged for shares of Class A Common Stock	2,000			(2,000)			—
EEH Units cancelled in connection with the settlement of Chisholm escrow shares	(105,894)			—			(105,894)



EEH Units issued in connection with the vesting of restricted stock units and performance units	887,810			—			887,810
As of June 30, 2023	106,331,055	75.6	%	34,257,641	24.4	%	140,588,696

Note 3. Fair Value Measurements

The Financial Accounting Standards Board (“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. FASB ASC Topic 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 FASB ASC Topic 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.

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.

Fair Value on a Recurring Basis

Derivative Financial Instruments

Derivative financial instruments are carried at fair value and measured on a recurring basis. The derivative financial instruments consist of fixed price swaps, basis swaps, costless collars and deferred premium put options. The Company’s commodity price hedges are valued based on discounted future cash flow models that are primarily based on published forward commodity price curves; thus, these inputs are designated as Level 2 within the valuation hierarchy.

Share-based Compensation Liability

Certain of our performance-based stock awards (“PSUs”) and performance-based restricted stock units (“PRSUs” and collectively with the PSUs, “performance units”) may be payable in cash. The Company classifies the awards that may be

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 performance unit liability awards is included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of June 30, 2023.

The following table summarizes the fair value of the Company’s financial assets and liabilities, by level within the fair-value hierarchy (in thousands):


June 30, 2023	Level 1		Level 2		Level 3		Total
Financial assets
Derivative asset - current	$	—	$	7,106	$	—	$	7,106
Derivative asset - noncurrent	—		2,284		—		2,284
Total financial assets	$	—	$	9,390	$	—	$	9,390

Financial liabilities
Derivative liability - current	$	—	$	31,702	$	—	$	31,702
Derivative liability - noncurrent	—		10,624		—		10,624
Share-based compensation liability - current	—		12,722		—		12,722
Share-based compensation liability - noncurrent	—		2,179		—		2,179
Total financial liabilities	$	—	$	57,227	$	—	$	57,227

December 31, 2022
Financial assets
Derivative asset - current	$	—	$	31,331	$	—	$	31,331
Derivative asset - noncurrent	—		9,117		—		9,117
Total financial assets	$	—	$	40,448	$	—	$	40,448

Financial liabilities
Derivative liability - current	$	—	$	14,053	$	—	$	14,053

Share-based compensation liability - current	—		14,411		—		14,411
Share-based compensation liability - noncurrent	—		10,357		—		10,357
Total financial liabilities	$	—	$	38,821	$	—	$	38,821

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 revolving credit facility obligation bears interest at floating market rates, therefore carrying amounts and fair value of any outstanding amounts would be approximately equal. The 2027 Notes and 2031 Notes bear interest at fixed rates.

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, 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 certain circumstances indicate that adjustments may be necessary. No triggering events that require assessment were observed during the six months ended June 30, 2023. See further discussion in Note 6. Oil and Natural Gas Properties.

Items Not Recorded at Fair Value

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 June 30, 2023 and December 31, 2022. The carrying value of the 2027 Notes, net of $9.7 million of deferred financing costs, of $540.3 million and accrued interest of $9.3 million had an estimated fair value of $530.9 million as of June 30, 2023. The carrying value of the 2031 Notes, net of the $10.2 million original issue discount and $8.6 million of deferred financing costs, of $481.2 million and accrued interest of $0.1 million had an estimated fair value of $494.7 million as of June 30, 2023. There were no other debt instruments outstanding at June 30, 2023.

Note 4. 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 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, ~~2024.~~2024 and maintains certain natural gas basis swaps through December 31, 2025. 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.

The Company’s derivative instruments are cash flow hedge transactions in which it is hedging the variability of cash flow related to a forecasted transaction. 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~~following table sets forth the ~~following~~Company's open crude oil and natural gas derivative contracts as of June 30, ~~2022:~~2023. When aggregating multiple contracts, the weighted average contract price is disclosed.

Price Swaps
Period Commodity Volume
(Bbls / MMBtu) Weighted Average Price
($/Bbl / $/MMBtu)
Q3 - Q4 2022 Crude Oil 2,162,000 $ 66.70
Q1 - Q4 2023 Crude Oil 1,277,500 $ 76.20
Q3 - Q4 2022 Crude Oil Basis Swap (1) 3,082,000 $ 0.61
Q1 - Q4 2023 Crude Oil Basis Swap (1) 4,743,500 $ 0.59
Q3 - Q4 2022 Natural Gas 5,159,500 $ 3.52
Q1 - Q4 2023 Natural Gas 3,670,000 $ 3.35
Q3 - Q4 2022 Natural Gas Basis Swap (2) 3,680,000 $ (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)


	Price Swaps
Period	Commodity	Volume (Bbls / MMBtu)	Weighted Average Price ($/Bbl / $/MMBtu)
Q3 - Q4 2023	Crude Oil	1,145,200	$74.90
Q1 - Q4 2024	Crude Oil	621,600	$69.28
Q3 - Q4 2023	Crude Oil Basis Swap (1)	4,692,000	$0.92

Q3 - Q4 2023	Natural Gas	2,300,000	$3.35

Q3 - Q4 2023	Natural Gas Basis Swap (2)	25,760,000	$(1.67)
Q1 - Q4 2024	Natural Gas Basis Swap (2)	36,600,000	$(1.05)
Q1 - Q4 2025	Natural Gas Basis Swap (2)	14,600,000	$(0.74)

(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.

1213

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Costless Collars
Period Commodity Volume
(Bbls / MMBtu) Bought Floor
($/Bbl / $/MMBtu) Sold Ceiling
($/Bbl / $/MMBtu)
Q3 - Q4 2022 Crude Oil Costless Collar 1,357,000 $ 71.86 $ 91.39
Q1 - Q4 2023 Crude Oil Costless Collar 2,828,000 $ 65.74 $ 91.90
Q3 - Q4 2022 Natural Gas Costless Collar 11,400,500 $ 4.08 $ 6.48
Q1 - Q4 2023 Natural Gas Costless Collar 14,133,000 $ 3.46 $ 5.34


	Costless Collars
Period	Commodity	Volume (Bbls / MMBtu)	Bought Floor ($/Bbl / $/MMBtu)	Sold Ceiling ($/Bbl / $/MMBtu)
Q3 - Q4 2023	Crude Oil Costless Collar	2,120,800	$62.73	$85.26
Q1 - Q4 2024	Crude Oil Costless Collar	732,000	$60.00	$76.01
Q3 - Q4 2023	Natural Gas Costless Collar	13,298,800	$3.12	$5.21
Q1 - Q4 2024	Natural Gas Costless Collar	14,640,000	$2.56	$4.51

Deferred Premium Puts
Period Commodity Volume
(Bbls / MMBtu) $/Bbl (Put Price) $/Bbl (Net of Premium)
Q3 - Q4 2022 Crude Oil 253,000 $ 80.00 $ 75.79
Q1 - Q4 2023 Crude Oil 638,000 $ 70.00 $ 62.85

Deferred Premium Puts

Period

Commodity

Volume
(Bbls / MMBtu)

$/Bbl (Put Price)

$/Bbl (Net of Premium)

Q3 - Q4 2023

Crude Oil

791,200

$70.00

$64.54

Q1 - Q4 2024

Crude Oil

915,000

$65.00

$60.04

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):


			June 30, 2022						December 31, 2021								June 30, 2023						December 31, 2022
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	$	18,502	$	(15,175)	$	3,327	$	3,191	$	(1,843)	$	1,348	Commodity contracts	Derivative asset - current	$	20,420	$	(13,314)	$	7,106	$	51,803	$	(20,472)	$	31,331
Commodity contracts	Commodity contracts	Derivative liability - current	$	137,242	$	(15,175)	$	122,067	$	47,153	$	(1,843)	$	45,310	Commodity contracts	Derivative liability - current	$	45,016	$	(13,314)	$	31,702	$	34,525	$	(20,472)	$	14,053

Commodity contracts	Commodity contracts	Derivative asset - noncurrent	$	15,819	$	(12,296)	$	3,523	$	2,721	$	(2,564)	$	157	Commodity contracts	Derivative asset - noncurrent	$	3,516	$	(1,232)	$	2,284	$	9,117	$	—	$	9,117
Commodity contracts	Commodity contracts	Derivative liability - noncurrent	$	32,057	$	(12,296)	$	19,761	$	3,135	$	(2,564)	$	571	Commodity contracts	Derivative liability - noncurrent	$	11,856	$	(1,232)	$	10,624	$	—	$	—	$	—

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	Derivatives not designated as hedging contracts under ASC Topic 815			Three Months Ended June 30,				Six Months Ended June 30,				Derivatives not designated as hedging contracts under ASC Topic 815			Three Months Ended June 30,				Six Months Ended June 30,
		Statement of Cash Flows Location	Statement of Operations Location	2022		2021		2022		2021			Statement of Cash Flows Location	Statement of Operations Location	2023		2022		2023		2022
Unrealized gain (loss)		Not separately presented	Not separately presented	$	29,192	$	(36,653)	$	(90,602)	$	(59,011)
Unrealized (loss) gain												Unrealized (loss) gain	Not separately presented	Not separately presented	$	(39,891)	$	29,192	$	(59,330)	$	(90,602)
Realized loss	Realized loss	Operating portion of net cash paid in settlement of derivative contracts	Not separately presented	(79,099)		(14,522)		(110,785)		(25,427)		Realized loss	Operating portion of net cash paid in settlement of derivative contracts	Not separately presented	(418)		(79,099)		(7,443)		(110,785)
		Total loss on derivative contracts, net	Loss on derivative contracts, net	$	(49,907)	$	(51,175)	$	(201,387)	$	(84,438)		Total loss on derivative contracts, net	Loss on derivative contracts, net	$	(40,309)	$	(49,907)	$	(66,773)	$	(201,387)

~~Note 4. Acquisitions and Divestitures~~

~~Titus Agreement~~

On June 27, 2022, Earthstone and EEH, together as buyer, and Titus Oil & Gas Production, LLC, a Delaware limited liability company, 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 a purchase and sale agreement (the “Titus I Purchase Agreement”).

~~Table of Contents~~

~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

Pursuant to the Titus I Purchase Agreement, EEH or its designated wholly-owned subsidiary will 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, for a purchase price (the “Titus I Purchase Price”) of approximately $270 million in cash and 1,811,132 shares (the “Titus I Shares”) of Class A common stock, $0.001 par value per share of Earthstone (the “Class A Common Stock”). The Titus I Purchase Price is subject to customary purchase price adjustments with an effective date of August 1, 2022, with closing anticipated in the third quarter of 2022. On June 29, 2022, in connection with the Titus I Purchase Agreement, EEH deposited approximately $18.8 million (the “Titus I Deposit”) in cash into a third-party escrow account as a deposit pursuant to the Titus I Purchase Agreement, which will be credited against the purchase price upon closing of the Titus I Acquisition. The Titus I Deposit is included in Other noncurrent assets in the Condensed Consolidated Balance Sheet as of June 30, 2022 and in Acquisition of oil and gas properties, net of cash acquired, on the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2022.

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”), as seller, entered into a purchase and sale agreement (the “Titus II Purchase Agreement” and together with the Titus I Purchase Agreement, the “Purchase Agreements”).

Pursuant to the Titus II Purchase Agreement, EEH or its designated wholly-owned subsidiary will acquire (the “Titus II Acquisition” and together with the Titus I Acquisition, the “Acquisitions”) interests in oil and gas leases and related property of Titus II located in the Northern Delaware Basin of New Mexico, for a purchase price (the “Titus II Purchase Price”) of approximately $305 million in cash and 2,047,811 shares (the “Titus II Shares” and together with the Titus I Shares, the “Titus Shares”) of Class A Common Stock. The Titus II Purchase Price is subject to customary purchase price adjustments with an effective date of August 1, 2022, with closing anticipated in the third quarter of 2022. On June 29, 2022, in connection with the Titus II Purchase Agreement, EEH deposited approximately $21.2 million (the “Titus II Deposit”) in cash into a third-party escrow account as a deposit pursuant to the Titus II Purchase Agreement, which will be credited against the purchase price upon closing of the Titus II Acquisition. The Titus II Deposit is included in Other noncurrent assets in the Condensed Consolidated Balance Sheet as of June 30, 2022 and in Acquisition of oil and gas properties, net of cash acquired, on the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2022.

~~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 $641.8 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 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):

~~Table of Contents~~

~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~


~~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~~ ~~(1)~~	~~640,157~~
~~Direct transaction costs~~ ~~(2)~~	~~1,619~~
~~Total consideration transferred~~	$	~~719,533~~

~~Fair value of assets acquired:~~
~~Current assets~~	$	~~827~~
~~Oil and gas properties~~	~~762,045~~
~~Amount attributable to assets acquired~~	$	~~762,872~~

~~Fair value of liabilities assumed:~~
~~Suspense payable~~	~~27,062~~
~~Other current liabilities~~	~~3,083~~
~~Noncurrent liabilities - ARO~~	~~13,194~~
~~Amount attributable to liabilities assumed~~	$	~~43,339~~

~~(1)Includes preliminary customary purchase price adjustments.~~

~~(2)Represents $1.6 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, as adjusted for preliminary and customary purchase price adjustments, consisting of: (i) approximately $313.8 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):

~~Table of Contents~~

~~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~~	~~383,843~~

~~Total consideration transferred~~	$	~~633,358~~

~~Fair value of assets acquired:~~
~~Oil and gas properties~~	$	~~641,398~~
~~Amount attributable to assets acquired~~	$	~~641,398~~

~~Fair value of liabilities assumed:~~
~~Other current liabilities~~	$	~~2,069~~
~~Asset retirement obligation - noncurrent~~	~~5,971~~
~~Amount attributable to liabilities assumed~~	$	~~8,040~~

~~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):

~~Table of Contents~~

~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~


~~Consideration:~~
~~Shares of Class A Common Stock issued~~	~~12,719,594~~
~~Class A Common Stock price as of January 7, 2021~~	$	~~6.02~~
~~Class A Common Stock consideration~~	~~76,572~~
~~Cash consideration~~	~~140,507~~

~~Total consideration transferred~~	$	~~217,079~~

~~Fair value of assets acquired:~~
~~Cash~~	$	~~4,763~~
~~Other current assets~~	~~11,524~~
~~Oil and gas properties~~	~~224,112~~
~~Other non-current assets~~	~~252~~
~~Amount attributable to assets acquired~~	$	~~240,651~~

~~Fair value of liabilities assumed:~~
~~Derivative liability~~	$	~~10,177~~
~~Other current liabilities~~	~~5,196~~
~~Asset retirement obligation - noncurrent~~	~~8,199~~
~~Amount attributable to liabilities assumed~~	$	~~23,572~~

~~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) $18.8 million in cash, net of customary purchase price adjustments, 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) $41.4 million in cash, net of customary purchase price adjustments, and (ii) 1.5 million shares of Class A Common Stock. A Significant Shareholder, as identified below, owned approximately 49% of Tracker as of the closing of the Tracker Acquisition. See ~~Note 12. Related Party Transactions~~ ~~for further discussion.~~

The Tracker/Sequel Acquisitions have been accounted for as asset 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 acquired 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):

~~Table of Contents~~

~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~Total~~

~~Consideration:~~

~~Shares of Class A Common Stock issued~~

~~6,200,000~~

~~Class A Common Stock price as of July 20, 2021~~

~~9.97~~

~~Class A Common Stock consideration~~

~~61,814~~

~~Cash consideration~~ ~~(1)~~

~~60,159~~

~~Direct transaction costs~~ ~~(2)~~

~~1,715~~

~~Total consideration transferred~~

~~123,688~~

~~Fair value of assets acquired:~~

~~Oil and gas properties~~

~~124,288~~

~~Amount attributable to assets acquired~~

~~124,288~~

~~Fair value of liabilities assumed:~~

~~Noncurrent liabilities - asset retirement obligations~~

~~600~~

~~Amount attributable to liabilities assumed~~

~~600~~

~~(1)Includes customary purchase price adjustments.~~

~~(2)Represents $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 Bighorn Acquisition, Chisholm Acquisition, IRM Acquisition and Tracker/Sequel Acquisitions had been completed as of January 1, 2021. The unaudited supplemental pro forma financial information was derived from 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 results of operations (in thousands, except per share amounts):

Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Revenue $ 501,601 $ 291,725 $ 893,604 $ 512,796
Income (loss) before taxes 261,050 (3,675) 333,366 (12,522)
Net income (loss) 238,362 (3,544) 312,211 (12,319)
Less: Net income (loss) attributable to noncontrolling interest 76,673 (1,528) 102,865 (5,454)
Net income (loss) attributable to Earthstone Energy, Inc. 161,689 (2,016) 209,346 (6,865)
Pro forma net income (loss) per common share attributable to Earthstone Energy, Inc.:
Basic $ 2.07 $ (0.03) $ 2.95 $ (0.09)
Diluted $ 1.62 $ (0.03) $ 2.54 $ (0.09)

The Company has included in its Condensed Consolidated Statements of Operations, revenues of $167.3 million and operating expenses of $50.9 million for the period April 14, 2022 to June 30, 2022 related to the Bighorn Acquisition. The Company has included in its Condensed Consolidated Statements of Operations, revenues of $128.1 million and operating expenses of $46.3 million for the period February 15, 2022 to June 30, 2022 related to the Chisholm Acquisition. During the three and six months ended June 30, 2022, the Company recorded $0.3 million and $10.3 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.

~~Foreland-BCC Acquisition~~

~~Table of Contents~~

~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

On November 2, 2021, Earthstone, EEH and Foreland Investments LP, a Delaware limited partnership (“Foreland”), consummated the transactions contemplated in the Purchase and Sale Agreement dated as of September 30, 2021 by and among Earthstone, EEH and Foreland (the “Foreland Purchase Agreement”). Net of customary purchase price adjustments, EEH acquired (the “Foreland Acquisition”) interests in oil and gas leases and related property of Foreland located in Irion County and Crockett County, Texas, for a purchase price consisting of: (i) $13.4 million in cash and (ii) 2,611,111 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 agreement between Foreland, Foreland Operating, LLC, and BCC involving portions of the acreage covered by the Foreland Purchase Agreement for a purchase price of $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 4 separate sellers. The aggregate purchase price of the Eagle Ford Acquisitions was approximately $45.2 million. One of the 4 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 acquired oil and natural gas properties.

~~Eagle Ford Divestiture~~

On July 1, 2022, the Company sold certain non-operated oil and gas properties located in Fayette and Gonzales Counties of Texas. In connection with the sale, the Company received preliminary cash consideration of approximately $25.6 million which is subject to customary final purchase price adjustments.

Note 5. Acquisitions and Divestitures

Novo Acquisition

On June 14, 2023, EEH entered into (i) a Securities Purchase Agreement (the “Novo Purchase Agreement”) with Novo Oil & Gas Legacy Holdings, LLC (“Holdings”), Novo Intermediate, LLC (“Intermediate,” and together with Holdings, collectively, the “Sellers”) and Novo Oil & Gas Holdings, LLC (“Novo”), pursuant to which EEH will acquire 100% of the issued and outstanding equity interests (the “Subject Securities”) of Novo (the “Novo Acquisition”); and (ii) an Acquisition and Cooperation Agreement (the “Cooperation Agreement”) with Northern Oil and Gas, Inc. (“NOG”), pursuant to which NOG has agreed to acquire, immediately after the closing of the Novo Acquisition, an undivided 1/3 interest in Novo’s oil and natural gas

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

properties and related assets (the “Novo Assets”) acquired pursuant to the Novo Purchase Agreement (the “Novo Divestiture” and, together with the Novo Acquisition, the “Novo Transactions”). A Significant Shareholder is the majority owner of the Sellers.

Under the terms and conditions of the Novo Purchase Agreement, which has an economic effective date of May 1, 2023, the aggregate consideration to be paid to the Sellers in the Novo Acquisition will consist of $1.5 billion in cash (the “Novo Consideration”), subject to customary purchase price adjustments. Pursuant to the Novo Purchase Agreement, on the execution date thereof, EEH (together with NOG) deposited approximately $112.5 million (the “Acquisition Deposit”) into escrow, which will be credited toward the Novo Consideration payable at the closing of the Novo Acquisition. EEH’s portion of the deposit was $75 million which is included in Other noncurrent assets in the Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2023.

Immediately after the consummation of the Novo Acquisition, pursuant to the Cooperation Agreement, EEH has agreed to transfer to NOG an undivided 1/3 interest in the Novo Assets acquired pursuant to the Novo Purchase Agreement in exchange for consideration of approximately $500.0 million in cash, subject to certain customary purchase price adjustments. As a result, assuming an undivided 1/3 interest in the Novo Assets are transferred at the closing of the Cooperation Agreement, the Company will have acquired Novo, and retained ownership of an undivided 2/3 interest in the Novo Assets, for an unadjusted aggregate purchase price of approximately $1.0 billion in cash.

The Sellers and Purchaser have made customary representations and warranties in the Novo Purchase Agreement. The Novo Purchase Agreement also contains customary covenants and agreements, including, among others, covenants and agreements relating to (a) the conduct of Novo’s businesses during the period between the execution of the Novo Purchase Agreement and closing of the Novo Acquisition and (b) the efforts of the parties to cause the Novo Acquisition to be completed, including obtaining any required governmental approval and causing any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 to expire or terminate.

Titus Acquisition

On June 27, 2022, Earthstone and EEH, as buyer, and Titus Oil & Gas Production, LLC, a Delaware limited liability company, 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 a purchase and 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 $568.5 million in cash, net of customary purchase price adjustments, and 3,857,015 shares of Class A Common Stock.

The Titus Acquisition was accounted for as an asset acquisition. The consideration paid by the Company and allocation of that amount to the underlying assets acquired, on a relative fair value basis, was recorded on the Company's books as of the date of the closing of the Titus Acquisition. Additionally, costs directly related to the Titus Acquisition were capitalized as a component of the purchase price. The consideration transferred, assets acquired and liabilities assumed by the Company were recorded as follows (in thousands, except share amounts and stock price):

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


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	567,334
Direct transaction costs	1,202
Total consideration transferred	$	622,110

Assets acquired:
Oil and gas properties	$	626,696
Amount attributable to assets acquired	$	626,696

Liabilities assumed:
Current liabilities	$	3,672
Noncurrent liabilities - ARO	914
Amount attributable to liabilities assumed	$	4,586

Bighorn Acquisition

On January 30, 2022, Earthstone, EEH, as buyer, 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 $628.3 million in cash, net of customary purchase price adjustments, and 5,650,977 shares Class A Common Stock.

The Bighorn Acquisition was accounted for as an asset acquisition. The consideration paid by the Company and allocation of that amount to the underlying assets acquired, on a relative fair value basis, was recorded on the Company's 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. The consideration transferred, assets acquired and liabilities assumed by the Company were recorded as follows (in thousands, except share amounts and stock price):

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


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	625,887
Direct transaction costs	2,397
Total consideration transferred	$	706,041

Assets acquired:
Current assets	$	769
Oil and gas properties	746,211
Amount attributable to assets acquired	$	746,980

Liabilities assumed:
Suspense payable	$	25,710
Other current liabilities	2,035
Noncurrent liabilities - ARO	13,194
Amount attributable to liabilities assumed	$	40,939

Chisholm Acquisition

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 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. On April 10, 2023, 105,894 shares of Class A Common Stock were released to Earthstone from escrow and canceled in connection with the settlement of the Chisholm Acquisition. A Significant Shareholder, as identified below, was the majority owner of Chisholm as of the closing of the Chisholm Acquisition. See Note 12. Related Party Transactions for further discussion.

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Chisholm Acquisition has been accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer. 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	19,311,582
Class A Common Stock price as of February 15, 2022	$	12.85
Class A Common Stock consideration	248,154
Cash consideration	383,877

Total consideration transferred	$	632,031

Fair value of assets acquired:
Oil and gas properties	$	642,391
Amount attributable to assets acquired	$	642,391

Fair value of liabilities assumed:
Other current liabilities	$	4,389
Asset retirement obligation - noncurrent	5,971
Amount attributable to liabilities assumed	$	10,360

The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair value of oil and gas properties and asset retirement obligations were measured using the discounted cash flow technique of valuation.

Significant inputs to the valuation of oil and gas properties include estimates of: (i) reserves, (ii) future operating and development costs, (iii) future commodity prices, (iv) future plugging and abandonment costs, (v) estimated future cash flows, and (vi) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates and are the most sensitive and subject to change.

Divestitures

During the three and six months ended June 30, 2023, the Company sold certain non-core properties for approximately $54.2 million and $56.1 million, respectively, in cash, resulting in net gains of approximately $49.3 million and $46.1 million, respectively, recorded in Gain on sale of oil and gas properties, net in the Condensed Consolidated Statements of Operations for each of the periods then ended. There were no material divestitures during the six months ended June 30, 2022.

Note 6. 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 the three and six months ended June 30, 2023, depletion expense for oil and gas producing property and related equipment was $109.6 million and $219.9 million, respectively For the three and six months ended June 30, 2022, depletion expense for oil and gas producing property and related equipment was $66.2 million and $100.3 million, respectively. ~~For the three and six months ended June 30, 2021, depletion expense for oil and gas producing property and related equipment was $25.9 million and $50.1 million, respectively.~~

~~Our accrual basis capital expenditures for the three and six months ended June 30, 2022 were as follows (in thousands~~):

Three Months Ended June 30, 2022 Six Months Ended June 30, 2022
Drilling and completions $ 119,300 $ 201,300
Leasehold costs 151 260
Total capital expenditures $ 119,451 $ 201,560

1918

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Our accrual basis capital expenditures for the three and six months ended June 30, 2023, were as follows (in thousands):


	Three Months Ended June 30, 2023		Six Months Ended June 30, 2023
Development costs	$	173,702	$	375,086
Leasehold costs	738		1,626
Total capital expenditures	$	174,440	$	376,712

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

During the three and six months ended June 30, 2023, the Company recorded non-cash impairment charges of $0.9 million to its oil and natural gas properties due to acreage expirations in non-core operating areas. No impairments were recorded to the Company's oil and natural gas properties during the three and six months ended June 30, ~~2022 and 2021.~~

~~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 six months ended June 30, 2022 and 2021 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 June 30, 2022 and December 31, 2021 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.

~~The following table presents the changes in noncontrolling interest for the six months ended June 30, 2022:~~

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 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 598,772 — 598,772
As of June 30, 2022 79,217,423 69.8 % 34,261,641 30.2 % 113,479,064

2022.

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

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~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

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.

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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
June 30, Six Months Ended
June 30,
(In thousands, except per share amounts) 2022 2021 2022 2021
Net income (loss) attributable to Earthstone Energy, Inc. $ 144,885 $ (8,871) $ 111,407 $ (14,704)
Net income (loss) attributable to Earthstone Energy, Inc. from assumed conversion of Series A Preferred Stock (2)
4,351 — 4,351 —
Net income (loss) attributable to Earthstone Energy, Inc. - Diluted $ 149,236 $ (8,871) $ 115,758 $ (14,704)
Net income (loss) per common share attributable to Earthstone Energy, Inc.:
Basic $ 1.85 $ (0.20) $ 1.57 $ (0.34)
Diluted $ 1.46 $ (0.20) $ 1.37 $ (0.34)
Weighted average common shares outstanding
Basic 78,291,037 44,127,718 70,909,353 43,457,043
Add potentially dilutive securities:
Unvested restricted stock units (1)
493,600 — 506,760 —
Unvested performance units (1)
2,003,778 — 1,979,770 —
Series A Preferred Stock (2)
21,621,621 — 10,870,539 —
Diluted weighted average common shares outstanding 102,410,036 44,127,718 84,266,422 43,457,043

~~(1)~~For the three and six months ended June 30, 2022 and 2021, the 1,099,800 performance units granted on January 27, 2021 were excluded due to an assumed settlement in cash and the liability treatment described in ~~Note 9. Stock-Based Compensation. For the three and six months ended June 30, 2021, there were no dilutive effects related to unvested restricted stock units or performance units due to the losses for those periods.~~

~~(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 $4.4 million for both the three and six months ended June 30, 2022.


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share amounts)	2023		2022		2023		2022
Net income attributable to Earthstone Energy, Inc.	$	58,042	$	144,885	$	118,590	$	111,407

Net income attributable to Earthstone Energy, Inc. from assumed conversion of Series A Convertible Preferred Stock	—		4,351		—		4,351

Net income attributable to Earthstone Energy, Inc. - Diluted	$	58,042	$	149,236	$	118,590	$	115,758

Net income per common share attributable to Earthstone Energy, Inc.:
Basic	$	0.55	$	1.85	$	1.12	$	1.57
Diluted	$	0.54	$	1.46	$	1.10	$	1.37

Weighted average common shares outstanding
Basic	106,209,657		78,291,037		106,091,850		70,909,353
Add potentially dilutive securities:
Unvested restricted stock units	204,310		493,600		276,434		506,760
Unvested performance units	922,728		2,003,778		1,069,778		1,979,770
Series A Convertible Preferred Stock	—		21,621,621		—		10,870,539
Diluted weighted average common shares outstanding	107,336,695		102,410,036		107,438,062		84,266,422

The Class B Common Stock ~~par value $0.001~~has been excluded, as its conversion would eliminate noncontrolling interest and net income attributable to noncontrolling interest of $24.4 million for the three months ended June 30, 2023 and net income attributable to noncontrolling interest of $50.1 million for the six months ended June 30, 2023 would be added back to Net income attributable to Earthstone Energy, Inc. for the periods then ended, having no dilutive effect on Net income per common share ofattributable to Earthstone ~~(the “Class~~Energy, Inc.

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 $73.1 million for the three months ended June 30, 2022 and net income attributable to noncontrolling interest of $54.7 million for the six months ended June 30, 2022 would be added back to Net income attributable to Earthstone Energy, Inc. for the periods then ended, having no dilutive 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 loss attributable to noncontrolling interest of $7.0 million for the three months ended June 30, 2021 and net loss attributable to noncontrolling interest of $11.7 million for the six months ended June 30, 2021 would be added back to Net loss attributable to Earthstone Energy, Inc. for the periods then ended, having no dilutive effect on Net loss per common share attributable to Earthstone Energy, Inc.

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~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

Note 8. Common ~~Stock and Preferred~~ Stock

Class A Common Stock

At June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, there were ~~79,217,423~~106,331,055 and ~~53,467,307~~105,547,139 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.

During the three and six months ended June 30, ~~2022,~~2023, 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 issued 188,064 and 1,404,966 shares, respectively, of Class A Common Stock, of which 56,683 and 517,156 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. Additionally, on April 10, 2023, 105,894 shares of Class A Common Stock were released to Earthstone from escrow and canceled in connection with the settlement of the Chisholm Acquisition.

During the three and six months ended June 30, 2022, as a result of the vesting and settlement of performance units and restricted stock units under the 2014 Plan, Earthstone issued 163,753 and 933,896 shares, respectively, of Class A Common Stock, of which 48,232 and 335,124 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~~ In connection with the Chisholm Acquisition, on February 15,

~~Note 9. Stock-Based Compensation.~~Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 closing of 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.

Class B Common Stock

At June 30, 2023 and December 31, 2022, there were 34,257,641 and 34,259,641 shares of Class B Common Stock issued and outstanding. Each share of Class B Common Stock, together with one EEH Unit, is convertible into one share of Class A Common Stock. During the three and six months ended June 30, 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 221,401 and 487,660 shares, respectively, of Class A Common Stock, of which 66,343 and 145,654 shares, respectively, of Class A Common Stock were retained as treasury stock and canceled to satisfy the related employee income tax 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 June 30, 2022 and December 31, 2021, there were 34,261,641 and 34,344,532~~2023, 2,000 shares of Class B Common Stock ~~issued~~ and ~~outstanding, respectively. Each share~~EEH Units were exchanged for an equal number of ~~Class B Common Stock, together with 1 EEH Unit, is convertible into 1 share~~shares of Class A Common Stock. During the three and six months ended June 30, 2022, 10,125 and 82,891 shares, respectively, 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 six months ended June 30, 2021, 33,463 and 611,494 shares, respectively, of Class B Common Stock and EEH Units were exchanged for an equal number of shares of Class A Common Stock.

~~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 “Investors”) to sell, in a private placement (the “Private Placement”), 280,000 shares of newly authorized convertible preferred stock, $0.001 par value per share (the “Series A 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 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 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 Preferred Stock pursuant to the SPA in exchange for cash proceeds of $279.3 million, net of offering costs.

~~At June 30, 2022 and December 31, 2021, there were 280,000 and no shares of the Series A Preferred Stock issued and outstanding, respectively.~~

On July 6, 2022, the Series A Preferred Stock automatically converted into 25,225,225 shares of Class A Common Stock. As such, the Series A Preferred Stock is no longer outstanding and the Investors now hold the 25,225,225 shares of Class A Common Stock issued upon the conversion of the Series A 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 Preferred Stock.

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~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

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 June 30, ~~2022,~~2023, 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. Holders of outstanding RSUs granted prior to December 1, 2022 do not have dividend rights prior to vesting and settlement. Holders of outstanding RSUs granted subsequent to December 1, 2022 do have dividend rights. 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 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.

The table below summarizes RSU award activity for the six months ended June 30, ~~2022:~~2023:


		Shares	Weighted-Average Grant Date Fair Value			Shares	Weighted-Average Grant Date Fair Value
Unvested RSUs at December 31, 2021		771,817	$	5.91
Unvested RSUs at December 31, 2022					Unvested RSUs at December 31, 2022	869,978	$	11.40
Granted	Granted	487,215	$	11.20	Granted	420,655	$	13.37
Forfeited	Forfeited	(10,100)	$	7.08	Forfeited	(22,252)	$	12.14
Vested	Vested	(325,771)	$	7.70	Vested	(361,166)	$	11.10
Unvested RSUs at June 30, 2022		923,161	$	8.06
Unvested RSUs at June 30, 2023					Unvested RSUs at June 30, 2023	907,215	$	12.41

As of June 30, ~~2022,~~2023, there was ~~$8.4~~$11.0 million of unrecognized compensation expense related to the RSU awards which will be recognized over a weighted average period of ~~1.09~~1.06 years.

For the three and six months ended June 30, 2023, Stock-based compensation related to RSUs was $1.8 million and $3.6 million, respectively. For the three and six months ended June 30, 2022, Stock-based compensation related to RSUs was $1.5 million and $2.7 million, respectively. ~~For the three and six months ended June 30, 2021, Stock-based compensation related to RSUs was $1.2 million and $2.7 million, respectively.~~

Performance Units

Performance units include both performance-based stock units (“PSUs”) and performance-based restricted stock units (“PRSUs”). The table below summarizes ~~PSU~~performance unit activity for the six months ended June 30, ~~2022:~~2023:

Shares Weighted-Average Grant Date Fair Value
Unvested PSUs at December 31, 2021 2,751,725 $ 8.42
Granted 472,485 $ 19.42
Vested (608,125) $ 9.30
Unvested PSUs at June 30, 2022 2,616,085 $ 10.20

On February 1, 2022, the Board of Directors of Earthstone (the “Board”) granted 472,485 PSUs (the “2022 PSUs”) to certain officers pursuant to the 2014 Plan (the “2022 Grant”). 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 “Performance Period”) of certain performance criteria established by the Board. The Company classifies these awards 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 2022 PSUs are eligible to be earned based on the annualized Total Shareholder Return (“TSR”) of the Class A Common Stock during a three-year period beginning on February 1, 2022. 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:


	Shares	Weighted-Average Grant Date Fair Value
Unvested Performance Units at December 31, 2022	2,616,085	$	10.21
Granted	559,325	$	18.86

Vested	(1,043,800)	$	5.36
Unvested Performance Units at June 30, 2023	2,131,610	$	14.85

2321

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Earthstone’s Annualized TSR TSR Multiplier
23.9% or greater 2
14.5% 1
8.4% 0.5
Less than 8.4% 0
On January 6, 2023, the Board of Directors of Earthstone (the “Board”) granted 258,150 PRSUs (the “2023 RTSR PRSUs”) to certain officers pursuant to the 2014 Plan. The 2023 RTSR PRSUs are payable in cash or shares of Class A Common Stock upon the achievement by Earthstone over a period commencing on January 1, 2023 and ending on December 31, 2025 (the “2023 Performance Period”) of certain performance criteria established by the Board. The Company classifies these awards that will be settled in cash as liability awards. PRSU grants to be settled in shares are classified as equity awards. The holders of 2023 RTSR PRSUs do not have any voting rights with respect to such PRSUs until vesting and settlement; however, such holders do have dividend rights.

The number of shares of Class A Common Stock that may be earned will be determined based on the TSR (as defined below) achieved by Earthstone relative to the TSR of each of the companies in the predetermined peer group during the Performance Period. Between 0x to 2.0x of the PRSUs are eligible to be earned based on Earthstone’s ranking relative to the companies in the predetermined peer group. In the event that greater than 1.0x of the 2023 RTSR PRSUs are earned, such additional PRSUs may be paid in cash rather than the issuance of shares of Class A Common Stock

Total shareholder return is generally determined by dividing (A) the volume weighted average price of a share of stock for the trading days during the thirty calendar days ending on and including the last calendar day of the applicable performance period minus the volume weighted average price of a share of stock for the trading days during the thirty calendar days ending on and including the first day of the applicable performance period plus cash dividends paid over the applicable performance period by (B) the volume weighted average price of a share of stock for the trading days during the thirty calendar days ending on and including the first day of the applicable performance period (“TSR”).

The Company accounts for ~~these~~the 2023 RTSR PRSU awards as market-based awards which are valued 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. For the ~~2022 PSUs,~~2023 RTSR PRSUs, assuming a risk-free rate of ~~1.4%~~3.89% and ~~volatility of 86.0%~~volatilities ranging from 40.6% to 142.5%, the Company calculated the weighted average grant date fair value per ~~PSU~~PRSU to be ~~$19.42.~~$20.06.

On January ~~27, 2021,~~6, 2023, the Board granted ~~1,099,800 PSUs~~301,175 PRSUs (the “2023 ATSR PRSUs”) to certain officers pursuant to the 2014 ~~Plan (the “2021 PSUs”).~~Plan. The ~~PSUs~~2023 ATSR PRSUs are payable in cash or shares of Class A Common Stock upon the achievement by Earthstone over the ~~Company over a period commencing on January 1, 2021 and ending on December 31,~~ 2023 Performance Period of certain performance criteria established by the Board. The Company classifies these awards that will be settled in cash as liability ~~awards~~awards. PRSU grants to be settled in shares are classified as ~~they~~equity awards. The holders of 2023 ATSR PRSUs do not have any voting rights with respect to such PRSUs until vesting and settlement; however, such holders do have dividend rights.

The 2023 ATSR PRSUs are ~~expected~~eligible to be earned based on the annualized TSR of the Class A Common Stock during the 2023 Performance Period. 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			2.0
14.5%			1.0
8.4%			0.5
Less than 8.4%			0.0

In the event that greater than 1.0x of the 2023 ATSR PRSUs are earned, such additional PRSUs may be paid in ~~cash. As~~cash rather than the issuance of ~~June 30, 2022~~shares of Class A Common Stock.

The Company accounts for the 2023 ATSR PRSUs as market-based awards which are valued utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and ~~December 31, 2021, $12.9 million~~establishes grant date fair value based on the most likely outcome. For the 2023 ATSR PRSUs, assuming a risk-free rate of 3.89% and ~~$6.3 million, respectively, have been included in Other noncurrent liabilities in~~volatility of 77%, the ~~Condensed Consolidated Balance Sheets related~~Company calculated the weighted average grant date fair value per PRSU to ~~the 2021 PSUs.~~be $17.84.

On January ~~28, 2019,~~30, 2020, the Board granted ~~669,550~~1,043,800 PSUs (the “2020 PSUs”) to certain ~~named executive~~ officers pursuant to the 2014 Plan (the ~~“2019 PSUs”~~“2020 Grant”).

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The ~~2019~~2020 PSUs were ~~payable in shares of Class A Common Stock based upon the achievement by Earthstone over a period commencing on February 1, 2019 and ending~~settled on January 31, ~~2022 of performance criteria established by the Board. On January 31, 2022, the Company settled the remaining 608,125 PSUs, net of forfeitures, at a rate of 1.97x. 1.0x was settled through~~2023 resulting in the issuance of ~~608,125~~1,043,800 shares of Class A Common Stock and ~~the remainder was settled in cash.~~cash payments totaling approximately $14.5 million.

As of June 30, ~~2022,~~2023, there was ~~$22.5~~$17.7 million of unrecognized compensation expense related to all PSU awards which will be amortized over a weighted average period of ~~0.94~~0.89 years.

For the three and six months ended June 30, 2023, Stock-based compensation related to all performance units was approximately $6.1 million and $8.9 million, respectively. For the three and six months ended June 30, 2022, Stock-based compensation related to all ~~PSUs~~performance units was approximately $4.5 million and $9.1 million, respectively. ~~For the three and six months ended June 30, 2021, Stock-based compensation related~~

The Company classifies awards that will be settled in cash as liability awards. PSU grants to ~~all PSUs was approximately $3.2~~be settled in shares are classified as equity awards. Corresponding liabilities of $12.7 million and ~~$5.0 million, respectively. A liability of $12.9~~$14.4 million related to the ~~PSU liability awards is~~performance units were included in Other current liabilities and Accrued expenses, respectively, in the Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022, respectively. Additionally, corresponding liabilities of $2.2 million and $10.4 million related to the performance units were included in Other noncurrent liabilities in the Condensed Consolidated Balance ~~Sheet~~Sheets as of June 30, ~~2022.~~2023 and December 31, 2022, respectively.

Note 10. Long-Term Debt

The Company's long-term debt consisted of the following (in thousands):


	June 30, 2023		December 31, 2022
Revolving credit facility(1)	$	—	$	270,136
Term loan under credit facility due 2027	—		250,000
8.000% Senior notes due 2027	550,000		550,000
9.875% Senior notes due 2031	500,000		—
	1,050,000		1,070,136
Unamortized debt issuance costs on term loan	—		(5,309)
Unamortized debt issuance costs on 8.000% Senior notes	(9,660)		(10,948)
Original issue discount on 9.875% Senior notes(2)	(10,160)		—
Unamortized debt issuance costs on 9.875% Senior notes(2)	(8,625)		—
Long-term debt, net	$	1,021,555	$	1,053,879

(1)Related to the borrowings under the revolving credit facility, the Company had debt issuance costs of $16.4 million and $15.3 million, net of accumulated amortization of $8.5 million and $6.5 million, as of June 30, 2023 and December 31, 2022, respectively. Unamortized deferred financing costs on the borrowings under the revolving credit facility are included in Other noncurrent assets in the Condensed Consolidated Balance Sheets.

(2)The 9.875% Senior notes due 2031 were issued on June 30, 2023 resulting in no amortization of the original issue discount and debt issuance costs in the current period. Beginning July 1, 2023, the Company will show amortization of the original issue discount and debt issuance costs as interest expense in the Condensed Consolidated Statement of Operations.

Credit Agreement

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, Royal Bank of Canada, as Syndication Agent, Truist Bank, as successor by merger to SunTrust Bank, as Documentation Agent, and the ~~lenders~~Lenders party thereto ~~(the “Lenders”~~(collectively, the “Parties”) entered into a credit agreement ~~(the~~(together with all amendments or other modifications, the “Credit Agreement”), which replaced the prior credit facility, which was terminated on November 21, 2019.

On ~~January~~March 30, ~~2022,~~2023, Earthstone, EEH, ~~as Borrower,~~ Wells Fargo, ~~as Administrative Agent,~~ the lenders party thereto (the “Lenders”) and the guarantors party thereto entered into an ~~amended and restated Fifth Amendment~~amendment (the ~~“Fifth~~“Eighth Amendment”) to the Credit Agreement. Among other things, the Eighth Amendment (i) increased elected commitments from $1.2 billion to $1.4 billion, (ii) settled the $250 million term loan tranche under the Credit Agreement (the “Term Loan”) through an elected revolving commitment, (iii) redetermined the borrowing base ~~and corresponding elected commitments from $650 million to $825 million upon the closing~~at $1.65 billion as a part of the ~~Chisholm Agreement.~~regularly scheduled redetermination, (iv) added new banks to the lending group, and (v) made certain administrative changes.

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.

~~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,~~July 7, 2023, Earthstone, EEH, Wells Fargo, the Lenders and the guarantors party thereto entered into an amendment (the ~~“Sixth~~“Ninth Amendment”) to the Credit Agreement. Among other things, the Amendment ~~extended~~(i) adds JPMorgan Chase Bank, N.A. and Citibank N.A. as new Lenders, arrangers, and documentation agents for 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~~Lenders under the Credit Agreement, ~~remain at $800 million.~~

~~The next regularly scheduled redetermination of~~(ii) increases the aggregate elected borrowing base commitments from $1.40 billion to $1.75 billion, and (iii) increases the borrowing base ~~is expected to occur on or around November 1, 2022. Subsequent redeterminations are expected to occur on or about each May 1st and November 1st thereafter. The amounts~~

2423

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

from $1.65 billion to $2.00 billion. The effectiveness of the Amendment is conditioned upon, among other things, the closing of the previously announced Novo Transactions.

The next regularly scheduled redetermination of the borrowing base is expected to occur on or around October 1, 2023. Subsequent redeterminations are expected to occur on or about each May 1st and November 1st thereafter. The amounts borrowed under the Credit Agreement bear annual interest rates at either (a) the adjusted SOFR Rate (as customarily defined) (the “Adjusted Term SOFR Rate”) plus 2.25% to 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 Term SOFR Rate for an interest rate period of one month plus 1.0%, (ii) plus 1.25% to 2.25%, depending on the amount borrowed under the Credit Agreement. Principal amounts outstanding under the Credit Agreement are due and payable in full at maturity on June 2, 2027. All of the obligations under the Credit Agreement, and the guarantees of those obligations, are secured by substantially all of EEH’s assets. Additional payments due under the Credit Agreement include paying a commitment fee of 0.375% to 0.50% per year, depending on the amount borrowed under the Credit Agreement, to the Lenders in respect of the unutilized commitments thereunder. EEH is also required to pay customary letter of credit fees.

The Credit Agreement 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 Agreement 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 of the fiscal quarter to (ii) EBITDAX for the applicable period, which ~~for the period ended June 30, 2022,~~ was calculated ~~by multiplying~~as EBITDAX for the four consecutive fiscal ~~quarter~~quarters ending on such ~~date by four.~~date. 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 Agreement 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 June 30, ~~2022,~~2023, EEH was in compliance with the covenants under the Credit Agreement.

As of June 30, 2023, no borrowings were outstanding under the Credit Agreement, resulting in $1.4 billion of borrowing base availability. At December 31, 2022, ~~$395.0~~$270.1 million and $250.0 million of borrowings were outstanding under the revolving tranche and the term loan tranche of the Credit Agreement, bearing annual interest of 4.584%, resulting in an additional $405.0 million of borrowing base availability under the Credit Agreement. At December 31, 2021, there were $320.0 million of borrowings outstanding under the Credit Agreement.respectively.

For the three and six months ended June 30, 2023, the interest rate on borrowings under the revolving tranche of the Credit Agreement averaged 7.60% and 7.56% per annum, respectively, which excluded commitment fees of $0.9 million and $1.6 million, respectively, and amortization of deferred financing costs of $1.0 million and $2.0 million, respectively. For the three and six months ended June 30, 2022, the interest rate on borrowings under the Credit Agreement averaged 4.42% and 4.04% per annum, respectively, which excluded commitment fees of $0.0 million and $0.2 million, respectively, and amortization of deferred financing costs of $0.9 million and $1.6 million, respectively. ~~For~~

No costs associated with the revolving tranche of the Credit Agreement were capitalized during the three months ended June 30, 2023. During the six months ended June 30, 2023, the Company capitalized $3.1 million of costs associated with the revolving tranche of the Credit Agreement. There were no costs associated with the term loan tranche of the Credit Agreement to capitalize during the three and six months ended June 30, 2021, interest on borrowings under the Credit Agreement averaged 3.33% and 3.36% per annum, respectively, which excluded commitment fees of $0.2 million and $0.4 million, respectively, and amortization of deferred financing costs of $0.2 million and $0.3 million, respectively.

2023. During the three and six months ended June 30, 2022, the Company capitalized $5.7 million and $11.6 million, respectively, of costs associated with the Credit Agreement. ~~During the three and six months ended June 30, 2021, the Company capitalized $0.8 million and $1.8 million, respectively, of costs associated with the Credit Agreement.~~

Related to the Credit Agreement, the Company had debt issuance costs of $18.3 million and $6.7 million, net of accumulated amortization of $4.9 million and $3.3 million, as of June 30, 2022 and December 31, 2021, respectively. The Company’s policy is to capitalize the financing costs associated with ~~the Credit Agreement~~its debt and amortize those costs on a straight-line basis over the term of the associated ~~debt. The capitalized costs~~debt, which approximates the effective interest method over the term of the related ~~to the Credit Agreement are included in Other noncurrent assets in the Condensed Consolidated Balance Sheets.~~

~~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.debt.

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~On April 12, 2022, in connection with the completion~~8.000% Senior Notes

At June 30, 2023, there were $550.0 million of ~~the Notes Offering, EEH entered into an indenture, dated as of April 12, 2022~~outstanding senior notes due 2027 (the ~~“Indenture”~~“2027 Notes”)~~, among EEH, the guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee.~~

. The 2027 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.

year. The 2027 Notes are guaranteed on a senior unsecured basis by ~~the Company~~Earthstone and ~~its~~four subsidiaries of EEH (the “Guarantors”) and the 2027 Notes may be guaranteed by certain of EEH’s future restricted subsidiaries. The 2027 Notes are unsecured, rank equally in right of payment with all existing and future senior unsecured indebtedness of EEH and the Guarantors, including the 2031 Notes, and rank senior in right of payment to any future subordinated indebtedness of EEH and the Guarantors. The 2027 Notes will rank effectively junior to all secured indebtedness of EEH and the Guarantors, including indebtedness under ~~EEH’s revolving credit facility,~~the Credit Agreement, to the extent of the value of the assets securing such indebtedness. The 2027 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~~indenture dated April 12, 2022 under which the ~~ability of its Restricted Subsidiaries (as defined in the Indenture), including the Guarantors, to: (i) incur or guarantee additional indebtedness or issue~~2027 Notes were issued also contains 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. Theserestrictive 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.

~~The Indenture contains customary~~redemption rights, 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 six months ended June 30, 2022, the Company capitalized $12.8 million of costs associated with the Notes. No costs associated with the Notes were capitalized during the three and six months ended June 30, 2021.

Related to the Notes, the Company had debt issuance costs of $12.2 million, net of accumulated amortization of $0.5 million, as of June 30, 2022. The Company’s policy is to capitalize the financing costs associated with the Notes and amortize those costs on a straight-line basis over the term of the Notes. The capitalized costs associated with the Notes are included in 8.000% Senior Notes due 2027, net in the Condensed Consolidated Balance Sheets.customary provisions.

As of June 30, ~~2022,~~2023, accrued interest of ~~$9.5~~$9.3 million associated with the 2027 Notes was included in Accrued expenses in the Condensed Consolidated Balance Sheets.

9.875% Senior Notes

On June 30, 2023, EEH completed an offering of $500.0 million aggregate principal amount of EEH’s 9.875% senior notes due 2031 (the “2031 Notes”). The 2031 Notes will mature on July 15, 2031 with interest accruing at a rate of 9.875% per annum payable semi-annually in cash in arrears on January 15 and July 15 of each year, commencing January 15, 2024. The 2031 Notes are guaranteed on a senior unsecured basis by the Guarantors and the 2031 Notes may be guaranteed by certain of EEH’s future restricted subsidiaries. The 2031 Notes are unsecured, rank equally in right of payment with all existing and future senior unsecured indebtedness of EEH and the Guarantors, including the 2027 Notes, and rank senior in right of payment to any future subordinated indebtedness of EEH and the Guarantors. The 2031 Notes will rank effectively junior to all secured indebtedness of EEH and the Guarantors, including indebtedness under the Credit Agreement, to the extent of the value of the assets securing such indebtedness. The 2031 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 dated June 30, 2023 under which the 2031 Notes were issued (the “Indenture”) also contains certain restrictive covenants, redemption rights, events of default and other customary provisions.

Subject to the terms of the Indenture, if the consummation of the Novo Acquisition does not occur before a specified date, EEH will be required to redeem all of the 2031 Notes issued on the issue date at a redemption price equal to 100% of the initial issue price of the 2031 Notes, plus accrued and unpaid interest on the 2031 Notes being redeemed, if any.

As of June 30, 2023, accrued interest of $0.1 million associated with the 2031 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.

~~Table of Contents~~

~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

The following table summarizes the Company’s asset retirement obligation transactions recorded during the six months ended June 30, ~~2022~~2023 (in thousands):

~~2022~~2023

Beginning asset retirement obligations

~~15,866~~30,559

Liabilities incurred

~~215~~171

Liabilities settled

~~(475)~~

~~Acquisitions~~

~~19,165~~

~~Accretion expense~~

~~1,105~~ (1,036)

Accretion expense

1,275

Divestitures

(892)

Revision of estimates

69478

Ending asset retirement obligations

~~35,945~~30,555

Note 12. Related Party Transactions

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 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 (the “Significant Shareholders” or separately, each a “Significant Shareholder”).

As discussed in Note 4.5. Acquisitions and Divestitures, the Chisholm Acquisition was consummated on February 15, 2022, whereby the Company acquired the Chisholm Assets for a purchase price of ~~$377.5~~$383.9 million in cash, net of ~~preliminary and~~ customary purchase price adjustments, and approximately 19.4 million shares of Class A Common Stock. A Significant Shareholder was the majority owner of Chisholm as of the closing 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 19.4 million shares of Class A Common Stock in connection with the closing of the Chisholm ~~Agreement~~Acquisition was (1) approved by a majority of the voting power of all outstanding disinterested shares of the Common Stock and (2) increased the Significant Stockholder's beneficial ownership of Class A Common Stock from approximately 25% to 36% as of February 15, 2022.

As discussed in Note 4. Acquisitions, on March 31, 2021, Earthstone and EEH entered into the Tracker/Sequel Purchase Agreements. The Tracker/Sequel Acquisitions were consummated on July 20, 2021, whereby the Company acquired the Tracker Assets for a purchase price of $18.8 million in cash and 4.7 million shares of Class A Common Stock. A 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 On April 10, 2023, 105,894 shares of Class A Common Stock were released to Earthstone from escrow and canceled in connection with the ~~closing~~settlement of the ~~Tracker/Sequel Purchase Agreements at Earthstone’s Annual Meeting of Stockholders held on July 20, 2021.~~Chisholm Acquisition.

As discussed in Note 4.5. Acquisitions and Divestitures, ~~during~~on June 14, 2023, EEH entered into the ~~second quarter of 2021,~~Novo Purchase Agreement. Pursuant to the ~~Company completed~~Novo Purchase Agreement, EEH will acquire the ~~Eagle Ford Acquisitions~~Novo Assets for aan aggregate purchase price of ~~approximately $45.2 million~~$1.5 billion in ~~cash.~~cash, subject to customary purchase price adjustments, and reduced by NOG's portion of the purchase price pursuant to the Cooperation Agreement. A Significant Shareholder ~~controlled one~~is the majority owner of the ~~4 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.~~Sellers.

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 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 Preferred Stock in exchange for cash proceeds of $279.3 million, net of offering costs.

~~On July 6, 2022, the Series A 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.~~

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 Investments L.P. (“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 Securities Purchase Agreement dated as of January 30, 2022, by and among Earthstone and the Investors. 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, the Company may be involved in other various legal proceedings and claims in the ordinary course of ~~business.~~

~~Table~~business, none of ~~Contents~~

~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~Commitment~~which are reasonably expected to ~~Purchase Materials~~

~~The Company entered into an agreement~~result in a material liability to purchase certain materials related to its drilling completion activities through 2024 (the “Materials Purchase Agreement”). The Company has already fulfilled its 2022 financial obligation under the Materials Purchase Agreement and the Company ~~has committed to payments totaling $13.6 million and $3.7 million due on or before January 1, 2023 and 2024, respectively.~~as of June 30, 2023.

Environmental and Regulatory

As of June 30, ~~2022,~~2023, there were no known environmental or other regulatory matters related to the Company’s properties or operations that are reasonably expected to result in a material liability to the Company.

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.

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

On February 15, 2022, the Company completed the Chisholm Acquisition which included the issuance of ~~19,417,476~~19,311,582 shares of Class A Common ~~Stock. When there is a~~Stock, which resulted in an ownership change ~~in ownership, as defined under~~within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”)~~, it results in~~. As a ~~limitation that applies~~result of the ownership change, the Company’s ability to ~~all~~utilize net operating losses (“NOLs”) and credits generated prior to the ownership change date ~~that can~~may be ~~used~~limited to offset taxable income incurred after the ownership change date (the “382 Limitation”). The annual limitation is based on Earthstone’s stock value prior to the ownership change, multiplied by the applicable federal long-term, tax-exempt interest rate (the “FLTR”). Based on Earthstone’s stock price at the close of business on February 15, 2022 of $12.85 and the applicable FLTR of 1.46%, the current limitation is estimated to be $10.1 million per year. Additionally, unutilized 382 Limitation amounts can be carried forward to future years, cumulatively.

As of June ~~2022~~30, 2023 and December 31, ~~2021, a~~2022, current ~~liability~~liabilities of ~~$0.8~~$1.6 million and ~~$0.9~~$1.8 million, respectively, are included in Other current liabilities in the Condensed Consolidated Balance ~~Sheets. The amounts represent~~Sheets related solely to current Texas Margin Tax payable.

During the six months ended June 30, 2023, the Company recorded income tax expense of approximately $36.7 million comprised of (1) deferred federal income tax expense for Earthstone of $31.0 million resulting from its share of the distributable income from EEH, (2) a deferred federal income tax expense for Lynden US of $1.8 million as a result of its share of the distributable income from EEH and (3) income tax expense of $3.9 million related to both current and deferred state income taxes. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the six months ended June 30, 2023.

During the six months ended June 30, 2022, the Company recorded income tax expense of approximately $21.2 million which included (1) a deferred income tax expense for Earthstone of $17.9 million which included a deferred income tax expense of $24.3 million resulting from its share of the distributable income from EEH, offset by a $6.4 million release of valuation allowance, (2) a deferred income tax expense for Lynden US of $2.0 million as a result of its share of the distributable ~~loss~~income from EEH and (3) income tax expense of $1.3 million related to state taxes. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the six months ended June 30, 2022.

~~During~~

Note 15. Supplemental Disclosures

Accounts Payable

The following table summarizes the ~~six~~Company’s current accounts payable at June 30, 2023 and December 31, 2022 (in thousands):


	June 30,		December 31,
	2023		2022
Accounts payable related to vendors	$	37,430	$	76,044
Accounts payable related to severance taxes	8,752		10,380
Other	7,642		5,391
Total accounts payable	$	53,824	$	91,815

Revenue and Royalties Payable

The following table summarizes the Company’s revenues held in suspense and royalties payable at June 30, 2023 and December 31, 2022 (in thousands):


	June 30,		December 31,
	2023		2022
Revenue held in suspense	$	115,540	$	101,838
Revenue and royalties payable	50,840		61,530
Total revenue and royalties payable	$	166,380	$	163,368

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Accrued Expenses

The following table summarizes the Company’s current accrued expenses at June 30, 2023 and December 31, 2022 (in thousands):


	June 30,		December 31,
	2023		2022
Accrued capital expenditures	$	42,866	$	38,482
Accrued lease operating expenses	16,342		14,173
Accrued interest	9,450		10,995
Accrued general and administrative expense	8,417		7,351
Accrued ad valorem taxes	18,873		4,243
Other	6,253		5,698
Total accrued expenses	$	102,201	$	80,942

Supplemental Cash Flow Information

The following table provides supplemental disclosures of cash flow information for the three months ended June 30, 2021, the Company recorded income tax benefit of approximately $0.8 million which included (1) a deferred income tax benefit for Lynden US of $0.4 million as a result of its share of the distributable loss from EEH, (2) no net income tax benefit for Earthstone as the $2.6 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 assured2023 and (3) deferred income tax benefit of $0.8 million related to the Texas Margin Tax, offset by (4) current income tax expense of $0.4 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the six months ended June 30, 2021.2022 (in thousands):


	For the Six Months Ended June 30,
	2023		2022
Cash paid for:
Interest	$	43,035	$	9,468
Income taxes	$	1,251	$	625
Non-cash investing and financing activities:


Class A Common Stock issued in Chisholm Acquisition	$	(1,361)	$	249,515
Class A Common Stock issued in Bighorn Acquisition	$	—	$	77,757


Accrued capital expenditures	$	74,689	$	44,285
Lease asset additions - ASC 842	$	997	$	678
Asset retirement obligations	$	649	$	284

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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 in this report and under “Item 1A. Risk Factors” in our ~~2021~~2022 Annual Report on Form 10-K and “Part II, Item 1A - Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 that were 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~~Consolidated Financial Statements for the year ended December 31, ~~2021,~~2022, which are included in our ~~2021~~2022 Annual Report on Form 10-K.

Overview

Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with ~~our~~its 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 primarily in the Delaware Basin in New Mexico and in the Midland Basin in West ~~Texas, the Eagle Ford Trend in South Texas and the Delaware Basin in New Mexico.~~Texas.

~~Recent Developments~~

~~Titus Purchase Agreements~~

OnAs of June ~~27, 2022, Earthstone and Earthstone Energy Holdings, LLC (“EEH”), a subsidiary~~30, 2023, outstanding common shares of Earthstone, together as buyer, and Titus Oil & Gas Production, LLC, a Delaware limited liability company, 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 a purchase and sale agreement (the “Titus I Purchase Agreement”).

Pursuant to the Titus I Purchase Agreement, EEH or its designated wholly-owned subsidiary will 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, for a purchase price (the “Titus I Purchase Price”) of approximately $270 million in cash and 1,811,132 shares (the “Titus I Shares”) of Class A common stock, $0.001 par value per share of Earthstone (the “Class A Common Stock”). The Titus I Purchase Price is subject to customary purchase price adjustments with an effective date of August 1, 2022. On June 29, 2022, in connectionalong with the ~~Titus I Purchase Agreement,~~equal number of corresponding outstanding EEH ~~deposited~~Units, were approximately ~~$18.8~~140.6 million, ~~in cash into a third-party escrow account as a deposit pursuant to the Titus I Purchase Agreement, which will be credited against the purchase price upon closing~~consisting of ~~the Titus I Acquisition.~~

Pursuant to the Titus II Purchase Agreement, EEH or its designated wholly-owned subsidiary will acquire (the “Titus II Acquisition” and together with the Titus I Acquisition, the “Titus Acquisitions”) interests in oil and gas leases and related property of Titus II located in the Northern Delaware Basin of New Mexico, for a purchase price (the “Titus II Purchase Price”) of approximately $305106.3 million ~~in cash and 2,047,811~~ shares ~~(the “Titus II Shares” and together with the Titus I Shares, the “Titus Shares”)~~ of Class A Common Stock and 34.3 million shares of Class B Common Stock. The ~~Titus II Purchase Price is subject to customary purchase price adjustments with an effective~~following diagram indicates our simplified ownership structure as of the date of ~~August 1, 2022. On June 29, 2022, in connection~~this report. This diagram is provided for illustrative purposes only and does not represent all legal entities affiliated with the Titus II Purchase Agreement, EEH deposited approximately $21.2 million in cash into a third-party escrow account as a deposit pursuant to the Titus II Purchase Agreement, which will be credited against the purchase price upon closing of the Titus II Acquisition.us.

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~~The~~Recent Developments

Novo Acquisition

On June 14, 2023, Earthstone Energy Holdings, LLC (“EEH”), as purchaser and a subsidiary of Earthstone, entered into (i) a Securities Purchase ~~Agreements contain customary representations~~Agreement (the “Novo Purchase Agreement”) with Novo Oil & Gas Legacy Holdings, LLC (“Holdings”), Novo Intermediate, LLC (“Intermediate,” and ~~warranties for transactions of this nature. The Purchase Agreements also contain customary pre-closing covenants~~together with Holdings, collectively, the “Sellers”) and Novo Oil & Gas Holdings, LLC (“Novo”), pursuant to which EEH will acquire 100% of the ~~parties, including the obligation~~issued and outstanding equity interests (the “Subject Securities”) of ~~Titus I~~Novo (the “Novo Acquisition”) and ~~Titus II~~(ii) an Acquisition and Cooperation Agreement (the “Cooperation Agreement”) with Northern Oil and Gas, Inc. (“NOG”), pursuant to ~~conduct business in an ordinary course consistent with past practice and~~which NOG has agreed to ~~refrain from taking certain specified actions, subject to certain exceptions. The Titus Acquisitions are expected to close in the third quarter of 2022.~~

In connection with the closing of the Purchase Agreements, Earthstone will also enter into a customary registration rights agreement with Titus I and Titus II and their respective equity holders containing provisions by which Earthstone will, among other things, file a registration statement on Form S-3 with the SEC providing for the registration of the Titus Shares and cooperate in certain underwritten offerings thereof.

In connection with the closing of the Purchase Agreements, Earthstone will also enter into a customary lock-up agreement with Titus I and Titus II and their respective equity holders providing that such holders will not transfer, subject to limited exceptions, 50% of the Titus Shares for 30 daysacquire, immediately after the closing of the ~~Titus Acquisitions~~Novo Acquisition, an undivided 1/3 interest in Novo’s oil and natural gas properties and related assets (the “Novo Assets”) acquired pursuant to the ~~remaining Titus Shares 60 days after~~Novo Purchase Agreement (the “Novo Divestiture” and, together with the Novo Acquisition, the “Novo Transactions”). A significant stockholder of Earthstone is the majority owner of the Sellers. The Novo Transactions were approved by the board of directors and conflicts committee of Earthstone.

~~Bighorn Acquisition~~

~~On April 14, 2022, Earthstone, Earthstone Energy Holdings, LLC, a subsidiary~~Novo Acquisition. EEH's portion of the ~~Company (“EEH”),~~Acquisition Deposit was $75 million. If the Novo Purchase Agreement is terminated in accordance with its terms and ~~Bighorn Asset Company, LLC (“Bighorn”)~~conditions, the Acquisition Deposit will be disbursed to EEH and NOG or the Sellers as ~~seller, consummated the transactions contemplated~~provided in the Novo Purchase Agreement.

The Sellers and ~~Sale~~EEH have made customary representations and warranties in the Novo Purchase Agreement. The Novo Purchase Agreement ~~dated January 30, 2022, by~~also contains customary covenants and agreements, including, among ~~Earthstone,~~others, covenants and agreements relating to (a) the conduct of Novo’s businesses during the period between the execution of the Novo Purchase Agreement and closing of the Novo Acquisition and (b) the efforts of the parties to cause the Novo Acquisition to be completed, including obtaining any required governmental approval and causing any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 to expire or terminate.

Cooperation Agreement

Immediately after the consummation of the Novo Acquisition, pursuant to the Cooperation Agreement, EEH ~~and Bighorn (the “Bighorn~~has agreed to transfer to NOG an undivided 1/3 interest in the Novo Assets acquired pursuant to the Novo Purchase ~~Agreement”) that was previously reported on Form 8-K filed on February 2, 2022 with~~Agreement in exchange for consideration of approximately $500.0 million in cash, subject to certain customary purchase price adjustments. As a result, assuming an undivided 1/3 interest in the ~~SEC. At~~Novo Assets are transferred at the closing of the ~~Bighorn Purchase~~Cooperation Agreement, ~~among other things, EEH~~we will have acquired ~~(the “Bighorn Acquisition”) interests in oil~~Novo, and ~~gas leases and related property~~retained ownership of ~~Bighorn located~~an undivided 2/3 interest in the ~~Midland Basin, Texas,~~Novo Assets, for aan unadjusted aggregate purchase price ~~(the “Purchase Price”)~~ of approximately ~~$641.8 million~~$1.0 billion 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 (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 (“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.

In connection with the closing of the Bighorn Purchase Agreement, Earthstone entered into a customary lock-up agreement on April 14, 2022 with Bighorn Permian providing that such holder will not transfer 5,140,339 of the Closing Shares (the “Lock-up Shares”) for 60 days after the closing of the Bighorn Acquisition. Sixty days after the closing of Bighorn Acquisition, 25% of the Lock-up Shares may be transferred; ninety days after the closing of the Bighorn Acquisition, an additional 25% of the Lock-up Shares may be transferred; and one hundred twenty days after the closing of the Bighorn Acquisition, the remaining 50% of the Lock-up Shares may be transferred.

~~Securities Purchase Agreement~~

Also, on April 14, 2022, Earthstone, EnCap Energy Capital Fund XI, L.P. (“EnCap Fund XI”), an affiliate of EnCap Investments L.P. (“EnCap”), and Cypress Investments, LLC (“Cypress” and collectively with EnCap Fund XI, the “Investors”), a fund managed by Post Oak Energy Capital, LP (“Post Oak”), consummated the sale and issuance of 280,000 shares of newly authorized Series A convertible preferred stock, par value $0.001 per share, of Earthstone (the “Series A Preferred Stock”), pursuant to that certain Securities Purchase Agreement dated as of January 30, 2022, by and among Earthstone and the 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 Preferred Stock in exchange for gross cash proceeds of $280 million (the “Private Placement”).

On June 15, 2022, notice of action by written consent (the “Written Consent”) pursuant to Section 228(e) of the General Corporation Law of the State of Delaware (the “DGCL”), as well as the Information Statement on Schedule 14C (the “Information Statement”), were furnished by the Board of Directors of Earthstone to the holders of record at the close of business on January 30, 2022 of the outstanding shares of Class A Common Stock and Class B common stock, par value $0.001 per share of Earthstone (the “Class B Common Stock” and with the Class A Common Stock, the “Common Stock”) pursuant to Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The purpose of the Information Statement was to provide formal notice to Earthstone’s stockholders that, on January 30, 2022, holders of approximately 61.6% of the voting power of all of the outstanding shares of Common Stock delivered to Earthstone an irrevocable Written Consent in lieu of a special meeting of stockholders approving the conversion feature of the Series A Preferred Stock and the issuance of the Class A Common Stock upon conversion of the Series A Preferred Stock. This action was required to be taken to comply with the rules of the New York Stock Exchange on which the Class A Common Stock is listed.

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Pursuant to the DGCL, the Written Consent was effective upon delivery to Earthstone. Pursuant to Rule 14c-2 of the Exchange Act, the actions contemplated by the Written Consent were to be taken 20 calendar days following the date the Company first mailed the Information Statement to its stockholders. Accordingly, the conversion of the Series A Preferred Stock into 25,225,225 shares of Class A Common Stock automatically occurred on July 6, 2022 (the 21st calendar day following the date on which the Information Statement was mailed to stockholders). The Series A 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 Preferred Stock.

On April 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.cash.

Notes Offering

On ~~April 7, 2022,~~June 27, 2023, EEH, and four of ~~its~~EEH’s 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~~“2031 Notes Purchase Agreement”) with ~~RBC Capital Markets,~~Wells Fargo Securities, LLC, as representative of the several initial purchasers named in ~~the Purchase Agreement~~Exhibit A thereto (together, the “Initial Purchasers”), providing for the private offer and sale by EEH (the ~~“Notes Offering”~~“Offering”) of ~~$550.0~~$500.0 million aggregate principal amount of EEH’s ~~8.000%~~9.875% senior notes due ~~2027~~2031 (the ~~“Notes”~~“2031 Notes”), along with related guarantees (the “Guarantees”) of the 2031 Notes.

The 2031 Notes Purchase Agreement contains customary representations and warranties of the parties and indemnification and contribution provisions under which EEH and the Guarantors, on one hand, and the Initial Purchasers, on the other, have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.

The Offering was made pursuant to an offering memorandum dated June 27, 2023 and closed on ~~April 12, 2022. EEH received~~June 30, 2023. The 2031 Notes were issued at a price of 97.968% of their principal amount, resulting in net proceeds ~~from the Notes Offering~~to EEH of approximately ~~$537.2~~$482.3 million (after deducting underwriting discounts and ~~commissions) which was used primarily~~commissions, but before offering expenses). EEH intends to ~~fund the Bighorn Acquisition and the remainder for general corporate purposes.~~

~~Credit Agreement~~

On January 30, 2022, Earthstone, EEH, as Borrower, Wells Fargo Bank, National Association (“Wells Fargo”) as Administrative Agent, the lenders party thereto (the “Lenders”) and the guarantors party thereto entered into an amendment (the “Fifth 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, Royal Bank of Canada, as Syndication Agent, Truist Bank, Citizens 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 Agents, and the Lenders party thereto (together with all amendments or other modifications, the “Credit Agreement”). Among other things, the Amendment increased the borrowing base and corresponding elected commitments from $650 million to $825 million upon the closing of that certain Purchase and Sale Agreement dated as December 15, 2021 (the “Chisholm Agreement”) by and among Earthstone, EEH, Chisholm Energy Operating, LLC (“OpCo”) and Chisholm Energy Agent, Inc. (“Agent” and collectively with OpCo, “Chisholm”); provided that upon the closing of the Bighorn Acquisition, the borrowing base and corresponding elected commitments would increase to $1.325 billion, unless Earthstone completed an unsecured senior notes offering (“Notes Offering”) prior to the closing of the Bighorn Acquisition in which case the elected commitments would be reduced by the amount ofuse the net proceeds from the Offering to fund a Notes Offering up to $500 million (the “Notes Offering Elected Commitments Reduction”); provided for an increase in interest rates by 0.50% in the event a Notes Offering has not been completed prior to the closingportion of the Bighorn Acquisition; provided mechanics relating to the transition from LIBOR to a benchmark replacement rate, the Secured Overnight Financing Rate, to be effective contemporaneously with the effectivenesspurchase price of the ~~Amendment on January 30, 2022; added certain hedging~~Novo Acquisition. The 2031 Notes and the Guarantees were offered and sold in a transaction exempt from the registration requirements ~~relating to anticipated oil and natural gas production~~ of the properties to be acquired pursuant to the Bighorn Acquisition; adjusted some financial covenants; redefined the limitations on certain restricted payments the Borrower may make; and made certain administrative changes to the Credit Agreement.

~~On April 14, 2022, in advance of the potential aforementioned~~Securities Act. The 2031 Notes ~~Offering Elected Commitments Reduction, the Company voluntarily elected to reduce commitments under the borrowing base of the Credit Facility 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 remain at $800 million.

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~~Chisholm Acquisition~~Guarantees were resold to persons reasonably believed to be qualified institutional buyers under Rule 144A of the Securities Act and outside the United States to non-U.S. persons in compliance with Regulation S of the Securities Act.

~~On February 15, 2022, Earthstone, EEH,~~Certain of the Initial Purchasers or their affiliates have performed and ~~Chisholm, as seller, consummated~~may perform commercial and investment banking and advisory services for us and our affiliates from time to time for which they will receive and have received customary fees and expenses. In particular, affiliates of certain of the Initial Purchasers are lenders under EEH’s senior secured revolving credit facility and therefore may receive their pro rata share of any proceeds from the sale of the 2031 Notes that are used to repay borrowings under our credit facility. The Initial Purchasers may, from time to time, engage in transactions ~~contemplated~~with and perform services for us and our affiliates in the ~~Chisholm Agreement~~ordinary course of their business, for which they may receive fees and expenses.

Indenture

On June 30, 2023, in connection with the completion of the Offering, EEH entered into that certain indenture, dated as of June 30, 2023 (the “2031 Indenture”), by and among EEH, the Guarantors and U.S. Bank Trust Company, National Association, as trustee, that was previously reported on Form 8-K filed with the SEC on ~~December 17, 2021. At~~June 30, 2023.

The 2031 Notes will mature on July 15, 2031 with interest accruing at a rate of 9.875% per annum payable semi-annually in cash in arrears on January 15 and July 15 of each year, commencing January 15, 2024. Before July 15, 2026, EEH may redeem some or all of the 2031 Notes at a redemption price equal to 100% of the aggregate principal amount of the 2031 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 2031 Notes at any time on or after July 15, 2026, at the applicable redemption price plus accrued and unpaid interest to, but not including, the date of redemption. Further, before July 15, 2026, EEH may on one or more occasions redeem up to 35% of the aggregate principal amount of the 2031 Notes in an amount not exceeding the net proceeds from one or more private or public equity offerings at a redemption price of 109.875% of the principal amount of the 2031 Notes, plus accrued and unpaid interest to the date of redemption, if at least 65% of the aggregate principal amount of the 2031 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 2031 Notes on terms and conditions set forth in detail in the 2031 Indenture.

Credit Agreement

On July 7, 2023, but effective as of the date the conditions set forth therein are satisfied or waived (such date not to occur later than September 19, 2023), Earthstone, as Parent, EEH, as Borrower, the guarantors party thereto, the lenders party thereto (the “Lenders”) and Wells Fargo Bank, National Association (“Wells Fargo”) as Administrative Agent and Issuing Bank, entered into that certain Ninth Amendment to the Credit Agreement (the “Amendment”), which amends that certain Credit Agreement, dated as of November 21, 2019, by and among EEH, as Borrower, the Company, as Parent, Wells Fargo, as Administrative Agent and Issuing Bank, the Lenders party thereto and the documentation agents party thereto (as amended by the Amendment and as further amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Credit Agreement”). Among other things, the Amendment (i) adds JPMorgan Chase Bank, N.A. and Citibank N.A. as new Lenders, arrangers, and documentation agents for the Lenders under the Credit Agreement, (ii) increases the aggregate elected borrowing base commitments from $1.40 billion to $1.75 billion, and (iii) increases the borrowing base from $1.65 billion to $2.0 billion. The effectiveness of the Amendment is conditioned upon, among other things, the closing of the ~~Chisholm Agreement, among other things, EEH acquired (the “Chisholm Acquisition”) interests~~Novo Transactions.

Natural Gas Takeaway Capacity

The Permian Basin has been experiencing a lack of sufficient pipeline transportation that is connected to markets which are purchasing the gas. This has resulted in ~~oil and~~negative gas leases and related property of Chisholm located in Lea County and Eddy County, New Mexico, for aggregate consideration, as adjusted for preliminary and customary purchase price adjustments, consisting of: (i) approximately $313.8 million in cash that continuesprices at times, whereby the seller is actually paying the purchaser to ~~remain subject to post-closing settlement adjustments between EEH and Chisholm paid at~~take the ~~closing of the Chisholm Acquisition, (ii) $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 12. Related Party Transactions~~ gas. If these depressed or inverted natural gas prices continue in the ~~Notes~~region, our natural gas revenues will continue to ~~Consolidated Financial Statements~~.

Cash consideration for the Chisholm Acquisition was funded by borrowings under our senior secured revolving credit facility whose borrowing base was increased from $650 million to $825 million upon consummation of the Chisholm Acquisition.be negatively impacted.

Inflation

Inflation has ~~begun to impact~~increased costs associated with our capital program and production operations. We have ~~already~~ experienced increases in the costs of ~~certain~~many of the materials, supplies, equipment and services used in our ~~business processes.~~operations and we expect inflation to continue based on current economic circumstances. In addition, the attempts to reduce inflation by the Federal Reserve have resulted in increased interest rates on debt and contributed to debt and equity market volatility. We continue to closely monitor ~~these~~ costs and take all reasonable steps to mitigate the inflationary effect on our cost structure and also work to enhance our efficiency to minimize additional ~~potential~~cost increases ~~when~~where possible.

~~COVID-19~~

Despite the recoveries in commodity prices from 2020 lows, recent surges from COVID-19 variants continue to impact the global economy, disrupt global supply chains and may create significant volatility and disruption

Table 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. In 2022, we have not experienced a material impact to date to our business processes, but our management team continues to evaluate COVID-19 factors as they occur.Contents

Areas of Operation

Our primary focus is concentrated in the Delaware Basin in New Mexico and in the Midland Basin in West Texas, ~~and the Delaware Basin in New Mexico, a~~both containing high oil and liquids rich ~~resource~~resources which provides us with multiple horizontal targets with proven production results, long-lived reserves and historically high drilling success rates.

Consolidation Focus

We continue to pursue value-accretive and scale-enhancing consolidation opportunities, as we believe we are in a position to operate effectively despite the volatility in commodity ~~prices.~~prices and inflationary pressures. We are focusing our attention on acquisition and corporate merger opportunities that would increase the scale of our ~~operations.~~operations and provide synergistic cost savings. In addition, we believe the current industry environment presents unique opportunities which could provide us with the potential for further consolidation because of our financial strength. At the same time, we will seek to ~~block up~~acquire acreage in close proximity to our existing acreage that would allow for longer horizontal laterals providing higher economic returns, increased operated inventory and greater operating efficiency. In short, we believe we are well qualified to continue to be a significant consolidator which could increase the scale of our operations and add value to our shareholders.

Operations Update

We operated a five-rig drilling program during the second quarter of 2023 with three rigs in the Delaware Basin and two in the Midland Basin.

Delaware Basin Highlights

In the Delaware Basin, during the second quarter of 2023, we commenced drilling 12 gross (9.7 net) wells and brought 13 gross (9.5 net) wells online.

We completed the Lonesome Dove Com pad on acreage acquired in the Titus acquisition in the Stateline area in Lea County, New Mexico. The wells targeted the First and Second Bone Spring intervals. The four wells had an average peak IP-30 rate of 1,762 Boepd from laterals averaging approximately 7,700 feet with an average oil percentage of 72%. We hold a 90% working interest in the Lonesome Dove Com pad.

Also, in the Stateline area, we completed the Cattlemen Fed Com Pad, where we hold a 99% working interest. The 2-well pad had an average peak IP-30 of 1,934 Boepd and was approximately 67% oil. The average lateral length of the two wells was about 7,700 feet, and the wells targeted the First and Second Bone Spring. The Cattlemen Fed Com pad is located on acreage also acquired in the Titus acquisition.

Midland Basin Highlights

During the second quarter of ~~2022 for our Company-operated activity,~~2023 in the Midland Basin, we ~~commenced~~began drilling ~~seven~~nine gross ~~(5.6~~(7.2 net) wells and brought ~~six~~four gross ~~(4.8~~(3.0 net) wells online.

In Irion County, Texas, at the Barnhart pad, we put four wells online in July producing from the ~~Midland Basin. In~~Wolfcamp Upper and Lower B zones. These wells were drilled with an average lateral length of approximately 13,340 feet. Although these wells have not been online for a full 30 days, their performance is in line with a prior pad completed by the ~~Delaware Basin, we commenced drilling eight gross (5.6 net) wells~~Company in 2022 and ~~brought six gross (4.0 net) wells online.~~they have average peak IP-20 over 1,030 Boepd with approximately 86% oil. We hold a 100% working interest in the Barnhart pad.

We ~~brought~~recently put two wells online ~~a two-well~~at the Mid-States East Unit 37-5 pad, ~~in Lea County,~~and the ~~Bel-Air 5-8 pad, in late June.~~wells are producing from the Wolfcamp D zone. This ~~pad~~ is ~~one of our first sets of wells to be drilled and completed by us from start to finish after closing on~~ our initial ~~Delaware Basin acquisition earlier this year. After initially allowing~~development of the Wolfcamp D interval in Midland County. The wells ~~to flow~~had an average lateral length of 9,950 feet with a 67% working interest. The wells are flowing naturally ~~we recently installed~~with no artificial lift and results are ~~seeing current~~encouraging, with recent average daily production ~~rates of 1,085 Boepd (92% oil)~~ per well ~~as the wells continue to clean up.~~

~~We are currently operating a four-rig drilling program, with two rigs in the Midland Basin~~over 800 Boepd and two rigs in the Delaware Basin. We anticipate picking up a fifth rig late in the third quarter of 2022 that will be operated in the Delaware Basin. For full year 2022 and only for our Company-operated activity, we anticipate spudding 38 gross (33.5 net) wells and bringing 34 gross (30.7 net) wells online in the Midland Basin. In the Delaware Basin, we anticipate spudding 28 gross (19.1 net) wells and bringing 27

~~Table of Contents~~

gross (19.3 net) wells online. This includes spudding four more Delaware Basin wells in 2022 compared to our prior plans as a result of drilling efficiencies and also includes spudding an incremental four gross (3.3 net) wells and bringing an incremental six gross (5.5 net) wells online in the Delaware Basin as a result of the Titus Acquisition and the expected addition of the fifth rig.89% oil.

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 six months ended June 30, ~~2022.~~2023.

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Recent Accounting Pronouncements

There ~~are~~were no recent accounting pronouncements during the six months ended June 30, 2023 that are expected to have a material impact on our financial statements.

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Results of Operations

Three Months Ended June 30, ~~2022,~~2023, compared to the Three Months Ended June 30, ~~2021~~2022


		Three Months Ended June 30,							Three Months Ended June 30,
		2022		2021		Change			2023		2022		Change
Sales volumes:	Sales volumes:							Sales volumes:
Oil (MBbl)	Oil (MBbl)	2,587		1,083		139	%	Oil (MBbl)	4,014		2,587		55	%
Natural gas (MMcf)	Natural gas (MMcf)	14,414		2,927		392	%	Natural gas (MMcf)	18,308		14,414		27	%
Natural gas liquids (MBbl)	Natural gas liquids (MBbl)	2,029		496		309	%	Natural gas liquids (MBbl)	2,535		2,029		25	%
Barrels of oil equivalent (MBoe)	Barrels of oil equivalent (MBoe)	7,018		2,067		240	%	Barrels of oil equivalent (MBoe)	9,600		7,018		37	%
Average Daily Production (Boepd)	Average Daily Production (Boepd)	77,125		22,716		240	%	Average Daily Production (Boepd)	105,493		77,125		37	%

Average prices:	Average prices:							Average prices:
Oil (per Bbl)	Oil (per Bbl)	$	110.80	$	65.47	69	%	Oil (per Bbl)	$	73.49	$	110.80	(34)	%
Natural gas (per Mcf)	Natural gas (per Mcf)	$	6.67	$	2.29	191	%	Natural gas (per Mcf)	$	1.13	$	6.67	(83)	%
Natural gas liquids (per Bbl)	Natural gas liquids (per Bbl)	$	44.25	$	24.31	82	%	Natural gas liquids (per Bbl)	$	21.45	$	44.25	(52)	%

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)	$	87.30	$	52.39	67	%	Oil ($/Bbl)	$	73.07	$	87.30	(16)	%
Natural gas ($/Mcf)	Natural gas ($/Mcf)	$	5.40	$	2.19	147	%	Natural gas ($/Mcf)	$	1.20	$	5.40	(78)	%
Natural gas liquids ($/Bbl)	Natural gas liquids ($/Bbl)	$	44.25	$	24.31	82	%	Natural gas liquids ($/Bbl)	$	21.45	$	44.25	(52)	%

(In thousands)	(In thousands)							(In thousands)
Oil revenues	Oil revenues	$	286,632	$	70,918	304	%	Oil revenues	$	294,997	$	286,632	3	%
Natural gas revenues	Natural gas revenues	$	96,125	$	6,690	1,337	%	Natural gas revenues	$	20,649	$	96,125	(79)	%
Natural gas liquids revenues	Natural gas liquids revenues	$	89,794	$	12,063	644	%	Natural gas liquids revenues	$	54,362	$	89,794	(39)	%

Lease operating expense	Lease operating expense	$	50,514	$	11,747	330	%	Lease operating expense	$	87,602	$	50,514	73	%
Production and ad valorem taxes	Production and ad valorem taxes	$	34,195	$	5,176	561	%	Production and ad valorem taxes	$	31,805	$	34,195	(7)	%

Impairment expense								Impairment expense	$	854	$	—	NM
Depreciation, depletion and amortization	Depreciation, depletion and amortization	$	66,463	$	26,027	155	%	Depreciation, depletion and amortization	$	109,990	$	66,463	65	%

General and administrative expense (excluding stock-based compensation)	General and administrative expense (excluding stock-based compensation)	$	8,117	$	4,758	71	%	General and administrative expense (excluding stock-based compensation)	$	12,157	$	8,117	50	%
Stock-based compensation		$	5,960	$	4,412	35	%
Stock-based compensation - equity and liability awards								Stock-based compensation - equity and liability awards	$	7,835	$	5,960	31	%
General and administrative expense	General and administrative expense	$	14,077	$	9,170	54	%	General and administrative expense	$	19,992	$	14,077	42	%

Exploration expense								Exploration expense	$	6,082	$	—	NM
Gain on sale of oil and gas properties								Gain on sale of oil and gas properties	$	49,254	$	—	NM
Interest expense, net	Interest expense, net	$	(16,625)	$	(2,401)	592	%	Interest expense, net	$	(22,092)	$	(16,625)	33	%

Unrealized gain (loss) on derivative contracts		$	29,192	$	(36,653)	(180)	%
Realized (loss) on derivative contracts		$	(79,099)	$	(14,522)	445	%
Unrealized (loss) gain on derivative contracts								Unrealized (loss) gain on derivative contracts	$	(39,891)	$	29,192	(237)	%
Realized loss on derivative contracts								Realized loss on derivative contracts	$	(418)	$	(79,099)	(99)	%
Loss on derivative contracts, net	Loss on derivative contracts, net	$	(49,907)	$	(51,175)	(2)	%	Loss on derivative contracts, net	$	(40,309)	$	(49,907)	(19)	%

Income tax (expense) benefit		$	(22,688)	$	486	NM
Income tax expense								Income tax expense	$	(18,053)	$	(22,688)	(20)	%

NM – Not Meaningful

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Results of Operations Highlights

The Titus Acquisition, Bighorn Acquisition ~~the~~and Chisholm Acquisition ~~the Foreland Acquisition and the Tracker/Sequel Acquisitions~~ (collectively, the “Acquisitions”) have had a significant impact on our results of operations for the three and six months ended June 30, ~~2022~~2023 as compared to the corresponding periods ~~of 2021. In addition, commodity prices have improved, further impacting our results of operations.~~in 2022. Below is a discussion highlighting the impact of our recent ~~acquisitions.~~Acquisitions.

Oil revenues

For the three months ended June 30, ~~2022,~~2023, oil revenues increased by ~~$215.7~~$8.4 million, or ~~304%~~3%, relative to the comparable period in ~~2021.~~2022. Of the increase, ~~$166.6~~$104.9 million was attributable to an increase in sales volume, ~~and $49.1~~partially offset by $96.5 million ~~was~~ attributable to ~~an increase~~a decrease in our realized price. Our average realized price per Bbl ~~increased~~decreased from ~~$65.47~~$110.80 for the three months ended June 30, ~~2021~~2022 to ~~$110.80,~~$73.49, or ~~69%~~34%, for the three months ended June 30, ~~2022.~~2023. Additionally, we had a net increase in the volume of oil sold of ~~1,504~~1,427 MBbls, or ~~139%~~55%, which included an increase of ~~1,392~~1,155 MBbls related to the wells acquired in the ~~Acquisitions~~Titus Acquisition and ana net increase of ~~112~~272 MBbls primarily attributable to new producing wells partially offset by natural declines in our other ~~wells primarily resulting from new wells coming online related to our 2022 drilling program.~~wells.

Natural gas revenues

For the three months ended June 30, ~~2022,~~2023, natural gas revenues ~~increased~~decreased by ~~$89.4~~$75.5 million, or ~~1,337%~~79%, relative to the comparable period in ~~2021.~~2022. Of the ~~increase, $76.6 million was due to increased sales volume and $12.8~~decrease, $79.9 million was attributable to ana decrease in realized price, partially offset by a $4.4 million increase in ~~realized price.~~sales volume. Our average realized price per Mcf ~~increased 191%~~decreased 83% from ~~$2.29 for the three months ended June 30, 2021 to~~ $6.67 for the three months ended June 30, ~~2022.~~2022 to $1.13 for the three months ended June 30, 2023. The total volume of natural gas ~~produced and~~ sold increased ~~11,487~~3,894 MMcf, or ~~392%~~27%, which included an increase of ~~11,717 MMcf~~2,078 MBbls related to the wells acquired in the ~~Acquisitions~~Titus Acquisition and a ~~decrease~~net increase of ~~230 MMcf~~1,816 MBbls primarily attributable to new producing wells partially offset by natural declines in our other ~~wells primarily resulting from natural declines.~~wells.

Natural gas liquids revenues

For the three months ended June 30, ~~2022,~~2023, natural gas liquids revenues ~~increased~~decreased by ~~$77.7~~$35.4 million, or ~~644%~~39%, relative to the comparable period in ~~2021.~~2022. Of the ~~increase, $9.9~~decrease, $46.3 million was attributable to ~~an increase~~a decrease in our realized price ~~and $67.8~~resulting from a 52% decrease in our average realized price of $21.45 for the three months ended June 30, 2023 from $44.25 for the three months ended June 30, 2022, partially offset by a $10.9 million ~~was attributable to increased volume.~~increase in sales volumes. The volume of natural gas liquids ~~produced and~~ sold increased by ~~1,533~~506 MBbls, or ~~309%~~25%, ~~primarily resulting from~~which included an increase of ~~1,555 MMcf~~310 MBbls related to the wells acquired in the ~~Acquisitions.~~Titus Acquisition and a net increase of 196 MBbls primarily attributable to new producing wells partially offset by natural declines in our other wells.

Lease operating expense (“LOE”)

LOE increased by ~~$38.8~~$37.1 million, or ~~330%~~73%, for the three months ended June 30, ~~2022~~2023 relative to the comparable period in ~~2021,~~2022, due to a ~~$29.8~~$32.5 million increase resulting from the LOE of the properties acquired in the ~~Acquisitions~~Titus Acquisition and a ~~$9.0~~$4.6 million increase resulting from both higher production volumes from new wells coming online and inflationary factors experienced in the current year period.

Production and ad valorem taxes

Production and ad valorem taxes for the three months ended June 30, ~~2022 increased~~2023 decreased by ~~$29.0~~$2.4 million, or ~~561%~~7%, relative to the comparable period in ~~2021~~2022 due to a ~~$23.4~~$8.0 million increase resulting from the properties acquired in the ~~Acquisitions and~~Titus Acquisition, partially offset by a ~~$5.6~~$10.4 million ~~increase~~decrease related to our other wells resulting from ~~improved~~lower commodity prices.

Impairment expense

During the three months ended June 30, 2023, we recorded non-cash impairment charges of $0.9 million to its oil and natural gas properties due to acreage expirations in our non-core operating areas. No impairments were recorded to the Company's oil and natural gas properties during the three months ended June 30, 2022.

Depreciation, depletion and amortization (“DD&A”)

DD&A for the three months ended June 30, ~~2022~~2023 increased by ~~$40.4~~$43.5 million, or ~~155%~~65%, relative to the comparable period in ~~2021,~~2022, primarily due to a ~~$34.9~~$29.6 million increase in DD&A related to the assets acquired in the ~~Acquisitions~~Titus Acquisition and a ~~$5.5~~$13.9 million increase in DD&A driven by higher production volumes and increased depletable costs related to the development of our properties which were also affected by inflationary ~~factors.~~factors experienced in the current year period.

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General and administrative expense (“G&A”)

G&A for the three months ended June 30, ~~2022~~2023 increased by ~~$4.9~~$5.9 million, or ~~54%~~42%, relative to the comparable period in ~~2021,~~2022, primarily due to a ~~$2.6~~$2.3 million increase ~~attributable to higher~~in payroll and employee costs associated with increased headcount, ana $1.7 million increase ~~of $1.5 million in non-cash performance-based stock-based compensation expense resulting from an increase in the market value of our Class A Common Stock and the remaining $0.8 million~~ primarily due to ~~increased~~higher professional fees resulting from overall increased acquisition and operating activities and a $1.9 million increase in stock-based compensation expense.

Exploration expense

During the three months ended June 30, 2023, we incurred $6.1 million in expenses associated with a well that was plugged and abandoned due to ~~overall increased operating activity.~~mechanical failure. No such expenses were incurred during the three months ended June 30, 2022.

35Gain on sale of oil and gas properties

~~Table~~During the three months ended June 30, 2023, we sold certain non-core properties for approximately $54.2 million in cash, resulting in net gains of ~~Contents~~approximately $49.3 million. There were no material divestitures during the three months ended June 30, 2022.

See Note 5. Acquisitions and Divestitures in the Notes to Unaudited Condensed Consolidated Financial Statements.

Interest expense, net

Interest expense increased from ~~$2.4 million for the three months ended June 30, 2021 to~~ $16.6 million for the three months ended June 30, 2022 to $22.1 million for the three months ended June 30, 2023, due to higher average borrowings outstanding compared to the prior year period primarily resulting from borrowings related to the Acquisitions and higher effective interest rates resulting from the issuance of the 8.000% Senior ~~Notes.~~Notes issued in April 2022. See Note 10. Long-Term Debt in the Notes to Unaudited Condensed Consolidated Financial Statements.

Loss on derivative contracts, net

For the three months ended June 30, 2023, we recorded a net loss on derivative contracts of $40.3 million, consisting of unrealized mark-to-market losses of $39.9 million related to our commodity hedges and net realized losses on settlements of our commodity hedges of $0.4 million. For the three months ended June 30, 2022, we recorded a net loss on derivative contracts of $49.9 million, consisting of unrealized mark-to-market gains of $29.2 million related to our commodity hedges ~~offset by~~along with net realized losses on settlements of our commodity hedges of $79.1 million. For the three months ended June 30, 2021, we recorded a net loss on derivative contracts of $51.2 million, consisting of unrealized mark-to-market losses of $36.6 million related to our commodity hedges along with net realized losses on settlements of our commodity hedges of $14.5 million and net realized losses on our interest rate swap of $0.1 million.

Income tax ~~(expense) benefit~~expense

During the three months ended June 30, ~~2022, the Company~~2023, we recorded income tax expense of approximately ~~$22.7~~$18.1 million ~~as compared to an~~comprised of (1) deferred federal income tax ~~benefit~~expense for Earthstone of ~~$0.5~~$15.2 million inresulting from its share of the ~~prior year period. The $23.2~~distributable income from EEH, (2) a deferred federal income tax expense for Lynden US of $0.9 million ~~increase was primarily due to a $257.0 million increase in Income (loss) before income taxes from the prior year period~~ as a result of ~~an increase in our results~~its share of ~~operations due to~~ the ~~Acquisitions. Of the $22.7 million~~distributable income from EEH and (3) income tax expense ~~recorded in the current year period, $20.6~~of $2.0 million related to both current and deferred state income taxes. Lynden Corp incurred no material income or loss, or related income tax expense ~~as a result of substantial forecasted current year income tax deductions generated by~~or benefit, for the ~~Acquisitions, as well as forecasted intangible drilling cost income tax deductions, partially offset by utilization of our valuation allowance in the current year period.~~three months ended June 30, 2023.

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Results of Operations

Six Months Ended June 30, ~~2022,~~2023, compared to the Six Months Ended June 30, ~~2021~~2022


		Six Months Ended June 30,							Six Months Ended June 30,
		2022		2021		Change			2023		2022		Change
Sales volumes:	Sales volumes:							Sales volumes:
Oil (MBbl)	Oil (MBbl)	4,004		2,140		87	%	Oil (MBbl)	8,167		4,004		104	%
Natural gas (MMcf)	Natural gas (MMcf)	20,053		5,372		273	%	Natural gas (MMcf)	35,118		20,053		75	%
Natural gas liquids (MBbl)	Natural gas liquids (MBbl)	2,869		861		233	%	Natural gas liquids (MBbl)	4,980		2,869		74	%
Barrels of oil equivalent (MBoe)	Barrels of oil equivalent (MBoe)	10,214		3,896		162	%	Barrels of oil equivalent (MBoe)	19,000		10,214		86	%
Average Daily Production (Boepd)	Average Daily Production (Boepd)	56,432		21,525		162	%	Average Daily Production (Boepd)	104,974		56,432		86	%

Average prices:	Average prices:							Average prices:
Oil (per Bbl)	Oil (per Bbl)	$	106.00	$	61.56	72	%	Oil (per Bbl)	$	74.98	$	106.00	(29)	%
Natural gas (per Mcf)	Natural gas (per Mcf)	$	5.94	$	2.33	155	%	Natural gas (per Mcf)	$	1.44	$	5.94	(76)	%
Natural gas liquids (per Bbl)	Natural gas liquids (per Bbl)	$	43.66	$	24.35	79	%	Natural gas liquids (per Bbl)	$	24.12	$	43.66	(45)	%

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)	$	83.16	$	50.06	66	%	Oil ($/Bbl)	$	74.22	$	83.16	(11)	%
Natural gas ($/Mcf)	Natural gas ($/Mcf)	$	4.97	$	2.20	126	%	Natural gas ($/Mcf)	$	1.41	$	4.97	(72)	%
Natural gas liquids ($/Bbl)	Natural gas liquids ($/Bbl)	$	43.66	$	24.35	79	%	Natural gas liquids ($/Bbl)	$	24.12	$	43.66	(45)	%

(In thousands)	(In thousands)							(In thousands)
Oil revenues	Oil revenues	$	424,384	$	131,737	222	%	Oil revenues	$	612,375	$	424,384	44	%
Natural gas revenues	Natural gas revenues	$	119,083	$	12,542	849	%	Natural gas revenues	$	50,667	$	119,083	(57)	%
Natural gas liquids revenues	Natural gas liquids revenues	$	125,234	$	20,964	497	%	Natural gas liquids revenues	$	120,102	$	125,234	(4)	%

Lease operating expense	Lease operating expense	$	72,145	$	22,596	219	%	Lease operating expense	$	175,580	$	72,145	143	%
Production and ad valorem taxes	Production and ad valorem taxes	$	47,510	$	10,203	366	%	Production and ad valorem taxes	$	64,958	$	47,510	37	%

Impairment expense								Impairment expense	$	854	$	—	NM
Depreciation, depletion and amortization	Depreciation, depletion and amortization	$	100,789	$	50,434	100	%	Depreciation, depletion and amortization	$	220,740	$	100,789	119	%

General and administrative expense (excluding stock-based compensation)	General and administrative expense (excluding stock-based compensation)	$	14,593	$	9,809	49	%	General and administrative expense (excluding stock-based compensation)	$	25,118	$	14,593	72	%
Stock-based compensation		$	11,790	$	7,741	52	%
Stock-based compensation - equity and liability awards								Stock-based compensation - equity and liability awards	$	12,453	$	11,790	6	%
General and administrative expense	General and administrative expense	$	26,383	$	17,550	50	%	General and administrative expense	$	37,571	$	26,383	42	%

Transaction costs	Transaction costs	$	10,340	$	2,613	296	%	Transaction costs	$	401	$	10,340	(96)	%

Exploration expense								Exploration expense	$	6,548	$	92	NM
Gain on sale of oil and gas properties								Gain on sale of oil and gas properties	$	46,114	$	—	NM
Interest expense, net	Interest expense, net	$	(21,943)	$	(4,618)	375	%	Interest expense, net	$	(44,948)	$	(21,943)	105	%

Write-off of deferred financing costs								Write-off of deferred financing costs	$	(5,109)	$	—	NM

Unrealized loss on derivative contracts	Unrealized loss on derivative contracts	$	(90,602)	$	(59,011)	54	%	Unrealized loss on derivative contracts	$	(59,330)	$	(90,602)	(35)	%
Realized loss on derivative contracts	Realized loss on derivative contracts	$	(110,785)	$	(25,427)	336	%	Realized loss on derivative contracts	$	(7,443)	$	(110,785)	(93)	%
Loss on derivative contracts, net	Loss on derivative contracts, net	$	(201,387)	$	(84,438)	139	%	Loss on derivative contracts, net	$	(66,773)	$	(201,387)	(67)	%

Income tax (expense) benefit		$	(21,155)	$	794	(2,764)	%
Income tax expense								Income tax expense	$	(36,654)	$	(21,155)	73	%

NM – Not Meaningful

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Oil revenues

For the six months ended June 30, ~~2022,~~2023, oil revenues increased by ~~$292.6~~$188.0 million, or ~~222%~~44%, relative to the comparable period in ~~2021.~~2022. Of the increase, ~~$197.6~~$312.2 million was attributable to an increase in volume, ~~and $95.0~~partially offset by $124.2 million ~~was~~ attributable to ~~an increase~~a decrease in our realized ~~price.~~prices. Our average realized price per Bbl ~~increased~~decreased from ~~$61.56~~$106.00 for the six months ended June 30, ~~2021~~2022 to ~~$106.00,~~$74.98, or ~~72%~~29%, for the six months ended June 30, ~~2022.~~2023. Additionally, we had a net increase in the volume of oil sold of ~~1,864~~4,163 MBbls, or ~~87%~~104%, which included an increase of ~~1,831~~3,650 MBbls related to the wells acquired in the Acquisitions and ana net increase of 33513 MBbls primarily attributable to new producing wells partially offset by natural declines in our other ~~wells primarily resulting from new wells brought online since the second quarter of 2021.~~wells.

Natural gas revenues

For the six months ended June 30, ~~2022,~~2023, natural gas revenues ~~increased~~decreased by ~~$106.5~~$68.4 million, or ~~849%~~57%, relative to the comparable period in ~~2021.~~2022. Of the ~~increase, $87.1~~decrease, $90.1 million was attributable to a decrease in realized prices, partially offset by $21.7 million due to increased sales ~~volume and $19.4 million was attributable to an increase in realized price.~~volume. Our average realized price per Mcf ~~increased 155%~~decreased 76% from ~~$2.33 for the six months ended June 30, 2021 to~~ $5.94 for the six months ended June 30, ~~2022.~~2022 to $1.44 for the six months ended June 30, 2023. The total volume of natural gas ~~produced and~~ sold increased ~~14,681~~15,065 MMcf, or ~~273%~~75%, which included an increase of ~~14,737~~13,114 MMcf related to the wells acquired in the Acquisitions and a net increase of 1,951 MBbls primarily attributable to new producing wells partially offset by ~~a decrease of 56 MMcf~~natural declines in our other ~~wells primarily resulting from natural decline.~~wells.

Natural gas liquids revenues

For the six months ended June 30, ~~2022,~~2023, natural gas liquids revenues ~~increased~~decreased by ~~$104.3~~$5.1 million, or ~~497%~~4%, relative to the comparable period in ~~2021.~~2022. Of the ~~increase, $87.7~~decrease, $50.9 million was attributable to increased volume, ~~and $16.6~~partially offset by $56.0 million ~~was~~ attributable to ~~an increase~~a decrease in our realized ~~price.~~prices. Our average realized price per Bbl decreased 45% from $43.66 for the six months ended June 30, 2022 to $24.12 for the six months ended June 30, 2023. The volume of natural gas liquids ~~produced and~~ sold increased by ~~2,008~~2,111 MBbls, or ~~233%~~74%, primarily resulting from an increase of ~~1,966 MMcf~~1,907 MBbls related to the wells acquired in the ~~Acquisitions.~~Acquisitions and a net increase of 204 MBbls primarily attributable to new producing wells partially offset by natural declines in our other wells.

Lease operating expense (“LOE”)

LOE increased by ~~$49.5~~$103.4 million, or ~~219%~~143%, for the six months ended June 30, ~~2022~~2023 relative to the comparable period in ~~2021,~~2022, due to ~~an $36.7~~a $80.0 million increase resulting from the LOE of the properties acquired in the Acquisitions and a ~~$12.8~~$23.4 million increase resulting from both higher production volumes from new wells coming online and inflationary factors experienced in the current year period.

Production and ad valorem taxes

Production and ad valorem taxes for the six months ended June 30, ~~2022~~2023 increased by ~~$37.3~~$17.4 million, or ~~366%~~37%, relative to the comparable period in ~~2021~~2022 due to a ~~$29.2~~$24.1 million increase resulting from the properties acquired in the Acquisitions, ~~and~~partially offset by a ~~$8.1~~$6.7 million ~~increase~~decrease related to our other wells resulting from ~~improved~~lower commodity prices.

Impairment expense

During the six months ended June 30, 2023, we recorded non-cash impairment charges of $0.9 million to our oil and natural gas properties due to acreage expirations in our non-core operating areas. No impairments were recorded to our oil and natural gas properties during the six months ended June 30, 2022.

Depreciation, depletion and amortization (“DD&A”)

DD&A for the six months ended June 30, ~~2022~~2023 increased by ~~$50.4~~$120.0 million, or ~~100%~~119%, relative to the comparable period in ~~2021~~2022 primarily due to a ~~$44.6~~$110.3 million increase in DD&A related to the assets acquired in the Acquisitions and a ~~$5.8~~$9.7 million increase in DD&A driven by higher production volumes and increased depletable costs related to the development of our properties.

General and administrative expense (“G&A”)

G&A for the six months ended June 30, ~~2022~~2023 increased by ~~$8.8~~$11.2 million, or ~~50%~~42%, relative to the comparable period in ~~2021, primarily~~2022, due to ~~increases~~an increase of ~~$4.0~~$7.0 million in ~~non-cash performance-based stock-based compensation expense resulting from increases in the market value of our Class A Common Stock, $3.4 million attributable to higher~~ payroll and employee costs associated with increased headcount, ~~and the remaining $1.4~~$3.5 million primarily ~~due~~related to ~~increased~~an increase in professional fees due to overall increased acquisition and operating ~~activity~~activities and a $0.7 million increase in stock-based compensation.

Table of ~~the Company.~~Contents

Transaction ~~costs~~Costs

For the six months ended June 30, ~~2022,~~2023, transaction costs ~~increased~~decreased by ~~$7.7~~$9.9 million primarily due to ~~costs~~legal and professional fees associated with the Chisholm ~~Acquisition.~~Acquisition in the prior year period.

~~Interest~~Exploration expense ~~net~~

~~Interest expense increased from $4.6 million for~~During the six months ended June 30, ~~2021~~2023, we incurred $6.5 million in expenses primarily associated with a well that was plugged and abandoned due to mechanical failure. No material Exploration expense was incurred during the six months ended June 30, 2022.

Gain on sale of oil and gas properties, net

During the six months ended June 30, 2023, we sold certain non-core properties for approximately $56.1 million in cash, resulting in net gains of approximately $46.1 million. There were no material divestitures during the six months ended June 30, 2022.

Interest expense, net

Interest expense increased from $21.9 million for the six months ended June 30, 2022 to $44.9 million for the six months ended June 30, 2023, due to higher average borrowings outstanding compared to the prior year period primarily resulting from

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borrowings related to the Acquisitions and higher effective interest rates resulting from the issuance of the 8.000% Senior ~~Notes.~~Notes issued in April 2022 and higher interest rates on borrowings under the Credit Agreement. See Note 10. Long-Term Debt in the Notes to Unaudited Condensed Consolidated Financial Statements.

Write-off of deferred financing costs

On March 30, 2023, we settled the $250.0 million term loan tranche of borrowings under the Credit Agreement through an elected revolving commitment and $5.1 million of remaining unamortized deferred financing costs were written off.

Loss on derivative contracts, net

For the six months ended June 30, 2023, we recorded a net loss on derivative contracts of $66.8 million, consisting of unrealized mark-to-market losses of $59.3 million related to our commodity hedges, along with net realized losses on settlements of our commodity hedges of $7.4 million. For the six months ended June 30, 2022, we recorded a net loss on derivative contracts of $201.4 million, consisting of unrealized mark-to-market losses of $90.6 million related to our commodity hedges, along with net realized losses on settlements of our commodity hedges of $110.8 million. For the six months ended June 30, 2021, we recorded a net loss on derivative contracts of $84.4 million, consisting of unrealized mark-to-market losses of $59.6 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 $25.3 million and net realized losses on our interest rate swap of $0.1 million.

Income tax ~~(expense) benefit~~expense

During the six months ended June 30, ~~2022, the Company~~2023, we recorded income tax expense of approximately ~~$21.2~~$36.7 million ~~as compared to an~~comprised of (1) deferred federal income tax ~~benefit~~expense for Earthstone of ~~$0.8~~$31.0 million inresulting from its share of the ~~prior year period. The $22.0~~distributable income from EEH, (2) a deferred federal income tax expense for Lynden US of $1.8 million ~~increase was primarily due to a $214.5 million increase in Income (loss) before income taxes from the prior year period~~ as a result of ~~an increase in our results~~its share of ~~operations due to~~ the ~~Acquisitions. Of the $21.2 million~~distributable income from EEH and (3) income tax expense ~~recorded in the current year period, $19.9~~of $3.9 million related to both current and deferred state income taxes. Lynden Corp incurred no material income or loss, or related income tax expense ~~as a result of substantial forecasted current year income tax deductions generated by~~or benefit, for the ~~Acquisitions, as well as forecasted intangible drilling cost income tax deductions, partially offset by utilization of our valuation allowance in the current year period.~~three months ended June 30, 2023.

Liquidity and Capital Resources

Sources and Uses of Cash

With ~~two~~the pending Novo Acquisition, we will be re-allocating our drilling rigs ~~operating in~~and capital plans. Upon closing the ~~Midland Basin, two additional~~Novo Acquisition, we expect to have four drilling rigs operating in the Delaware Basin and ~~a third Delaware Basin~~one drilling rig ~~expected to be added late~~operating in the ~~third quarter of 2022,~~Midland Basin, however, we expect total ~~2022 drilling plan spending~~2023 capital expenditures of ~~$502-$527~~$725 to $775 million ~~which we~~to remain unchanged. We expect capital expenditures to be funded by cash flows from operations. During the six months ended June 30, ~~2022,~~2023, we generated ~~$337.7~~$476.8 million of cash flows from operating activities. We incurred $357.2 million in cash additions to oil and natural gas properties ($376.7 million of capital expenditures on an accrual basis) during the six months ended June 30, 2023. As of June 30, ~~2022,~~2023, we had available borrowings under our Credit Agreement of approximately ~~$405.0 million. Additionally, on April 12, 2022, we issued $550.0 million~~$1.4 billion.

Table of 8.000% senior notes due 2027 for net proceeds of approximately $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.Contents

Although we expect cash flows from operations and capacity under our Credit Agreement to be sufficient to fund our expected ~~2022~~2023 capital program and to service our debt obligations, 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, although we may be able to influence the amount of realized revenues through the use of derivative contracts as part of our commodity price risk management.

We believe we will have sufficient liquidity with cash flows from operations and borrowings under our Credit Agreement to meet our capital requirements for the next 12 months.

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Working Capital

Working capital (presented below) was a deficit of ~~$163.1~~$170.8 million as of June 30, ~~2022.~~2023. Of the ~~$163.1~~$170.8 million working capital deficit, ~~$118.7~~$24.6 million relates to our derivative contracts expected to settle in the next 12 months (subsequent to June 30, ~~2022)~~2023) resulting from increased oil price futures as of June 30, ~~2022.~~2023. 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 working capital deficit of ~~$44.4~~$146.2 million is ~~$360.6 million~~$1.3 billion less than our ~~cash and~~ available borrowings as of June 30, ~~2022~~2023 of ~~$405.0 million.~~$1.4 billion. The components of working capital are presented below:


		June 30,		December 31,			June 30,		December 31,
(In thousands)	(In thousands)	2022		2021		(In thousands)	2023		2022
Current assets:	Current assets:					Current assets:
Cash		$	—	$	4,013
Cash and cash equivalents						Cash and cash equivalents	$	49,500	$	—
Accounts receivable:	Accounts receivable:					Accounts receivable:
Oil, natural gas, and natural gas liquids revenues	Oil, natural gas, and natural gas liquids revenues	230,449		50,575		Oil, natural gas, and natural gas liquids revenues	111,436		161,531
Joint interest billings and other, net of allowance of $19 and $19 at June 30, 2022 and December 31, 2021, respectively		22,004		2,930
Joint interest billings and other, net of allowance of $19 and $19 at June 30, 2023 and December 31, 2022, respectively						Joint interest billings and other, net of allowance of $19 and $19 at June 30, 2023 and December 31, 2022, respectively	24,196		34,549
Derivative asset	Derivative asset	3,327		1,348		Derivative asset	7,106		31,331
Prepaid expenses and other current assets	Prepaid expenses and other current assets	13,646		2,549		Prepaid expenses and other current assets	19,658		18,854
Total current assets	Total current assets	269,426		61,415		Total current assets	211,896		246,265

Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	80,386	$	31,397	Accounts payable	$	53,824	$	91,815
Revenues and royalties payable	Revenues and royalties payable	150,087		36,189		Revenues and royalties payable	166,380		163,368
Accrued expenses	Accrued expenses	72,168		31,704		Accrued expenses	102,201		80,942

Asset retirement obligation	Asset retirement obligation	390		395		Asset retirement obligation	860		948
Derivative liability	Derivative liability	122,067		45,310		Derivative liability	31,702		14,053
Advances	Advances	5,774		4,088		Advances	11,449		7,312
Operating lease liabilities	Operating lease liabilities	850		681		Operating lease liabilities	906		842

Finance lease liabilities						Finance lease liabilities	1,083		802
Other current liabilities	Other current liabilities	767		851		Other current liabilities	14,335		16,202
Total current liabilities	Total current liabilities	432,489		150,615		Total current liabilities	382,740		376,284

Working Capital	Working Capital	$	(163,063)	$	(89,200)	Working Capital	$	(170,844)	$	(130,019)

Cash Flows from Operating Activities

Cash flows provided by operating activities for the six months ended June 30, ~~2022~~2023 increased to ~~$337.7~~$476.8 million compared to ~~$93.4~~$337.7 million for the six months ended June 30, ~~2021,~~2022, 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 compared to the prior year period.

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Cash Flows from Investing Activities

Cash flows used in investing activities for the six months ended June 30, ~~2022 increased~~2023 decreased to $377.7 million from $1.2 billion ~~from $216.2 million~~ for the six months ended June 30, ~~2021, primarily~~2022, due to the impact of approximately $1.0 billion in prior year acquisition of oil and gas properties, ~~and~~partially offset by increased current year spending related to the execution of our drilling program.

Cash Flows from Financing Activities

Cash flows used in financing activities of $49.6 million for the six months ended June 30, 2023 primarily resulted from the use of operating cash flows and proceeds from the issuance of the 2031 Notes to pay off borrowings under the Credit Agreement. Cash flows provided by financing activities ~~were~~of $875.3 million for the six months ended June 30, 2022 ~~compared~~primarily resulted from net borrowings used to ~~cash flows provided by financing activities~~finance the acquisition of $121.8 million for the six months ended June 30, 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 Preferred Stock for net proceeds of approximately $279.3 million.

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oil and natural gas properties.

Capital Expenditures

Our accrual basis capital expenditures for the three and six months ended June 30, ~~2022~~2023 were as follows (in thousands):


		Three Months Ended June 30, 2022		Six Months Ended June 30, 2022			Three Months Ended June 30, 2023		Six Months Ended June 30, 2023
Drilling and completions	Drilling and completions	$	119,300	$	201,300	Drilling and completions	$	173,702	$	375,086
Leasehold costs	Leasehold costs	151		260		Leasehold costs	738		1,626
Total capital expenditures	Total capital expenditures	$	119,451	$	201,560	Total capital expenditures	$	174,440	$	376,712

Hedging Activities

The following table sets forth our outstanding derivative contracts at June 30, ~~2022.~~2023. When aggregating multiple contracts, the weighted average contract price is disclosed.


	Price Swaps
Period	Commodity	Volume (Bbls / MMBtu)	Weighted Average Price ($/Bbl / $/MMBtu)
Q3 - Q4 2023	Crude Oil	1,145,200	$74.90
Q1 - Q4 2024	Crude Oil	621,600	$69.28
Q3 - Q4 2023	Crude Oil Basis Swap (1)	4,692,000	$0.92

Q3 - Q4 2023	Natural Gas	2,300,000	$3.35

Q3 - Q4 2023	Natural Gas Basis Swap (2)	25,760,000	$(1.67)
Q1 - Q4 2024	Natural Gas Basis Swap (2)	36,600,000	$(1.05)
Q1 - Q4 2025	Natural Gas Basis Swap (2)	14,600,000	$(0.74)

(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)
Q3 - Q4 2023	Crude Oil Costless Collar	2,120,800	$62.73	$85.26
Q1 - Q4 2024	Crude Oil Costless Collar	732,000	$60.00	$76.01
Q3 - Q4 2023	Natural Gas Costless Collar	13,298,800	$3.12	$5.21
Q1 - Q4 2024	Natural Gas Costless Collar	14,640,000	$2.56	$4.51

Premium Puts
Period Commodity Volume
(Bbls / MMBtu) $/Bbl (Put Price) $/Bbl (Net of Premium)
Q3 - Q4 2022 Crude Oil 253,000 $ 80.00 $ 75.79
Q1 - Q4 2023 Crude Oil 638,000 $ 70.00 $ 62.85

Premium Puts

Period

Commodity

Volume
(Bbls / MMBtu)

$/Bbl (Put Price)

$/Bbl (Net of Premium)

Q3 - Q4 2023

Crude Oil

791,200

$70.00

$64.54

Q1 - Q4 2024

Crude Oil

915,000

$65.00

$60.04

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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 ~~2021~~2022 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.

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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.

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 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~~

~~There are no recent accounting pronouncements that are expected to 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, 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.

We have entered into a series of derivative instruments to hedge a ~~significant~~ portion of ~~our~~its expected oil and natural gas production through December 31, ~~2024.~~2024 and maintain certain natural gas basis swaps through December 31, 2025. 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 June 30, ~~2022:~~

2023:


	Price Swaps
Period	Commodity	Volume (Bbls / MMBtu)	Weighted Average Price ($/Bbl / $/MMBtu)
Q3 - Q4 2023	Crude Oil	1,145,200	$74.90
Q1 - Q4 2024	Crude Oil	621,600	$69.28
Q3 - Q4 2023	Crude Oil Basis Swap (1)	4,692,000	$0.92

Q3 - Q4 2023	Natural Gas	2,300,000	$3.35

Q3 - Q4 2023	Natural Gas Basis Swap (2)	25,760,000	$(1.67)
Q1 - Q4 2024	Natural Gas Basis Swap (2)	36,600,000	$(1.05)
Q1 - Q4 2025	Natural Gas Basis Swap (2)	14,600,000	$(0.74)

(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.

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Premium Puts
Period Commodity Volume
(Bbls / MMBtu) $/Bbl (Put Price) $/Bbl (Net of Premium)
Q3 - Q4 2022 Crude Oil 253,000 $ 80.00 $ 75.79
Q1 - Q4 2023 Crude Oil 638,000 $ 70.00 $ 62.85


	Costless Collars
Period	Commodity	Volume (Bbls / MMBtu)	Bought Floor ($/Bbl / $/MMBtu)	Sold Ceiling ($/Bbl / $/MMBtu)
Q3 - Q4 2023	Crude Oil Costless Collar	2,120,800	$62.73	$85.26
Q1 - Q4 2024	Crude Oil Costless Collar	732,000	$60.00	$76.01
Q3 - Q4 2023	Natural Gas Costless Collar	13,298,800	$3.12	$5.21
Q1 - Q4 2024	Natural Gas Costless Collar	14,640,000	$2.56	$4.51

Premium Puts

Period

Commodity

Volume
(Bbls / MMBtu)

$/Bbl (Put Price)

$/Bbl (Net of Premium)

Q3 - Q4 2023

Crude Oil

791,200

$70.00

$64.54

Q1 - Q4 2024

Crude Oil

915,000

$65.00

$60.04

Changes in fair value of commodity derivative instruments are reported 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 ~~$135.0~~$32.9 million at June 30, ~~2022.~~2023. Based on the published commodity futures price curves for the underlying commodity as of June 30, ~~2022,~~2023, a 10% increase in per unit commodity prices would cause the total fair value of our commodity derivative financial instruments to decrease by approximately ~~$30.9~~$7.3 million to an overall net liability position of ~~$104.1~~$25.6 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 ~~$30.9~~$7.3 million to an overall net liability position of ~~$165.9~~$40.2 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

WeFrom time to time, 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 SOFR and 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 June 30, ~~2022,~~2023, the Company had no outstanding borrowings ~~under the Credit Agreement were $395.0 million bearing~~subject to variable interest ~~at rates described in~~ ~~Note 10. Long-Term Debt~~ ~~in the~~ ~~Notes to Consolidated Financial Statements~~. Fluctuations in interest rates will cause our annual interest costs to fluctuate. At June 30, 2022, the interest rate on borrowings under the Credit Agreement was 4.584% per year. If borrowings at December 31, 2021 were to remain constant, a 10% change in interest rates would impact our future cash flows by approximately $1.8 million per year.

rates.

Disclosure of Limitations

Because the information above included only those exposures that existed at June 30, ~~2022,~~2023, 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 commodity price fluctuations and interest expense incurred 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 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 June 30, ~~2022~~2023 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.

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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. The Company’s threshold for disclosing material environmental legal proceedings involving a governmental authority where potential monetary sanctions are involved is $1 million. As of June 30, ~~2022,~~2023, 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, 2021.~~which is incorporated herein by reference.

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, ~~2021.~~2022 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sale of Equity Securities

~~Unregistered sales of~~We sold no unregistered equity securities during the ~~three~~six months ended June 30, ~~2022 were reported in our Current Report on Form 8-K filed with the SEC on April 18, 2022.~~2023.

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
April 2022 — $ — — —
May 2022 — — — —
June 2022 48,232 $ 14.93 — —


	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
April 2023	—	$	—	—	—
May 2023	—	—		—	—
June 2023	56,683	$	14.10	—	—

(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.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information.

~~None.~~During the quarter ended June 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K).

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Item 6. Exhibits

Exhibit No.

Description

Filed Herewith

Furnished Herewith

31.1

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

31.2

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

32.1

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act

32.2

Certification of the Executive Vice President - Accounting and Administration pursuant to Section 906 of the Sarbanes-Oxley Act

101

Interactive Data Files (formatted as Inline XBRL).

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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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:

August ~~4, 2022~~2, 2023

By:

/s/ Tony Oviedo

Tony Oviedo

Executive Vice President – Accounting and Administration


	Shares	Weighted-Average Grant Date Fair Value
Unvested PSUs at December 31, 2021	2,751,725	$	8.42
Granted	472,485	$	19.42

Vested	(608,125)	$	9.30
Unvested PSUs at June 30, 2022	2,616,085	$	10.20