
	September 30,			December 31,				September 30,		December 31,
ASSETS	2017			2016			ASSETS	2022		2021
Current assets:							Current assets:
Cash	$	11,047		$	10,200		Cash	$	—	$	4,013
Accounts receivable:							Accounts receivable:
Oil, natural gas, and natural gas liquids revenues		15,093			13,998		Oil, natural gas, and natural gas liquids revenues	196,941		50,575
Joint interest billings and other, net of allowance of $138 at September 30, 2017 and $163 at December 31, 2016		4,371			2,698
Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2022 and December 31, 2021, respectively							Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2022 and December 31, 2021, respectively	20,328		2,930
Derivative asset		147			—		Derivative asset	14,950		1,348
Prepaid expenses and other current assets		1,299			446		Prepaid expenses and other current assets	19,089		2,549
Total current assets		31,957			27,342		Total current assets	251,308		61,415

Oil and gas properties, successful efforts method:							Oil and gas properties, successful efforts method:
Proved properties		599,222			363,072		Proved properties	3,832,991		1,625,367
Unproved properties		291,364			51,723		Unproved properties	290,111		222,025
Land		5,534			—		Land	5,482		5,382
Total oil and gas properties		896,120			414,795		Total oil and gas properties	4,128,584		1,852,774

Accumulated depreciation, depletion and amortization		(122,842	)		(145,393	)	Accumulated depreciation, depletion and amortization	(516,662)		(395,625)
Net oil and gas properties		773,278			269,402		Net oil and gas properties	3,611,922		1,457,149

Other noncurrent assets:							Other noncurrent assets:
Goodwill		17,620			17,620
Office and other equipment, net of accumulated depreciation of $1,973 and $1,600 at September 30, 2017 and December 31 2016, respectively		1,039			1,479

Office and other equipment, net of accumulated depreciation and amortization of $5,059 and $4,547 at September 30, 2022 and December 31, 2021, respectively							Office and other equipment, net of accumulated depreciation and amortization of $5,059 and $4,547 at September 30, 2022 and December 31, 2021, respectively	5,070		1,986
Derivative asset							Derivative asset	5,526		157
Operating lease right-of-use assets							Operating lease right-of-use assets	2,255		1,795
Other noncurrent assets		1,078			669		Other noncurrent assets	16,216		33,865
TOTAL ASSETS	$	824,972		$	316,512		TOTAL ASSETS	$	3,892,297	$	1,556,367
LIABILITIES AND EQUITY							LIABILITIES AND EQUITY
Current liabilities:							Current liabilities:
Accounts payable	$	19,343		$	11,927		Accounts payable	$	75,162	$	31,397
Revenues and royalties payable							Revenues and royalties payable	158,867		36,189
Accrued expenses		16,516			5,392		Accrued expenses	105,623		31,704
Revenues and royalties payable		9,156			10,769

Asset retirement obligation							Asset retirement obligation	941		395
Derivative liability							Derivative liability	28,404		45,310
Advances		5,048			4,542		Advances	15,405		4,088
Derivative liability		1,986			4,595
Current portion of long-term debt		1,704			1,604
Operating lease liabilities							Operating lease liabilities	869		681
Finance lease liabilities							Finance lease liabilities	784		—
Other current liabilities							Other current liabilities	4,105		851
Total current liabilities		53,753			38,829		Total current liabilities	390,160		150,615

Noncurrent liabilities:							Noncurrent liabilities:
Long-term debt		71,400			12,693

Long-term debt, net							Long-term debt, net	1,174,549		320,000
Deferred tax liability		16,513			15,776		Deferred tax liability	93,322		15,731
Asset retirement obligation		3,204			6,013		Asset retirement obligation	35,837		15,471
Derivative liability		422			1,575		Derivative liability	7,840		571
Other noncurrent liabilities		143			169
Total noncurrent liabilities		91,682			36,226

Commitments and Contingencies (Note 13)

Equity:
Preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued or outstanding		—			—
Common stock, $0.001 par value, no shares authorized; none issued or outstanding at September 30, 2017 and 100,000,000 shares authorized; 22,289,177 issued and 22,273,820 outstanding at December 31, 2016		—			23
Class A Common stock, $0.001 par value, 200,000,000 shares authorized; 22,988,759 issued and outstanding at September 30, 2017 and none issue or outstanding at December 31, 2016		23			—
Class B Common Stock, $0.0001 par value, 50,000,000 shares authorized; 36,070,828 shares issued and outstanding at September 30, 2017; none issued or outstanding at December 31, 2016		36			—
Additional paid-in capital		463,009			454,202
Accumulated deficit		(227,146	)		(212,308	)
Treasury stock, no shares at September 30, 2017 and 15,357 shares at December 31, 2016		—			(460	)
Total Earthstone Energy, Inc. equity		235,922			241,457
Noncontrolling interest		443,615			—
Total equity		679,537			241,457

TOTAL LIABILITIES AND EQUITY	$	824,972		$	316,512


														Three Months Ended				Nine Months Ended
	Three Months Ended September 30,						Nine Months Ended September 30,							September 30,				September 30,
	2017			2016			2017			2016				2022		2021		2022		2021
REVENUES													REVENUES
Oil	$	25,733		$	8,262		$	59,815		$	21,898		Oil	$	332,036	$	74,051	$	756,420	$	205,788
Natural gas		2,513			1,417			6,338			3,376		Natural gas	113,937		14,368		233,020		26,910
Natural gas liquids		3,036			851			6,249			1,843		Natural gas liquids	85,522		21,965		210,756		42,929
Total revenues		31,282			10,530			72,402			27,117		Total revenues	531,495		110,384		1,200,196		275,627

OPERATING COSTS AND EXPENSES													OPERATING COSTS AND EXPENSES
Lease operating expense		5,407			4,581			14,989			11,081		Lease operating expense	75,829		12,983		147,974		35,579
Severance taxes		1,588			522			3,705			1,418
Rig idle and termination expense		—			—			—			5,059
Impairment expense		92			—			66,740			—
Production and ad valorem taxes													Production and ad valorem taxes	40,219		7,225		87,729		17,428

Depreciation, depletion and amortization		10,330			5,149			28,258			16,252		Depreciation, depletion and amortization	90,880		27,059		191,669		77,493

General and administrative expense		5,608			2,285			14,838			6,961		General and administrative expense	14,188		7,650		40,571		25,200
Stock-based compensation		1,687			1,328			4,645			1,889
Transaction costs		109			846			4,676			1,641		Transaction costs	1,778		293		12,118		2,906
Accretion of asset retirement obligation		72			143			378			404		Accretion of asset retirement obligation	758		323		1,863		916
Exploration expense		—			—			1			5		Exploration expense	2,248		296		2,340		326
Total operating costs and expenses		24,893			14,854			138,230			44,710		Total operating costs and expenses	225,900		55,829		484,264		159,848

Gain on sale of oil and gas properties		2,157			8			3,848			8		Gain on sale of oil and gas properties	14,803		392		14,803		740

Income (loss) from operations		8,546			(4,316	)		(61,980	)		(17,585	)
Income from operations													Income from operations	320,398		54,947		730,735		116,519

OTHER INCOME (EXPENSE)													OTHER INCOME (EXPENSE)
Interest expense, net		(903	)		(341	)		(1,873	)		(934	)	Interest expense, net	(20,988)		(3,050)		(42,931)		(7,668)
Write-off of deferred financing costs		-			—			(526	)		—
(Loss) gain on derivative contracts, net		(3,663	)		946			4,137			(2,517	)
Other (expense) income, net		(66	)		12			(34	)		(70	)

Gain (loss) on derivative contracts, net													Gain (loss) on derivative contracts, net	60,286		(33,128)		(141,101)		(117,566)

Other income, net													Other income, net	134		520		430		823
Total other income (expense)		(4,632	)		617			1,704			(3,521	)	Total other income (expense)	39,432		(35,658)		(183,602)		(124,411)

Income (loss) before income taxes		3,914			(3,699	)		(60,276	)		(21,106	)	Income (loss) before income taxes	359,830		19,289		547,133		(7,892)
Income tax benefit (expense)		94			(201	)		10,046			(387	)
Income tax (expense) benefit													Income tax (expense) benefit	(60,518)		(451)		(81,673)		343
Net income (loss)		4,008			(3,900	)		(50,230	)		(21,493	)	Net income (loss)	299,312		18,838		465,460		(7,549)

Less: Net income (loss) attributable to noncontrolling interest		2,452			—			(35,392	)		—		Less: Net income (loss) attributable to noncontrolling interest	87,856		8,420		142,597		(3,263)

Net income (loss) attributable to Earthstone Energy, Inc.	$	1,556		$	(3,900	)	$	(14,838	)	$	(21,493	)	Net income (loss) attributable to Earthstone Energy, Inc.	$	211,456	$	10,418	$	322,863	$	(4,286)

Net income (loss) per common share attributable to Earthstone Energy, Inc.:													Net income (loss) per common share attributable to Earthstone Energy, Inc.:
Basic and diluted	$	0.07		$	(0.17	)	$	(0.66	)	$	(1.23	)
Basic													Basic	$	2.01	$	0.21	$	3.91	$	(0.09)
Diluted													Diluted	$	1.94	$	0.20	$	3.61	$	(0.09)

Weighted average common shares outstanding:													Weighted average common shares outstanding:
Basic and diluted		22,905,023			22,289,177			22,638,977			17,433,079
Basic													Basic	105,254,778		49,243,185		82,483,635		45,406,952
Diluted													Diluted	109,278,661		52,662,942		92,844,854		45,406,952

For the Nine Months Ended September 30,

2017

2016

Cash flows from operating activities:

Net loss

$
(50,230
)

$
(21,493
)
Adjustments to reconcile net loss to net cash provided by operating activities:

Impairment of proved and unproved oil and gas properties

66,740

—

Depreciation, depletion and amortization

28,258

16,252

Accretion of asset retirement obligations

378

404

Settlement of asset retirement obligations

—

(15
)
Gain on sale of oil and gas properties

(3,848
)

(8
)
Rig idle and termination expense

—

5,059

Total (gain) loss on derivative contracts, net

(4,137
)

2,517

Operating portion of net cash received in settlement of derivative contracts

229

3,330

Stock-based compensation

4,645

1,889

Deferred income taxes

(10,046
)

387

Write-off of deferred financing costs

526

—

Amortization of deferred financing costs

195

220

Changes in assets and liabilities:

Decrease in accounts receivable

6,964

9,141

Increase in prepaid expenses and other current assets

(455
)

(1,790
)
Decrease in accounts payable and accrued expenses

(11,522
)

(3,462
)
Decrease in revenues and royalties payable

(4,019
)

(1,730
)
Increase (decrease) in advances

506

(8,966
)
Net cash provided by operating activities

24,184

1,735

Cash flows from investing activities:

Bold Contribution Agreement, net of cash acquired

(55,609
)

—

Lynden Arrangement, net of cash acquired

—

(31,334
)
Additions to oil and gas properties

(29,958
)

(15,272
)
Additions to office and other equipment

(139
)

(63
)
Proceeds from sales of oil and gas properties

5,054

—

Net cash used in investing activities

(80,652
)

(46,669
)
Cash flows from financing activities:

Proceeds from borrowings

70,000

36,597

Repayments of borrowings

(11,193
)

(38,165
)
Common stock exchanged and cancelled

(324
)

—

Issuance of common stock, net of offering costs of $2.7 million

—

47,125

Deferred financing costs

(1,168
)

(78
)
Net cash provided by financing activities

57,315

45,479

Net increase in cash and cash equivalents

847

545

Cash at beginning of period

10,200

23,264

Cash at end of period

$
11,047

$
23,809

Supplemental disclosure of cash flow information

Cash paid for:

Interest

$
1,555

$
688

Non-cash investing and financing activities:

Class B Common stock issued in Bold Contribution Agreement

$
489,842

$
—

Class A Common stock issued in Bold Contribution Agreement

$
2,037

$
—

Common stock issued in Lynden Arrangement

$
—

$
45,699

Accrued capital expenditures

$
19,519

$
8,938

Asset retirement obligations

$
83

$
101

Promissory Note

$
—

$
5,059


	Issued Shares
	Series A Convertible Preferred Stock	Class A Common Stock	Class B Common Stock	Series A Conv Pref Stock		Class A Common Stock		Class B Common Stock		Additional Paid-in Capital		(Accumulated Deficit) Retained Earnings		Total Earthstone Energy, Inc. Equity		Noncontrolling Interest		Total Equity
At December 31, 2021	—	53,467,307	34,344,532	$	—	$	53	$	34	$	718,181	$	(159,774)	$	558,494	$	487,767	$	1,046,261
Stock-based compensation expense - equity portion	—	—	—	—		—		—		2,301		—		2,301		—		2,301
Shares issued in connection with Chisholm Acquisition	—	19,417,476	—	—		19		—		249,496		—		249,515		—		249,515
Vesting of restricted stock units, net of taxes paid	—	483,251	—	—		1		—		(1)		—		—		—		—
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings	—	286,892	—	—		—		—		(3,898)		—		(3,898)		—		(3,898)
Cancellation of Treasury shares	—	(286,892)	—	—		—		—		—		—		—		—		—
Class B Common Stock converted to Class A Common Stock	—	72,766	(72,766)	—		—		—		1,014		—		1,014		(1,014)		—
Net loss	—	—	—	—		—		—		—		(33,478)		(33,478)		(18,399)		(51,877)
At March 31, 2022	—	73,440,800	34,271,766	—		$	73	$	34	$	967,093	$	(193,252)	$	773,948	$	468,354	$	1,242,302
Stock-based compensation expense - equity portion	—	—	—	—		—		—		2,693		—		2,693		—		2,693
Issuance of Series A Convertible Preferred Stock, net of offering costs of $674	280,000	—	—	—		—		—		279,326		—		279,326		—		279,326
Shares issued in connection with Bighorn Acquisition	—	5,650,977	—	—		6		—		77,751		—		77,757		—		77,757
Vesting of restricted stock units, net of taxes paid	—	115,521	—	—		—		—		—		—		—		—		—
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings	—	48,232	—	—		—		—		(719)		—		(719)		—		(719)
Cancellation of Treasury shares	—	(48,232)	—	—		—		—		—		—		—		—		—
Class B Common Stock converted to Class A Common Stock	—	10,125	(10,125)	—		—		—		149		—		149		(149)		—
Net income	—	—	—	—		—		—		—		144,885		144,885		73,140		218,025
At June 30, 2022	280,000	79,217,423	34,261,641	—		$	79	$	34	$	1,326,293	$	(48,367)	$	1,278,039	$	541,345	$	1,819,384
Stock-based compensation expense - equity portion	—	—	—��	—		—		—		2,745		—		2,745		—		2,745
Conversion of Series A Convertible Preferred Stock	(280,000)	25,225,225	—	—		25		—		(25)		—		—		—		—

certain ~~relief provisions, for leases~~circumstances indicate that exist or are entered into after the beginning of the earliest comparative period in the financial statements when adopted. The Company expects to adopt this standards update, as required, beginning with the first quarter of 2019. ~~The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its Condensed Consolidated Financial Statements.~~

~~Statement of Cash Flows –~~ In August 2016, the FASB issued updated guidance that clarifies how certain cash receipts and cash payments are presented in the statement of cash flows. This update provides guidance on eight specific cash flow issues. The standards update is effective for interim and annual periods beginning after December 15, 2017, and should be applied retrospectively to all periods presented. Early adoption is permitted. The Company expects to adopt this standards update, as required, beginning with the first quarter of 2018. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its Condensed Consolidated Financial Statements.

~~Business Combinations –~~ In January 2017, the FASB issued updated guidance that clarifies the definition of a business, which amends the guidance used in evaluating whether a set of acquired assets and activities represents a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not considered a business. As a result, acquisition fees and expenses will be capitalized to the cost basis of the property acquired, and the tangible and intangible components acquired will be recorded based on their relative fair values as of the acquisition date. The standard is effective for all public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted for periods for which financial statements have not yet been issued. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its Condensed Consolidated Financial Statements.

~~Intangibles - Goodwill and Other –~~ In January 2017, the FASB issued updated guidance simplifying the test for goodwill impairment. The update eliminates Step 2 of the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The update is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company is in the process of evaluating the impact, if any, on its Condensed Consolidated Financial Statements.

~~Compensation – Stock Compensation –~~ In May 2017, the FASB issued updated guidance that provides clarity about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The update is effective for annual periods beginning after December 15, 2017, and early adoption is permitted, including adoption in any interim period. The Company is currently evaluating the impact, if any, of this update, but does not expect the adoption to have a material impact on its Condensed Consolidated Financial Statements.

~~Note 2. Acquisitions and Divestitures~~

~~The Company accounts for its acquisitions that qualify as business combinations, under the acquisition method of accounting in accordance with FASB ASC Topic 805,~~ ~~Business Combinations~~, which, among other things, requires the assets acquired and liabilities assumed to be measured and recorded at their fair values as of the acquisition date. The initial accounting for acquisitions may not be complete and adjustments to provisional amounts, or recognition of additional assets acquired or liabilities assumed, may occur as additional information is obtained about the facts and circumstances that existed as of the acquisition dates.

~~Bold Transaction~~

~~On May 9, 2017, Earthstone completed the Bold Transaction~~ ~~described in~~ ~~Note 1. Basis of Presentation and Summary of Significant Accounting Policies~~.

An allocation of the purchase price was prepared using, among other things, a reserve report prepared by qualified reserve engineers and priced as of the acquisition date. The following allocation is still preliminary with respect to final tax amounts and certain accruals and includes the use of estimates based on information that was available to management at the time these Condensed Consolidated Financial Statements were prepared.

~~EARTHSTONE ENERGY, INC.~~

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

~~The following table summarizes the consideration transferred, fair value of assets acquired and liabilities assumed (in thousands, except share and share price amounts~~):

Consideration:

Shares of Class A Common Stock issued pursuant to the Bold Contribution Agreement to certain employees of Bold

150,000

EEH Units issued to Bold Holdings

36,070,828

Total equity interest issued in the Bold Transaction

36,220,828

Closing per share price of Class A Common Stock as of May 9, 2017

$
13.58

Total consideration transferred ⁽¹⁾⁽²⁾

$
491,879

Fair value of assets acquired:

Cash and cash equivalents

$
2,355

Other current assets

10,078

Oil and gas properties ⁽³⁾

557,704

Amount attributable to assets acquired

$
570,137

Fair value of liabilities assumed:

Long-term debt ⁽⁴⁾

$
58,000

Current liabilities

17,042

Deferred tax liability

2,857

Noncurrent asset retirement obligations

359

Amount attributable to liabilities assumed

$
78,258

~~(1)~~

~~Consideration included 150,000 shares of Class A Common Stock recorded above based upon its fair value which was determined using its closing price of $13.58 per share on May 9, 2017.~~

~~(2)~~

Consideration was 36,070,828 EEH Units. Additionally, Bold Holdings purchased 36,070,828 shares of Class B Common Stock for $36,071. Each EEH Unit, together with one share of Class B Common Stock, is convertible into one share of Class A Common Stock. The fair value of the consideration was determined using the closing price of the Company’s Class A Common Stock of $13.58 per share on May 9, 2017.

~~(3)~~

The market assumptions as to the future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of the future development and operating costs, projecting of future rates of production, expected recovery rate and risk adjusted discount rates used by the Company to estimate the fair value of the oil and natural gas properties represent Level 3 inputs; see ~~Note 3. Fair Value Measurements, below.~~

~~(4)~~

~~Concurrent with the closing of the Bold Transaction, EEH assumed Bold’s outstanding borrowings of $58 million under its credit agreement.~~

~~EARTHSTONE ENERGY, INC.~~

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

The following unaudited supplemental pro forma condensed results of operations present consolidated information as though the Bold Transaction had been completed as of January 1, 2016. The unaudited supplemental pro forma financial information was derived from the historical consolidated and combined statements of operations for Bold and Earthstone and adjusted to include: (i) depletion expense applied to the adjusted basis of the properties acquired and (ii) to eliminate non-recurring transaction costs directly related to the Bold Transaction that do not have a continuing impact on the Company’s operating results. 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 pro forma financial information (in thousands, except per share amounts~~):

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2017

2016

Revenue

$
15,865

$
99,192

$
38,165

Loss before taxes

$
(4,860
)

$
(41,420
)

$
(31,723
)

Net loss

$
(5,061
)

$
(31,374
)

$
(32,109
)

Less: Net loss available to noncontrolling interest

$
(3,120
)

$
(19,253
)

$
(21,587
)

Net loss attributable to Earthstone Energy, Inc.

$
(1,941
)

$
(12,121
)

$
(10,522
)

Pro forma net loss per common share attributable to Earthstone Energy, Inc.:

Basic and diluted

$
(0.09
)

$
(0.53
)

$
(0.60
)

The Company has included in its Condensed Consolidated Statements of Operations, revenues of $17.7 million and direct operating expenses of $9.8 million for the three months ended September 30, 2017, and revenues of $28.6 million and direct operating expenses of $16.0 million for the period May 9, 2017 to September 30, 2017 related to the properties acquired in the Bold Transaction.

~~2017 Divestitures~~

~~For the three months ended September 30,~~ 2017, the Company sold certain non-core properties for a total cash consideration of approximately $2.7 million, while eliminating approximately $3.6 million of future abandonment obligations. The sales resulted in a net gain of approximately $2.2 million recorded in Gain on sale of oil and gas properties in the Condensed Consolidated Statements of Operations.

~~For~~necessary. No triggering events that require assessment were observed during the nine months ended September 30, ~~2017,~~ 2022. See further discussion in Note 5. Oil and Natural Gas Properties.

Note 3. ~~Fair Value Measurements~~

FASB ASC Topic 820, defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. ASC 820 provides a framework for measuring fair value, establishes a three level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the counterparty’s creditworthiness when valuing certain assets.

~~The three-level fair value hierarchy for disclosure of fair value measurements defined by ASC 820 is as follows:~~

~~Level 1~~ – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

~~Level 2~~ – Inputs, other than quoted prices within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

~~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

~~EARTHSTONE ENERGY, INC.~~

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

some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level. There were no transfers between fair value hierarchy levels for the nine months ended September 30, 2017.

~~Fair Value on a Recurring Basis~~

Derivative financial instruments are carried at fair value and measured on a recurring basis. The derivative financial instruments consist of swaps for crude oil and natural gas. The Company’s swaps are valued based on a discounted future cash flow model. The primary input for the model is published forward commodity price curves. The swaps are also designated as Level 2 within the valuation hierarchy.

The fair values of commodity derivative instruments in an asset position include a measure of counterparty nonperformance risk, and the fair values of commodity derivative instruments in a liability position include a measure of the Company’s nonperformance risk. These measurements were not material to the Condensed Consolidated Financial Statements.

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

September 30, 2017

Level 1

Level 2

Level 3

Total

Financial assets

Derivative asset - current

$
—

$
147

$
—

$
147

Total financial assets

$
—

$
147

$
—

$
147

Financial liabilities

Derivative liability - current

$
—

$
1,986

$
—

$
1,986

Derivative liability - noncurrent

—

422

—

422

Total financial liabilities

$
—

$
2,408

$
—

$
2,408

December 31, 2016

Financial liabilities

Derivative liability - current

$
—

$
4,595

$
—

$
4,595

Derivative liability - noncurrent

—

1,575

—

1,575

Total financial assets

$
—

$
6,170

$
—

$
6,170

Other financial instruments include cash, accounts receivable and payable, and revenue royalties. The carrying amount of these instruments approximates fair value because of their short-term nature. The Company’s long-term debt obligation bears interest at floating market rates, therefore carrying amounts and fair value are approximately equal.

~~Fair Value on a Nonrecurring Basis~~

The Company applies the provisions of the fair value measurement standard on a non-recurring basis to its non-financial assets and liabilities, including oil and gas properties and goodwill. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances.

~~Proved Oil and Natural Gas Properties~~

Proved oil and natural gas properties are measured at fair value on a nonrecurring basis in order to review for impairment. 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.

~~EARTHSTONE ENERGY, INC.~~

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

~~Goodwill~~

Goodwill represents the excess of the purchase price of assets acquired over the fair value of those assets and is tested for impairment annually, or more frequently if events or changes in circumstances dictate that the fair value of goodwill may be less than its carrying amount. Such test includes an assessment of qualitative and quantitative factors.

~~Business Combinations~~

The Company records the identifiable assets acquired and liabilities assumed at fair value at the date of acquisition on a nonrecurring basis. Fair value may be estimated using comparable market data, a discounted cash flow method, or a combination of the two. In the discounted cash flow method, estimated future cash flows are based on management’s expectations for the future and include estimates of future oil and gas production, commodity prices based on NYMEX commodity futures price strips as of the date of the estimate, operating and development costs, and a risk-adjusted discount rate. The future oil and natural gas pricing used in the valuation is a Level 2 assumption. Significant Level 3 assumptions associated with the calculation of discounted cash flows used in the determination of fair value of the acquisition include the Company’s estimate operating and development costs, anticipated production of proved reserves, appropriate risk-adjusted discount rates and other relevant data. The Company’s acquisitions are described in ~~Note 2. Acquisitions and Divestitures~~.

~~Asset Retirement Obligations~~

The asset retirement obligation estimates are derived from historical costs and management’s expectation of future cost environments; and therefore, the Company has designated these liabilities as Level 3. The significant inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, well life, inflation and credit-adjusted risk free rate. See ~~Note 11. Asset Retirement Obligations~~ ~~for a reconciliation of the beginning and ending balances of the liability for the Company’s asset retirement obligations.~~

~~Note 4.~~ Derivative Financial Instruments

~~In connection with the closing of the Bold Transaction on May 9, 2017, all oil and natural gas derivative contracts were novated to EEH.~~

~~The following table summarizes the activity for the equity attributable to the noncontrolling interest for the nine months ended September 30, 2017 (in thousands~~):

For the nine months ended September 30, 2017, the Company had borrowings of $70.0 million and $11.2 million in repayments of borrowings. The borrowings included $58.0 million related to the repayment of all outstanding borrowings under Bold’s credit agreement which were assumed by EEH in connection with the closing of the Bold Transaction.

For the three and nine months ended September 30, ~~2017,~~2022, interest on borrowings under the revolving tranche of the Credit Agreement averaged ~~4.21%~~4.75% and ~~4.01%~~4.29% per annum, respectively, of which excluded commitment fees of ~~$0.1~~$1.0 million and ~~$0.2~~$1.1 million, respectively, and amortization of deferred financing costs of ~~$0.1~~$0.8 million and $2.4 million, respectively. For the three and nine months ended September 30, 2022, interest on borrowings under the term loan tranche of the Credit Agreement averaged 6.01% and 6.01% per annum, respectively, which excluded amortization of deferred financing costs of $0.2 million and $0.2 million, respectively. For the three and nine months ended September 30, ~~2016,~~2021, interest on borrowings under the Credit Agreement averaged ~~3.78%~~3.66% and ~~5.40%~~3.47% per annum, respectively, of which excluded commitment fees of ~~$0.1~~$0.2 million and ~~$0.2~~$0.6 million, respectively, and amortization of deferred financing costs of ~~$0.1~~$0.2 million and ~~$0.2~~$0.6 million, respectively.

~~The Company capitalized $0.1 million and $1.2 million, respectively, of costs associated with the ESTE Credit Agreement for~~

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

2017

2016

Beginning asset retirement obligations

$
6,013

$
5,075

Liabilities incurred

64

114

Liabilities settled

—

(15
)
Acquisitions ⁽¹⁾

359

250

Accretion expense

378

404

Divestitures ⁽²⁾

(3,629
)

—

Revision of estimates

19

(13
)
Ending asset retirement obligations

$
3,204

$
5,815

	~~(1)~~	~~The 2017 amount is related to the Bold Transaction. The 2016 amount is related to the Lynden Arrangement.~~
			2022
Beginning asset retirement obligations			$	15,866
Liabilities incurred			342
Liabilities settled			(665)
Acquisitions			20,078
Accretion expense			1,863
Divestitures			(1,087)
Revision of estimates			381
Ending asset retirement obligations			$	36,778

~~(2)~~

~~See~~ ~~Note 2. Acquisitions and Divestitures.~~

Note 12. Related Party Transactions

FASB ASC Topic 850,, Related Party Disclosures,, requires that information about transactions with related parties that would make a difference in decision making shall be disclosed so that users of the financial statements can evaluate their significance.

The Audit Committee of the Board 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. Acquisitions, the Chisholm Acquisition was consummated on February 15, 2022, whereby the Company acquired the Chisholm Assets for a purchase price of $377.5 million in cash, net of 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 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

Table of Contents~~Flatonia Energy,~~

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 shares of Class A Common Stock in connection with the closing of the Tracker/Sequel Purchase Agreements at Earthstone’s Annual Meeting of Stockholders held on July 20, 2021.

As discussed in Note 4. Acquisitions, during the second quarter of 2021, the Company completed the Eagle Ford Acquisitions for a purchase price of approximately $45.2 million in cash. A Significant Shareholder controlled one of the four sellers. After participating in a competitive sales process, the Company acquired the aforementioned assets for $8.2 million in cash from that related party entity.

As described in Note 8. Common Stock and Preferred Stock, on January 30, 2022, Earthstone entered into the SPA with certain affiliates of EnCap and Post Oak (collectively, the “Investors”) to issue 220,000 shares and 60,000 shares, respectively, of the Series A Convertible Preferred Stock. On April 14, 2022, the SPA was consummated resulting in the issuance of the total of 280,000 shares of the Series A Convertible Preferred Stock in exchange for cash proceeds of $279.3 million, net of offering costs.

On July 6, 2022, the Series A Convertible Preferred Stock automatically converted into 25,225,225 shares of Class A Common Stock.

The Company paid $0.2 million to one of our Significant Shareholders for reimbursement of certain costs associated with the aforementioned SPA.

On October 11, 2022, Earthstone repurchased an aggregate of 3,000,000 shares of Class A Common Stock, held by affiliates of Warburg Pincus LLC (“~~Flatonia”~~Warburg”)~~, which owns~~ in a private transaction, for an aggregate purchase price of approximately ~~12.9%~~$43.7 million, or $14.58 per share (the “Repurchase”). Additionally, on October 11, 2022, Warburg sold 3,750,000 shares of Class A Common Stock to an unrelated party for $14.58 per share (collectively with the Repurchase, the “Warburg Sales”). Immediately preceding the Warburg Sales, Warburg owned approximately 18.7% of our outstanding Class A Common Stock asand 14.1% of ~~September 30, 2017, is a party to a joint operating agreement (the “Operating Agreement”) with~~our Class A Common Stock and Class B Common Stock combined. Immediately following the ~~Company. The Operating Agreement covers certain jointly~~Warburg Sales and through the date of this filing, Warburg owned ~~oil~~approximately 12.3% of our Class A Common Stock and ~~natural gas properties located in the Eagle Ford trend in Texas. In connection with the Operating Agreement, the Company made payments to Flatonia~~9.3% of ~~$6.4 million~~our Class A Common Stock and $20.8 million and received payments from Flatonia of $0.8 million and $3.2 million for the three and nine months ended September 30, 2017, respectively. For the three and nine months ended September 30, 2016, the Company made payments to Flatonia of $5.1 million and $21.3 million and received payments from Flatonia of $5.8 million and $8.6 million, respectively. At September 30, 2017, amounts receivable from Flatonia in connection with the Operating Agreement were $1.5 million. At December 31, 2016, Earthstone had $1.5 million of outstanding receivables due from Flatonia. Amounts payable to Flatonia in connection with the Operating Agreement were $3.1 million at December 31, 2016. There were no payables outstanding and due to Flatonia as of September 30, 2017.

Class B Common Stock combined.

Note 13. Commitments and Contingencies

Legal

George Assad, et. al. v. EnCap Investments L.P., et. al.: On September 12, 2022, a complaint (the “Complaint”) styled as a “derivative action” was filed in the Delaware Court of Chancery (the “Court”) by George Assad (the “plaintiff”) a purported holder of a small number of shares of Class A Common Stock against Earthstone, six of its 10 directors and EnCap, a principal stockholder. The Complaint alleges that a majority of Earthstone’s directors were conflicted and, along with EnCap, breached their fiduciary duties in approving the sale of shares of Series A Convertible Preferred Stock that is convertible into Class A Common Stock pursuant to the SPA. The plaintiff requested the Court to declare that the defendants breached their fiduciary duties, award of unspecified monetary damages, including interest and costs, and/ or rescind the stock purchase transaction. On October 14, 2022, the defendants filed a motion to dismiss the amended Complaint. Earthstone believes the Complaint is completely without merit and intends to contest vigorously the allegations made therein and to seek reimbursement for its costs and expenses in so doing. Earthstone carries insurance for the claims asserted against it and the officer and director defendants in the Complaint, and the carrier has accepted coverage subject to applicable self-retentions and limits of liability. The Company does not expect this case to have a material adverse effect on the results of operations, financial position or cash flows of the Company.

From time to time, the Company ~~and its subsidiaries~~ may be involved in other various legal proceedings and claims in the ordinary course of business.

~~In July 2015, EF Non-Op, LLC, a subsidiary of Earthstone, filed suit in the 125~~^th ~~Judicial District Court of Harris County, Texas against the operator of its properties in LaSalle County, Texas. In the case~~ ~~EF Non-Op, LLC vs. BHP Billiton Petroleum Properties (N.A.), LP (F/K/A Petrohawk Properties, LP),~~ ~~the Company claims the operator has breached the applicable joint operating agreements in numerous ways, including, but not limited~~

Commitment to ~~improper authorization for expenditure requests, improper and imprudent operations, misrepresentation of charges and excessive billings, as well as refusal to provide requested information.~~ Purchase Materials

The Company ~~also claims damages from negligent representation~~entered into an agreement to purchase certain materials related to its drilling and fraud. The Company is seeking all relief to which it is entitled, including consequential damages and attorneys’ fees. BHP Billiton has claimed they are owed unpaid lease operating expenses and attorneys’ fees. With respect to a portion of the litigation associated with nine non-operated gas wells that were drilled in 2014 and placed on production in the first half of 2015, BHP Billiton in early 2016 elected to deem the Company as a non-consenting working interest owner regarding costs associated with the drilling, completing and operating of these nine wells, as BHP’s sole and exclusive remedy.completion activities through 2024 (the “Materials Purchase Agreement”). The Company has ~~accepted this “non-consent” status. The litigation is continuing with respect to~~already fulfilled its 2022 financial obligation under the ~~other disputes. The outcome of remaining disputes in this proceeding is uncertain,~~Materials Purchase Agreement and ~~while~~ the Company ~~is confident in its position, any potential monetary recovery or loss~~has committed to ~~the Company cannot be estimated at this time.~~

~~Olenik v. Lodzinksi et al.: On June 2, 2017, Nicholas Olenik filed a purported shareholder class and derivative action in the Delaware Court~~payments of Chancery against the Company’s Chief Executive Officer, along with other members of the Board, EnCap, Bold, Bold Holdings and Oak Valley. The complaint alleges that the Company’s directors breached their fiduciary duties in connection with the Bold Contribution Agreement. The Plaintiff asserts that the directors negotiated the Bold Transaction to benefit EnCap and its affiliates, failed to obtain adequate consideration for the Earthstone shareholders who were not affiliated with EnCap or Earthstone

~~EARTHSTONE ENERGY, INC.~~

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

management, did not follow an adequate process in negotiating and approving the Bold Transaction, and made materially misleading or incomplete proxy disclosures in connection with the Bold Transaction. The suit seeks unspecified damages and purports to assert claims derivatively on behalf of the Company and as a class action on behalf of all persons who held Common Stock up to March 13, 2017, excluding defendants and their affiliates. The Company and each of the other defendants believe the claims are entirely without merit and they intend to mount a vigorous defense. The outcome of this suit is uncertain, and while the Company is confident in its position, any potential monetary recovery or loss to the Company cannot be estimated at this time.

On August 18, 2017, litigation captioned Trinity Royal Partners, LP v. Bold Energy III LLC, et al. was filed with the 142nd Judicial District of the District Court in Midland County, Texas, asserting breach of contract and indemnity claims for alleged damages from loss of property relating to two oil and natural gas wells in which Bold was the operator. Trinity Royalty Partners, LP (“Trinity”) alleges that Bold is required to indemnify Trinity under the terms of an Assignment and a Participation and Joint Development Agreement between Bold and Trinity. Damages are alleged to include costs incurred in attempting to repair and restore an oil and natural gas well and for the loss of future reserves attributable to both wells. Trinity is seeking approximately $7.2$29.8 million in ~~damages~~2023 and ~~attorneys’ fees. Earthstone and Bold believe the suit is without any merit and Bold intends to mount a vigorous defense. The outcome of this suit is uncertain, and while the Company is confident~~$6.9 million in ~~its position, any potential monetary recovery or loss to the Company cannot be estimated at this time.~~

2024.

Environmental and Regulatory

As of September 30, ~~2017,~~2022, there were no known environmental or other regulatory matters related to the Company’s operations that are reasonably expected to result in a material liability to the Company.

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 14. Income Taxes

~~Following the closing of the Bold Transaction, the Company continues to record an income tax provision consistent with its status as a corporation.~~

The Company’s corporate structure requires the filing of two separate ~~consolidated~~ U.S. Federal income tax returns and one Canadian income tax return ~~resulting from the Lynden Arrangement that includes~~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. ~~Following the Bold Transaction,~~ 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 well as any standalone income or loss generated by each company.~~interest. As EEH is treated as a partnership for U.S. Federal income tax purposes, it is not subject to income tax at the federal level and only recognizes the Texas Margin Tax.

On February 15, 2022, the Company completed the Chisholm Acquisition which included the issuance of 19,417,476 shares of Class A Common Stock, which resulted in an ownership change within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). As a result of the ownership change, the Company’s ability to utilize net operating losses (“NOLs”) and credits generated prior to the ownership change date may be limited to offset taxable income incurred after the ownership change date (the “382 Limitation”).

As of September 30, 2022 and December 31, 2021, current liabilities of $4.1 million and $0.9 million, respectively, are included in Other current liabilities in the Condensed Consolidated Balance Sheets. As of September 30, 2022, amount includes $2.0 million current federal income tax payable and $2.1 million current Texas Margin Tax payable. As of December 31, 2021, the amounts solely represent current Texas Margin Tax payable.

During the nine months ended September 30, ~~2017,~~2022, the Company recorded an income tax ~~benefit~~expense of approximately $81.7 million comprised of (1) income tax expense for Earthstone of $70.0 million, which included a deferred income tax expense of $74.5 million and a current income tax expense of $2.0 million, resulting from its share of the distributable income from EEH, offset by a $6.5 million release of valuation allowance, (2) a deferred income tax expense for Lynden US of ~~$2.7~~$5.5 million as a result of ~~its standalone pre-tax loss incurred before the Bold Transaction and~~ its share of the distributable loss from EEH ~~after~~and (3) income tax expense of $6.2 million related to state taxes, which included a deferred income tax expense of $4.1 million and a current income tax expense of $2.1 million. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the ~~Bold Transaction.~~

nine months ended September 30, 2022.

During the nine months ended September 30, ~~2017,~~2021, the Company ~~did not record an~~recorded income tax benefit of approximately $0.3 million comprised of (1) a deferred income tax benefit for ~~Earthstone~~Lynden US of $0.1 million as a result of ~~its standalone pre-tax loss incurred before the Bold Transaction and~~ its share of the distributable loss from EEH, ~~after~~(2) no net income tax benefit for Earthstone as the ~~Bold Transaction, because the future realization of such loss cannot be reasonably assured and is subject to a full valuation allowance. Earthstone recorded a $7.5~~$0.8 million income tax benefit ~~as a discrete item during the current reporting period, which resulted~~resulting from ~~a change in assessment~~its share of the distributable loss from EEH had a full valuation allowance recorded against it as future realization of ~~its~~the net deferred tax ~~assets due to the~~asset cannot be assured and (3) deferred ~~tax liability that was recorded with respect to its investment in EEH as part of the Bold Transaction as an adjustment to Additional paid-in capital within the Condensed Consolidated Balance Sheet.~~

~~Lynden Corp incurred no material net income (loss), or related~~ income tax ~~expense (benefit), for the three and nine months ended September 30, 2017.~~

~~EEH recorded deferred tax expense during nine months ended September 30, 2017~~benefit of ~~$0.2~~$0.8 million related to the Texas Margin Tax, ~~as the deficit margin generated during the period cannot be carried forward to~~ offset ~~future taxable margin~~by (4) current income tax expense of $0.6 million related to ~~state basis differences in EEH’s oil and natural gas properties.~~

the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the nine months ended September 30, 2021.

Table of Contents I~~tem~~

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 ~~2016~~2021 Annual Report on Form 10-K ~~as amended, that was~~ filed with the Securities and Exchange Commission (“SEC”), which you should read carefully in connection with our forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. We undertake no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

You should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in conjunction with the corresponding sections and our audited consolidated financial statements for the year ended December 31, ~~2016,~~2021, which are included in our ~~2016~~2021 Annual Report on Form ~~10-K, as amended.~~

10-K.

Overview

~~We are~~

Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with 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 and, to a lesser extent, exploration activities.~~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 ~~primary~~ assets are located in the Midland Basin ~~of west~~in West Texas, the Eagle Ford ~~trend of south~~Trend in South Texas and the ~~Bakken/Three Forks formations~~Delaware Basin in New Mexico.

Recent Developments

Share Repurchase

On October 11, 2022, Earthstone repurchased an aggregate of ~~North Dakota~~.

3,000,000 shares of Class A Common Stock, held by affiliates of Warburg Pincus LLC in a private transaction, for an aggregate purchase price of approximately $43.7 million, or $14.58 per share.

Titus Acquisition

On August 10, 2022, Earthstone Energy, Inc. (“Earthstone”) ~~is the sole managing member~~, Earthstone Energy Holdings, LLC, a subsidiary of Earthstone ~~Energy Holdings,~~(“EEH”), as buyer, and Titus Oil & Gas Production, LLC, a Delaware limited liability company ~~(together with its wholly-owned consolidated subsidiaries, “EEH”~~(“TOGI”), ~~with~~Titus Oil & Gas Corporation, a ~~controlling interest in EEH. Earthstone, together with its wholly-owned subsidiary, Lynden Energy Corp.,~~Delaware corporation, Lenox Minerals, LLC, a ~~corporation organized under the laws of British Columbia (“Lynden Corp”),~~Delaware limited liability company, and ~~Lynden Corp’s wholly-owned consolidated subsidiary, Lynden USA~~Lenox Mineral Title Holdings, Inc., a ~~Utah~~Delaware corporation ~~(“Lynden US”~~(collectively, “Titus I”), as seller, consummated the transactions contemplated in that certain Purchase and also a member of EEH, consolidates the financial results of EEH and records a noncontrolling interest in the Condensed Consolidated Financial Statements representing the economic interests of EEH's members other than Earthstone and Lynden US (collectively, the “Company” “our,” “we,” “us,” or similar terms).

~~Recent Developments~~

~~Bold Contribution~~Sale Agreement

~~On May 9, 2017, Earthstone completed a contribution agreement~~ dated ~~as of November 7, 2016 and as amended on March 21, 2017 (the “Bold Contribution Agreement”),~~June 27, 2022, by and among Earthstone, EEH ~~Lynden US, Lynden USA Operating,~~and Titus I (the “Titus I Purchase Agreement”) that was previously reported on Form 8-K filed on June 29, 2022 with the Securities and Exchange Commission (“SEC”). Also on August 10, 2022, Earthstone, EEH, as buyer, and Titus Oil & Gas Production II, LLC, a ~~Texas~~Delaware limited liability company (“~~Lynden Op”~~TOGII”), ~~Bold Energy Holdings,~~Lenox Minerals II, LLC, a ~~Texas~~Delaware limited liability company, ~~(“Bold Holdings”),~~ and ~~Bold Energy III~~Lenox Mineral Holdings II, LLC, a ~~Texas~~Delaware limited liability company ~~(“Bold”~~(collectively, “Titus II” and together with Titus I, “Titus”)~~. The purpose~~, as seller, consummated the transactions contemplated in that certain Purchase and Sale Agreement dated June 27, 2022, by and among Earthstone, EEH and Titus II (the “Titus II Purchase Agreement,” and together with the Titus I Purchase Agreement, the “Purchase Agreements”) that was previously reported on Form 8-K filed on June 29, 2022 with the SEC. At the closing of the ~~Bold Contribution Agreement was to provide for,~~Purchase Agreements, among other things, ~~described below, the business combination between Earthstone and Bold, which owns significant developed and undeveloped~~EEH acquired (the “Titus Acquisition”) interests in oil and ~~natural~~ gas ~~properties~~leases and related property of Titus I and Titus II located in the ~~Midland~~Delaware Basin, New Mexico, for an aggregate purchase price (the “Purchase Price”) of ~~west Texas (the “Bold Transaction”).~~

~~The Bold Transaction was structured~~approximately $565.8 million in a manner commonly known as an “Up-C.” Under this structure and the Bold Contribution Agreement, (i) Earthstone recapitalized its common stock into two classes – Class A common stock, $0.001 par value per share (the “Class A Common Stock”cash (“Cash Consideration”), net of preliminary and ~~Class B common stock, $0.001 par value per share~~customary purchase price adjustments and subject to final post-closing settlement between EEH and Titus, and an aggregate 3,857,015 shares (the ~~“Class B Common Stock”),~~“Shares” and ~~all~~such issuance, the “Stock Issuance”) of ~~Earthstone’s existing outstanding common stock, $0.001 par value per share (the “Common Stock”), was recapitalized on a one-for-one basis for~~ Class A Common Stock, net of preliminary and customary purchase price adjustments. At the closing of the Titus Acquisition, $64.5 million of the Cash Consideration was deposited in an escrow account to support Titus’ indemnity obligations under the Purchase Agreements, 1,811,132 of the Shares (the ~~“Recapitalization”~~“Titus I Closing Shares”)~~; (ii)~~ were issued to Titus Oil & Gas, LLC, an affiliate of TOGI (“Titus O&G”), and 2,045,883 of the Shares (the “Titus II Closing Shares”) were issued to Titus Oil & Gas Investments II, LLC, an affiliate of TOGII (“Titus O&G II”). On August 10, 2022, in

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connection with the closing of the Titus Purchase Agreements, Earthstone ~~transferred all~~entered into a customary registration rights agreement with Titus I and Titus II and their respective equity holders relating to the Titus Shares.

Conversion of ~~its membership interests in~~Series A Convertible Preferred Stock

On July 6, 2022, the 280,000 shares of Series A Convertible Preferred Stock, par value $0.001 per share of Earthstone Operating, LLC, Sabine River Energy, LLC, EF Non-Op, LLC and Earthstone Legacy Properties, LLC (formerly Earthstone GP, LLC) and $36,071 in cash from the sale of Class B Common Stock to Bold Holdings (collectively, the “Earthstone Assets”(the “Series A Convertible Preferred Stock”) to EEH, in exchange for 16,791,296 membership units of EEH (the “EEH Units”); (iii) Lynden US transferred all of its membership interests in Lynden Op to EEH in exchange for 5,865,328 EEH Units; (iv) Bold Holdings transferred all of its membership interests in Bold to EEH in exchange for 36,070,828 EEH Units and purchased 36,070,828automatically converted into 25,225,225 shares of Class BA Common Stock. As such, the Series A Convertible Preferred Stock is no longer outstanding and the Investors were issued ~~by Earthstone for $36,071; and (v) Earthstone granted an aggregate of 150,000 fully vested~~the 25,225,225 shares of Class A Common Stock upon the conversion of the Series A Convertible Preferred Stock.

On July 15, 2022, Earthstone filed a certificate of elimination with the Secretary of State of the State of Delaware eliminating all provisions of the certificate of designations previously filed by Earthstone with the Secretary of State of the State of Delaware on April 13, 2022 related to the Series A Convertible Preferred Stock.

Credit Agreement

On September 29, 2022, in connection with a regularly scheduled borrowing base redetermination, the borrowing base increased from $1.7 billion to $1.85 billion.

On August 10, 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 “Seventh 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 Seventh Amendment increased the borrowing base from $1.4 billion to $1.7 billion and increased elected commitments from $800 million to $1.2 billion. The Seventh Amendment also established a fully funded $250 million term loan tranche as a portion of the $1.2 billion of available commitments under ~~Earthstone’s 2014 Long-Term Incentive Plan, as amended~~the Credit Agreement (the ~~“2014 Plan”~~“Term Loan”), with the remaining $950 million of commitments in the form of revolving commitments. The Term Loan is fully pre-payable without premium or penalty, subject to the satisfaction of certain ~~employees~~specified conditions, and bears an interest rate of ~~Bold. Each~~Term SOFR plus 3.25%, increasing by 0.25% each 180-day period following the Term Loan funding. The Term Loan is co-terminus with the revolving loans' maturity date of June 2, 2027, subject to the Springing Maturity Date (as defined in the Credit Agreement) applicable to revolving loans and term loans. The interest rate applicable to revolving loans remains a rate of Term SOFR plus an applicable margin between 2.25% and 3.25%, depending upon borrowing base utilization.

On June 2, 2022, the Company, EEH, ~~Unit, together~~Wells Fargo, the Lenders and the guarantors party thereto entered into an amendment (the “Sixth Amendment”) to the Credit Agreement. Among other things, the Sixth Amendment extended the maturity of the Credit Agreement to June 2027, increased the borrowing base from $1.325 billion to $1.4 billion and reduced the interest rate for amounts outstanding. Elected commitments under the Credit Agreement remained at $800 million.

On April 14, 2022, in connection with ~~one share~~the Notes Offering, the Company voluntarily elected to reduce commitments under the borrowing base of ~~Class B Common Stock, are convertible~~the Credit Agreement to $800 million.

On January 30, 2022, Earthstone, EEH as Borrower, Wells Fargo as Administrative Agent, the Lenders and the guarantors party thereto entered into ~~one share~~an amended and restated Fifth Amendment (the “Fifth Amendment”) to the Credit Agreement. Among other things, the Fifth Amendment increased the borrowing base and corresponding elected commitments from $650 million to $825 million upon the closing of the Chisholm Agreement.

Bighorn Acquisition

On April 14, 2022, Earthstone, EEH, and Bighorn Asset Company, LLC (“Bighorn”) as seller, consummated the transactions contemplated in the Purchase and Sale Agreement dated January 30, 2022, by and among Earthstone, EEH and Bighorn (the “Bighorn Purchase Agreement”) that was previously reported on Form 8-K filed on February 2, 2022 with the SEC. At the closing of the Bighorn Purchase Agreement, among other things, EEH acquired (the “Bighorn Acquisition”) interests in oil and gas leases and related property of Bighorn located in the Midland Basin, Texas, for a purchase price (the “Purchase Price”) of approximately $641.8 million in cash, net of customary purchase price adjustments, and 5,650,977 shares (the “Bighorn Shares”) of Class A Common Stock.

~~Upon~~ At the closing of the ~~Bold Transaction on May 9, 2017, Bold Holdings owned approximately 61.4%~~Bighorn Acquisition, 510,638 of the Bighorn Shares were deposited in a stock escrow account for Bighorn’s indemnity obligations and 5,140,339 of the Bighorn Shares (the “Closing Shares”) were issued to Bighorn Permian Resources, LLC, an affiliate of Bighorn (“Bighorn Permian”). On April 14, 2022, in connection with the closing of the Bighorn Purchase Agreement, Earthstone and Bighorn Permian entered into a customary registration rights agreement relating to the Bighorn Shares.

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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 Series A Convertible 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 Convertible Preferred Stock in exchange for gross cash proceeds of $280 million (the “Private Placement”).

On July 6, 2022, all of the PIPE Shares were converted into 25,225,225 shares of Class A Common Stock. The Series A Convertible Preferred Stock is no longer outstanding and the Investors were issued 25,225,225 shares of Class A Common Stock ~~on a fully diluted, as converted basis. The EEH Units and~~upon the shares of Class B Common Stock issued to Bold Holdings were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but were issued by EEH and Earthstone in reliance on the exemption provided under Section 4(a)(2)conversion of the ~~Securities Act.~~

~~Pursuant to the terms of the Bold Contribution Agreement, at~~Series A Convertible Preferred Stock.

On April 14, 2022, in connection with the closing of the ~~Bold Transaction,~~SPA, Earthstone ~~Bold Holdings,~~ and the ~~unitholders of Bold Holdings~~Investors entered into a customary registration rights agreement ~~(the “Registration Rights Agreement”)~~ relating to the shares of Class A Common Stock ~~issuable upon~~underlying the ~~exchange of the EEH Units and Class B Common Stock held by Bold Holdings or its unitholders. In accordance with the Registration Rights Agreement, Earthstone filed~~PIPE Shares. On July 15, 2022, a registration statement on Form S-3 with respect to the resale of the PIPE shares was declared effective by the SEC.

Notes Offering

On April 7, 2022, EEH and four of its wholly-owned subsidiaries, Earthstone Operating, LLC, a Texas limited liability company (“Earthstone Operating”), Earthstone Permian LLC, a Texas limited liability company (“Earthstone Permian”), Sabine River Energy, LLC, a Texas limited liability company (“Sabine River Energy”), and Independence Resources Technologies, LLC, a Delaware limited liability company (“Independence Technology” and, together with Earthstone Operating, Earthstone Permian, Sabine River Energy and Earthstone, the “Guarantors”), entered into a purchase agreement (the ~~“Registration Statement”~~“Purchase Agreement”) with RBC Capital Markets, LLC, as representative of the several initial purchasers named in the Purchase Agreement (together, the “Initial Purchasers”), providing for the private offer and sale by EEH (the “Notes Offering”) of $550.0 million aggregate principal amount of EEH’s 8.000% senior notes due 2027 (the “Notes”), along with related guarantees (the “Guarantees”) of the Notes.

The Notes Offering closed on April 12, 2022. EEH received net proceeds from the Notes Offering of approximately $537.2 million (after deducting underwriting discounts and commissions) which was used primarily to fund the Bighorn Acquisition and the remainder for general corporate purposes.

Chisholm Acquisition

On February 15, 2022, Earthstone, EEH, and Chisholm, as seller, consummated the transactions contemplated in the Chisholm Agreement that was previously reported on Form 8-K filed with the SEC ~~to permit~~on December 17, 2021. At the ~~public resale~~closing of the Chisholm Agreement, among other things, EEH acquired (the “Chisholm Acquisition”) interests in oil and 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 continues to remain subject to post-closing settlement adjustments between EEH and Chisholm 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 issued~~Stock. See further discussion in Note 12. Related Party Transactions in the Notes to Unaudited Condensed Consolidated Financial Statements.

Cash consideration for the Chisholm Acquisition was funded by ~~Earthstone~~borrowings under our senior secured revolving credit facility whose borrowing base was increased from $650 million to ~~Bold Holdings or its unitholders in connection with the exchange of Class B Common Stock and EEH Units in accordance with the terms~~$825 million upon consummation of the ~~First Amended~~Chisholm Acquisition.

Inflation

Inflation has begun to impact our operations. We have already experienced increases in the costs of certain materials, equipment and ~~Restated Limited Liability Company Agreement~~services used in our business processes. We continue to closely monitor these costs and work to minimize additional potential increases when possible.

COVID-19

Despite the recoveries in commodity prices from 2020 lows, recent surges from COVID-19 variants continue to impact the global economy, disrupt global supply chains and may create significant volatility and disruption of ~~EEH. On October 18, 2017, the SEC issued a Notice of Effectiveness for the Registration Statement.~~

~~On May 9, 2017, in connection with the closing~~financial and commodity markets. The extent of the ~~Bold Contribution Agreement, Earthstone, EnCap Investments L.P. (“EnCap”), Oak Valley Resources, LLC (“Oak Valley”),~~impact of the COVID-19 pandemic on our operational and ~~Bold Holdings entered into a voting agreement (the “Voting Agreement”), pursuant~~financial performance, including our ability to ~~which EnCap, Oak Valley,~~execute our business strategies and ~~Bold Holdings agreed not~~initiatives in the expected time frame, is uncertain and depends on various factors, including how the pandemic and measures taken in response to ~~vote~~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 ~~shares~~

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resurgence, and we expect that the longer the duration of any ~~action, or take any action that would in any way alter~~such disruption, the ~~composition~~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.

Areas of ~~the board of directors of Earthstone (the “Board”) from its composition immediately following the closing of the Bold Contribution Agreement as long as the Voting Agreement~~Operation

Our primary focus is ~~in effect.~~

Immediately following the closing of the Bold Contribution Agreement, the Board was increased to nine members from eight members, four of which are designated by EnCap, three of which are independent, and two of which are members of management, including Earthstone’s Chief Executive Officer. At any time during the effectiveness of the Voting Agreement during which EnCap’s collective ownership of Earthstone exceeds 50% of the total issued and outstanding voting stock, EnCap may remove and replace one director that was not originally designated by EnCap, and his or her successors. Any such removal and replacement will be conducted in accordance with the provisions of Earthstone’s certificate of incorporation and bylaws then in effect. The Voting Agreement terminates on the earlier of (i) the fifth anniversary of the closing date of the Bold Contribution Agreement and (ii) the date upon which EnCap, Oak Valley, and Bold Holdings collectively own, of record and beneficially, less than 20% of Earthstone’s outstanding voting stock.

On May 9, 2017, the closing sale price of the Class A Common Stock was $13.58 per share. On May 10, 2017, the Class A Common Stock was uplisted from the NYSE MKT, LLC (the “NYSE MKT”) to the New York Stock Exchange (the “NYSE”) where it is listed under the symbol “ESTE.”

~~Management’s Plans~~

~~Since establishing a substantial operated presence~~concentrated in the Midland Basin we have been focused on integrating the operations, engineering, geology, land, accounting and personnel functions throughout the Company as well as continuing a drilling and completion program. Although commodity prices have been volatile in 2017, our current business plan is to continue to operate one rig primarily in the Midland Basin of west Texas throughout the rest of 2017 and through 2018. In the Eagle Ford trend, we concluded an 11 well drilling program and expect to start completion operations on those wells in November 2017.

~~We intend to focus on reducing our lease operating expenses and general and administrative expense on a per unit of production basis, as well as improving the efficiency of our capital spending.~~

~~We will remain vigilant in assessing volatility in the commodity prices and adjust our business plan accordingly.~~

~~Credit Agreement~~

On May 9, 2017, in connection with the closing of the Bold Transaction, the Company exited its credit agreement dated December 19, 2014, by and among Earthstone, Oak Valley Operating, LLC, EF Non-OP, LLC, Sabine River Energy, LLC, Basic Petroleum Services, Inc., BOKF, NA dba Bank ofWest Texas and the ~~Lenders party thereto (as amended, modified or restated from time~~Delaware Basin in New Mexico, both containing high oil and liquids rich resources which provides us with multiple horizontal targets with proven production results, long-lived reserves and historically high drilling success rates.

Consolidation Focus

We continue to ~~time,~~pursue value-accretive and scale-enhancing consolidation opportunities, as we believe we are in a position to operate effectively despite the “ESTE Credit Agreement”). At that time, all outstanding borrowings of $10.0 million under the ESTE Credit Agreement were repaid and $0.5 million of remaining unamortized deferred financing costs were expensed and includedvolatility in ~~Write-off of deferred financing costs in the Condensed Consolidated Statements of Operations.~~

On May 9, 2017, EEH (the “Borrower”), Earthstone Operating, LLC, EF Non-Op, LLC, Sabine River Energy, LLC, Earthstone Legacy Properties, LLC, Lynden Op, Bold, Bold Operating, LLC (the “Guarantors”), BOKF, NA dba Bank of Texas, as Agent and Lead Arranger, Wells Fargo Bank, National Association as Syndication Agent and the Lenders party thereto (the “Lenders”), entered into a credit agreement (the “EEH Credit Agreement”).

The borrowing base under the EEH Credit Agreement is $150.0 million, and is subject to redetermination on or about November 1st and May 1st of each year. The amounts borrowed under the EEH Credit Agreement bear annual interest rates at either (a) the London

Interbank Offered Rate (“LIBOR”) plus 2.25% to 3.25% or (b) the prime lending rate of Bank of Texas plus 1.25% to 2.25%, depending on the amounts borrowed under the EEH Credit Agreement. Principal amounts outstanding under the EEH Credit Agreement are due and payable in full at maturity on May 9, 2022. All of the obligations under the EEH Credit Agreement, and the guarantees of those obligations, are secured by substantially all of EEH’s assets. Additional payments due under the EEH Credit Agreement include paying a commitment fee of 0.50% per year to the Lenders in respect of the unutilized commitments thereunder, as well as certain other customary fees.

The EEH 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, enter into sale and leaseback transactions, pay dividends and make 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 EEH Credit Agreement requires EEH to maintain the following financial covenants: a current ratio of not less than 1.0 to 1.0 and a leverage ratio of not greater than 4.0 to 1.0. 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 (excluding any debt from obligations relating to non-cash losses under FASB ASC 815 as a result of changes in the fair market value of derivatives) to (ii) the product of EBITDAX for such fiscal quarter multiplied by four. The term “EBITDAX” means, for any period, the sum of consolidated net income for such period plus (a) the following expenses or charges to the extent deducted from consolidated net income in such period: (i) interest, (ii) taxes, (iii) depreciation, (iv) depletion, (v) amortization, (vi) non-cash losses under FASB ASC 815 as a result of changes in the fair market value of derivatives, (vii) exploration expenses, (viii) impairment expenses, and (ix) non-cash compensation expenses and minus (b) to the extent included in consolidated net income in such period, non-cash gains under FASB ASC 815 as a result of changes in the fair market value of derivatives.

The EEH 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 if Frank A. Lodzinski ceases to serve and function as Chief Executive Officer of EEH and the majority of the Lenders do not approve of Mr. Lodzinski’s successor. Upon the occurrence and continuance of an event of default, the Lenders have the right to accelerate repayment of the loans and exercise their remedies with respect to the collateral. As of September 30, 2017, EEH was in compliance with these covenants under the EEH Credit Agreement.

As of September 30, 2017, the Company had a $150 million borrowing base under the EEH Credit Agreement, of which $70 million was outstanding, bearing annual interest of 3.7311%, resulting in an additional $80 million of borrowing base availability under the EEH Credit Agreement.

~~Class A Common Stock Offering~~

In October 2017, the Company completed a public offering of 4,500,000 shares of Class A Common Stock, at a public offering price of $9.25 per share, receiving net proceeds of $39.2 million, after deducting underwriters’ fees and offering expenses of $2.4 million. The net proceeds were used to repay outstanding indebtedness under the EEH Credit Agreement. We also agreed to issue and sell to the underwriters, at their option, up to 675,000 additional shares of Class A Common Stock under an overallotment option expiring November 23, 2017. As of the date of the filing of this quarterly report, the option had not been exercised.

~~Divestiture of Assets~~

During the nine months ended September 30, 2017, we sold several small legacy properties for cash consideration of approximately $4.2 million. These properties were substantially non-operated, low margin properties which produced approximately 341 Boepd (64% gas) year to date. We may seek further sales of smaller, non-core assets through year-end pending economiccommodity prices. We are also considering a divestiture of our Bakken non-operated assets, which averaged approximately 876 Boepd (64% oil, 82% liquids) during the third quarter. A sale of these assets would allow us to further support our growth in the Midland Basin.

~~Uplisting of Class A Common Stock~~

On May 8, 2017, the Board approved (i) the transfer of the listing of the common stock, $0.001 par value per share (the “Common Stock”) of Earthstone, from the NYSE MKT to the NYSE, and (ii) the voluntary delisting of the Common Stock from the NYSE MKT. In connection with the closing of the Bold Transaction, all of the Common Stock was converted into Class A Common Stock, on a one-for-one basis. The Class A Common Stock began trading on the NYSE on May 10, 2017. The ticker symbol for the Class A Common Stock is the same as the Common Stock and trades under the symbol “ESTE.”

~~Closing of Denver Office~~

On June 30, 2017, Earthstone management informed the employees of its office located in Denver, Colorado, that it would be closing those offices and providing severance pay, consisting of both regular salary and benefits, for a specified period, if the employee agreed to stay through the transition period ended July 31, 2017.

~~Areas of Operation~~

~~Our core areas of operations are in the Midland Basin of west Texas, the Eagle Ford trend of south Texas and the Bakken/Three Forks formations of North Dakota.~~

~~Our operating results for the three and nine months ended September 30, 2017, were affected by the following factors:~~

~~In early 2016, we survived a low commodity price environment and industry downturn by reducing our costs and capital expenditures.~~

~~On May 18, 2016, Earthstone acquired Lynden US giving rise to our Midland Basin operations.~~

Our pre-Lynden US inventory of wells that were drilled but not completed in 2014 and 2015 were completed in the fourth quarter of 2016 in an improved commodity price environment compared to earlier in 2016.

~~On May 9, 2017, we completed the Bold Transaction, adding significant production to our operating results.~~

~~Commodity prices continue to be volatile.~~

~~Midland Basin~~

~~We believe that the Midland Basin continues to have attractive economics and we expect to continue to focus~~focusing our attention on ~~growing~~acquisition and corporate merger opportunities that would increase the scale of our ~~footprint through~~operations. In addition, we believe the current industry environment presents unique opportunities which could provide us the potential for further consolidation because of our financial strength. At the same time, we will seek to block up acreage ~~trades, acquisitions, development drilling and merger and acquisition opportunities. We are acutely focused on expansion~~ in ~~the Midland Basin and production results continue~~close proximity to ~~be as good or better than we projected. Well results in the Wolfcamp formation have continued to meet or exceed~~ our ~~expectations.~~

We have been operating a one drilling rig program in the Midland Basin and plan to maintain a one rig program throughout the remainder of 2017 and 2018, with a view toward adding a second rig at some point in 2018 based upon commodity prices, our drilling results and liquidity. We recently completed drilling our seventh Midland Basin well (100% working interest) located in Reagan County and recently completed a three well pad (100% working interest) in Reagan County. We currently have a rig drilling the first well of a two-well pad in Reagan County, and we anticipateexisting acreage that the rig will thereafter be moved to Midland County to drill a two well pad. There are currently five wells in Reagan County waiting on completion for which we plan to initiate completion operations in November 2017.

~~We continue to be active in acreage trades and acquisitions in the Midland Basin which generally~~would allow for longer horizontal laterals providing higher economic returns, increased operated inventory and greater operating efficiency.

~~Eagle Ford Trend~~

In short, we believe we are well qualified to continue to be a consolidator which could increase the scale of our operations and add value to our shareholders.

Operations Update

During the third quarter of 2022, for our Company-operated activity, we commenced drilling 12 gross (12.0 net) wells and brought seven gross (6.3 net) wells online in the Midland Basin. We ~~recently~~began drilling six gross (3.3 net) wells in the Delaware Basin and brought 12 gross (10.5 net) wells online.

In the Midland Basin, the Barnhart five-well pad in Irion County came online in August 2022 and had peak IP-30 average production of ~1,170 Boepd (~81% oil) per well. These wells averaged a completed ~~an 11~~lateral length of ~10,000 ft per well and are producing from the Wolfcamp B interval.

In the Delaware Basin, the Cletus and Salt Draw pads in Eddy County commenced production in early September. The two-well Cletus pad had peak IP-30 average production of ~1,350 Boepd (69% oil) per well, and both wells have completed lateral length of approximately 9,750 ft and are producing from the Wolfcamp A interval. The two-well Salt Draw pad had a peak IP-30 average production of ~1,570 Boepd (77% oil) per well from the Second Bone Springs interval. The two wells have a completed lateral length of approximately 4,700 ft per well. Additionally, in early September, the six drilled but uncompleted wells (Lonesome Dove and Cattlemen pads) acquired in the Titus acquisition in Lea County came online and had peak IP-30 average production of ~1,400 Boepd (72% oil) per well. All six wells had completed lateral length of approximately 7,700 ft per well and are producing from the First and Second Bone Springs interval.

We operated a four-rig drilling program ~~for 2017~~ in ~~southern Gonzales County, Texas by drilling six wells~~the third quarter with two rigs in ~~our Crosby Unit. Completion operations on the 11 wells are expected to begin in November 2017. We expect our 2018 drilling program to be consistent with our 2017 program. Additionally, during~~ each of the ~~second~~Midland and ~~third quarters of 2017, we entered into~~Delaware basins. We have recently added our fifth rig in the Delaware Basin and expect to continue a ~~Joint Development Agreements ("JDA")~~five-rig operated drilling program in ~~southern Gonzales County. In each of the~~2023 with two ~~JDA’s, the financial partner is obligated to pay a promoted (higher) share of the capital expenditures to earn 50% of our interest~~rigs in these units and adjacent acreage. Based on current estimates, the two JDA’s are expected to reduce the Company's overall capital expenditures by approximately $17 million, allowing the Company to shift capital resources from the Eagle Ford to the Midland Basin ~~while still maintaining operating control over its Eagle Ford program.~~

~~Additionally, the impacts from Hurricane Harvey during the third quarter were relatively minimal for us~~and three rigs in the ~~Eagle Ford, with no significant damages to~~Delaware Basin. For full year 2022 and only for our ~~operations there. Minor weather associated delays~~Company-operated activity, we anticipate spudding 36 gross (32.4 net) wells and bringing 34 gross (30.7 net) wells online in ~~initiating completion operations in southern Gonzales County may reduce~~ the ~~number~~Midland Basin. In the Delaware Basin, we anticipate spudding 28 gross (18.2 net) wells and bringing 27 gross (19.3 net) wells online. Actual results of our ~~wells brought online during the last quarter~~drilling activities are as follows:


	Wells Spud in the Period January 1, 2022 through September 30, 2022		Wells Brought Online in the Period January 1, 2022 through September 30, 2022
	Gross	Net	Gross	Net
Midland Basin in West Texas
Operated	30	25.6	28	24.4
Non-operated	17	3.5	2	0.3
Total	47	29.1	30	24.7
Delaware Basin in New Mexico
Operated	21	12.7	18	14.0
Non-operated	2	—	4	0.7
Total	23	12.7	22	14.7

Table of ~~2017, pushing some completions into early 2018.~~

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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.

~~The following~~ There have been no significant ~~change has been made~~changes to our critical accounting policies during the nine months ended September 30, ~~2017:~~

2022.

~~The Bold Transaction was recorded in accordance with Financial~~Recent Accounting ~~Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, and is consolidated in these~~Pronouncements

The Titus Acquisition, Bighorn Acquisition, Chisholm Acquisition, Foreland Acquisition, and the ~~Condensed Consolidated Statements~~Tracker/Sequel Acquisitions (collectively, the “Acquisitions”) have had a significant impact on our results of ~~Operations~~operations for the three and nine months ended ~~September30, 2017. As of~~ September 30, ~~2017, Earthstone and Lynden US held 38.9% of the outstanding membership interests in EEH while Bold Holdings held the remaining 61.1%. See further discussion in~~ ~~Note 6. Noncontrolling Interest~~ ~~in the~~ ~~Notes to Unaudited Condensed Consolidated Financial Statements~~.

~~Results of Operations~~

~~Three months ended September 30, 2017,~~2022 as compared to the ~~three months ended September 30, 2016~~

Three Months Ended September 30,

2017

2016

Change

Sales volumes:

Oil (MBbl)

563

201

180
%
Natural gas (MMcf)

967

563

72
%
Natural gas liquids (MBbl)

166

71

134
%
Barrels of oil equivalent (MBOE)

890

366

143
%

Average prices realized: ⁽¹⁾

Oil (per Bbl)

$
45.73

$
41.11

11
%
Natural gas (per Mcf)

$
2.60

$
2.52

3
%
Natural gas liquids (per Bbl)

$
18.29

$
11.95

53
%

(In thousands)

Oil revenues

$
25,733

$
8,262

211
%
Natural gas revenues

$
2,513

$
1,417

77
%
Natural gas liquids revenues

$
3,036

$
851

257
%

Lease operating expense

$
5,407

$
4,581

18
%
Severance taxes

$
1,588

$
522

204
%
Depreciation, depletion and amortization

$
10,330

$
5,149

101
%
General and administrative expense

$
5,608

$
2,285

145
%
Stock-based compensation

$
1,687

$
1,328

27
%
Transaction costs

$
109

$
846

-87
%
Gain on sale of oil and gas properties

$
2,157

$
8

NM

Interest expense, net

$
(903
)

$
(341
)

165
%
(Loss) gain on derivative contracts, net

$
(3,663
)

$
946

-487
%
Income tax benefit (expense)

$
94

$
(201
)

-147
%

~~(1) Prices presented exclude any effects~~corresponding periods of ~~oil and natural gas derivatives.~~

~~NM – Not Meaningful~~

2021. In addition, commodity prices have improved, further impacting our results of operations. Below is a discussion highlighting the impact of our recent acquisitions.

~~Interest expense includes commitment fees, amortization of deferred financing costs, and interest on outstanding indebtedness.~~

During the ~~three~~nine months ended September 30, ~~2016, we~~2022, the Company recorded income tax expense of approximately $81.7 million which included (1) income tax expense for Earthstone of $70.0 million, which included a ~~net gain on derivative contracts~~deferred income tax expense of ~~$0.9 million, consisting of net realized gains on settlements of $0.5~~$74.5 million and ~~unrealized mark-to-market gains of $0.4 million.~~

~~Income tax benefit (expense)~~

~~Our corporate structure requires the filing of two separate consolidated U.S. Federal~~a current income tax ~~returns~~expense of $2.0 million, resulting from its share of the ~~Lynden Arrangement that includes Lynden US and Earthstone. During the three months ended September 30, 2017, we recorded an~~distributable income from EEH, offset by a $6.5 million release of valuation allowance, (2) a deferred income tax expense for Lynden US of ~~$0.2~~$5.5 million as a result of its share of the distributable ~~income~~loss from EEH ~~after the Bold Transaction~~ and ~~EEH recorded deferred~~(3) income tax ~~benefit~~expense of ~~$0.3~~$6.2 million related to ~~the Texas Margin Tax as the deficit margin generated during the period cannot be carried forward to offset future taxable margin~~state taxes, which included a deferred income tax expense of $4.1 million and a current income tax expense of $2.1 million. Lynden Corp incurred no material income or loss, or related ~~to state basis differences in EEH’s oil and natural gas properties.~~

~~Nine months ended September 30, 2017, compared to the nine months ended September 30, 2016~~

Nine Months Ended September 30,

2017

2016

Change

Sales volumes:

Oil (MBbl)

1,300

607

114
%
Natural gas (MMcf)

2,328

1,593

46
%
Natural gas liquids (MBbl)

350

161

117
%
Barrels of oil equivalent (MBOE)

2,038

1,034

97
%

Average prices realized: ⁽¹⁾

Oil (per Bbl)

$
46.02

$
36.09

28
%
Natural gas (per Mcf)

$
2.72

$
2.12

28
%
Natural gas liquids (per Bbl)

$
17.86

$
11.43

56
%

(In thousands)

Oil revenues

$
59,815

$
21,898

173
%
Natural gas revenues

$
6,338

$
3,376

88
%
Natural gas liquids revenues

$
6,249

$
1,843

239
%

Lease operating expense

$
14,989

$
11,081

35
%
Severance taxes

$
3,705

$
1,418

161
%
Rid idle and termination expense

$
—

$
5,059

-100
%
Impairment expense

$
66,740

$
—

NM

Depreciation, depletion and amortization

$
28,258

$
16,252

74
%
General and administrative expense

$
14,838

$
6,961

113
%
Stock-based compensation

$
4,645

$
1,889

146
%
Transaction costs

$
4,676

$
1,641

185
%
Gain on sale of oil and gas properties

$
3,848

$
8

NM

Interest expense, net

$
(1,873
)

$
(934
)

101
%
Write-off of deferred financing costs

$
(526
)

$
—

NM

Gain (loss) on derivative contracts, net

$
4,137

$
(2,517
)

-264
%
Income tax benefit (expense)

$
10,046

$
(387
)

NM

~~(1)~~ ~~Prices presented exclude any effects of oil and natural gas derivatives.~~

~~NM – Not Meaningful~~

~~Oil revenues~~

~~For the nine months ended September 30, 2017, oil revenues increased by~~ ~~approximately~~ ~~$37.9 million~~income tax expense or ~~173% relative to the comparable period in 2016. Of the increase,~~ ~~approximately~~ ~~$6.0 million was attributable to an increase in our realized price and $31.9 million was attributable to increased volume.~~ ~~Our~~ ~~average realized price per Bbl increased from $36.09~~benefit, for the nine months ended September 30, ~~2016 to $46.02 or 28% for the nine months ended September 30, 2017.~~ ~~We had a net increase~~2022. The combined Earthstone and Lynden deferred income tax expense amounts of $80.0 million in the ~~volume~~period were deferred as a result of ~~oil sold~~substantial forecasted current year income tax deductions generated by the Acquisitions, as well as forecasted intangible drilling cost income tax deductions resulting from our drilling program.

Our accrual basis capital ~~based on our joint development agreements in the Eagle Ford and reduction by approximately $10 million in our land and infrastructure expenditures in the Midland Basin. Capital~~ expenditures for the three and nine months ended September 30, ~~2017 are~~2022 were as ~~follows:~~

follows (in thousands):


	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Drilling and completions	$	146,845	$	348,145
Leasehold costs	307		567
Total capital expenditures	$	147,152	$	348,712

Three Months Ended

Nine Months Ended

September 30, 2017

September 30, 2017

Drilling and completions

$
24,968

$
41,162

Leasehold costs

145

1,003

Other acquisition

1,202

1,457

Surface land

987

1,803

Total capital expenditures

$
27,302

$
45,425

Hedging Activities

~~Public Offering~~

As described above, in October 2017, we completed a public offering of 4,500,000 shares of Class A Common Stock, at a public offering price of $9.25 per share, receiving net proceeds of $39.2 million, after deducting underwriters’ fees and offering expenses of $2.4 million.

The ~~net proceeds from the offering were used to repay~~following table sets forth our outstanding ~~indebtedness under the EEH Credit Agreement.~~

~~Credit Agreement~~

~~On May 9, 2017, in connection with the closing of the Bold Transaction, Earthstone became party to the EEH Credit Agreement described in~~ ~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Recent Developments, Credit Agreement. As of~~derivative contracts at September 30, ~~2017,~~2022. When aggregating multiple contracts, the ~~Company had a $150 million borrowing base under~~weighted average contract price is disclosed.


	Price Swaps
Period	Commodity	Volume (Bbls / MMBtu)	Weighted Average Price ($/Bbl / $/MMBtu)
Q4 2022	Crude Oil	1,081,000	$	66.70
Q1 - Q4 2023	Crude Oil	1,277,500	$	76.20
Q4 2022	Crude Oil Basis Swap (1)	3,128,000	$	0.89
Q1 - Q4 2023	Crude Oil Basis Swap (1)	9,488,500	$	0.92
Q4 2022	Natural Gas	1,893,500	$	3.33
Q1 - Q4 2023	Natural Gas	3,670,000	$	3.35
Q4 2022	Natural Gas Basis Swap (2)	1,840,000	$	(0.33)
Q1 - Q4 2023	Natural Gas Basis Swap (2)	36,500,000	$	(1.47)
Q1 - Q4 2024	Natural Gas Basis Swap (2)	36,600,000	$	(1.05)

(1)The basis differential price is between WTI Midland Crude and the ~~EEH Credit Agreement, of which $70 million was outstanding, bearing an annual interest rate of 3.7311%, resulting in an additional $80 million of borrowing base availability under~~WTI NYMEX.

(2)The basis differential price is between W. Texas (WAHA) and the ~~EEH Credit Agreement.~~

~~Commodity Prices~~

Commodity prices are volatile and can fluctuate significantly. Through September 30, 2017, oil prices have declined 8% and natural gas prices declined 15% compared to December 31, 2016. If the commodity price environment continues to decline, it will have an adverse impact on our revenues, cash flows, estimated reserves and planned capital expenditures, and could result in further impairments of our proved and unproved oil and natural gas properties.

~~Impairments to Oil and Natural Gas Properties~~

As a result of significant forward commodity price declines, in the second quarter of 2017, we recognized $66.7 million of non-cash asset impairments that have negatively impacted our results of operations and equity. These impairments consisted of $63.0 million to our proved oil and natural gas properties and $3.7 million to our unproved oil and natural gas properties, primarily to our properties located in ~~the Eagle Ford shale trend of south Texas. See~~ ~~Note 3. Fair Value Measurements~~ ~~in the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of how impairments are measured.~~

~~Hedging Activities~~

As of September 30, 2017, we had hedged a total of 157,500 Bbls of remaining 2017 oil production at an average price of $50.66/Bbl and 645,000 MMBtu of remaining 2017 natural gas production at average price of $3.167/MMBbtu. As of September 30, 2017, we had hedged a total of 1,279,000 Bbls of 2018 oil production at an average price of $50.16/Bbl and 810,000 MMBtu of 2018 natural gas production at average price of $3.066/MMBtu. Additionally, on October 30, 2017, we entered into additional fixed price oil swap agreements, hedging an additional 365,000 Bbls of 2019 oil production at a price of $51.55/Bbl.

Henry Hub NYMEX.


	Costless Collars
Period	Commodity	Volume (Bbls / MMBtu)	Bought Floor ($/Bbl / $/MMBtu)		Sold Ceiling ($/Bbl / $/MMBtu)
Q4 2022	Crude Oil Costless Collar	805,000	$	73.14	$	96.49
Q1 - Q4 2023	Crude Oil Costless Collar	1,715,500	$	62.98	$	80.34
Q4 2022	Natural Gas Costless Collar	8,686,500	$	4.57	$	10.17
Q1 - Q4 2023	Natural Gas Costless Collar	17,298,000	$	3.77	$	7.49


	Premium Puts
Period	Commodity	Volume (Bbls / MMBtu)	$/Bbl (Put Price)		$/Bbl (Net of Premium)
Q4 2022	Crude Oil	253,000	$	80.00	$	75.79
Q1 - Q4 2023	Crude Oil	1,750,500	$	70.00	$	64.53

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 ~~2016~~2021 Annual Report on Form ~~10-K.~~

10-K other than those described in Note 13. Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

Environmental Regulations

Our operations are subject to risks normally associated with the ~~exploration~~drilling for and the production of oil and natural gas, including blowouts, fires, and environmental risks such as oil spills or natural gas leaks that could expose us to liabilities associated with these risks.

In our acquisition of existing or previously drilled well bores, we may not be aware of prior environmental safeguards, if any, that were taken at the time such wells were drilled or during such time the wells were operated. ~~We maintain comprehensive insurance coverage that we believe is adequate to mitigate the risk of any adverse financial effects associated with these risks.~~

However, should it be determined that a liability exists with respect to any environmental cleanup or restoration, the liability to cure or remediate such a violation could still accrue to ~~us.~~us or our existing insurance may not be adequate to insure against such liabilities. No claim has been made, nor are we aware of any liability which we may have, as it relates to any environmental cleanup, restoration, or the violation of any rules or regulations relating thereto.

~~Delaware~~	~~84-0592823~~
Delaware		84-0592823
(State or other jurisdiction		(~~I.R.S~~I.R.S. Employer
of incorporation or organization)		Identification No.)


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


	For the Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net income (loss)	$	465,460	$	(7,549)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization	191,669		77,493


Accretion of asset retirement obligations	1,863		916
Settlement of asset retirement obligations	(664)		(103)
Gain on sale of oil and gas properties	(14,803)		(740)
Gain on sale of office and other equipment	(152)		(114)

Total loss on derivative contracts, net	141,101		117,566
Operating portion of net cash paid in settlement of derivative contracts	(169,708)		(46,311)
Stock-based compensation - equity and liability awards	15,112		10,621
Deferred income taxes	77,591		(343)

Amortization of deferred financing costs	3,723		581

Changes in assets and liabilities:
(Increase) decrease in accounts receivable	(189,504)		(12,238)
(Increase) decrease in prepaid expenses and other current assets	(16,546)		900
Increase (decrease) in accounts payable and accrued expenses	92,450		6,090
Increase (decrease) in revenues and royalties payable	94,260		2,556
Increase (decrease) in advances	11,317		(2,015)

Net cash provided by operating activities	703,169		147,310
Cash flows from investing activities:
Acquisition of oil and gas properties, net of cash acquired	(1,518,269)		(240,431)
Additions to oil and gas properties	(325,109)		(65,074)
Additions to office and other equipment	(1,694)		(886)
Proceeds from sales of oil and gas properties	26,165		975
Net cash used in investing activities	(1,818,907)		(305,416)
Cash flows from financing activities:
Proceeds from borrowings under Credit Agreement	2,348,728		503,734
Repayments of borrowings under Credit Agreement	(2,276,996)		(340,482)
Proceeds from issuance of 8% Senior Notes due 2027, net	537,256		—
Proceeds from term loan	244,209		—
Proceeds from issuance of Series A Convertible Preferred Stock, net of offering costs of $674	279,326		—
Cash paid related to the exchange and cancellation of Class A Common Stock	(5,168)		(3,420)
Cash paid for finance leases	(408)		(70)
Deferred financing costs	(15,222)		(2,709)
Net cash provided by financing activities	1,111,725		157,053
Net decrease in cash	(4,013)		(1,053)
Cash at beginning of period	4,013		1,494
Cash at end of period	$	—	$	441
Supplemental disclosure of cash flow information
Cash paid for:
Interest	$	17,485	$	7,126
Income taxes	$	625	$	687
Non-cash investing and financing activities:
Class A Common Stock issued in IRM Acquisition	$	—	$	76,572
Class A Common Stock issued in Tracker/Sequel Acquisitions	$	—	$	61,814
Class A Common Stock issued in Chisholm Acquisition	$	249,515	$	—
Class A Common Stock issued in Bighorn Acquisition	$	77,757	$	—
Class A Common Stock issued in Titus Acquisition	$	53,574	$	—
Accrued capital expenditures	$	40,969	$	18,971
Lease asset additions - ASC 842	$	3,111	$	—
Asset retirement obligations	$	722	$	242


		September 30, 2017									December 31, 2016								September 30, 2022						December 31, 2021
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	Derivative asset - current	$	327		$	(180	)	$	147		$	—	$	—	$	—	Commodity contracts	Derivative asset - current	$	53,601	$	(38,651)	$	14,950	$	3,191	$	(1,843)	$	1,348
Commodity contracts	Derivative asset - noncurrent	$	24		$	(24	)	$	—		$	—	$	—	$	—	Commodity contracts	Derivative liability - current	$	67,055	$	(38,651)	$	28,404	$	47,153	$	(1,843)	$	45,310

Commodity contracts	Derivative liability - current	$	(2,166	)	$	180		$	(1,986	)	$	4,595	$	—	$	4,595	Commodity contracts	Derivative asset - noncurrent	$	12,941	$	(7,415)	$	5,526	$	2,721	$	(2,564)	$	157
Commodity contracts	Derivative liability - noncurrent	$	(446	)	$	24		$	(422	)	$	1,575	$	—	$	1,575	Commodity contracts	Derivative liability - noncurrent	$	15,255	$	(7,415)	$	7,840	$	3,135	$	(2,564)	$	571


Derivatives not designated as hedging contracts under ASC Topic 815			Three Months Ended September 30,				Nine Months Ended September 30,
	Statement of Cash Flows Location	Statement of Operations Location	2022		2021		2022		2021
Unrealized gain (loss)	Not separately presented	Not separately presented	$	119,209	$	(12,244)	$	28,607	$	(71,255)
Realized loss	Operating portion of net cash paid in settlement of derivative contracts	Not separately presented	(58,923)		(20,884)		(169,708)		(46,311)
	Total (gain) loss on derivative contracts, net	Gain (loss) on derivative contracts, net	$	60,286	$	(33,128)	$	(141,101)	$	(117,566)

☒
☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Operating lease liabilities	1,549		1,276
Finance lease liabilities	1,003		—
Other noncurrent liabilities	13,574		6,442
Total noncurrent liabilities	1,327,674		359,491

Commitments and Contingencies (Note 13)

Equity:
Preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued or outstanding	—		—

Series A Convertible Preferred Stock, $0.001 par value, none authorized, issued or outstanding	—		—
Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 108,416,926 and 53,467,307 issued and outstanding at September 30, 2022 and December 31, 2021, respectively	108		53
Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,261,641 and 34,344,532 issued and outstanding at September 30, 2022 and December 31, 2021, respectively	34		34
Additional paid-in capital	1,382,026		718,181
Retained earnings (accumulated deficit)	163,089		(159,774)

Total Earthstone Energy, Inc. equity	1,545,257		558,494
Noncontrolling interest	629,206		487,767
Total equity	2,174,463		1,046,261

TOTAL LIABILITIES AND EQUITY	$	3,892,297	$	1,556,367

	For the Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net loss	$	(50,230	)	$	(21,493	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Impairment of proved and unproved oil and gas properties		66,740			—
Depreciation, depletion and amortization		28,258			16,252
Accretion of asset retirement obligations		378			404
Settlement of asset retirement obligations		—			(15	)
Gain on sale of oil and gas properties		(3,848	)		(8	)
Rig idle and termination expense		—			5,059
Total (gain) loss on derivative contracts, net		(4,137	)		2,517
Operating portion of net cash received in settlement of derivative contracts		229			3,330
Stock-based compensation		4,645			1,889
Deferred income taxes		(10,046	)		387
Write-off of deferred financing costs		526			—
Amortization of deferred financing costs		195			220
Changes in assets and liabilities:
Decrease in accounts receivable		6,964			9,141
Increase in prepaid expenses and other current assets		(455	)		(1,790	)
Decrease in accounts payable and accrued expenses		(11,522	)		(3,462	)
Decrease in revenues and royalties payable		(4,019	)		(1,730	)
Increase (decrease) in advances		506			(8,966	)
Net cash provided by operating activities		24,184			1,735
Cash flows from investing activities:
Bold Contribution Agreement, net of cash acquired		(55,609	)		—
Lynden Arrangement, net of cash acquired		—			(31,334	)
Additions to oil and gas properties		(29,958	)		(15,272	)
Additions to office and other equipment		(139	)		(63	)
Proceeds from sales of oil and gas properties		5,054			—
Net cash used in investing activities		(80,652	)		(46,669	)
Cash flows from financing activities:
Proceeds from borrowings		70,000			36,597
Repayments of borrowings		(11,193	)		(38,165	)
Common stock exchanged and cancelled		(324	)		—
Issuance of common stock, net of offering costs of $2.7 million		—			47,125
Deferred financing costs		(1,168	)		(78	)
Net cash provided by financing activities		57,315			45,479
Net increase in cash and cash equivalents		847			545
Cash at beginning of period		10,200			23,264
Cash at end of period	$	11,047		$	23,809
Supplemental disclosure of cash flow information
Cash paid for:
Interest	$	1,555		$	688
Non-cash investing and financing activities:
Class B Common stock issued in Bold Contribution Agreement	$	489,842		$	—
Class A Common stock issued in Bold Contribution Agreement	$	2,037		$	—
Common stock issued in Lynden Arrangement	$	—		$	45,699
Accrued capital expenditures	$	19,519		$	8,938
Asset retirement obligations	$	83		$	101
Promissory Note	$	—		$	5,059


Shares issued in connection with Titus Acquisition	—	3,857,015	—	—	4		—		53,570		—		53,574		—		53,574
Vesting of restricted stock units, net of taxes paid	—	117,263	—	—	—		—		—		—		—		—		—
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings	—	48,073	—	—	—		—		(552)		—		(552)		—		(552)
Cancellation of treasury shares	—	(48,073)	—	—	—		—		—		—		—		—		—
Class B Common Stock converted to Class A Common Stock	—	—	—	—	—		—		(5)		—		(5)		5		—
Net income	—	—	—	—	—		—		—		211,456		211,456		87,856		299,312
At September 30, 2022	—	108,416,926	34,261,641	—	$	108	$	34	$	1,382,026	$	163,089	$	1,545,257	$	629,206	$	2,174,463


September 30, 2022	Level 1		Level 2		Level 3		Total
Financial assets
Derivative asset - current	$	—	$	14,950	$	—	$	14,950
Derivative asset - noncurrent	—		5,526		—		5,526
Total financial assets	$	—	$	20,476	$	—	$	20,476

Financial liabilities
Derivative liability - current	$	—	$	28,404	$	—	$	28,404
Derivative liability - noncurrent	—		7,840		—		7,840
Share-based compensation liability - noncurrent	—		13,474		—		13,474
Total financial liabilities	$	—	$	49,718	$	—	$	49,718

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

Consideration:
Shares of Class A Common Stock issued pursuant to the Bold Contribution Agreement to certain employees of Bold		150,000
EEH Units issued to Bold Holdings		36,070,828

Total equity interest issued in the Bold Transaction		36,220,828
Closing per share price of Class A Common Stock as of May 9, 2017	$	13.58

Total consideration transferred ⁽¹⁾⁽²⁾	$	491,879

Fair value of assets acquired:
Cash and cash equivalents	$	2,355
Other current assets		10,078
Oil and gas properties ⁽³⁾		557,704
Amount attributable to assets acquired	$	570,137

Fair value of liabilities assumed:
Long-term debt ⁽⁴⁾	$	58,000
Current liabilities		17,042
Deferred tax liability		2,857
Noncurrent asset retirement obligations		359
Amount attributable to liabilities assumed	$	78,258


	Deferred Premium Puts
Period	Commodity	Volume (Bbls / MMBtu)	$/Bbl (Put Price)		$/Bbl (Net of Premium)
Q4 2022	Crude Oil	253,000	$	80.00	$	75.79
Q1 - Q4 2023	Crude Oil	1,750,500	$	70.00	$	64.53


Consideration:
Shares of Class A Common Stock issued	3,857,015
Class A Common Stock price as of August 10, 2022	$	13.89
Class A Common Stock consideration	53,574
Cash consideration	565,777
Total consideration transferred	$	619,351

Fair value of assets acquired:
Oil and gas properties	$	623,119
Amount attributable to assets acquired	$	623,119

Fair value of liabilities assumed:
Current liabilities	$	2,854
Noncurrent liabilities - ARO	914
Amount attributable to liabilities assumed	$	3,768


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


	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Development costs	$	146,845	$	348,145
Leasehold costs	307		567
Total capital expenditures	$	147,152	$	348,712

Total consideration transferred ⁽¹⁾	$	491,879
Change to Additional paid-in capital to reflect the noncontrolling interest within equity at their membership interest		(12,872	)
Portion of equity attributable to noncontrolling interest ⁽²⁾	$	479,007

	EEH Units Held By Earthstone and Lynden US		%			EEH Units Held By Others		%			Total EEH Units Outstanding
As of December 31, 2016		—		—			—		—			—
May 9, 2017 - Bold Transaction		22,656,624		38.6	%		36,070,828		61.4	%		58,727,452
EEH Units issued in connection with Class A Common Stock issued in connection with Bold Transaction		150,000					—					150,000
EEH Units issued in connection with the vesting of restricted stock units		182,135					—					182,135
As of September 30, 2017		22,988,759		38.9	%		36,070,828		61.1	%		59,059,587

	2017
As of December 31, 2016	$	—
Noncontrolling interest recorded within equity in connection with the closing of the Bold Transaction		479,007
Net loss attributable to noncontrolling interest		(35,392	)
As of September 30, 2017	$	443,615

	Shares			Weighted-Average Grant Date Fair Value
Unvested RSUs at December 31, 2016		781,500		$	12.53
Granted		254,500		$	11.67
Forfeited		(36,000	)	$	13.30
Vested		(594,380	)	$	12.45
Unvested RSUs at September 30, 2017		405,620		$	12.03


	Shares	Weighted-Average Grant Date Fair Value
Unvested RSUs at December 31, 2021	771,817	$	5.91
Granted	511,615	$	13.75
Forfeited	(14,934)	$	7.93
Vested	(491,107)	$	7.77
Unvested RSUs at September 30, 2022	777,391	$	9.86


	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 September 30, 2022	2,616,085	$	10.20


Earthstone’s Annualized TSR						TSR Multiplier
23.9% or greater						2
14.5%						1
8.4%						0.5
Less than 8.4%						0


	September 30, 2022		December 31, 2021
Revolving credit facility(1)	$	391,732	$	320,000
Term loan under credit facility due 2027	250,000		—
8.000% Senior notes due 2027	550,000		—
	1,191,732		320,000
Unamortized debt issuance costs on term loan	(5,591)		—
Unamortized debt issuance costs on 8.000% Senior notes	(11,592)		—
Long-term debt, net	$	1,174,549	$	320,000


	September 30,		December 31,
(In thousands)	2022		2021
Current assets:
Cash	$	—	$	4,013
Accounts receivable:
Oil, natural gas, and natural gas liquids revenues	196,941		50,575
Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2022 and December 31, 2021, respectively	20,328		2,930
Derivative asset	14,950		1,348
Prepaid expenses and other current assets	19,089		2,549
Total current assets	251,308		61,415

Current liabilities:
Accounts payable	$	75,162	$	31,397
Revenues and royalties payable	158,867		36,189
Accrued expenses	105,623		31,704

Asset retirement obligation	941		395
Derivative liability	28,404		45,310
Advances	15,405		4,088
Operating lease liabilities	869		681
Finance lease liabilities	784		—
Other current liabilities	4,105		851
Total current liabilities	390,160		150,615

Working Capital	$	(138,852)	$	(89,200)


	Total Number of Shares Purchased (1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan or Programs
July 2022	—	$	—	—	—
August 2022	—	—		—	—
September 2022	48,073	$	12.21	—	—