Earthstone Energy, Inc. Interests – SEC Price Case
January 24, 2023
Page 2
Future net revenue is prior to deducting state production taxes and ad valorem taxes. Future net cash flow is after deducting these taxes, future capital (development) costs and operating expenses, but before consideration of federal income taxes. In accordance with SEC guidelines, the future net cash flow has been discounted at an annual rate of ten percent to determine its “present worth”. The present worth is shown to indicate the effect of time on the value of money and should not be construed as being the fair market value of the reserves by Cawley, Gillespie & Associates, Inc. (“CG&A”).
The oil reserves include oil and condensate. Oil and natural gas liquid (NGL) volumes are expressed in barrels (42 U.S. gallons). Gas volumes are expressed in thousands of standard cubic feet (Mcf) at contract temperature and pressure base.
Hydrocarbon Pricing
As requested for SEC purposes, the base oil and gas prices calculated for December 31, 2022 were $93.67/BBL and $6.358/MMBTU, respectively. As specified by the SEC, a company must use a 12-month average price, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period. The base oil price is based upon WTI-Cushing spot prices (EIA) during January 2022 through December 2022 and the base gas price is based upon Henry Hub spot prices (Platts Gas Daily) during January 2022 through December 2022. NGL prices were adjusted on a per-property basis and averaged 41.0% of the net oil price on a composite basis.
The base prices were adjusted for differentials on a per-property basis, which may include local basis differential, treating cost, transportation, gas shrinkage, gas heating value (BTU content) and/or crude quality and gravity corrections. After these adjustments, the net realized prices for the SEC price case over the life of the proved properties was estimated to be $95.82 per barrel for oil, $5.51 per MCF for natural gas and $39.24 per barrel for NGL. All economic factors were held constant in accordance with SEC guidelines.
Future Development Costs, Expenses and Taxes
Capital expenditures (Future Development Costs), lease operating expenses and ad valorem tax values were forecast as provided by Earthstone. As you explained, the capital costs were based on the most current estimates, lease operating expenses were based on the analysis of historical actual expenses, operating overhead is included for non-operated properties and no credit or deduction is made for producing overhead paid to the company by other owners of the operated properties. Lease operating expenses are applied based on location, operatorship and wellbore orientation on a per-property or per-unit basis. Capital costs and lease operating expenses were held constant in accordance with SEC guidelines.
Severance tax rates were applied at normal state percentages of oil and gas revenue. Severance tax rates in certain instances, where authorized by taxing authorities, have severance tax abatements and were provided by your office and applied when appropriate.
SEC Conformance and Regulations
The reserve classifications and the economic considerations used herein conform to the criteria of the SEC as defined in pages 3 and 4 of the Appendix. The reserves and economics are predicated on regulatory agency classifications, rules, policies, laws, taxes and royalties currently in effect except as noted herein. Federal, state, and local laws and regulations, which are currently in effect and that govern the development and production of oil and natural gas, have been considered in the evaluation of proved reserves for this report. The possible effects of changes in legislation or other Federal or State restrictive actions which could affect the reserves and economics have not been considered. These possible changes could have an effect on the reserves and economics. However, we do not anticipate nor are we aware of any legislative changes or restrictive regulatory actions that may impact the recovery of reserves.
