UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________
FORM 10-Q
_________________________________________________________
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2021March 31, 2022
Or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 001-35049
_________________________________________________________
EARTHSTONE ENERGY, INC.
(Exact name of registrant as specified in its charter)
_________________________________________________________
| | | | | | | | |
Delaware | | 84-0592823 |
(State or other jurisdiction | | (I.R.S Employer |
of incorporation or organization) | | Identification No.) |
1400 Woodloch Forest Drive, Suite 300
The Woodlands, Texas 77380
(Address of principal executive offices)
Registrant’s telephone number, including area code: (281) 298-4246
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock, $0.001 par value per share | ESTE | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to thesuch filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☐ | | Accelerated filer | | ☒ |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☒☐ |
Emerging growth company | | ☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 2, 2021, 53,305,168April 28, 2022, 79,091,777 shares of Class A Common Stock, $0.001 par value per share, and 34,351,99534,271,766 shares of Class B Common Stock, $0.001 par value per share, were outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
| | | | September 30, | | December 31, | | | March 31, | | December 31, |
ASSETS | ASSETS | | 2021 | | 2020 | ASSETS | | 2022 | | 2021 |
Current assets: | Current assets: | | | | | Current assets: | | | | |
Cash | Cash | | $ | 441 | | | $ | 1,494 | | Cash | | $ | 482 | | | $ | 4,013 | |
Accounts receivable: | Accounts receivable: | | Accounts receivable: | |
Oil, natural gas, and natural gas liquids revenues | Oil, natural gas, and natural gas liquids revenues | | 45,076 | | | 16,255 | | Oil, natural gas, and natural gas liquids revenues | | 98,182 | | | 50,575 | |
Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2021 and December 31, 2020, respectively | | 3,058 | | | 7,966 | | |
Joint interest billings and other, net of allowance of $19 and $19 at March 31, 2022 and December 31, 2021, respectively | | Joint interest billings and other, net of allowance of $19 and $19 at March 31, 2022 and December 31, 2021, respectively | | 11,980 | | | 2,930 | |
Derivative asset | Derivative asset | | 17 | | | 7,509 | | Derivative asset | | 1,849 | | | 1,348 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 1,565 | | | 1,509 | | Prepaid expenses and other current assets | | 4,440 | | | 2,549 | |
Total current assets | Total current assets | | 50,157 | | | 34,733 | | Total current assets | | 116,933 | | | 61,415 | |
| Oil and gas properties, successful efforts method: | Oil and gas properties, successful efforts method: | | Oil and gas properties, successful efforts method: | |
Proved properties | Proved properties | | 1,487,362 | | | 1,017,496 | | Proved properties | | 2,278,496 | | | 1,625,367 | |
Unproved properties | Unproved properties | | 235,232 | | | 233,767 | | Unproved properties | | 280,805 | | | 222,025 | |
Land | Land | | 5,382 | | | 5,382 | | Land | | 5,382 | | | 5,382 | |
Total oil and gas properties | Total oil and gas properties | | 1,727,976 | | | 1,256,645 | | Total oil and gas properties | | 2,564,683 | | | 1,852,774 | |
| Accumulated depreciation, depletion and amortization | Accumulated depreciation, depletion and amortization | | (367,000) | | | (291,213) | | Accumulated depreciation, depletion and amortization | | (429,743) | | | (395,625) | |
Net oil and gas properties | Net oil and gas properties | | 1,360,976 | | | 965,432 | | Net oil and gas properties | | 2,134,940 | | | 1,457,149 | |
| Other noncurrent assets: | Other noncurrent assets: | | Other noncurrent assets: | |
| Office and other equipment, net of accumulated depreciation and amortization of $4,323 and $3,675 at September 30, 2021 and December 31, 2020, respectively | | 1,730 | | | 931 | | |
Office and other equipment, net of accumulated depreciation and amortization of $4,636 and $4,547 at March 31, 2022 and December 31, 2021, respectively | | Office and other equipment, net of accumulated depreciation and amortization of $4,636 and $4,547 at March 31, 2022 and December 31, 2021, respectively | | 2,389 | | | 1,986 | |
Derivative asset | Derivative asset | | 453 | | | 396 | | Derivative asset | | 5,810 | | | 157 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | | 1,963 | | | 2,450 | | Operating lease right-of-use assets | | 2,310 | | | 1,795 | |
Other noncurrent assets | Other noncurrent assets | | 9,694 | | | 1,315 | | Other noncurrent assets | | 58,889 | | | 33,865 | |
TOTAL ASSETS | TOTAL ASSETS | | $ | 1,424,973 | | | $ | 1,005,257 | | TOTAL ASSETS | | $ | 2,321,271 | | | $ | 1,556,367 | |
LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | | LIABILITIES AND EQUITY | | | | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | | $ | 33,602 | | | $ | 6,232 | | Accounts payable | | $ | 69,749 | | | $ | 31,397 | |
Revenues and royalties payable | Revenues and royalties payable | | 30,139 | | | 27,492 | | Revenues and royalties payable | | 52,167 | | | 36,189 | |
Accrued expenses | Accrued expenses | | 20,620 | | | 16,504 | | Accrued expenses | | 39,179 | | | 31,704 | |
Deferred acquisition payment - Chisholm | | Deferred acquisition payment - Chisholm | | 70,000 | | | — | |
Asset retirement obligation | Asset retirement obligation | | 543 | | | 447 | | Asset retirement obligation | | 609 | | | 395 | |
Derivative liability | Derivative liability | | 67,575 | | | 1,135 | | Derivative liability | | 150,055 | | | 45,310 | |
Advances | Advances | | 1,325 | | | 2,277 | | Advances | | 2,447 | | | 4,088 | |
Operating lease liabilities | Operating lease liabilities | | 732 | | | 773 | | Operating lease liabilities | | 747 | | | 681 | |
Finance lease liabilities | | — | | | 69 | | |
| Other current liabilities | Other current liabilities | | 634 | | | 565 | | Other current liabilities | | 630 | | | 851 | |
Total current liabilities | Total current liabilities | | 155,170 | | | 55,494 | | Total current liabilities | | 385,583 | | | 150,615 | |
| Noncurrent liabilities: | Noncurrent liabilities: | | Noncurrent liabilities: | |
Long-term debt | Long-term debt | | 278,253 | | | 115,000 | | Long-term debt | | 624,229 | | | 320,000 | |
Deferred tax liability | Deferred tax liability | | 13,764 | | | 14,497 | | Deferred tax liability | | 14,404 | | | 15,731 | |
Asset retirement obligation | Asset retirement obligation | | 14,965 | | | 2,580 | | Asset retirement obligation | | 21,509 | | | 15,471 | |
Derivative liability | Derivative liability | | 7,730 | | | 173 | | Derivative liability | | 21,775 | | | 571 | |
| Operating lease liabilities | Operating lease liabilities | | 1,394 | | | 1,840 | | Operating lease liabilities | | 1,725 | | | 1,276 | |
Finance lease liabilities | | — | | | 5 | | |
| Other noncurrent liabilities | Other noncurrent liabilities | | 3,803 | | | 132 | | Other noncurrent liabilities | | 9,744 | | | 6,442 | |
Total noncurrent liabilities | Total noncurrent liabilities | | 319,909 | | | 134,227 | | Total noncurrent liabilities | | 693,386 | | | 359,491 | |
| Commitments and Contingencies (Note 13) | Commitments and Contingencies (Note 13) | | 0 | | 0 | Commitments and Contingencies (Note 13) | | 0 | | 0 |
| Equity: | Equity: | | Equity: | |
Preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued or outstanding | Preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued or outstanding | | — | | | — | | Preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued or outstanding | | — | | | — | |
| Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 50,692,057 and 30,343,421 issued and outstanding at September 30, 2021 and December 31, 2020, respectively | | 51 | | | 30 | | |
Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,353,995 and 35,009,371 issued and outstanding at September 30, 2021 and December 31, 2020, respectively | | 34 | | | 35 | | |
Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 73,440,800 and 53,467,307 issued and outstanding at March 31, 2022 and December 31, 2021, respectively | | Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 73,440,800 and 53,467,307 issued and outstanding at March 31, 2022 and December 31, 2021, respectively | | 73 | | | 53 | |
Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,271,766 and 34,344,532 issued and outstanding at March 31, 2022 and December 31, 2021, respectively | | Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,271,766 and 34,344,532 issued and outstanding at March 31, 2022 and December 31, 2021, respectively | | 34 | | | 34 | |
Additional paid-in capital | Additional paid-in capital | | 690,739 | | | 540,074 | | Additional paid-in capital | | 967,093 | | | 718,181 | |
Accumulated deficit | Accumulated deficit | | (199,544) | | | (195,258) | | Accumulated deficit | | (193,252) | | | (159,774) | |
| Total Earthstone Energy, Inc. equity | Total Earthstone Energy, Inc. equity | | 491,280 | | | 344,881 | | Total Earthstone Energy, Inc. equity | | 773,948 | | | 558,494 | |
Noncontrolling interest | Noncontrolling interest | | 458,614 | | | 470,655 | | Noncontrolling interest | | 468,354 | | | 487,767 | |
Total equity | Total equity | | 949,894 | | | 815,536 | | Total equity | | 1,242,302 | | | 1,046,261 | |
| TOTAL LIABILITIES AND EQUITY | TOTAL LIABILITIES AND EQUITY | | $ | 1,424,973 | | | $ | 1,005,257 | | TOTAL LIABILITIES AND EQUITY | | $ | 2,321,271 | | | $ | 1,556,367 | |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
| | | Three Months Ended | | Nine Months Ended | | | | Three Months Ended |
| | | September 30, | | September 30, | | | | March 31, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | | 2022 | | 2021 |
REVENUES | REVENUES | | | | | REVENUES | | | |
Oil | Oil | | $ | 74,051 | | | $ | 33,158 | | | $ | 205,788 | | | $ | 93,017 | | Oil | | | $ | 137,752 | | | $ | 60,819 | |
Natural gas | Natural gas | | 14,368 | | | 2,642 | | | 26,910 | | | 4,855 | | Natural gas | | | 22,958 | | | 5,852 | |
Natural gas liquids | Natural gas liquids | | 21,965 | | | 5,247 | | | 42,929 | | | 9,976 | | Natural gas liquids | | | 35,440 | | | 8,901 | |
Total revenues | Total revenues | | 110,384 | | | 41,047 | | | 275,627 | | | 107,848 | | Total revenues | | | 196,150 | | | 75,572 | |
| OPERATING COSTS AND EXPENSES | OPERATING COSTS AND EXPENSES | | OPERATING COSTS AND EXPENSES | | |
Lease operating expense | Lease operating expense | | 12,983 | | | 7,044 | | | 35,579 | | | 21,971 | | Lease operating expense | | | 21,631 | | | 10,849 | |
Production and ad valorem taxes | Production and ad valorem taxes | | 7,225 | | | 2,696 | | | 17,428 | | | 7,198 | | Production and ad valorem taxes | | | 13,315 | | | 5,027 | |
Rig termination expense | | — | | | — | | | — | | | 426 | | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | | 27,059 | | | 28,538 | | | 77,493 | | | 76,096 | | Depreciation, depletion and amortization | | | 34,326 | | | 24,407 | |
Impairment expense | | — | | | 2,115 | | | — | | | 62,548 | | |
| General and administrative expense | General and administrative expense | | 7,650 | | | 5,796 | | | 25,200 | | | 19,615 | | General and administrative expense | | | 12,306 | | | 8,380 | |
Transaction costs | Transaction costs | | 293 | | | (705) | | | 2,906 | | | (324) | | Transaction costs | | | 10,742 | | | 2,106 | |
Accretion of asset retirement obligation | Accretion of asset retirement obligation | | 323 | | | 47 | | | 916 | | | 137 | | Accretion of asset retirement obligation | | | 397 | | | 290 | |
Exploration expense | Exploration expense | | 296 | | | — | | | 326 | | | 298 | | Exploration expense | | | 92 | | | — | |
Total operating costs and expenses | Total operating costs and expenses | | 55,829 | | | 45,531 | | | 159,848 | | | 187,965 | | Total operating costs and expenses | | | 92,809 | | | 51,059 | |
| Gain on sale of oil and gas properties | | 392 | | | — | | | 740 | | | 198 | | |
| Income (loss) from operations | | 54,947 | | | (4,484) | | | 116,519 | | | (79,919) | | |
| Income from operations | | Income from operations | | | 103,341 | | | 24,513 | |
| OTHER INCOME (EXPENSE) | OTHER INCOME (EXPENSE) | | OTHER INCOME (EXPENSE) | | |
Interest expense, net | Interest expense, net | | (3,050) | | | (1,186) | | | (7,668) | | | (4,207) | | Interest expense, net | | | (5,318) | | | (2,217) | |
| (Loss) gain on derivative contracts, net | | (33,128) | | | (6,040) | | | (117,566) | | | 73,065 | | |
Loss on derivative contracts, net | | Loss on derivative contracts, net | | | (151,480) | | | (33,263) | |
| Other income, net | Other income, net | | 520 | | | (18) | | | 823 | | | 120 | | Other income, net | | | 47 | | | 103 | |
Total other income (expense) | | (35,658) | | | (7,244) | | | (124,411) | | | 68,978 | | |
Total other expense | | Total other expense | | | (156,751) | | | (35,377) | |
| Income (loss) before income taxes | | 19,289 | | | (11,728) | | | (7,892) | | | (10,941) | | |
Income tax (expense) benefit | | (451) | | | (130) | | | 343 | | | (112) | | |
Net income (loss) | | 18,838 | | | (11,858) | | | (7,549) | | | (11,053) | | |
Loss before income taxes | | Loss before income taxes | | | (53,410) | | | (10,864) | |
Income tax benefit | | Income tax benefit | | | 1,533 | | | 308 | |
Net loss | | Net loss | | | (51,877) | | | (10,556) | |
| Less: Net income (loss) attributable to noncontrolling interest | | 8,420 | | | (6,413) | | | (3,263) | | | (5,977) | | |
Less: Net loss attributable to noncontrolling interest | | Less: Net loss attributable to noncontrolling interest | | | (18,399) | | | (4,723) | |
| Net income (loss) attributable to Earthstone Energy, Inc. | | $ | 10,418 | | | $ | (5,445) | | | $ | (4,286) | | | $ | (5,076) | | |
Net loss attributable to Earthstone Energy, Inc. | | Net loss attributable to Earthstone Energy, Inc. | | | $ | (33,478) | | | $ | (5,833) | |
| Net income (loss) per common share attributable to Earthstone Energy, Inc.: | | |
Basic | | $ | 0.21 | | | $ | (0.18) | | | $ | (0.09) | | | $ | (0.17) | | |
Diluted | | $ | 0.20 | | | $ | (0.18) | | | $ | (0.09) | | | $ | (0.17) | | |
Net loss per common share attributable to Earthstone Energy, Inc.: | | Net loss per common share attributable to Earthstone Energy, Inc.: | | |
Basic and Diluted | | Basic and Diluted | | | $ | (0.53) | | | $ | (0.14) | |
| | Weighted average common shares outstanding: | Weighted average common shares outstanding: | | Weighted average common shares outstanding: | | |
Basic | | 49,243,185 | | | 30,073,635 | | | 45,406,952 | | | 29,810,705 | | |
Diluted | | 52,662,942 | | | 30,073,635 | | | 45,406,952 | | | 29,810,705 | | |
Basic and Diluted | | Basic and Diluted | | | 63,445,649 | | | 42,778,916 | |
| |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(In thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued Shares | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Earthstone Energy, Inc. Equity | | Noncontrolling Interest | | Total Equity |
At December 31, 2020 | 30,343,421 | | | 35,009,371 | | | $ | 30 | | | $ | 35 | | | $ | 540,074 | | | $ | (195,258) | | | $ | 344,881 | | | $ | 470,655 | | | $ | 815,536 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,605 | | | — | | | 2,605 | | | | | 2,605 | |
Shares issued in connection with the IRM Acquisition | 12,719,594 | | | — | | | 13 | | | — | | | 76,559 | | | — | | | 76,572 | | | — | | | 76,572 | |
Vesting of restricted stock units and performance units, net of taxes paid | 463,495 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Vested restricted stock units and performance units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 257,764 | | | — | | | — | | | — | | | (2,080) | | | — | | | (2,080) | | | — | | | (2,080) | |
Cancellation of treasury shares | (257,764) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 578,031 | | | (578,031) | | | 1 | | | (1) | | | 7,758 | | | — | | | 7,758 | | | (7,758) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | (5,833) | | | (5,833) | | | (4,723) | | | (10,556) | |
At March 31, 2021 | 44,104,541 | | | 34,431,340 | | | $ | 44 | | | $ | 34 | | | $ | 624,916 | | | $ | (201,091) | | | $ | 423,903 | | | $ | 458,174 | | | $ | 882,077 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,175 | | | — | | | 2,175 | | | — | | | 2,175 | |
Vesting of restricted stock units, net of taxes paid | 155,058 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 66,343 | | | — | | | — | | | — | | | (741) | | | — | | | (741) | | | — | | | (741) | |
Cancellation of treasury shares | (66,343) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 33,463 | | | (33,463) | | | — | | | — | | | 441 | | | — | | | 441 | | | (441) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | (8,871) | | | (8,871) | | | (6,960) | | | (15,831) | |
At June 30, 2021 | 44,293,062 | | | 34,397,877 | | | $ | 44 | | | $ | 34 | | | $ | 626,791 | | | $ | (209,962) | | | $ | 416,907 | | | $ | 450,773 | | | $ | 867,680 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,161 | | | — | | | 2,161 | | | — | | | 2,161 | |
Shares issued in connection with the Tracker/Sequel Acquisitions | 6,200,000 | | | — | | | 6 | | | — | | | 61,808 | | | — | | | 61,814 | | | — | | | 61,814 | |
Vesting of restricted stock units, net of taxes paid | 155,113 | | | — | | | 1 | | | — | | | (1) | | | — | | | — | | | — | | | — | |
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 65,106 | | | — | | | — | | | — | | | (599) | | | — | | | (599) | | | — | | | (599) | |
Cancellation of treasury shares | (65,106) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 43,882 | | | (43,882) | | | — | | | — | | | 579 | | | — | | | 579 | | | (579) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | 10,418 | | | 10,418 | | | 8,420 | | | 18,838 | |
At September 30, 2021 | 50,692,057 | | | 34,353,995 | | | $ | 51 | | | $ | 34 | | | $ | 690,739 | | | $ | (199,544) | | | $ | 491,280 | | | $ | 458,614 | | | $ | 949,894 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued Shares | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Earthstone Energy, Inc. Equity | | Noncontrolling Interest | | Total Equity |
At December 31, 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 | |
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| Issued Shares | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Earthstone Energy, Inc. Equity | | Noncontrolling Interest | | Total Equity |
At December 31, 2020 | 30,343,421 | | | 35,009,371 | | | $ | 30 | | | $ | 35 | | | $ | 540,074 | | | $ | (195,258) | | | $ | 344,881 | | | $ | 470,655 | | | $ | 815,536 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,605 | | | — | | | 2,605 | | | — | | | 2,605 | |
Shares issued in connection with the IRM Acquisition | 12,719,594 | | | — | | | 13 | | | — | | | 76,559 | | | — | | | 76,572 | | | — | | | 76,572 | |
Vesting of restricted stock units and performance units, net of taxes paid | 463,495 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Vested restricted stock units and performance units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 257,764 | | | — | | | — | | | — | | | (2,080) | | | — | | | (2,080) | | | — | | | (2,080) | |
Cancellation of treasury shares | (257,764) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 578,031 | | | (578,031) | | | 1 | | | (1) | | | 7,758 | | | — | | | 7,758 | | | (7,758) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | (5,833) | | | (5,833) | | | (4,723) | | | (10,556) | |
At March 31, 2021 | 44,104,541 | | | 34,431,340 | | | $ | 44 | | | $ | 34 | | | $ | 624,916 | | | $ | (201,091) | | | $ | 423,903 | | | $ | 458,174 | | | $ | 882,077 | |
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The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
EARTHSTONE ENERGY, INC.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued Shares | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Earthstone Energy, Inc. Equity | | Noncontrolling Interest | | Total Equity |
At December 31, 2019 | 29,421,131 | | | 35,260,680 | | | $ | 29 | | | $ | 35 | | | $ | 527,246 | | | $ | (181,711) | | | $ | 345,599 | | | $ | 490,152 | | | $ | 835,751 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,694 | | | — | | | 2,694 | | | | | 2,694 | |
Vesting of restricted stock units, net of taxes paid | 231,834 | | | — | | | 1 | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 75,695 | | | — | | | — | | | — | | | (214) | | | — | | | (214) | | | — | | | (214) | |
Cancellation of treasury shares | (75,695) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 199,993 | | | (199,993) | | | — | | | — | | | 2,897 | | | — | | | 2,897 | | | (2,897) | | | — | |
Net income | — | | | — | | | — | | | — | | | — | | | 16,708 | | | 16,708 | | | 20,006 | | | 36,714 | |
At March 31, 2020 | 29,852,958 | | | 35,060,687 | | | $ | 30 | | | $ | 35 | | | $ | 532,623 | | | $ | (165,003) | | | $ | 367,685 | | | $ | 507,261 | | | $ | 874,946 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,568 | | | — | | | 2,568 | | | — | | | 2,568 | |
Vesting of restricted stock units, net of taxes paid | 165,399 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 57,810 | | | — | | | — | | | — | | | (170) | | | — | | | (170) | | | — | | | (170) | |
Cancellation of treasury shares | (57,810) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 2,000 | | | (2,000) | | | — | | | — | | | 28 | | | — | | | 28 | | | (28) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | (16,339) | | | (16,339) | | | (19,570) | | | (35,909) | |
At June 30, 2020 | 30,020,357 | | | 35,058,687 | | | $ | 30 | | | $ | 35 | | | $ | 535,049 | | | $ | (181,342) | | | $ | 353,772 | | | $ | 487,663 | | | $ | 841,435 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,403 | | | — | | | 2,403 | | | — | | | 2,403 | |
Vesting of restricted stock units, net of taxes paid | 141,076 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 54,268 | | | — | | | — | | | — | | | (147) | | | — | | | (147) | | | — | | | (147) | |
Cancellation of treasury shares | (54,268) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 49,316 | | | (49,316) | | | — | | | — | | | 685 | | | — | | | 685 | | | (685) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | (5,445) | | | (5,445) | | | (6,413) | | | (11,858) | |
At September 30, 2020 | 30,210,749 | | | 35,009,371 | | | $ | 30 | | | $ | 35 | | | $ | 537,990 | | | $ | (186,787) | | | $ | 351,268 | | | $ | 480,565 | | | $ | 831,833 | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, |
| | 2022 | | 2021 |
Cash flows from operating activities: | | |
Net loss | | $ | (51,877) | | | $ | (10,556) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
Depreciation, depletion and amortization | | 34,326 | | | 24,407 | |
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Accretion of asset retirement obligations | | 397 | | | 290 | |
Settlement of asset retirement obligations | | (201) | | | (15) | |
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Gain on sale of office and other equipment | | (22) | | | — | |
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Total loss on derivative contracts, net | | 151,480 | | | 33,263 | |
Operating portion of net cash paid in settlement of derivative contracts | | (31,686) | | | (10,905) | |
Stock-based compensation - equity portion | | 2,301 | | | 3,329 | |
Deferred income taxes | | (1,327) | | | (308) | |
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Amortization of deferred financing costs | | 627 | | | 141 | |
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Changes in assets and liabilities: | | | | |
(Increase) decrease in accounts receivable | | (48,735) | | | (5,379) | |
(Increase) decrease in prepaid expenses and other current assets | | (1,896) | | | 367 | |
Increase (decrease) in accounts payable and accrued expenses | | 21,783 | | | 5,389 | |
Increase (decrease) in revenues and royalties payable | | 14,932 | | | (2,081) | |
Increase (decrease) in advances | | (7,100) | | | 358 | |
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Net cash provided by operating activities | | 83,002 | | | 38,300 | |
Cash flows from investing activities: | | | | |
Acquisition of oil and gas properties, net of cash acquired | | (324,198) | | | (134,641) | |
Additions to oil and gas properties | | (55,925) | | | (8,913) | |
Additions to office and other equipment | | (590) | | | (226) | |
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Net cash used in investing activities | | (380,713) | | | (143,780) | |
Cash flows from financing activities: | | | | |
Proceeds from borrowings | | 582,498 | | | 177,114 | |
Repayments of borrowings | | (278,269) | | | (68,690) | |
Cash paid related to the exchange and cancellation of Class A Common Stock | | (3,898) | | | (2,080) | |
Cash paid for finance leases | | — | | | (20) | |
Deferred financing costs | | (6,151) | | | (891) | |
Net cash provided by financing activities | | 294,180 | | | 105,433 | |
Net decrease in cash | | (3,531) | | | (47) | |
Cash at beginning of period | | 4,013 | | | 1,494 | |
Cash at end of period | | $ | 482 | | | $ | 1,447 | |
Supplemental disclosure of cash flow information | | | | |
Cash paid for: | | | | |
Interest | | $ | 4,580 | | | $ | 1,922 | |
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Non-cash investing and financing activities: | | | | |
Class A Common Stock issued in IRM Acquisition | | $ | — | | | $ | 76,572 | |
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Class A Common Stock issued in Chisholm Acquisition | | $ | 249,515 | | | $ | — | |
Deferred acquisition payment - Chisholm | | $ | 70,000 | | | $ | — | |
Accrued capital expenditures | | $ | 49,853 | | | $ | 7,775 | |
Lease asset additions - ASC 842 | | $ | 678 | | | $ | — | |
Asset retirement obligations | | $ | 86 | | | $ | 427 | |
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The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2021 | | 2020 |
Cash flows from operating activities: | | |
Net loss | | $ | (7,549) | | | $ | (11,053) | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | |
Depreciation, depletion and amortization | | 77,493 | | | 76,096 | |
Impairment of proved and unproved oil and gas properties | | — | | | 44,928 | |
Impairment of goodwill | | — | | | 17,620 | |
Accretion of asset retirement obligations | | 916 | | | 137 | |
Settlement of asset retirement obligations | | (103) | | | — | |
(Gain) on sale of oil and gas properties | | (740) | | | (198) | |
(Gain) on sale of office and other equipment | | (114) | | | — | |
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Total loss (gain) on derivative contracts, net | | 117,566 | | | (73,065) | |
Operating portion of net cash (paid) received in settlement of derivative contracts | | (46,311) | | | 47,599 | |
Stock-based compensation | | 10,621 | | | 7,665 | |
Deferred income taxes | | (343) | | | 112 | |
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Amortization of deferred financing costs | | 581 | | | 241 | |
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Changes in assets and liabilities: | | | | |
(Increase) decrease in accounts receivable | | (12,238) | | | 12,102 | |
(Increase) decrease in prepaid expenses and other current assets | | 900 | | | (264) | |
Increase (decrease) in accounts payable and accrued expenses | | 6,090 | | | 1,976 | |
Increase (decrease) in revenues and royalties payable | | 2,556 | | | (7,768) | |
Increase (decrease) in advances | | (2,015) | | | (11,412) | |
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Net cash provided by operating activities | | 147,310 | | | 104,716 | |
Cash flows from investing activities: | | | | |
Acquisition of oil and gas properties, net of cash acquired | | (240,431) | | | — | |
Additions to oil and gas properties | | (65,074) | | | (72,869) | |
Additions to office and other equipment | | (886) | | | (111) | |
Proceeds from sales of oil and gas properties | | 975 | | | 409 | |
Net cash used in investing activities | | (305,416) | | | (72,571) | |
Cash flows from financing activities: | | | | |
Proceeds from borrowings | | 503,734 | | | 93,923 | |
Repayments of borrowings | | (340,482) | | | (133,923) | |
Cash paid related to the exchange and cancellation of Class A Common Stock | | (3,420) | | | (531) | |
Cash paid for finance leases | | (70) | | | (125) | |
Deferred financing costs | | (2,709) | | | — | |
Net cash provided by (used in) financing activities | | 157,053 | | | (40,656) | |
Net decrease in cash | | (1,053) | | | (8,511) | |
Cash at beginning of period | | 1,494 | | | 13,822 | |
Cash at end of period | | $ | 441 | | | $ | 5,311 | |
Supplemental disclosure of cash flow information | | | | |
Cash paid for: | | | | |
Interest | | $ | 7,126 | | | $ | 3,613 | |
Income taxes | | $ | 687 | | | $ | — | |
Non-cash investing and financing activities: | | | | |
Class A Common Stock issued in IRM Acquisition | | $ | 76,572 | | | $ | — | |
Class A Common Stock issued in Tracker/Sequel Acquisitions | | $ | 61,814 | | | $ | — | |
Accrued capital expenditures | | $ | 18,971 | | | $ | 2,213 | |
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Asset retirement obligations | | $ | 242 | | | $ | 44 | |
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The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with its consolidated subsidiaries, the “Company”), is a growth-oriented independent oil and natural gas development and production company. In addition, the Company is active in corporate mergers and the acquisition of oil and natural gas properties that have production and future development opportunities. The Company's operations are all in the upstream segment of the oil and natural gas industry and all its properties are onshore in Texas.Texas and New Mexico.
Earthstone is the sole managing member of Earthstone Energy Holdings, LLC, a Delaware limited liability company (together with its wholly-owned consolidated subsidiaries, “EEH”), with a controlling interest in EEH. Earthstone, together with its wholly-owned subsidiary, Lynden Energy Corp., a corporation organized under the laws of British Columbia (“Lynden Corp”), and Lynden Corp’s wholly-owned consolidated subsidiary, Lynden USA Inc., a Utah corporation (“Lynden US”) and also a member of EEH, consolidates the financial results of EEH and records a noncontrolling interest in the Condensed Consolidated Financial Statements representing the economic interests of EEH's members other than Earthstone and Lynden US.
The accompanying unaudited Condensed Consolidated Financial Statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The accompanying unaudited Condensed Consolidated Financial Statements and notes should be read in conjunction with the financial statements and notes included in Earthstone’s 20202021 Annual Report on Form 10-K.
The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for the fair presentation of the Company's financial position, results of operations and cash flows for the periods presented. Any such adjustments are of a normal, recurring nature. The Company’s Condensed Consolidated Balance Sheet at December 31, 20202021 is derived from the audited Consolidated Financial Statements at that date.
Recently Issued Accounting Standards
Income Taxes - In December 2019, the FASB issued an update that simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and early adoption is permitted. The Company adopted the update effective January 1, 2021 and the impact was not material to the Consolidated Financial Statements.
Reference Rate Reform - In March 2020, the FASB issued an update that provides optional guidance for a limited period of time to ease the transition from LIBOR to an alternative reference rate. The ASU intends to address certain concerns relating to accounting for contract modifications and hedge accounting. These optional expedients and exceptions to applying GAAP, assuming certain criteria are met, are allowed through December 31, 2022. TheAs discussed in Note 10. Long-Term Debt, the Company is currently evaluating the provisions of this update and has not yet determined whether it will elect the optional expedients. The Company does not expectamended its credit facility on January 30, 2022, which, among other things, provided mechanics relating to the transition from LIBOR to an alternative ratea benchmark replacement rate. The transition from LIBOR is not expected to have a material impact on its business, operations or liquidity.the Company’s consolidated financial statements.
Note 2. Fair Value Measurements
FASB Accounting Standards Codification (“ASC”) Topic 820, defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. ASC 820 provides a framework for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the counterparty’s creditworthiness when valuing certain assets.
The three-level fair value hierarchy for disclosure of fair value measurements defined by ASC 820 is as follows:
Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Inputs, other than quoted prices within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Level 3 – Prices or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation under Level 3 generally involves a significant degree of judgment from management.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or parameters or derived from such
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level. There were no transfers between fair value hierarchy levels for the ninethree months ended September 30, 2021.March 31, 2022.
Fair Value on a Recurring Basis
Derivative Financial Instruments
Derivative financial instruments are carried at fair value and measured on a recurring basis. The derivative financial instruments consist of swaps and costless collars for crude oil and natural gas and interest rate swaps. The Company’s commodity price hedges and interest rate swaps are valued based on discounted future cash flow models that are primarily based on published forward commodity price curves and published LIBOR forward curves; thus, these inputs are designated as Level 2 within the valuation hierarchy.
The fair values of derivative instruments in asset positions include measures of counterparty nonperformance risk, and the fair values of derivative instruments in liability positions include measures of the Company’s nonperformance risk. These measurements were not material to the Condensed Consolidated Financial Statements.
Share-based Compensation Liability
Certain of our performance-based stock awards (“PSUs” or “performance units”) may be payable in cash. The Company classifies the awards that may be settled in cash as liability awards. These awards are valued quarterly utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes grant date fair value based on the most likely outcome. The inputs for the Monte Carlo model are designated as Level 2 within the valuation hierarchy. The share-based compensation liability related to the PSU liability awards is included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of September 30, 2021.March 31, 2022.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the fair value of the Company’s financial assets and liabilities, by level within the fair-value hierarchy (in thousands):
| September 30, 2021 | | Level 1 | | Level 2 | | Level 3 | | Total | |
March 31, 2022 | | March 31, 2022 | | Level 1 | | Level 2 | | Level 3 | | Total |
Financial assets | Financial assets | | | | | | | | | Financial assets | | | | | | | | |
Derivative asset - current | Derivative asset - current | | $ | — | | | $ | 17 | | | $ | — | | | $ | 17 | | Derivative asset - current | | $ | — | | | $ | 1,849 | | | $ | — | | | $ | 1,849 | |
Derivative asset - noncurrent | Derivative asset - noncurrent | | — | | | 453 | | | — | | | 453 | | Derivative asset - noncurrent | | — | | | 5,810 | | | — | | | 5,810 | |
Total financial assets | Total financial assets | | $ | — | | | $ | 470 | | | $ | — | | | $ | 470 | | Total financial assets | | $ | — | | | $ | 7,659 | | | $ | — | | | $ | 7,659 | |
| Financial liabilities | Financial liabilities | | Financial liabilities | |
Derivative liability - current | Derivative liability - current | | $ | — | | | $ | 67,575 | | | $ | — | | | $ | 67,575 | | Derivative liability - current | | $ | — | | | $ | 150,055 | | | $ | — | | | $ | 150,055 | |
Derivative liability - noncurrent | Derivative liability - noncurrent | | — | | | 7,730 | | | — | | | 7,730 | | Derivative liability - noncurrent | | — | | | 21,775 | | | — | | | 21,775 | |
Share-based compensation liability - noncurrent | Share-based compensation liability - noncurrent | | — | | | 3,680 | | | — | | | 3,680 | | Share-based compensation liability - noncurrent | | — | | | 9,630 | | | — | | | 9,630 | |
Total financial liabilities | Total financial liabilities | | $ | — | | | $ | 78,985 | | | $ | — | | | $ | 78,985 | | Total financial liabilities | | $ | — | | | $ | 181,460 | | | $ | — | | | $ | 181,460 | |
| December 31, 2020 | | |
December 31, 2021 | | December 31, 2021 | |
Financial assets | Financial assets | | | | | | | | | Financial assets | | | | | | | | |
Derivative asset - current | Derivative asset - current | | $ | — | | | $ | 7,509 | | | $ | — | | | $ | 7,509 | | Derivative asset - current | | $ | — | | | $ | 1,348 | | | $ | — | | | $ | 1,348 | |
Derivative asset - noncurrent | Derivative asset - noncurrent | | — | | | 396 | | | — | | | 396 | | Derivative asset - noncurrent | | — | | | 157 | | | — | | | 157 | |
Total financial assets | Total financial assets | | $ | — | | | $ | 7,905 | | | $ | — | | | $ | 7,905 | | Total financial assets | | $ | — | | | $ | 1,505 | | | $ | — | | | $ | 1,505 | |
| Financial liabilities | Financial liabilities | | Financial liabilities | |
Derivative liability - current | Derivative liability - current | | $ | — | | | $ | 1,135 | | | $ | — | | | $ | 1,135 | | Derivative liability - current | | $ | — | | | $ | 45,310 | | | $ | — | | | $ | 45,310 | |
Derivative liability - noncurrent | Derivative liability - noncurrent | | — | | | 173 | | | — | | | 173 | | Derivative liability - noncurrent | | — | | | 571 | | | — | | | 571 | |
Share-based compensation liability - current | | Share-based compensation liability - current | | — | | | 7,835 | | | — | | | 7,835 | |
Share-based compensation liability - noncurrent | | Share-based compensation liability - noncurrent | | — | | | 6,324 | | | — | | | 6,324 | |
Total financial liabilities | Total financial liabilities | | $ | — | | | $ | 1,308 | | | $ | — | | | $ | 1,308 | | Total financial liabilities | | $ | — | | | $ | 60,040 | | | $ | — | | | $ | 60,040 | |
|
Other financial instruments include cash, accounts receivable and payable, and revenue royalties. The carrying amount of these instruments approximates fair value because of their short-term nature. The Company’s long-term debt obligation bears interest at floating market rates, therefore carrying amounts and fair value are approximately equal.
Fair Value on a Nonrecurring Basis
The Company applies the provisions of the fair value measurement standard on a non-recurring basis to its non-financial assets and liabilities, including oil and gas properties, goodwill, business combinations and asset retirement obligations. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments if events or changes in certain circumstances indicate that adjustments may be necessary. Due to significant declines in commodity prices and global demand for oil and natural gas products resulting from the COVID-19 pandemic, the Company assessed the fair values of its oil and natural gas properties and goodwill resulting in non-cash impairment chargesNo triggering events that require assessment were observed during the three months ended March 31, 2020. Since then, commodity prices have recovered and no other such triggering events that require further assessment were observed during the nine months ended September 30, 2021.2022. See further discussion in Note 5. Oil and Natural Gas Properties.
Note 3. Derivative Financial Instruments
Commodity Derivative Instruments
The Company’s hedging activities primarily consist of derivative instruments entered into in order to hedge against changes in oil and natural gas prices through the use of fixed price swap agreements and costless collars. Swaps exchange floating price risk in the future for a fixed price at the time of the hedge. Costless collars set both a maximum (sold ceiling) and a minimum (bought floor) future price. Consistent with its hedging policy, the Company has entered into a series of derivative instruments to hedge a significant portion of its expected oil and natural gas production through December 31, 2022.2024. Typically, these derivative instruments require payments to (receipts from) counterparties based on specific indices as required by the derivative agreements. Although not risk free, the Company believes these instruments reduce its exposure to oil and natural gas price fluctuations and, thereby, allow the Company to achieve a more predictable cash flow. The Company does not enter into derivative instruments for trading or other speculative purposes.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
These transactions are recorded in the Condensed Consolidated Financial Statements in accordance with FASB ASC Topic 815. The Company has accounted for these transactions using the mark-to-market accounting method. Generally, the Company incurs accounting losses on derivatives during periods where prices are rising and gains during periods where prices are falling which may cause significant fluctuations in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations.
The Company nets its derivative instrument fair value amounts executed with each counterparty pursuant to an International Swap Dealers Association Master Agreement (“ISDA”), which provides for net settlement over the term of the contract. The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.
The Company had the following open crude oil and natural gas derivative contracts as of September 30, 2021:March 31, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q4 2021 | | Crude Oil | | 941,475 | | | $ | 50.63 | |
Q1 - Q4 2022 | | Crude Oil | | 2,462,250 | | | $ | 56.31 | |
Q4 2021 | | Crude Oil Basis Swap (1) | | 757,475 | | | $ | 0.80 | |
Q4 2021 | | Crude Oil Roll Swap (2) | | 228,475 | | | $ | (0.27) | |
Q1 - Q4 2022 | | Crude Oil Basis Swap (1) | | 2,007,500 | | | $ | 0.68 | |
Q4 2021 | | Natural Gas | | 2,576,000 | | | $ | 2.87 | |
Q1 - Q4 2022 | | Natural Gas | | 4,295,000 | | | $ | 2.92 | |
Q4 2021 | | Natural Gas Basis Swap (3) | | 2,698,000 | | | $ | (0.29) | |
Q1 - Q4 2022 | | Natural Gas Basis Swap (3) | | 9,100,000 | | | $ | (0.26) | |
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q2 - Q4 2022 | | Crude Oil | | 3,247,250 | | | $ | 65.96 | |
Q1 - Q4 2023 | | Crude Oil | | 1,277,500 | | | $ | 76.20 | |
Q2 - Q4 2022 | | Crude Oil Basis Swap (1) | | 3,377,500 | | | $ | 0.51 | |
Q1 - Q4 2023 | | Crude Oil Basis Swap (1) | | 730,000 | | | $ | 0.49 | |
Q2 - Q4 2022 | | Natural Gas | | 8,062,000 | | | $ | 3.55 | |
Q1 - Q4 2023 | | Natural Gas | | 3,670,000 | | | $ | 3.35 | |
Q2 - Q4 2022 | | Natural Gas Basis Swap (2) | | 5,500,000 | | | $ | (0.33) | |
Q1 - Q4 2023 | | Natural Gas Basis Swap (2) | | 25,550,000 | | | $ | (1.28) | |
Q1 - Q4 2024 | | Natural Gas Basis Swap (2) | | 25,620,000 | | | $ | (1.04) | |
(1)The basis differential price is between WTI Midland Crude and the WTI NYMEX.
(2)The swap is between WTI Roll and the WTI NYMEX.
(3)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) |
Q1 - Q4 2022 | | Crude Oil Costless Collar | | 365,000 | | | $ | 68.75 | | | $ | 55.00 | |
Q4 2021 | | Natural Gas Costless Collar | | 122,000 | | | $ | 4.10 | | | $ | 3.50 | |
Q1 - Q4 2022 | | Natural Gas Costless Collar | | 2,905,000 | | | $ | 4.00 | | | $ | 3.06 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) |
Q2 - Q4 2022 | | Crude Oil Costless Collar | | 1,560,000 | | | $ | 83.59 | | | $ | 69.42 | |
Q1 - Q4 2023 | | Crude Oil Costless Collar | | 1,715,500 | | | $ | 80.34 | | | $ | 62.98 | |
Q2 - Q4 2022 | | Natural Gas Costless Collar | | 12,782,500 | | | $ | 5.47 | | | $ | 3.66 | |
Q1 - Q4 2023 | | Natural Gas Costless Collar | | 13,188,000 | | | $ | 4.84 | | | $ | 3.28 | |
Interest Rate Swaps
At times, the Company’s hedging activities include the use of interest rate swaps entered into in order to manage cash flow variability resulting from changes in interest rates. These derivative instruments are not accounted for under hedge accounting.
The Company had the following interest rate swaps as of September 30, 2021:
| | | | | | | | | | | | | | |
Effective Dates | | Notional Amount | | Fixed Rate |
May 5, 2020 to May 5, 2022 | | $125,000,000 | | 0.286 | % |
May 5, 2022 to May 5, 2023 | | $100,000,000 | | 0.286 | % |
May 5, 2023 to May 7, 2024 | | $75,000,000 | | 0.286 | % |
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the location and fair value amounts of all derivative instruments in the Condensed Consolidated Balance Sheets as well as the gross recognized derivative assets, liabilities, and amounts offset in the Condensed Consolidated Balance Sheets (in thousands):
| | | | | | September 30, 2021 | | December 31, 2020 | | | | | March 31, 2022 | | December 31, 2021 |
Derivatives not designated as hedging contracts under ASC Topic 815 | Derivatives not designated as hedging contracts under ASC Topic 815 | | Balance Sheet Location | | Gross Recognized Assets / Liabilities | | Gross Amounts Offset | | Net Recognized Assets / Liabilities | | Gross Recognized Assets / Liabilities | | Gross Amounts Offset | | Net Recognized Assets / Liabilities | Derivatives not designated as hedging contracts under ASC Topic 815 | | Balance Sheet Location | | Gross Recognized Assets / Liabilities | | Gross Amounts Offset | | Net Recognized Assets / Liabilities | | Gross Recognized Assets / Liabilities | | Gross Amounts Offset | | Net Recognized Assets / Liabilities |
Commodity contracts | Commodity contracts | | Derivative asset - current | | $ | 1,340 | | | $ | (1,323) | | | $ | 17 | | | $ | 11,071 | | | $ | (3,562) | | | $ | 7,509 | | Commodity contracts | | Derivative asset - current | | $ | 6,294 | | | $ | (4,445) | | | $ | 1,849 | | | $ | 3,191 | | | $ | (1,843) | | | $ | 1,348 | |
Commodity contracts | Commodity contracts | | Derivative liability - current | | $ | 68,707 | | | $ | (1,323) | | | $ | 67,384 | | | $ | 4,492 | | | $ | (3,562) | | | $ | 930 | | Commodity contracts | | Derivative liability - current | | $ | 154,500 | | | $ | (4,445) | | | $ | 150,055 | | | $ | 47,153 | | | $ | (1,843) | | | $ | 45,310 | |
Interest rate swaps | | Derivative liability - current | | $ | 191 | | | $ | — | | | $ | 191 | | | $ | 205 | | | $ | — | | | $ | 205 | | |
| Commodity contracts | Commodity contracts | | Derivative asset - noncurrent | | $ | 285 | | | $ | (277) | | | $ | 8 | | | $ | 396 | | | $ | — | | | $ | 396 | | Commodity contracts | | Derivative asset - noncurrent | | $ | 18,223 | | | $ | (12,413) | | | $ | 5,810 | | | $ | 2,721 | | | $ | (2,564) | | | $ | 157 | |
Commodity contracts | Commodity contracts | | Derivative liability - noncurrent | | $ | 8,007 | | | $ | (277) | | | $ | 7,730 | | | $ | — | | | $ | — | | | $ | — | | Commodity contracts | | Derivative liability - noncurrent | | $ | 34,188 | | | $ | (12,413) | | | $ | 21,775 | | | $ | 3,135 | | | $ | (2,564) | | | $ | 571 | |
Interest rate swaps | | Derivative asset - noncurrent | | $ | 445 | | | — | | | 445 | | | $ | — | | | $ | — | | | $ | — | | |
Interest rate swaps | | Derivative liability - noncurrent | | $ | — | | | $ | — | | | $ | — | | | $ | 173 | | | $ | — | | | $ | 173 | | |
|
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the location and amounts of the Company’s realized and unrealized gains and losses on derivatives instruments in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging contracts under ASC Topic 815 | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | Statement of Cash Flows Location | | Statement of Operations Location | | 2021 | | 2020 | | 2021 | | 2020 |
Unrealized (loss) gain | | Not separately presented | | Not separately presented | | $ | (12,244) | | | $ | (14,543) | | | $ | (71,255) | | | $ | 25,466 | |
Realized (loss) gain | | Operating portion of net cash (paid) received in settlement of derivative contracts | | Not separately presented | | (20,884) | | | 8,503 | | | (46,311) | | | 47,599 | |
| | Total (loss) gain on derivative contracts, net | | (Loss) gain on derivative contracts, net | | $ | (33,128) | | | $ | (6,040) | | | $ | (117,566) | | | $ | 73,065 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging contracts under ASC Topic 815 | | | | Three Months Ended March 31, |
| | Statement of Cash Flows Location | | Statement of Operations Location | | | | | | 2022 | | 2021 |
Unrealized loss | | Not separately presented | | Not separately presented | | | | | | $ | (119,794) | | | $ | (22,358) | |
Realized loss | | Operating portion of net cash paid in settlement of derivative contracts | | Not separately presented | | | | | | (31,686) | | | (10,905) | |
| | Total loss on derivative contracts, net | | Loss on derivative contracts, net | | | | | | $ | (151,480) | | | $ | (33,263) | |
| | | | | | | | | | | | |
Included
Note 4. Acquisitions
Bighorn Agreement
On January 30, 2022, Earthstone, EEH, and Bighorn Asset Company, LLC, a Delaware limited liability company (“Bighorn”), as seller, entered into a Purchase and Sale Agreement (the “Bighorn Agreement”). Pursuant to the Bighorn Agreement, EEH acquired (the “Bighorn Acquisition”) interests in Accounts receivable underoil and gas leases and related property of Bighorn located in the subheadingMidland Basin, Texas, for a purchase price (the “Bighorn Purchase Price”) of Joint interest billings$770 million in cash and other6,808,511 shares of Class A Common Stock. The Bighorn Purchase Price is subject to customary purchase price adjustments with an effective date of January 1, 2022. In connection with the Bighorn Agreement, EEH deposited $50 million (the “Bighorn Deposit”) in cash into a third-party escrow account as a deposit pursuant to the Bighorn Agreement, which was credited against the Bighorn Purchase Price upon closing of the Bighorn Acquisition on April 14, 2022. The Bighorn Deposit is included in Other noncurrent assets in the Condensed Consolidated Balance SheetsSheet as of September 30,March 31, 2022 and in Acquisition of oil and gas properties, net of cash acquired, on the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2022. For further discussion, see Note 15. Subsequent Events.
Chisholm Acquisition
On December 15, 2021, Earthstone, EEH, as buyer, Chisholm Energy Operating, LLC (“OpCo”) and December 31, 2020 are $0.01Chisholm Energy Agent, Inc. (“Agent” and collectively with OpCo, “Chisholm”), collectively as seller, entered into a Purchase and Sale Agreement (the “Chisholm Agreement”), which provided that EEH would acquire (the “Chisholm Acquisition”) interests in oil and gas leases and related property of Chisholm located in Lea County and Eddy County, New Mexico (the “Chisholm Assets”).
On February 15, 2022, Earthstone, EEH and Chisholm consummated the transactions contemplated in the Chisholm Agreement whereby EEH acquired the Chisholm Assets for aggregate consideration, as adjusted for preliminary and customary purchase price adjustments, consisting of: (i) approximately $307.5 million in cash, that continues to remain subject to post-closing settlement adjustments between EEH and $2.3Chisholm paid at the closing of the Chisholm Acquisition, (ii) $70 million respectively, related to commodity hedge contracts settledin cash paid on April 15, 2022 and included in Deferred acquisition payment - Chisholm in the Condensed Consolidated Balance Sheet as of that date for which the cash has not been received.
Note 4. Acquisitions
IRM Acquisition
As part of the execution of its growth strategy to further increase its scale, on January 7, 2021, the Company completed the acquisition (the “IRM Acquisition”) of all of the issuedMarch 31, 2022; and outstanding limited liability company interests in Independence Resources Management, LLC (“IRM”) and certain wholly owned subsidiaries for consideration consisting of the following: (i) net cash of approximately $140.4 million (the “Cash Consideration”) and (ii) 12,719,594(iii) 19,417,476 shares of the Company’s Class A common stock $0.001 par value per share (“Class A Common Stock”). The fair value of each share of Class A Common Stock was determined using the closing price of $6.02$12.85 per share on January 7, 2021. The purchase agreement contains customary representations and warranties for transactionsFebruary 15, 2022. A Significant Shareholder, as described below, was the majority shareholder of this nature. The Company has obtained representation and warranty insurance to provide coverage in the event of certain breaches of representations and warrantiesChisholm as of the seller contained inclosing of the purchase agreement, which will be subject to various exclusions, deductibles and other terms and conditions set forth therein.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Chisholm Acquisition. See Note 12. Related Party Transactions for further discussion.The IRMChisholm Acquisition has been accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer. The preliminary allocation of the total purchase price in the IRMChisholm Acquisition is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the Company’s estimates of the acquired oil and gas properties resulting in changes to the purchase price allocation. These amounts will be finalized no later than one year from the acquisition date. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
Consideration: | |
Shares of Class A Common Stock issued | 19,417,476 | |
Class A Common Stock price as of February 15, 2022 | $ | 12.85 | |
Class A Common Stock consideration | 249,515 | |
Cash consideration(1) | 377,528 | |
| |
Total consideration transferred | $ | 627,043 | |
| |
Fair value of assets acquired: | |
Oil and gas properties | $ | 634,867 | |
Amount attributable to assets acquired | $ | 634,867 | |
| |
Fair value of liabilities assumed: | |
Other current liabilities | $ | 1,853 | |
Asset retirement obligation - noncurrent | 5,971 | |
Amount attributable to liabilities assumed | $ | 7,824 | |
(1)Includes $307.5 million of cash paid at closing, net of customary purchase price adjustments, and $70.0 million of cash consideration paid subsequent to closing based on the terms of the Chisholm Agreement.
IRM Acquisition
On January 7, 2021, the Company completed the acquisition (the “IRM Acquisition”) of all of the issued and outstanding limited liability company interests of Independence Resources Management, LLC (“IRM”) and certain of its wholly owned subsidiaries for consideration consisting of the following: (i) net cash of approximately $140.5 million (the “Cash Consideration”) and (ii) 12,719,594 shares of the Company’s Class A Common Stock. The fair value of each share of Class A Common Stock was determined using the closing price of $6.02 per share on January 7, 2021.
The IRM Acquisition has been accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer. The allocation of the total purchase price in the IRM Acquisition is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
Consideration: | |
Shares of Class A Common Stock issued | 12,719,594 | |
Earthstone Class A Common Stock price as of January 7, 2021 | $ | 6.02 | |
Class A Common Stock consideration | 76,572 | |
Cash consideration(1) | 140,366140,507 | |
| |
Total consideration transferred | $ | 216,938217,079 | |
| |
Fair value of assets acquired: | |
Cash | $ | 4,763 | |
Other current assets | 11,524 | |
Oil and gas properties | 226,178224,112 | |
Other non-current assets | 252 | |
Amount attributable to assets acquired | $ | 242,717240,651 | |
| |
Fair value of liabilities assumed: | |
Derivative liability | $ | 10,177 | |
Other current liabilities | 5,3145,196 | |
Asset retirement obligation - noncurrent | 10,2888,199 | |
Amount attributable to liabilities assumed | $ | 25,77923,572 | |
Tracker/Sequel Acquisitions
On March 31, 2021, Earthstone, EEH, Tracker Resource Development III, LLC, a Delaware limited liability company (“Tracker”), and TRD III Royalty Holdings (TX), LP, a Delaware limited partnership (“RoyaltyCo” and collectively with Tracker, the “Seller”), entered into a purchase and sale agreement (the “Tracker Agreement”), which provided that EEH would acquire (the “Tracker Acquisition”) interests in oil and gas leases and related property of Tracker located in Irion County, Texas (the “Tracker Assets”). Also on March 31, 2021, Earthstone, EEH, SEG-TRD LLC, a Delaware limited liability company (“SEG-I”), and SEG-TRD II LLC, a Delaware limited liability company (“SEG-II” and collectively with SEG-I, “Sequel”) entered into a purchase and sale agreement (the “Sequel Agreement” and collectively with the Tracker Agreement, the “Tracker/Sequel Purchase Agreements”), which provided that EEH would acquire (the “Sequel Acquisition” and collectively with the Tracker Acquisition, the “Tracker/Sequel Acquisitions”) certain well-bore interests and related equipment (the “Sequel Assets”).
On July 20, 2021, Earthstone, EEH and the Seller consummated the transactions contemplated in the Tracker Agreement. At the closing of the Tracker Agreement, among other things, EEH acquired the Tracker Assets for aggregate consideration consisting of: (i) $22.5$18.8 million in cash, net of preliminary and customary purchase price adjustments, that remains subject to final post-closing settlement between EEH and the Seller, and (ii) 4.7 million shares of Class A Common Stock. Also, on July 20, 2021, Earthstone, EEH and Sequel consummated the transactions contemplated in the Sequel Agreement. At the closing of the Sequel Agreement, among other things, EEH acquired the Sequel Assets for aggregate consideration consisting of: (i) $45.3$41.4 million in cash, net of preliminary and customary purchase price adjustments, that remains subject to final post-closing settlement between EEH and the Seller, and (ii) 1.5 million shares of Class A Common Stock valued at $9.97 per share at the closing of the transaction. TheStock. A Significant Shareholder, as described below, owned approximately 49% of Tracker as of the closing of the Tracker Acquisition. See Note 12. Related Party Transactions for further discussion.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Tracker/Sequel Acquisitions have been accounted for as asset acquisitions in accordance with ASC Topic 805, Business Combinations (referred to as “ASC 805”). The preliminary allocation of the total purchase price in the Tracker/Sequel Acquisitions is based upon management’s estimates of and assumptions related to the relative fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the Company’sacquired oil and natural gas properties. These amounts will be finalized no later than one year from the acquisition date. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | |
| | | | | | Total |
Consideration: | | | | | | |
Shares of Earthstone Class A Common Stock issued | | | | | | 6,200,000 | |
Earthstone Class A Common Stock price as of July 20, 2021 | | | | | | $ | 9.97 | |
Class A Common Stock consideration | | | | | | 61,814 | |
Cash consideration (1) | | | | | | 59,56960,159 | |
Direct transaction costs (2) | | | | | | 1,5501,715 | |
Total consideration transferred | | | | | | $ | 122,933123,688 | |
| | | | | | |
Fair value of assets acquired: | | | | | | |
Oil and gas properties | | | | | | $ | 123,533124,288 | |
Amount attributable to assets acquired | | | | | | $ | 123,533124,288 | |
| | | | | | |
Fair value of liabilities assumed: | | | | | | |
Noncurrent liabilities - AROasset retirement obligations | | | | | | 600 | |
Amount attributable to liabilities assumed | | | | | | $ | 600 | |
| | | | | | |
(1)Includes customary purchase price adjustments.
(2)Represents $1.6$1.7 million of transaction costs associated with the Tracker Acquisition and the Sequel Acquisition that have been capitalized in accordance with ASC 805-50.
The following unaudited supplemental pro forma condensed results of operations present consolidated information as though the IRM Acquisition and Tracker/Sequel Acquisitions had been completed as of January 1, 2020. The unaudited supplemental pro forma financial information was derived from the historical consolidated and combined statements of operations for IRM, Tracker, Sequel and Earthstone and adjusted to include depletion expense applied to the adjusted basis of the properties acquired. These unaudited supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future. Future results may vary significantly from the results reflected in this unaudited pro forma financial information (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Revenue | | $ | 115,331 | | | $ | 79,345 | | | $ | 316,932 | | | $ | 215,504 | |
Income (loss) before taxes | | 22,647 | | | (2,656) | | | 17,660 | | | 49,461 | |
Net income (loss) | | 22,196 | | | (2,840) | | | 18,003 | | | 48,962 | |
Less: Net income (loss) attributable to noncontrolling interest | | 9,921 | | | (1,182) | | | 7,782 | | | 20,372 | |
Net income (loss) attributable to Earthstone Energy, Inc. | | 12,275 | | | (1,658) | | | 10,222 | | | 28,589 | |
Pro forma net income (loss) per common share attributable to Earthstone Energy, Inc.: | | | | | | | | |
Basic | | $ | 0.25 | | | $ | (0.03) | | | $ | 0.23 | | | $ | 0.59 | |
Diluted | | $ | 0.23 | | | $ | (0.03) | | | $ | 0.23 | | | $ | 0.59 | |
| | | | | | | | |
The Company has included in its Condensed Consolidated Statements of Operations, revenues of $20.8 million and operating expenses of $9.6 million for the three months ended September 30, 2021 and revenues of $65.1 million and operating expenses of $33.7 million for the period January 7, 2021 to September 30, 2021 related to the IRM Acquisition. During the three and nine
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
months ended September 30, 2021, the Company recorded $0.1 million and $3.9 million, respectively, of legal and professional fees, and employee severance costs related to the IRM Acquisition which are included in Transaction costs in the Condensed Consolidated Statements of Operations.
Additionally, the Company has included in its Condensed Consolidated Statements of Operations, revenues of $16.6 million and operating expenses of $5.6 million for the period July 20, 2021 to September 30, 2021 related to the Tracker/Sequel Acquisitions.
The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair value of oil and gas properties and asset retirement obligations were measured using the discounted cash flow technique of valuation.
Significant inputs to the valuation of oil and gas properties include estimates of: (i) reserves, (ii) future operating and development costs, (iii) future commodity prices, (iv) future plugging and abandonment costs, (v) estimated future cash flows, and (vi) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates and are the most sensitive and subject to change.
The following unaudited supplemental pro forma condensed results of operations present consolidated information as though the Chisholm Acquisition, IRM Acquisition and Tracker/Sequel Acquisitions had been completed as of January 1, 2021. The unaudited supplemental pro forma financial information was derived from the historical consolidated and combined statements of operations for Chisholm, IRM, Tracker, Sequel and Earthstone and adjusted to include depletion expense applied to the adjusted basis of the properties acquired. These unaudited supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future. Future results may vary significantly from the results reflected in this unaudited pro forma financial information (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| | | | March 31, |
| | | | | | 2022 | | 2021 |
Revenue | | | | | | $ | 232,155 | | | $ | 133,854 | |
Loss before taxes | | | | | | (32,996) | | | (24,497) | |
Net loss | | | | | | (31,463) | | | (24,189) | |
Less: Net loss attributable to noncontrolling interest | | | | | | (11,159) | | | (10,823) | |
Net loss attributable to Earthstone Energy, Inc. | | | | | | (20,304) | | | (13,366) | |
Pro forma net loss per common share attributable to Earthstone Energy, Inc.: | | | | | | | | |
Basic and Diluted | | | | | | $ | (0.32) | | | $ | (0.20) | |
| | | | | | | | |
| | | | | | | | |
The Company has included in its Condensed Consolidated Statements of Operations, revenues of $37.8 million and operating expenses of $14.4 million for the period February 15, 2022 to March 31, 2022 related to the Chisholm Acquisition. During the three months ended March 31, 2022, the Company recorded $10.0 million of legal and professional fees related to the Chisholm Acquisition which are included in Transaction costs in the Condensed Consolidated Statements of Operations.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Eagle Ford Acquisitions
In May and June 2021, the Company completed acquisitions of working interests in certain assets it operates located in southern Gonzales County, Texas (collectively, the “Eagle Ford Acquisitions”) from 4 separate sellers. The aggregate purchase price of the Eagle Ford Acquisitions was approximately $48.0$45.2 million. One of the 4 separate sellers was a related party. See Note 12. Related Party Transactions for further discussion. The Eagle Ford Acquisitions have been accounted for as asset acquisitions in accordance with ASC 805. The preliminary allocation of each purchase was based upon management’s estimates of and assumptions related to the relative fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the Company’sacquired oil and natural gas properties. These amounts will be finalized no later than one year from the acquisition date.
ForelandForeland-BCC Acquisition
On September 30,November 2, 2021, Earthstone, and EEH as buyer, and Foreland Investments LP, a Delaware limited partnership (“Foreland”), as seller, entered into aconsummated the transactions contemplated in the Purchase and Sale Agreement dated as of September 30, 2021 by and among Earthstone, EEH and Foreland (the “Foreland Purchase Agreement”). Net of customary purchase price adjustments, EEH acquired (the “Foreland Acquisition”) interests in oil and gas leases and related property of Foreland located in Irion County and Crockett County, Texas, for a purchase price consisting of: (i) $13.4 million in cash and (ii) 2,611,111 shares of Class A Common Stock.
Also, on September 30,November 2, 2021, Earthstone, and EEH as buyer, and BCC-Foreland LLC, a Delaware limited liability company (“BCC”), as seller, entered into aconsummated the transactions contemplated in the Purchase and Sale Agreement dated as of September 30, 2021 by and among Earthstone, EEH and BCC (the “BCC Purchase Agreement”)(collectively the “Foreland Acquisition”), subject to. Net of customary purchase price adjustments, EEH acquired (the “BCC Acquisition” and with an effective date of July 1, 2021.
A $6.1 million deposit related to the Foreland Acquisition, became payable on September 30, 2021. As such, $6.1 million was recorded in both Other noncurrent assets and Accrued expenses in the Condensed Consolidated Balance Sheet as of September 30, 2021.
On November 2, 2021, the Foreland Acquisition was consummated. Among other things, EEH acquired interests in oil and gas leases and related property located in Irion County and Crockett County, Texas, including“Foreland-BCC Acquisition”) certain well-bore interests and related equipment held underby BCC that were part of a joint development agreement between Foreland, Foreland Operating, LLC, and BCC involving portions of the acreage covered by the Foreland Purchase Agreement for a collective purchase price of $49.2$20.5 million in cash, net of preliminary and customary purchase price adjustments and remains subject to final post-closing settlement between EEH and Foreland or BCC, as applicable, and 2,611,111 shares of Class A Common Stock valued at $10.77 per share at the closing of the transaction.cash.
Note 5. Oil and Natural Gas Properties
The Company follows the successful efforts method of accounting for its oil and natural gas properties. Under this method, costs to acquire oil and natural gas properties, drill and equip exploratory wells that find proved reserves, and drill and equip development wells are capitalized. Exploration costs, including unsuccessful exploratory wells and geological and geophysical costs, are charged to operations as incurred. Upon sale or retirement of oil and natural gas properties, the costs and related accumulated depreciation, depletion and amortization are eliminated from the accounts and the resulting gain or loss is recognized.
Costs incurred to maintain wells and related equipment, lease and well operating costs, and other exploration costs are charged to expense as incurred. Gains and losses arising from the sale of properties are included in Income from operations in the Condensed Consolidated Statements of Operations.
The Company’s lease acquisition costs and development costs of proved oil and natural gas properties are amortized using the units-of-production method, at the field level, based on total proved reserves and proved developed reserves, respectively. For the three months ended March 31, 2022, depletion expense for oil and gas producing property and related equipment was $34.1 million. For the three months ended March 31, 2021, depletion expense for oil and gas producing property and related equipment was $24.2 million.
Our accrual basis capital expenditures for the three months ended March 31, 2022 were as follows (in thousands):
| | | | | | | | | | |
| | | | Three Months Ended March 31, 2022 |
Drilling and completions | | | | $ | 82,000 | |
Leasehold costs | | | | 109 | |
Total capital expenditures | | | | $ | 82,109 | |
| | | | |
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
the three and nine months ended September 30, 2021, depletion expense for oil and gas producing property and related equipment was $26.9 million and $77.0 million, respectively. For the three and nine months ended September 30, 2020, depletion expense for oil and gas producing property and related equipment was $28.4 million and $75.7 million, respectively.
Our accrual basis capital expenditures for the three and nine months ended September 30, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 |
Drilling and completions | | $ | 42,179 | | | $ | 74,346 | |
Leasehold costs | | 1,990 | | | 2,444 | |
Total capital expenditures | | $ | 44,169 | | | $ | 76,790 | |
| | | | |
Proved Properties
Proved oil and natural gas properties are reviewed for impairment on a nonrecurring basis. The impairment charge reduces the carrying values to their estimated fair values. These fair value measurements are classified as Level 3 measurements and include many unobservable inputs. Fair value is calculated as the estimated discounted future net cash flows attributable to the assets. The Company’s primary assumptions in preparing the estimated discounted future net cash flows to be recovered from oil and gas properties are based on (i) proved reserves, (ii) forward commodity prices and assumptions as to costs and expenses, and (iii) the estimated discount rate that would be used by potential purchasers to determine the fair value of the assets.
Unproved Properties
Unproved properties consist of costs incurred to acquire undeveloped leases. Unproved oil and gas leases are generally for a primary term of three to five years. In most cases, the term of the unproved leases can be extended by paying a lease renewal fee, meeting contractual drilling obligations, or by the presence of producing wells on the leases. Unproved costs related to successful drilling on unproved leases are reclassified to proved properties.
The Company reviews its unproved properties periodically for impairment. In determining whether an unproved property is impaired, the Company considers numerous factors including, but not limited to, current exploration and development plans, favorable or unfavorable exploration activity on the property being evaluated and/or adjacent properties, the Company’s geologists' evaluation of the property, and the remaining months in the lease term for the property.
Impairments to Oil and Natural Gas Properties
No impairments were recorded to the Company's oil and natural gas properties during the three and nine months ended September 30,March 31, 2022 and 2021.
During the three months ended September 30, 2020, the Company recorded non-cash impairment charges of $2.1 million to its oil and natural gas properties due to acreage expirations. During the nine months ended September 30, 2020, as a result of the decline in crude oil price futures at the time, the Company recorded the following non-cash impairment charges:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Eagle Ford Trend | | Midland Basin | | Corporate | | Total |
Proved properties | | $ | 25,252 | | | $ | — | | | $ | — | | | $ | 25,252 | |
Unproved properties | | 11,311 | | | — | | | — | | | 11,311 | |
Acreage expirations (1) | | 450 | | | 7,915 | | | — | | | 8,365 | |
Goodwill | | — | | | — | | | 17,620 | | | 17,620 | |
| | $ | 37,013 | | | $ | 7,915 | | | $ | 17,620 | | | $ | 62,548 | |
(1)Impairments in unproved properties resulting from acreage deemed expired (not planned to be renewed).
Note 6. Noncontrolling Interest
Earthstone consolidates the financial results of EEH and its subsidiaries and records a noncontrolling interest for the economic interest in Earthstone held by the members of EEH other than Earthstone and Lynden US. Net income (loss)loss attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30,March 31, 2022 and 2021 and 2020 represents the portion of net income (loss)loss attributable to the economic interest in the Company held by the members of EEH other than Earthstone and Lynden US. Noncontrolling interest in the Condensed Consolidated Balance Sheets as of September 30, 2021March 31, 2022 and December 31, 20202021 represents the portion of net assets of the Company attributable to the members of EEH other than Earthstone and Lynden US. The term “EEH Unit” means the units of limited liability company interests of EEH denominated as common units.
The following table presents the changes in noncontrolling interest for the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | EEH Units Held By Earthstone and Lynden US | | % | | EEH Units Held By Others | | % | | Total EEH Units Outstanding |
As of December 31, 2021 | | 53,467,307 | | | 60.9 | % | | 34,344,532 | | | 39.1 | % | | 87,811,839 | |
EEH Units issued in connection with the Chisholm Acquisition | | 19,417,476 | | | | | — | | | | | 19,417,476 | |
| | | | | | | | | | |
EEH Units and Class B Common Stock converted to Class A Common Stock | | 72,766 | | | | | (72,766) | | | | | — | |
EEH Units issued in connection with the vesting of restricted stock units and performance-based units | | 483,251 | | | | | — | | | | | 483,251 | |
As of March 31, 2022 | | 73,440,800 | | | 68.2 | % | | 34,271,766 | | | 31.8 | % | | 107,712,566 | |
| | | | | | | | | | |
Note 7. Net Loss Per Common Share
Net loss per common share—basic is calculated by dividing Net loss by the weighted average number of shares of common stock outstanding during the period. Net loss per common share—diluted assumes the conversion of all potentially dilutive securities and is calculated by dividing Net loss by the sum of the weighted average number of shares of common stock, as defined above, outstanding plus potentially dilutive securities. Net loss per common share—diluted considers the impact of
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the changes in noncontrolling interest for the nine months ended September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | EEH Units Held By Earthstone and Lynden US | | % | | EEH Units Held By Others | | % | | Total EEH Units Outstanding |
As of December 31, 2020 | | 30,343,421 | | | 46.4 | % | | 35,009,371 | | | 53.6 | % | | 65,352,792 | |
EEH Units issued in connection with the IRM Acquisition | | 12,719,594 | | | | | — | | | | | 12,719,594 | |
EEH Units issued in connection with the Tracker/Sequel Acquisitions | | 6,200,000 | | | | | — | | | | | 6,200,000 | |
EEH Units and Class B Common Stock converted to Class A Common Stock | | 655,376 | | | | | (655,376) | | | | | — | |
EEH Units issued in connection with the vesting of restricted stock units and performance-based units | | 773,666 | | | | | — | | | | | 773,666 | |
As of September 30, 2021 | | 50,692,057 | | | 59.6 | % | | 34,353,995 | | | 40.4 | % | | 85,046,052 | |
| | | | | | | | | | |
Note 7. Net Income (Loss) Per Common Share
Net income (loss) per common share—basic is calculated by dividing Net income (loss) by the weighted average number of shares of common stock outstanding during the period. Net income (loss) per common share—diluted assumes the conversion of all potentially dilutive securities and is calculated by dividing Net income (loss) by the sum of the weighted average number of shares of common stock, as defined above, outstanding plus potentially dilutive securities. Net income (loss) per common share—diluted considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares, as defined above, would have an anti-dilutive effect.
A reconciliation of Net income (loss)loss per common share is as follows:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | Three Months Ended March 31, |
(In thousands, except per share amounts) | (In thousands, except per share amounts) | | 2021 | | 2020 | | 2021 | | 2020 | (In thousands, except per share amounts) | | | 2022 | | 2021 |
Net income (loss) attributable to Earthstone Energy, Inc. | | $ | 10,418 | | | $ | (5,445) | | | $ | (4,286) | | | $ | (5,076) | | |
Net loss attributable to Earthstone Energy, Inc. | | Net loss attributable to Earthstone Energy, Inc. | | | $ | (33,478) | | | $ | (5,833) | |
| Net income (loss) per common share attributable to Earthstone Energy, Inc.: | | |
Basic | | $ | 0.21 | | | $ | (0.18) | | | $ | (0.09) | | | $ | (0.17) | | |
Diluted | | $ | 0.20 | | | $ | (0.18) | | | $ | (0.09) | | | $ | (0.17) | | |
Net loss per common share attributable to Earthstone Energy, Inc.: | | Net loss per common share attributable to Earthstone Energy, Inc.: | | | |
Basic and Diluted | | Basic and Diluted | | | $ | (0.53) | | | $ | (0.14) | |
| | Weighted average common shares outstanding | Weighted average common shares outstanding | | Weighted average common shares outstanding | | | |
Basic | Basic | | 49,243,185 | | | 30,073,635 | | | 45,406,952 | | | 29,810,705 | | Basic | | | 63,445,649 | | | 42,778,916 | |
Add potentially dilutive securities: | Add potentially dilutive securities: | | | | | | | | | Add potentially dilutive securities: | | | | | |
Unvested restricted stock units (1) | Unvested restricted stock units (1) | | 525,475 | | | — | | | — | | | — | | Unvested restricted stock units (1) | | | — | | | — | |
Unvested performance units (1) | Unvested performance units (1) | | 2,894,282 | | | — | | | — | | | — | | Unvested performance units (1) | | | — | | | — | |
Diluted weighted average common shares outstanding | Diluted weighted average common shares outstanding | | 52,662,942 | | | 30,073,635 | | | 45,406,952 | | | 29,810,705 | | Diluted weighted average common shares outstanding | | | 63,445,649 | | | 42,778,916 | |
|
(1)For the three months ended September 30,March 31, 2022 and 2021, the 1,099,800 performance units granted on January 27, 2021 were excluded due to an assumed settlement in cash and the liability treatment described in Note 9. Stock-Based Compensation. For the ninethree months ended September 30,March 31, 2022 and 2021, there waswere no dilutive effecteffects related to unvested restricted stock units or performance units due to the losslosses for the period. For the three and nine months ended September 30, 2020, there was no dilutive effect related to unvested restricted stock units or performance units due to the loss for the period.those periods.
The Class B common stock, $0.001Common Stock, par value $0.001 per share of Earthstone (the “Class B Common Stock”), has been excluded, as its conversion would eliminate noncontrolling interestStock and net income attributable to noncontrolling interest of $8.4 million forwith the three months ended September 30, 2021 and net loss attributable to noncontrolling interest of $3.3 million for the nine months
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
ended September 30, 2021 would be added back to Net income (loss) attributable to Earthstone Energy, Inc. for the periods then ended, having no dilutive effect on Net income (loss) per common share attributable to Earthstone Energy, Inc.
The Class BA Common Stock, the “Common Stock”) has been excluded, as its conversion would eliminate noncontrolling interest and net loss attributable to noncontrolling interest of $6.4$18.4 million and $4.7 million for the three months ended September 30, 2020March 31, 2022 and net income attributable to noncontrolling interest of $6.0 million for the nine months ended September 30, 20202021, respectively would be added back to Net (loss) incomeloss attributable to Earthstone Energy, Inc. for the periods then ended, having no dilutive effect on Net (loss) incomeloss per common share attributable to Earthstone Energy, Inc.
Note 8. Common Stock
Class A Common Stock
At September 30, 2021March 31, 2022 and December 31, 2020,2021, there were 50,692,05773,440,800 and 30,343,42153,467,307 shares of Class A Common Stock issued and outstanding, respectively. In connection with the IRMChisholm Acquisition, on January 7, 2021,February 15, 2022, Earthstone issued 12,719,59419,417,476 shares of Class A Common Stock valued at approximately $76.6 million on that date. Additionally, in connection with the Tracker/Sequel Acquisitions, on July 20, 2021, Earthstone issued 6,200,000 shares of Class A Common Stock valued at approximately $61.8$249.5 million on that date.
During the three and nine months ended September 30, 2021,March 31, 2022, as a result of the vesting and settlement of performance units and restricted stock units under the Earthstone Energy, Inc. Amended and Restated 2014 Long-Term Incentive Plan, as amended (the “2014 Plan”), Earthstone 220,219 and 1,162,879issued 770,143 shares respectively, of Class A Common Stock, of which 65,106 and 389,213286,892 shares respectively, of Class A Common Stock were retained as treasury stock and canceled to satisfy the related employee income tax liability. For further discussion, see Note 9. Stock-Based Compensation.
During the three and nine months ended September 30, 2020,March 31, 2021, (1) in connection with the IRM Acquisition, on January 7, 2021, Earthstone issued 12,719,594 shares of Class A Common Stock valued at approximated $76.6 million on that date, (2) as a result of the vesting and settlement of performance units and restricted stock units under the 2014 Plan, Earthstone issued 195,344 and 726,082721,259 shares respectively, of Class A Common Stock, of which 54,268 and 187,773257,764 shares respectively, of Class A Common Stock were retained as treasury stock and canceled to satisfy the related employee income tax liability. Additionally,liability and (3) as discussed below, shares of Class A Common Stock were issued as the result of conversions of Class B Common Stock.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Class B Common Stock
At September 30, 2021March 31, 2022 and December 31, 2020,2021, there were 34,353,99534,271,766 and 35,009,37134,344,532 shares of Class B Common Stock issued and outstanding, respectively. Each share of Class B Common Stock, together with 1 EEH Unit, is convertible into 1 share of Class A Common Stock. During the three and nine months ended September 30, 2021, 43,882 and 655,376March 31, 2022, 72,766 shares respectively, of Class B Common Stock and EEH Units were exchanged for an equal number of shares of Class A Common Stock. During the three and nine months ended September 30, 2020, 49,316 and 251,309March 31, 2021, 578,031 shares respectively, of Class B Common Stock and EEH Units were exchanged for an equal number of shares of Class A Common Stock.
Note 9. Stock-Based Compensation
Restricted Stock Units
The 2014 Plan, allows, among other things, for the grant of restricted stock units (“RSUs”). As of September 30, 2021,March 31, 2022, the maximum number of shares of Class A Common Stock that may be issued under the 2014 Plan was 12.0 million shares.
Each RSU represents the contingent right to receive 1 share of Class A Common Stock. The holders of outstanding RSUs do not receive dividends or have voting rights prior to vesting and settlement. The Company determines the fair value of granted RSUs based on the market price of the Class A Common Stock on the date of the grant. Compensation expense for granted RSUs is recognized on a straight-line basis over the vesting and is net of forfeitures, as incurred. Stock-based compensation is included in General and administrative expense in the Condensed Consolidated Statements of Operations and is recorded with a corresponding increase in Additional paid-in capital within the Condensed Consolidated Balance Sheets.
The table below summarizes RSU award activity for the three months ended March 31, 2022:
| | | | | | | | | | | | | | |
| | Shares | | Weighted-Average Grant Date Fair Value |
Unvested RSUs at December 31, 2021 | | 771,817 | | | $ | 5.91 | |
Granted | | 393,515 | | | $ | 13.63 | |
Forfeited | | (3,033) | | | $ | 6.43 | |
Vested | | (162,018) | | | $ | 7.55 | |
Unvested RSUs at March 31, 2022 | | 1,000,281 | | | $ | 8.68 | |
| | | | |
As of March 31, 2022, there was $8.6 million of unrecognized compensation expense related to the RSU awards which will be recognized over a weighted average period of 1.12 years.
For the three months ended March 31, 2022 and 2021, Stock-based compensation related to RSUs was $1.2 million and $1.5 million, respectively.
Performance Units
The table below summarizes PSU activity for the three months ended March 31, 2022:
| | | | | | | | | | | | | | |
| | 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 March 31, 2022 | | 2,616,085 | | | $ | 10.20 | |
| | | | |
On February 1, 2022, the Board of Directors of Earthstone (the “Board”) granted 472,485 PSUs (the “2022 PSUs”) to certain officers pursuant to the 2014 Plan (the “2022 Grant”). The 2022 PSUs are expected to be paid in shares of Class A Common Stock upon the achievement by Earthstone over a period commencing on January 1, 2022 and ending on December 31, 2024 (the “Performance Period”) of certain performance criteria established by the Board. The Company classifies these awards as equity awards as they are expected to be settled in shares. In the event that a PSU grant is expected to be settled in cash, it is alternatively classified as a liability award.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The table below summarizes RSU award activity for the nine months ended September 30, 2021:
| | | | | | | | | | | | | | |
| | Shares | | Weighted-Average Grant Date Fair Value |
Unvested RSUs at December 31, 2020 | | 1,050,908 | | | $ | 5.55 | |
Granted | | 553,100 | | | $ | 5.38 | |
Forfeited | | (15,333) | | | $ | 5.13 | |
Vested | | (707,879) | | | $ | 5.75 | |
Unvested RSUs at September 30, 2021 | | 880,796 | | | $ | 5.30 | |
| | | | |
As of September 30, 2021, there was $4.6 million of unrecognized compensation expense related to the RSU awards which will be recognized over a weighted average period of 0.87 years.
For the three and nine months ended September 30, 2021, Stock-based compensation related to RSUs was $1.2 million and $3.9 million, respectively. For the three and nine months ended September 30, 2020, Stock-based compensation related to RSUs was $1.2 million and $4.2 million, respectively.
Performance Units
The table below summarizes PSU activity for the nine months ended September 30, 2021:
| | | | | | | | | | | | | | |
| | Shares | | Weighted-Average Grant Date Fair Value |
Unvested PSUs at December 31, 2020 | | 1,879,425 | | | $ | 7.65 | |
Granted | | 1,099,800 | | | $ | 10.85 | |
| | | | |
Vested | | (227,500) | | | $ | 13.75 | |
Unvested PSUs at September 30, 2021 | | 2,751,725 | | | $ | 8.42 | |
| | | | |
On January 27, 2021, the Board of Directors of Earthstone (the “Board”) granted 1,099,800 PSUs (the “2021 PSUs”) to certain officers pursuant to the 2014 Plan (the “2021 Grant”). The 2021 PSUs are payable in cash or shares of Class A Common Stock upon the achievement by the Company over a period commencing on January 1, 2021 and ending on December 31, 2023 (the “Performance Period”) of certain performance criteria established by the Board. The Company classifies these awards that will be settled in cash as liability awards. All previous PSU grants will be settled in shares and are classified as equity awards.
The 20212022 PSUs are eligible to be earned based on the annualized Total Shareholder Return (“TSR”) of the Class A Common Stock during a three-year period beginning on February 1, 2021.2022. Between 0x to 2.0x of the Performance Units are eligible to be earned based on Earthstone achieving an annualized TSR based on the following pre-established goals:
| | | | | | | | |
Earthstone’s Annualized TSR | | TSR Multiplier |
20.5% or greater | | 2 |
14.5% | | 1 |
7.7% | | 0.5 |
Less than 7.7% | | 0 |
| | | | | | | | |
Earthstone’s Annualized TSR | | TSR Multiplier |
23.9% or greater | | 2 |
14.5% | | 1 |
8.4% | | 0.5 |
Less than 8.4% | | 0 |
The Company accounts for these awards as market-based awards which are valued quarterly utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes grant date fair value based on the most likely outcome. For the 20212022 PSUs, assuming a risk-free rate of 0.3%1.4% and volatility of 86.0%, the Company calculated the weighted average grant date fair value per PSU to be $10.85. Based on$19.42.
On January 27, 2021, the fair valueBoard granted 1,099,800 PSUs to certain officers pursuant to the 2014 Plan (the “2021 PSUs”). The PSUs are payable in cash or shares of Class A Common Stock upon the 2021 PSUs,achievement by the Company recorded stock-based compensation expenseover a period commencing on January 1, 2021 and ending on December 31, 2023 of $0.7certain performance criteria established by the Board. The Company classifies these awards as liability awards as they are expected to be paid in cash. As of March 31, 2022 and December 31, 2021, $9.6 million and $3.7$6.3 million, during the three and nine months ended September 30, 2021, respectively. A corresponding liability of $3.7 million related to the 2021 PSUs isrespectively, have been included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of September 30, 2021.Sheets related to the 2021 PSUs.
On FebruaryJanuary 28, 2018,2019, the Board granted 252,500669,550 PSUs to certain named executive officers pursuant to the 2014 Plan. The PSUs were payable in shares of Class A Common Stock based upon the achievement by the CompanyEarthstone over a period commencing on February 28, 20181, 2019 and ending on February 28, 2021January 31, 2022 of performance criteria established by the Board. On March 18, 2021,January 31, 2022, the Company settled the remaining 227,500608,125 PSUs, net of forfeitures, based on the achievementat a rate of the 200% target, resulting in1.97x. 1.0x was settled through the issuance of 455,000608,125 shares of Class A Common Stock.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock and the remainder was settled in cash.As of September 30, 2021,March 31, 2022, there was $15.3$24.5 million of unrecognized compensation expense related to all PSU awards which will be amortized over a weighted average period of 1.051.06 years.
For the three and nine months ended September 30,March 31, 2022 and 2021, Stock-based compensation related to all PSUs was approximately $1.7$4.6 million and $6.7$1.8 million, respectively. For the three and nine months ended September 30, 2020, Stock-based compensationA liability of $9.6 million related to all PSUs was approximately $1.2 million and $3.5 million, respectively.the PSU liability awards is included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of March 31, 2022.
Note 10. Long-Term Debt
Credit Facility
On November 21, 2019, Earthstone, EEH (the “Borrower”), Wells Fargo Bank, National Association, as Administrative Agent and Issuing Bank (“Wells Fargo”), Royal Bank of Canada, as Syndication Agent, BOKF, NA dba Bank of Texas (“BOKF”) as Issuing Bank with respect to Existing Letters of Credit, SunTrust Bank, as Documentation Agent, and the lenders party thereto (the “Lenders”) entered into a credit agreement (the “Credit Facility”Agreement”), which replaced the prior credit facility, which was terminated on November 21, 2019.
On December 17, 2020,January 30, 2022, Earthstone, EEH, as Borrower, Wells Fargo as Administrative Agent, the guarantors party thereto, and the lenders party thereto (the “Lenders”) entered into an amendment (the “Second Amendment”) to the credit agreement dated November 21, 2019, by and among EEH, as Borrower, Earthstone, as Parent, Wells Fargo, as Administrative Agent and Issuing Bank, BOKF, NA dba Bank of Texas, as Issuing Bank with respect to Existing Letters of Credit, Royal Bank of Canada, as Syndication Agent, Truist Bank, as successor by merger to SunTrust Bank, as Documentation Agent, and the Lenders party thereto (collectively, the “Parties”) to the Credit Agreement. The Second Amendment was effective upon the closing of the IRM Acquisition described in Note 4. Acquisitions. Among other things, the Second Amendment (i) joined certain financial institutions as additional lenders, increased the borrowing base from $240.0 million to $360.0 million, (ii) increased the interest rate on outstanding borrowings; and (iii) adjusted some of the financial covenants.
On April 20, 2021, the Parties entered into an amendment (the “Third Amendment”) to the Credit Agreement under which the borrowing base increased from $360 million to $475 million in connection with its regularly scheduled redetermination. Further, the Third Amendment provided for an increase in the borrowing base from $475 million to $550 million which became effective on July 20, 2021 upon closing of the Tracker/Sequel Purchase Agreements described in Note 4. Acquisitions.
On September 17, 2021, Earthstone, EEH, as Borrower, Wells Fargo as Administrative Agent and Issuing Bank, the lenders party thereto (the “Lenders”) and the guarantors party thereto entered into an amendmentamended and restated Fifth Amendment (the “Fourth“Fifth Amendment”) to the Credit Agreement. Among other things, the Fourth Amendment increased the borrowing base and corresponding elected commitments from $550$650 million to $650$825 million upon the closing (“Chisholm Closing”) of the Chisholm Agreement; provided that upon the closing of the Bighorn Acquisition (assuming the occurrence of the Chisholm Closing), the borrowing base and corresponding elected commitments would increase to $1.325 billion, unless Earthstone completed an unsecured senior notes offering (the “Notes Offering”) prior to the closing of the Bighorn Acquisition in connection with its regularly scheduled semi-annual redetermination, added provisionswhich case the elected commitments would be reduced by the amount of the net proceeds from a Notes Offering up to provide$500 million(the “Notes Offering Elected Commitments Reduction); provided for an increase in interest rates by 0.50% in the eventual replacementevent a Notes Offering has not been completed prior to the closing of the Bighorn Acquisition; provided mechanics relating to the transition from LIBOR asto a benchmark interestreplacement rate madeto be effective contemporaneously with the effectiveness of the Amendment on January 30, 2022; added certain changeshedging requirements relating to anticipated oil and natural gas production of the properties to be acquired pursuant to the lenders underBighorn Acquisition; adjusted some financial covenants; redefined the Credit Agreement,limitations on certain restricted payments the Borrower may make; and made certain other administrative changes to the Credit Agreement.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
On April 14, 2022, in advance of the potential aforementioned Notes Offering Elected Commitments Reduction, the Company voluntarily elected to reduce commitments under the borrowing base of the Credit Agreement to $800 million.
The next regularly scheduled redetermination of the borrowing base is expected to occur on or around MayNovember 1, 2022. Subsequent redeterminations are expected to occur on or about each NovemberMay 1st and MayNovember 1st thereafter. The amounts borrowed under the Credit FacilityAgreement bear annual interest rates at either (a) the adjusted LIBOSOFR Rate (as customarily defined) (the “Adjusted LIBOTerm SOFR Rate”) plus 2.50% to 3.75%4.25% or (b) the sum of (i) the greatest of (A) the prime rate of Wells Fargo, (B) the federal funds rate plus ½ of 1.0%, and (C) the Adjusted LIBOTerm SOFR Rate for an interest rate period of one month plus 1.0%, (ii) plus 1.50% to 2.75%3.25%, depending on the amount borrowed under the Credit Facility.Agreement. Principal amounts outstanding under the Credit FacilityAgreement are due and payable in full at maturity on November 21, 2024. All of the obligations under the Credit Facility,Agreement, and the guarantees of those obligations, are secured by substantially all of EEH’s assets. Additional payments due under the Credit FacilityAgreement include paying a commitment fee of 0.375% to 0.50% per year, depending on the amount borrowed under the Credit Facility,Agreement, to the Lenders in respect of the unutilized commitments thereunder. EEH is also required to pay customary letter of credit fees.
Effective May 2020, the Company entered into certain interest rate swaps, exchanging the LIBO Rate for a fixed rate of 0.286% (the “Swap”). The initial notional amount of the Swap is $125 million through May 2022 and decreases to $100 million through May 2023 and $75 million through May 2024.
The Credit FacilityAgreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, EEH’s ability to incur additional indebtedness, create liens on assets, make investments, pay dividends and distributions or repurchase its limited liability interests, engage in mergers or consolidations, sell certain assets, sell or discount any notes receivable or accounts receivable and engage in certain transactions with affiliates.
In addition, the Credit FacilityAgreement requires EEH to maintain the following financial covenants: a current ratio, (as such term is defined in the Credit Agreement) of not less than 1.0 to 1.0 and a consolidated leverage ratio of not greater than 3.5 to 1.0. Consolidated leverage ratio means the ratio of (i) the aggregate debt of EEH and its consolidated subsidiaries as at the last day
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
of the fiscal quarter to (ii) EBITDAX for the applicable period, which was calculated as EBITDAX for the four consecutive fiscal quarters ending on such date. The term “EBITDAX” means, for any period, the sum of consolidated net income (loss) for such period plus (a) the following expenses or charges to the extent deducted from consolidated net income (loss) in such period: (i) interest, (ii) taxes, (iii) depreciation, (iv) depletion, (v) amortization, (vi) certain distributions to employees related to the stock compensation, (vii) certain transaction related expenses, (viii) reimbursed indemnification expenses related to certain dispositions and investments, (ix) non-cash extraordinary, usual, or nonrecurring expenses or losses, (x) other non-cash charges and minus (b) to the extent included in consolidated net income (loss) in such period: (i) non-cash income, (ii) gains on asset dispositions, disposals and abandonments outside of the ordinary course of business and (iii) to the extent not otherwise deducted from consolidated net income (loss), the aggregate amount of any pass-through cash distributions received by Borrower during such period in an amount equal to the aggregate amount of pass-through cash distributions actually made by Borrower during such period.
The Credit FacilityAgreement contains customary affirmative covenants and defines events of default to include failure to pay principal or interest, breach of covenants, breach of representations and warranties, insolvency, judgment default and a change in control. Upon the occurrence and continuance of an event of default, the Lenders have the right to accelerate repayment of the loans and exercise their remedies with respect to the collateral. As of September 30, 2021,March 31, 2022, EEH was in compliance with the covenants under the Credit Facility.Agreement.
As of September 30, 2021, $278.3March 31, 2022, $624.2 million of borrowings were outstanding, bearing annual interest of 3.153%3.812%, resulting in an additional $371.7$200.8 million of borrowing base availability under the Credit Facility.Agreement. At December 31, 2020,2021, there were $115.0$320.0 million of borrowings outstanding under the Credit Facility.Agreement.
For the ninethree months ended September 30, 2021,March 31, 2022, under the Credit Facility,Agreement, the Company had borrowings of $503.7$582.5 million and $340.5$278.3 million in repayments of borrowings.
For the three and nine months ended September 30, 2021,March 31, 2022, interest on borrowings under the Credit FacilityAgreement averaged 3.66% and 3.47%3.67% per annum, respectively, which excluded commitment fees of $0.2 million, and $0.6 million, respectively, and amortization of deferred financing costs of $0.2 million and $0.6 million, respectively.million. For the three and nine months ended September 30, 2020,March 31, 2021, interest on borrowings under the Credit FacilityAgreement averaged 2.48% and 2.89%3.19% per annum, respectively, which excluded commitment fees of $0.2$0.3 million, and $0.5 million, respectively, and amortization of deferred financing costs of $0.1 million and $0.2 million, respectively.million.
The Company’s policy is to capitalize the financing costs associated with its debt and amortize those costs on a straight-line basis over the term of the associated debt. These capitalized costs are included in Other noncurrent assets in the Condensed Consolidated Balance Sheets. During the three and nine months ended September 30, 2021,March 31, 2022, the Company capitalized $1.0$5.9 million, and $2.8 million, respectively, of costs associated with the Credit Facility.Agreement. No costs associated with the Credit FacilityAgreement were capitalized during the three and nine months ended September 30, 2020.March 31, 2021.
8.000% Senior Notes
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
On April 12, 2022, EEH issued $550.0 million aggregate principal amount of 8.000% senior notes due 2027. EEH received net proceeds of approximately $540.4 million (after deducting underwriting discounts and commissions) which was used primarily to fund the Bighorn Acquisition and the remainder for general corporate purposes. For further discussion, see Note 15. Subsequent Events.
Note 11. Asset Retirement Obligations
The Company has asset retirement obligations associated with the future plugging and abandonment of oil and gas properties and related facilities. Revisions to the liability typically occur due to changes in the estimated abandonment costs, well economic lives, and the discount rate.
The following table summarizes the Company’s asset retirement obligation transactions recorded during the ninethree months ended September 30,March 31, 2022 (in thousands):
| | | | | | | | | | |
| | 20212022 | | |
Beginning asset retirement obligations | | $ | 3,02715,866 | | | |
Liabilities incurred | | 10354 | | | |
Liabilities settled | | (103)(201) | | | |
Acquisitions | | 11,4665,971 | | | |
Accretion expense | | 916397 | | | |
Divestitures | | (41) | | | |
Revision of estimates | | 14031 | | | |
Ending asset retirement obligations | | $ | 15,50822,118 | | | |
| | | | |
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 12. Related Party Transactions
FASB ASC Topic 850,, Related Party Disclosures,, requires that information about transactions with related parties that would make a difference in decision making shall be disclosed so that users of the financial statements can evaluate their significance. The Audit Committee of the Board of Directors of Earthstone independently reviews and approves all related party transactions.
Earthstone has two significant shareholders that consist of various investment funds managed by each of the two private equity firms who may manage other investments in entities with which the Company interacts in the normal course of business. Onbusiness (the “Significant Shareholders” or separately, each a “Significant Shareholder”).
As discussed in Note 4. Acquisitions, the Chisholm Acquisition was consummated on February 12, 2020,15, 2022, whereby the Company sold certainacquired the Chisholm Assets for a purchase price of its interests$377.5 million in oilcash, net of preliminary and natural gas leasescustomary purchase price adjustments, and wells in an arm’s length transaction to a portfolio company19.4 million shares of oneClass A Common Stock. A Significant Shareholder was the majority owner of Chisholm as of the aforementioned shareholder (not under common control) (the “Significant Shareholder”) for cash considerationclosing of approximately $0.4 million.
Inthe 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 19.4 million shares of Class A Common Stock in connection with the Olenik v. Lodzinski et al. lawsuit described below in Note 13. Commitmentsclosing of the Chisholm Agreement was (1) approved by a majority of the voting power of all outstanding disinterested shares of the Common stock and Contingencies, the Significant Shareholder was also named in the lawsuit. As a result(2) increased their beneficial ownership of a settlement agreement relatingEarthstone’s Class A Common Stock from approximately 25% to the lawsuit, the Company agreed with its insurance carrier regarding an allocation36% as of defense costs and settlement contributions above its deductible for all the parties named in the lawsuit. In connection with the Court approved settlement, the Significant Shareholder was billed approximately $1.1 millionin fiscal 2020 and all amounts have been received.February 15, 2022.
As discussed in Note 4. Acquisitions,, on March 31, 2021, the CompanyEarthstone and EEH entered into the Tracker/Sequel Purchase Agreements. The Tracker/Sequel Acquisitions were consummated on July 20, 2021, whereby the Company acquired the Tracker Assets for a purchase price of $22.5$18.8 million in cash and 4.7 million shares of Earthstone’s Class A Common Stock. TheA Significant Shareholder owned approximately 49% of Tracker as of the closing of the Tracker Acquisition. A majority of the non-affiliated stockholders of Earthstone approved the issuance of 6.2 million shares of Class A Common Stock in connection with the closing of the Tracker/Sequel Purchase Agreements at Earthstone’s Annual Meeting of Stockholders held on July 20, 2021.
As discussed in Note 4. Acquisitions, during the second quarter of 2021, the Company completed the Eagle Ford Acquisitions for a purchase price of approximately $48.0$45.2 million in cash. TheA Significant Shareholder controlled one of the 4 sellers. After participating in a competitive sales process, the Company acquired the aforementioned assets for $8.2 million in cash from that related party entity.
On January 30, 2022, Earthstone entered into a securities purchase agreement (the “SPA”) with EnCap Capital Energy Fund XI, L.P. (“EnCap Fund XI”), an affiliate of EnCap Investments L.P. (“EnCap”), and Cypress Investments, LLC, a fund managed by Post Oak Energy Capital, LP (“Post Oak” and collectively with EnCap Fund XI, the “Investors”) to sell, in a private placement (the “Private Placement”), 280,000 shares of newly authorized convertible preferred stock, $0.001 par value per share (the
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
“Preferred Stock”), for anticipated gross proceeds of $280.0 million, at a price of $1,000.00 per share of Preferred Stock (or $11.10 per share of Class A Common Stock on an as-converted basis). The Private Placement was contingent upon the closing of the Bighorn Acquisition. The Company used the net proceeds from the sale of the Preferred Stock to fund, in conjunction with the Notes Offering, the Bighorn Acquisition. Each share of Preferred Stock will automatically convert into 90.0900900900901 shares of Class A Common Stock on the 21st calendar day after Earthstone mails an information statement on Schedule 14C pursuant to Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to its stockholders notifying the stockholders that on January 30, 2022, holders of 61.6% of the voting power of all outstanding shares of Common Stock delivered to Earthstone an irrevocable written consent in lieu of a special meeting of stockholders approving the conversion feature of the Preferred Stock and the issuance of the Class A Common Stock upon conversion of the Preferred Stock. If conversion has not occurred on or before October 1, 2022, holders of the Preferred Stock will be entitled to receive quarterly dividends accruing from the date of initial issuance at a rate of 8.0% per annum.
The Company paid $0.2 million to one of our Significant Shareholders for reimbursement of certain costs associated with the aforementioned SPA.
Note 13. Commitments and Contingencies
Legal
From time to time, Earthstone and its subsidiaries may be involved in various legal proceedings and claims in the ordinary course of business.
Olenik v. Lodzinski et al.: On June 2, 2017, a purported shareholder class and derivative action in the Delaware Court of Chancery was filed against Earthstone’s Chief Executive Officer, along with other members of the Board, EnCap Investments L.P. (“EnCap”), Bold Energy Holdings, LLC (“Bold Holdings”), and Bold Energy III LLC (“Bold”) and Oak Valley Resources, LLC. The complaint alleged that Earthstone’s directors breached their fiduciary duties in connection with the contribution agreement dated as of November 7, 2016 and as amended on March 21, 2017 (the “Bold Contribution Agreement”), by and among Earthstone, EEH, Lynden US, Lynden USA Operating, LLC, Bold Holdings and Bold. The Plaintiff asserted that the directors negotiated the business combination pursuant to the Bold Contribution Agreement (the “Bold Transaction”) to the detriment of the Earthstone stockholders who were not affiliated with EnCap or Earthstone management, did not follow an adequate process in negotiating and approving the Bold Transaction and made materially misleading or incomplete proxy disclosures in connection with the Bold Transaction. On July 20, 2018, the Delaware Court of Chancery granted the defendants’ motion to dismiss and entered an order dismissing the action in its entirety with prejudice. The Plaintiff filed an appeal with the Delaware Supreme Court. On April 5, 2019, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s dismissal of the proxy disclosure claims but reversed the Delaware Court of Chancery’s dismissal of the other claims, holding that the allegations with respect to those claims were sufficient for pleading purposes. After engaging in extensive pre-trial discovery, the parties entered into a settlement agreement that was approved by the Delaware Court of Chancery on March 31, 2021. The principal terms of the settlement agreement are: (i) a $3.5 million all-in cash settlement payment (the “Fund”) to be funded by defendants and/or their insurers into an escrow account, (ii) a bi-lateral complete and full release of all claims against defendants and plaintiffs, and (iii) 55% of the Fund (the derivative payment) be paid to Earthstone to be used as determined by management, 45% of the Fund (the class payment) be paid to members of the class or current stockholders of Earthstone. Earthstone paid the $3.5 million settlement in April 2021 and the insurance carriers reimbursed their agreed upon allocation of the settlement totaling $2.8 million. In addition, Earthstone has received $1.3 million from the derivative portion of the settlement, which was included as a reduction of Transaction costs in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2021.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Environmental and Regulatory
As of September 30, 2021,March 31, 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.
Note 14. Income Taxes
The Company’s corporate structure requires the filing of two separate consolidated U.S. Federal income tax returns and one Canadian income tax return which include Lynden US, Earthstone, and Lynden Corp. As such, taxable income of Earthstone cannot be offset by tax attributes, including net operating losses, of Lynden US, nor can taxable income of Lynden US be offset by tax attributes of Earthstone. Earthstone and Lynden US record a tax provision, respectively, for their share of the book income or loss of EEH, net of the non-controlling interest. As EEH is treated as a partnership for U.S. Federal income tax purposes, it is not subject to income tax at the federal level and only recognizes the Texas Margin Tax.
On February 15, 2022, the Company completed the Chisholm Acquisition which included the issuance of 19,417,476 shares of our Class A Common Stock. When there is a change in ownership, as defined under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), it results in a limitation that applies to all net operating losses (“NOLs”) and credits generated prior to the ownership change date that can be used to offset taxable income incurred after the ownership change date (the “382 Limitation”). The annual limitation is based on the Company’s stock value prior to the ownership change, multiplied by the applicable federal long-term, tax-exempt interest rate (the “FLTR”). Based on the Company’s stock price at the close of business on February 15, 2022 of $12.85 and the applicable FLTR of 1.46%, the current limitation is estimated to be $10.1 million per year. Additionally, unutilized 382 Limitation amounts can be carried forward to future years, cumulatively.
As of September 30, 2021March 31, 2022 and December 31, 2020,2021, a current liability of $0.6 million and $0.6$0.8 million, respectively, is included in Other current liabilities in the Condensed Consolidated Balance Sheets. The amounts represent current Texas Margin Tax payable.payable on or before May 16, 2022.
During the ninethree months ended September 30, 2021,March 31, 2022, the Company recorded income tax benefit of approximately $0.3$1.5 million which included (1) a deferred income tax benefit for Lynden US of $0.1$0.7 million as a result of its share of the distributable loss from EEH, (2) no net income tax benefit for Earthstone as the $0.8$6.6 million income tax benefit resulting from its share of the distributable loss from EEH had a full valuation allowance recorded against it as future realization of the net deferred tax asset cannot be assured and (3) deferred income tax benefit of $0.8 million related to the Texas Margin Tax, offset by (4) current income tax expense of $0.6 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the ninethree months ended September 30, 2021.March 31, 2022.
During the ninethree months ended September 30, 2020,March 31, 2021, the Company recorded income tax expensebenefit of approximately $0.1$0.3 million which included (1) noa deferred income tax expensebenefit for Lynden US of $0.2 million as a result of its share of the distributable income from EEH, (2) a deferredno net income tax benefit for Earthstone of $0.8as the $1.2 million as a result ofincome tax benefit resulting from its share of the distributable incomeloss from EEH which was used to reduce thehad a full valuation allowance recorded against its deferred tax asset which was previously recordedit as future realization of the net deferred tax asset
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
cannot be assured and (3) deferred income tax expensebenefit of $0.1 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the ninethree months ended September 30, 2020.March 31, 2021.
Note 15. Subsequent Events
Bighorn Acquisition
On April 14, 2022, Earthstone, EEH and Bighorn, consummated the transactions contemplated in the Bighorn Agreement. At the closing of the Bighorn Agreement, among other things, EEH acquired the Bighorn Assets for a purchase price of approximately $638.9 million in cash, net of preliminary and customary purchase price adjustments that remain subject to final post-closing settlement between EEH and Bighorn, and 5,650,977 shares of Class A Common Stock.
Securities Purchase Agreement
Also, on April 14, 2022, Earthstone, EnCap Fund XI and Cypress consummated the sale and issuance of 280,000 shares of Preferred Stock pursuant to the SPA. Each share of Preferred Stock will be convertible into 90.0900900900901 shares of Class A Common Stock. At the closing of the SPA, Earthstone issued 280,000 shares of Preferred Stock in exchange for gross cash proceeds of $280 million.
If the outstanding Preferred Stock has not been converted into Class A Common Stock on or before October 1, 2022, then the Preferred Stock will accrue dividends from April 14, 2022, the date of initial issuance, at a rate of 8% per annum until such time as it has converted. In addition, Earthstone will be required to redeem all of the outstanding Preferred Stock if the Preferred Stock has not converted into Class A Common Stock on or before November 22, 2025. The price per share for redemption would be the initial liquidation preference amount of $1,000.00 per share of Preferred Stock plus any accrued but unpaid dividends thereon.
Notes Offering
On April 7, 2022, EEH and four of its wholly-owned subsidiaries, Earthstone Operating, LLC, a Texas limited liability company (“Earthstone Operating”), Earthstone Permian LLC, a Texas limited liability company (“Earthstone Permian”), Sabine River Energy, LLC, a Texas limited liability company (“Sabine River Energy”), and Independence Resources Technologies, LLC, a Delaware limited liability company (“Independence Technology” and, together with Earthstone Operating, Earthstone Permian, Sabine River Energy and Earthstone, the “Guarantors”), entered into a purchase agreement (the “Purchase Agreement”) with RBC Capital Markets, LLC, as representative of the several initial purchasers named in the Purchase Agreement (together, the “Initial Purchasers”), providing for the private offer and sale by EEH (the “Notes Offering”) of $550.0 million aggregate principal amount of EEH’s 8.000% senior notes due 2027 (the “Notes”), along with related guarantees (the “Guarantees”) of the Notes.
The Notes Offering was made pursuant to an offering memorandum dated April 7, 2022 and closed on April 12, 2022. EEH received net proceeds from the Notes Offering of approximately $540.4 million (after deducting underwriting discounts and commissions). EEH used the net proceeds from the Notes Offering primarily to fund the Bighorn Acquisiton and the remainder for general corporate purposes.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Statement Regarding Forward-Looking Information
This discussion and other items in this Quarterly Report on Form 10-Q contain forward-looking statements and information that are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this document, the words “believe,” “anticipate,” “estimate,” “expect,” “intend,” “may,” “will,” “project,” “forecast,” “plan,” and similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. These statements are subject to numerous risks, uncertainties and assumptions. Certain of these risks are summarized under “Item 1A. Risk Factors” in our 20202021 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), which you should read carefully in connection with our forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. We undertake no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
You should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in conjunction with the corresponding sections and our audited consolidated financial statements for the year ended December 31, 2020,2021, which are included in our 20202021 Annual Report on Form 10-K.
Overview
Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with our consolidated subsidiaries, the “Company,” “our,” “we,” “us,” or similar terms), is a growth-oriented independent oil and gas company engaged in the acquisition and development of oil and gas reserves through activities that include the acquisition, drilling and development of undeveloped leases, asset and corporate acquisitions and mergers. Our operations are all in the upstream segment of the oil and natural gas industry and all our properties are onshore in the United States. At present, our assets are located in the Midland Basin of westin West Texas, and the Eagle Ford Trend of south Texas.
Our primary focus is concentrated in South Texas and the MidlandDelaware Basin of west Texas, a high oil and liquids rich resource basin which provides us with multiple horizontal targets with proven production results, long-lived reserves and historically high drilling success rates.in New Mexico.
Recent Developments
ForelandBighorn Acquisition
On September 30, 2021,April 14, 2022, Earthstone, Energy, Inc. (“Earthstone”), Earthstone Energy Holdings, LLC, a subsidiary of Earthstonethe Company (“EEH”), as buyer, and Foreland Investments LP, a Delaware limited partnershipBighorn Asset Company, LLC (“Foreland”Bighorn”), as seller, entered into aconsummated the transactions contemplated in the Purchase and Sale Agreement (the “Foreland Purchase Agreement”). Also, on Septemberdated January 30, 2021, Earthstone2022, by and EEH, as buyer, and BCC-Foreland LLC, a Delaware limited liability company (“BCC”), as seller, entered into a Purchase and Sale Agreement (the “BCC Purchase Agreement”).
On November 2, 2021,among Earthstone, EEH and Foreland consummatedBighorn (the “Bighorn Purchase Agreement”) that was previously reported on Form 8-K filed on February 2, 2022 with the transactions contemplated bySEC. At the Forelandclosing of the Bighorn Purchase Agreement, wherebyamong other things, EEH acquired (the “Foreland“Bighorn Acquisition”) interests in oil and gas leases and related property of ForelandBighorn located in Irion County and Crockett County,the Midland Basin, Texas, for a purchase price (the “Foreland Purchase“Purchase Price”) of: (i) $23.5of approximately $638.9 million in cash, net of preliminary and customary purchase price adjustments thatand remains subject to final post-closing settlement between EEH and Foreland,Bighorn, and (ii) 2,611,1115,650,977 shares (the “Foreland“Bighorn Shares”) of Class A common stock, par value $0.001 per share, of Earthstone (the “Class A Common Stock”) valued at $10.77 per share at. At the closing of the transaction. The cash portionBighorn Acquisition, 510,638 of the Foreland Purchase Price is subjectBighorn 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 customary purchase price adjustmentsBighorn Permian Resources, LLC (“Bighorn Permian”). On April 14, 2022, in connection with an effective datethe closing of July 1, 2021.
On November 2, 2021, Earthstone, EEH and BCC consummated the transactions contemplated by the BCCBighorn Purchase Agreement, whereby EEH acquired (the “BCC Acquisition”Earthstone and withBighorn Permian entered into a customary registration rights agreement relating to the Foreland Acquisition, the “Foreland-BCC Acquisition”) certain well-bore interests and related equipment held by BCC that are part of a joint development agreement between Foreland, Foreland Operating, LLC, and BCC involving portions of the acreage covered by the Foreland Purchase Agreement for a purchase price (the “BCC Purchase Price”) of $25.7 million in cash, net of preliminary and customary purchase price adjustments that remains subject to final post-closing settlement between EEH and BCC, with an effective date of July 1, 2021.Bighorn Shares.
In connection with the closing of the ForelandBighorn Purchase Agreement, Earthstone entered into a customary registration rightslock-up agreement (the “Lock-up Agreement”) on April 14, 2022 with ForelandBighorn Permian providing that such holder will not transfer 5,140,339 of the Closing Shares (the “Lock-up Shares”) for 60 days after the closing of the Bighorn Acquisition. Sixty days after the closing of Bighorn Acquisition, 25% of the Lock-up Shares may be transferred; ninety days after the closing of the Bighorn Acquisition, an additional 25% of the Lock-up Shares may be transferred; and their equity holders containing provisions under which Earthstone will, among other things, file aone hundred twenty days after the closing of the Bighorn Acquisition, the remaining 50% of the Lock-up Shares may be transferred.
registrationSecurities 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, L.P. (“Post Oak”), consummated the sale and issuance of 280,000 shares of newly authorized Series A convertible preferred stock, par value $0.001 per share, of Earthstone (the “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 Preferred Stock in exchange for gross cash proceeds of $280 million (the “Private Placement”).
Each share of Preferred Stock is expected to convert into 90.0900900900901 shares of Class A Common Stock on the 21st calendar day after Earthstone mails an information statement on Form S-3Schedule 14C pursuant to Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to its stockholders notifying the stockholders that on January 30, 2022, holders of 61.6% of the voting power of all outstanding shares of Class A Common Stock and Class B common stock, par value $0.001 per share (“Class B Common Stock” and collectively with the Securities and Exchange Commission (“SEC”Class A Common Stock, the “Common Stock”) providing fordelivered to Earthstone an irrevocable written consent in lieu of a special meeting of stockholders approving the registrationconversion feature of the Foreland SharesPreferred Stock and cooperatethe issuance of the Class A Common Stock upon conversion of the Preferred Stock. If conversion has not occurred on or before October 1, 2022, holders of the Preferred Stock will be entitled to receive quarterly dividends accruing from the date of initial issuance at a rate of 8.0% per annum.
On April 14, 2022, in certain as yet undetermined underwritten offerings thereof.connection with the closing of the SPA, Earthstone and the Investors entered into a customary registration rights agreement relating to the shares of Class A Common Stock underlying the PIPE Shares.
In connection with the closing of the Foreland Purchase Agreement,SPA, on April 14, 2022, Earthstone, Cypress, EnCap, and affiliates of Warburg Pincus LLC entered into a customary lock-upvoting agreement with Foreland(the “Voting Agreement”) containing provisions by which Cypress will have the right to appoint one director to the Board of Directors (the “Board”) of Earthstone. Cypress’ right to appoint one director will terminate upon the later to occur of (i) Cypress and its equity holders providing that such holders will not transfer a portionaffiliates, in the aggregate, no longer own at least 5.5% of the Foreland Shares for 60 days afteroutstanding Common Stock; and (ii) the one year anniversary of the Voting Agreement.
In connection with the closing of the Foreland Acquisition (25%SPA, on April 14, 2022, EEH amended and restated the First Amended and Restated Limited Liability Company Agreement pursuant to the Second Amended and Restated Limited Liability Company Agreement (the “Second LLC Agreement”) in order to provide for preferred units and update certain tax provisions.
Notes Offering
On April 7, 2022, EEH and four of its wholly-owned subsidiaries, Earthstone Operating, LLC, a Texas limited liability company (“Earthstone Operating”), Earthstone Permian LLC, a Texas limited liability company (“Earthstone Permian”), Sabine River Energy, LLC, a Texas limited liability company (“Sabine River Energy”), and Independence Resources Technologies, LLC, a Delaware limited liability company (“Independence Technology” and, together with Earthstone Operating, Earthstone Permian, Sabine River Energy and Earthstone, the “Guarantors”), entered into a purchase agreement (the “Purchase Agreement”) with RBC Capital Markets, LLC, as representative of the Foreland Shares)several initial purchasers named in the Purchase Agreement (together, the “Initial Purchasers”), a portionproviding 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 Foreland SharesNotes.
The Notes Offering was made pursuant to an offering memorandum dated April 7, 2022 and closed on April 12, 2022. EEH received net proceeds from the Notes Offering of approximately $540.4 million (after deducting underwriting discounts and commissions) which was used primarily to fund the Bighorn Acquisition and the remainder for 90 days after the closing of the Foreland Acquisition (25% of the Foreland Shares), and a portion of the Foreland Shares for 120 days after the closing of the Foreland Acquisition (50% of the Foreland Shares).general corporate purposes.
Fourth Amendment to Credit Agreement
On September 17, 2021,January 30, 2022, Earthstone, and EEH, (collectively the “Borrower”),as Borrower, Wells Fargo Bank, National Association (“Wells Fargo”) as Administrative Agent, and Issuing Bank, the lenders party thereto (the “Lenders”) and the guarantors party thereto entered into an amendmentamended and restated Fifth Amendment (the “Fourth Amendment”“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, as successor by merger to SunTrustCitizens Bank, N.A., KeyBank National Association, U.S. Bank National Association, Fifth Third Bank, PNC Bank, National Association, and Bank of America, N.A., as Documentation Agent,Agents, and the Lenders party thereto (together with all amendments or other modifications, the “Credit Agreement”). Among other things, the Fourth Amendment increased the borrowing base and corresponding elected commitments from $550$650 million to $650$825 million added provisionsupon the closing (“Chisholm Closing”) of that certain Purchase and Sale Agreement dated as December 15, 2021 (the “Chisholm Agreement”) by and among Earthstone, EEH, Chisholm Energy Operating, LLC (“OpCo”) and Chisholm Energy Agent, Inc. (“Agent” and collectively with OpCo, “Chisholm”); provides that upon the closing of the Bighorn Acquisition, the borrowing base and
corresponding elected commitments would increase to provide$1.325 billion, unless Earthstone completes an unsecured senior notes offering (“Notes Offering”) prior to the closing of the Bighorn Acquisition in which case the elected commitments will be reduced by the amount of the net proceeds from a Notes Offering up to $500 million (the “Notes Offering Elected Commitments Reduction”); provides for an increase in interest rates by 0.50% in the eventual replacementevent a Notes Offering has not been completed prior to the closing of the Bighorn Acquisition; provides mechanics relating to the transition from LIBOR asto a benchmark interestreplacement rate, madethe Secured Overnight Financing Rate (“SOFR”), to be effective contemporaneously with the effectiveness of the Amendment on January 30, 2022; adds certain changeshedging requirements relating to anticipated oil and natural gas production of the properties to be acquired pursuant to the lenders underBighorn Acquisition; adjusts some financial covenants; redefines the Credit Agreement,limitations on certain restricted payments the Borrower may make; and made certain other administrative changes to the Credit Agreement.
IRMOn April 14, 2022, in advance of the potential aforementioned Notes Offering Elected Commitments Reduction, the Company voluntarily elected to reduce commitments under the borrowing base of the Credit Facility to $800 million.
Chisholm Acquisition
On January 7, 2021,February 15, 2022, Earthstone, EEH, and EEH (collectively with Earthstone, the “Buyer”), Independence Resources Holdings, LLC (“Independence”), and Independence Resources Manager, LLC (“Independence Manager” and collectively with Independence, the “Seller”)Chisholm, as seller, consummated the transactions contemplated in the Purchase and SaleChisholm Agreement dated December 17, 2020 (the “IRM Purchase Agreement”) that was previously reported in our Current Report on Form 8-K filed with the SEC on December 22, 2020. The Seller was unaffiliated with the Company. At the closing of the IRM Purchase Agreement, EEH acquired (the “IRM Acquisition”) all of the issued and outstanding limited liability company interests in certain wholly owned subsidiaries of Independence and Independence Manager for aggregate consideration consisting of: (i) cash of approximately $140.4 million (the “Cash Consideration”) and (ii) 12,719,594 shares of Class A Common Stock (such shares, the “Acquisition Shares,” and such issuance, the “Stock Issuance”). As a result of the Stock Issuance, Earthstone is no longer considered a controlled company within the meaning of the listing standards of the NYSE.
In order to fund the cash consideration for the IRM Acquisition, on December 17, 2020, Earthstone, EEH, as Borrower, Wells Fargo Bank, National Association (“Wells Fargo”), as Administrative Agent, the guarantors party thereto, and the lenders party thereto (the “Lenders”) entered into an amendment (the “Second Amendment”) to the Credit Agreement. The Second Amendment was effective upon the closing of the IRM Acquisition. Among other things, the Second Amendment (i) joined certain financial institutions as additional lenders, increased the borrowing base from $240.0 million to $360.0 million, (ii) increased the interest rate on outstanding borrowings; and (iii) adjusted some of the financial covenants.
Eagle Ford Acquisitions
During the second quarter of 2021, we acquired working interests in certain assets we operate in southern Gonzales County, Texas (the “Eagle Ford Acquisitions”) from four separate sellers for approximately $48.0 million in cash. We funded the Eagle Ford Acquisitions with cash on hand and borrowings under our senior secured revolving credit facility. The effective date of the Eagle Ford Acquisitions was April 1, 2021. One of the four sellers is a related party entity. See further discussion in Note 4. Acquisitions and Note 12. Related Party Transactions in the Notes to Unaudited Condensed Consolidated Financial Statements.
Tracker/Sequel Acquisitions
On July 20, 2021, Earthstone, EEH, Tracker Resource Development III, LLC (“Tracker”), and TRD III Royalty Holdings (TX), LP (“RoyaltyCo” and collectively with Tracker, the “Seller”) consummated the transactions contemplated in the Purchase and Sale Agreement dated March 31, 2021 by and among Earthstone, EEH and Seller (the “Tracker Agreement”) that was previously reported on Form 8-K filed on April 5, 2021. At the closing of the TrackerChisholm Agreement, among other things, EEH acquired (the “Tracker“Chisholm Acquisition”) interests in oil and gas leases and related property of TrackerChisholm located in IrionLea County Texas (the “Tracker Assets”)and Eddy County, New Mexico, for aggregate consideration, as adjusted for preliminary and customary purchase price adjustments, consisting of: (i) $22.5approximately $307.5 million in cash and (ii) 4.7 million shares of Class A Common Stock. Also, on July 20, 2021, Earthstone, EEH, SEG-TRD LLC (“SEG-I”), and SEG-TRD II LLC (“SEG-II” and collectively with SEG-I, “Sequel”), consummated the transactions contemplated in the Purchase and Sale Agreement dated March 31, 2021 by and among Earthstone,that continues to remain subject to post-closing settlement adjustments between EEH and Sequel that was previously reported on Form 8-K filed on April 5, 2021. AtChisholm paid at the closing of the Sequel Agreement, EEH acquired certain well-bore interests and related equipment held by Sequel that were part of a joint development agreement between Tracker and Sequel involving portions of the acreage covered by the Tracker Agreement for
aggregate consideration consisting of: (i) $45.3Chisholm Acquisition, (ii) $70 million in cash paid on April 15, 2022; and (ii) 1.5 million(iii) 19,417,476 shares of Class A Common Stock. See further discussion in Note 4. Acquisitions and Note 12.14. Related Party Transactionsand Note 19. Subsequent Events in the Notes to Unaudited Condensed Consolidated Financial Statements.
Cash consideration for the Tracker/Sequel AcquisitionsChisholm Acquisition was funded by borrowings under our senior secured revolving credit facility whose borrowing base was increased from $475$650 million to $550$825 million on July 20, 2021.upon consummation of the Chisholm Acquisition.
COVID-19
Despite the recoveries in commodity prices, recent surges from COVID-19 variants continue to negatively impact the global economy, disrupt global supply chains and may create significant volatility and disruption of financial and commodity markets. The extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, is uncertain and depends on various factors, including how the pandemic and measures taken in response to its impact on demand for oil and natural gas, the availability of personnel, equipment and services critical to our ability to operate our properties and the impact of potential governmental restrictions on travel, transports and operations. There is uncertainty around the extent and duration of disruption, including any resurgence, and we expect that the longer the duration of any such disruption, the greater the adverse impact may be on our business.
Operational Status
As a producer of oil, natural gas and NGLs,natural gas liquids, we are recognized as an essential business under various federal, state and local regulations related to the COVID-19 pandemic. We have continued to operate as permitted under these regulations while taking mitigation efforts and steps to protect the health and safety of our employees. The safety of our employees is paramount, and we have emphasized the respective guidelines to support our mitigation efforts. Our field personnel are performing their job responsibilities and practicing mitigation guidelines with no issues to date. OurWhile our non-field personnel have returned to the office butin mid-2020 and were fully in the office during 2021 with minimal disruptions, we remain flexible to working remotely, using information technology in which we previously invested if needed. We have managed and conducted both field and non-field functions effectively thus far, including our day-to-day operations, our accounting and financial reporting systems and our internal control over financial reporting. We will continue to focus on the health and safety of our employees in conformity with the applicable jurisdictional mitigation guidelines. We will continue to monitor CDC guidelines and respond appropriately.
Commodity Market Impacts and Response
Operational/Financial Challenges
It is difficult to model and predict how our operations and financial status may change as a result of COVID-19. In our industry, any forecast, plans and changes to operations and financial status are a function of commodity prices. If oil prices decline due to a resurgence of COVID-19, we believe we can continue to operate and produce our properties at a minimum in a cash flow neutral position for the next 12 months. A significant driver in the future may be the financial institutions’ view on commodity prices with respect to borrowing base redeterminations. If a resurgence of COVID-19 triggers additional volatility in our business or global economies, our borrowing base recently increased to $650 million in September 2021, could be reduced. Significant reductions in the borrowing base under our Credit Agreement could create a borrowing base deficiency depending on our loans then outstanding which may lead to a default. We believe global as well as national mitigation efforts currently being implemented to fight COVID-19 have had, and may continue to have, a material impact on commodity prices and may continue to present significant challenges to our industry.
The effects of COVID-19, including a substantial decrease in economic activity, have contributed to significant credit, debt and equity market volatility. Similar to other producers in our business, we experienced volatility in the price of our Class A Common Stock.
Consolidation Focus
We believe that the current industry environment will move to more consolidations; however, execution may be hampered by producers with high debt levels. We continue to pursue value-accretive and scale-enhancing consolidation opportunities, as we
believe we are in a position to operate effectively despite the COVID-19 induced volatility in oil price. We are focusing our attention on acquisition and corporate merger opportunities that would increase the scale of our operations. In addition, we believe the current industry environment presents unique opportunities which could provide us the potential for further consolidation because of our financial strength. At the same time, we will seek to block up acreage that would allow for longer horizontal laterals that would provide for higher economic returns. 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.
Areas of Operation
Our primary focus is concentrated in the Midland Basin of westin West Texas and the Delaware Basin in New Mexico, a high oil and liquids rich resource which provides us with multiple horizontal targets with proven production results, long-lived reserves and historically high drilling success rates.
Midland Basin
During the first quarter of 2021,2022, we completed and turned to sales five gross (3.7(5.0 net) operated wells and commenced drilling ten gross (8.3 net) operated wells in the Midland Basin. With two rigs operating in the Midland Basin, we anticipate spudding 40 gross (35.8 net) operated wells and bringing 40 gross (36.7 net) operated wells online in 2022.
Delaware Basin
After acquiring the Delaware assets on the Hamman 30 pad in Upton County andFebruary 15, 2022, we commenced drilling three gross (2.1(1.9 net) operated wells on the Hamman 45 pad in Midland County. During the second quarter, we completed the wells on the Hamman 45 pad in Midland County and drilled four gross (3.8 net) wells on the Pearl Jam pad on the recently acquired IRM Spanish Pearl project. During the third quarter, we completed the wells on the four-well Pearl Jam pad and moved the rig to western Reagan County where we drilled four gross (3.5 net) wells on the Hartgrove West pad before moving to Upton County to drill five gross (5.0 net) wells on the Nickel Saloon pad. Completions are currently underway on the four-well Hartgrove West pad and we expect to have these wells online in November. Additionally, we expect to be in the process of completing the five-well Nickel Saloon pad around year-end and expect those wells to be online earlyDelaware Basin in the first quarter of 2022.
We have operated one drilling rig With two rigs operating in the MidlandDelaware Basin, since the first quarter of 2021we anticipate spudding 20 gross (11.8 net) operated wells and added a second drilling rigbringing 18 gross (11.6 net) operated wells online in the third quarter. Currently both rigs are drilling in Upton County, Texas. One rig is on our Nickel Saloon five-well pad where we have 100% working interest and will average approximately 10,000-foot laterals. The other rig is on our Benedum six-well pad where we hold 100% working interest and will average 7,500-foot laterals. We expect to spud one additional pad before year-end with one of these rigs which will bring our operated program spudding to 29 gross (25.4 net) wells for the year. We expect to bring our final pad online near year-end which will be three gross (2.3 net) wells from our Hamman 30 pad in Upton County bringing our total completed wells brought online for the year to 19 gross (15.4 net).2022.
Despite the commodity price volatility, weWe continue to seek acreage trades and acquisition opportunities in the Midland Basinand Delaware Basins which would allow for longer laterals, increased operated inventory and greater operating efficiency.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to use our judgment to make estimates and assumptions that affect certain amounts reported in our financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. Critical accounting policies are those accounting policies that involve judgment and uncertainties affecting the application of those policies and the likelihood that materially different amounts would be reported under different conditions or using differing assumptions. We periodically update our estimates used in the preparation of the financial statements based on our latest assessment of the current and projected business and general economic environment. There have been no significant changes to our critical accounting policies during the ninethree months ended September 30, 2021.March 31, 2022.
Results of Operations
Three Months Ended September 30, 2021,March 31, 2022, compared to the Three Months Ended September 30, 2020March 31, 2021
| | | | Three Months Ended September 30, | | | | | Three Months Ended March 31, | | |
| | | 2021 | | 2020 | | Change | | | 2022 | | 2021 | | Change |
Sales volumes: | Sales volumes: | | | | | | | Sales volumes: | | | | | | |
Oil (MBbl) | Oil (MBbl) | | 1,055 | | | 839 | | | 26 | % | Oil (MBbl) | | 1,417 | | | 1,057 | | | 34 | % |
Natural gas (MMcf) | Natural gas (MMcf) | | 4,119 | | | 2,010 | | | 105 | % | Natural gas (MMcf) | | 5,639 | | | 2,445 | | | 131 | % |
Natural gas liquids (MBbl) | Natural gas liquids (MBbl) | | 636 | | | 386 | | | 65 | % | Natural gas liquids (MBbl) | | 839 | | | 365 | | | 130 | % |
Barrels of oil equivalent (MBoe) | Barrels of oil equivalent (MBoe) | | 2,377 | | | 1,560 | | | 52 | % | Barrels of oil equivalent (MBoe) | | 3,196 | | | 1,829 | | | 75 | % |
Average Daily Production (Boepd) | Average Daily Production (Boepd) | | 25,836 | | | 16,959 | | | 52 | % | Average Daily Production (Boepd) | | 35,509 | | | 20,321 | | | 75 | % |
| Average prices: | Average prices: | | | | | | Average prices: | | | | | |
Oil (per Bbl) | Oil (per Bbl) | | $ | 70.20 | | | $ | 39.50 | | | 78 | % | Oil (per Bbl) | | $ | 97.24 | | | $ | 57.56 | | | 69 | % |
Natural gas (per Mcf) | Natural gas (per Mcf) | | $ | 3.49 | | | $ | 1.31 | | | 166 | % | Natural gas (per Mcf) | | $ | 4.07 | | | $ | 2.39 | | | 70 | % |
Natural gas liquids (per Bbl) | Natural gas liquids (per Bbl) | | $ | 34.56 | | | $ | 13.60 | | | 154 | % | Natural gas liquids (per Bbl) | | $ | 42.22 | | | $ | 24.40 | | | 73 | % |
| Average prices adjusted for realized derivatives settlements: | Average prices adjusted for realized derivatives settlements: | | Average prices adjusted for realized derivatives settlements: | |
Oil ($/Bbl) | Oil ($/Bbl) | | $ | 52.94 | | | $ | 49.34 | | | 7 | % | Oil ($/Bbl) | | $ | 75.61 | | | $ | 47.67 | | | 59 | % |
Natural gas ($/Mcf) | Natural gas ($/Mcf) | | $ | 2.85 | | | $ | 1.45 | | | 97 | % | Natural gas ($/Mcf) | | $ | 3.89 | | | $ | 2.23 | | | 74 | % |
Natural gas liquids ($/Bbl) | Natural gas liquids ($/Bbl) | | $ | 34.56 | | | $ | 13.60 | | | 154 | % | Natural gas liquids ($/Bbl) | | $ | 42.22 | | | $ | 24.40 | | | 73 | % |
| (In thousands) | (In thousands) | | | | | | (In thousands) | | | | | |
Oil revenues | Oil revenues | | $ | 74,051 | | | $ | 33,158 | | | 123 | % | Oil revenues | | $ | 137,752 | | | $ | 60,819 | | | 126 | % |
Natural gas revenues | Natural gas revenues | | $ | 14,368 | | | $ | 2,642 | | | 444 | % | Natural gas revenues | | $ | 22,958 | | | $ | 5,852 | | | 292 | % |
Natural gas liquids revenues | Natural gas liquids revenues | | $ | 21,965 | | | $ | 5,247 | | | 319 | % | Natural gas liquids revenues | | $ | 35,440 | | | $ | 8,901 | | | 298 | % |
| Lease operating expense | Lease operating expense | | $ | 12,983 | | | $ | 7,044 | | | 84 | % | Lease operating expense | | $ | 21,631 | | | $ | 10,849 | | | 99 | % |
Production and ad valorem taxes | Production and ad valorem taxes | | $ | 7,225 | | | $ | 2,696 | | | 168 | % | Production and ad valorem taxes | | $ | 13,315 | | | $ | 5,027 | | | 165 | % |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | | $ | 27,059 | | | $ | 28,538 | | | (5) | % | Depreciation, depletion and amortization | | $ | 34,326 | | | $ | 24,407 | | | 41 | % |
| General and administrative expense (excluding stock-based compensation) | General and administrative expense (excluding stock-based compensation) | | $ | 4,770 | | | $ | 3,393 | | | 41 | % | General and administrative expense (excluding stock-based compensation) | | $ | 6,476 | | | $ | 5,051 | | | 28 | % |
Stock-based compensation | Stock-based compensation | | $ | 2,880 | | | $ | 2,403 | | | 20 | % | Stock-based compensation | | $ | 5,830 | | | $ | 3,329 | | | 75 | % |
General and administrative expense | General and administrative expense | | $ | 7,650 | | | $ | 5,796 | | | 32 | % | General and administrative expense | | $ | 12,306 | | | $ | 8,380 | | | 47 | % |
| Transaction costs | Transaction costs | | $ | 293 | | | $ | (705) | | | NM | Transaction costs | | $ | 10,742 | | | $ | 2,106 | | | 410 | % |
| Interest expense, net | Interest expense, net | | $ | (3,050) | | | $ | (1,186) | | | 157 | % | Interest expense, net | | $ | (5,318) | | | $ | (2,217) | | | 140 | % |
| | Unrealized loss on derivative contracts | Unrealized loss on derivative contracts | | $ | (12,244) | | | $ | (14,543) | | | (16) | % | Unrealized loss on derivative contracts | | $ | (119,794) | | | $ | (22,358) | | | 436 | % |
Realized (loss) gain on derivative contracts | | $ | (20,884) | | | $ | 8,503 | | | (346) | % | |
Realized loss on derivative contracts | | Realized loss on derivative contracts | | $ | (31,686) | | | $ | (10,905) | | | 191 | % |
Loss on derivative contracts, net | Loss on derivative contracts, net | | $ | (33,128) | | | $ | (6,040) | | | 448 | % | Loss on derivative contracts, net | | $ | (151,480) | | | $ | (33,263) | | | 355 | % |
| | Income tax expense | | $ | (451) | | | $ | (130) | | | 247 | % | |
Income tax benefit | | Income tax benefit | | $ | 1,533 | | | $ | 308 | | | 398 | % |
NM – Not Meaningful
Results of Operations Highlights
The IRM Acquisition, the Eagle Ford Acquisitions, and the Tracker/Sequel Acquisitions, the Foreland Acquisition and the Chisholm Acquisition (collectively, the “Acquisitions”) have had a significant and pervasive impact on our results of operations whenas compared to the prior year corresponding periods and, as it relates to the nine months ended September 30, 2020, diminished operating results due to voluntary production shut-ins resulting from low commodity prices.first quarter of 2021. In addition, commodity prices have improved compared to the prior corresponding periodsfirst quarter of 2021 further impacting our results of operations. Below is a detailed discussion further highlighting the impact of our recent acquisitions.
Oil revenues
For the three months ended September 30, 2021,March 31, 2022, oil revenues increased by $40.9$76.9 million or 123%126% relative to the comparable period in 2020.2021. Of the increase, $25.8$41.9 million was attributable to an increase in our realized price and $15.1$35.0 million was attributable to an increase in sales volume. Our average realized price per Bbl increased from $39.50$57.56 for the three months ended September 30, 2020March 31, 2021 to $70.20$97.24 or 78%69% for the three months ended September 30, 2021.March 31, 2022. Additionally, we had a net increase in the volume of oil sold of 216360 MBbls or 26%34%, which included an increase of 397526 MBbls related to the wells acquired in the Acquisitions, offset by a decrease of 181166 MBbls in our other wells primarily resulting from natural declines, partially offset by the impact of new wells comingbrought online related to our 2021 drilling program.since the first quarter of 2021.
Natural gas revenues
For the three months ended September 30, 2021,March 31, 2022, natural gas revenues increased by $11.7$17.1 million or 444%292% relative to the comparable period in 2020.2021. Of the increase, $7.3$13.0 million was due to increased sales volume and $4.4$4.1 million was attributable to an increase in realized price. Our average realized price per Mcf increased 166%70% from $1.31$2.39 for the three months ended September 30, 2020March 31, 2021 to $3.49$4.07 for the three months ended September 30, 2021.March 31, 2022. The total volume of natural gas produced and sold increased 2,1083,194 MMcf or 105%131% which included an increase of 1,8523,044 MMcf related to the wells acquired in the Acquisitions and an increase of 256150 MMcf in our other wells primarily resulting from a higher mix of natural gas from existing wells and new wells comingbrought online related to our 2021 drilling program.since the first quarter of 2021.
Natural gas liquids revenues
For the three months ended September 30, 2021,March 31, 2022, natural gas liquids revenues increased by $16.7$26.5 million or 319%298% relative to the comparable period in 2020.2021. Of the increase, $8.1$20.0 million was attributable to increased volume and $6.5 million was attributable to an increase in our realized price and $8.6 million was attributable to increased volume.price. The volume of natural gas liquids produced and sold increased by 250475 MBbls or 65%130%, which included an increase of 263418 MMcf related to the wells acquired in the Acquisitions offset by a decreaseand an increase of 1357 MBbls in our other wells primarily resulting from natural declines, partially offset by new wells coming online related to our 2021 drilling program.since the first quarter of 2021.
Lease operating expense (“LOE”)
LOE increased by $5.9$10.8 million or 84%99% for the three months ended September 30, 2021March 31, 2022 relative to the comparable period in 2020,2021, due to a $5.7an $8.0 million increase resulting from the LOE of the properties acquired in the Acquisitions and a $0.2$2.8 million increase primarily resulting from workovers.higher production volumes from new wells coming online since the first quarter of 2021.
Production and ad valorem taxes
Production and ad valorem taxes for the three months ended September 30, 2021March 31, 2022 increased by $4.5$8.3 million or 168%165% relative to the comparable period in 20202021 due to a $3.0$6.1 million increase resulting from the properties acquired in the Acquisitions and a $1.5$2.2 million increase related to our other wells resulting from improved commodity prices.
Depreciation, depletion and amortization (“DD&A”)
DD&A for the three months ended September 30, 2021 decreasedMarch 31, 2022 increased by $1.5$9.9 million, or 5%41% relative to the comparable period in 2020,2021 primarily due to a $7.6 million increase in DD&A related to the assets acquired in the Acquisitions, offset byand a $9.1$2.3 million decreaseincrease in DD&A related to our other wells primarily resulting from additional volumes added to the depletable base of our properties resulting from the impact of improved commodity prices on our estimated proved reserves.
General and administrative expense (“G&A”)
G&A for the three months ended September 30, 2021March 31, 2022 increased by $1.9$3.9 million, or 32%47% relative to the comparable period in 2020,2021, primarily due to an increaseincreases of $0.5$2.5 million in non-cash performance-based stock-based compensation expense resulting from increases in the market value of our Class A Common Stock, an increase of $0.7$0.9 million resulting from the reinstatementattributable to higher payroll and employee costs associated with increased headcount and $0.5 million primarily due to increased professional fees.
of certain cash-based compensation expenses which were suspended in the prior year period and an increase of $0.2 million related to professional fees and lower administrative overhead reimbursements.
Transaction costs
For the three months ended September 30, 2021, there were no material transaction costs. For the three months ended September 30, 2020,March 31, 2022, transaction costs were a benefit resulting from reimbursementsincreased by $8.6 million primarily due to costs associated with the anticipated settlement of the Olenik litigation.Chisholm Acquisition.
Interest expense, net
Interest expense increased from $1.2$2.2 million for the three months ended September 30, 2020March 31, 2021 to $3.1$5.3 million for the three months ended September 30, 2021,March 31, 2022, due to higher average borrowings outstanding compared to the prior year period primarily resulting from borrowings related to the Acquisitions.Acquisitions and higher effective interest rates. See Note 10. Long-Term Debt in the Notes to Unaudited Condensed Consolidated Financial Statements.
Loss on derivative contracts, net
For the three months ended September 30, 2021,March 31, 2022, we recorded a net loss on derivative contracts of $33.1$151.5 million, consisting of unrealized mark-to-market losses of $12.2$119.8 million related to our commodity hedges, along with net realized losses on settlements of our commodity hedges of $20.8 million and net realized losses on our interest rate swap of $0.1$31.7 million. For the three months ended September 30, 2020, we recorded a net loss on derivative contracts of $6.0 million, consisting of unrealized mark-to-market losses of $14.6 million related to our commodity hedges and unrealized gains of $0.1 million related to our interest rate swap, partially offset by net realized gains on settlements of our commodity hedges of $8.5 million.
Income tax expense
For the three months ended September 30, 2021, we recorded income tax expense of approximately $0.5 million which included (1) a deferred income tax expense for one of our subsidiaries, Lynden USA Inc. (“Lynden US”), of $0.3 million as a result of its share of the distributable loss from EEH, (2) no net income tax expense for Earthstone as the $1.8 million income tax expense resulting from its share of the distributable income from EEH had a full valuation allowance recorded against it as future realization of the net deferred tax asset cannot be assured and (3) a current income tax expense of $0.2 million related to the Texas Margin Tax. One of our subsidiaries, Lynden Energy Corp. (“Lynden Corp”), incurred no material income or loss, or related income tax expense or benefit, for the three months ended September 30, 2021.
For the three months ended September 30, 2020, we recorded an income tax expense of approximately $0.1 million which included (1) no income tax expense for Lynden US as a result of its share of the distributable income from EEH, (2) deferred income tax benefit for Earthstone of $0.9 million as a result of its share of the distributable income from EEH, which was used to reduce the valuation allowance recorded against its deferred tax asset which was previously recorded as future realization of the net deferred tax asset cannot be assured and (3) deferred income tax expense of $0.1 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the three months ended September 30, 2020.
Nine Months Ended September 30, 2021, compared to the Nine Months Ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2021 | | 2020 | | Change |
Sales volumes: | | | | | | |
Oil (MBbl) | | 3,195 | | | 2,520 | | | 27 | % |
Natural gas (MMcf) | | 9,490 | | | 5,031 | | | 89 | % |
Natural gas liquids (MBbl) | | 1,497 | | | 870 | | | 72 | % |
Barrels of oil equivalent (MBoe) | | 6,273 | | | 4,229 | | | 48 | % |
Average Daily Production (Boepd) | | 22,978 | | | 15,433 | | | 49 | % |
| | | | | | |
Average prices: | | | | | | |
Oil (per Bbl) | | $ | 64.42 | | | $ | 36.92 | | | 74 | % |
Natural gas (per Mcf) | | $ | 2.84 | | | $ | 0.96 | | | 196 | % |
Natural gas liquids (per Bbl) | | $ | 28.69 | | | $ | 11.46 | | | 150 | % |
| | | | | | |
Average prices adjusted for realized derivatives settlements: | | | | | | |
Oil ($/Bbl) | | $ | 51.01 | | | $ | 55.14 | | | (7) | % |
Natural gas ($/Mcf) | | $ | 2.49 | | | $ | 1.31 | | | 90 | % |
Natural gas liquids ($/Bbl) | | $ | 28.69 | | | $ | 11.46 | | | 150 | % |
| | | | | | |
(In thousands) | | | | | | |
Oil revenues | | $ | 205,788 | | | $ | 93,017 | | | 121 | % |
Natural gas revenues | | $ | 26,910 | | | $ | 4,855 | | | 454 | % |
Natural gas liquids revenues | | $ | 42,929 | | | $ | 9,976 | | | 330 | % |
| | | | | | |
Lease operating expense | | $ | 35,579 | | | $ | 21,971 | | | 62 | % |
Production and ad valorem taxes | | $ | 17,428 | | | $ | 7,198 | | | 142 | % |
| | | | | | |
Impairment expense | | $ | — | | | $ | 62,548 | | | NM |
Depreciation, depletion and amortization | | $ | 77,493 | | | $ | 76,096 | | | 2 | % |
| | | | | | |
General and administrative expense (excluding stock-based compensation) | | $ | 14,579 | | | $ | 11,950 | | | 22 | % |
Stock-based compensation | | $ | 10,621 | | | $ | 7,665 | | | 39 | % |
General and administrative expense | | $ | 25,200 | | | $ | 19,615 | | | 28 | % |
| | | | | | |
Transaction costs | | $ | 2,906 | | | $ | (324) | | | NM |
| | | | | | |
Interest expense, net | | $ | (7,668) | | | $ | (4,207) | | | 82 | % |
| | | | | | |
| | | | | | |
Unrealized (loss) gain on derivative contracts | | $ | (71,255) | | | $ | 25,466 | | | (380) | % |
Realized (loss) gain on derivative contracts | | $ | (46,311) | | | $ | 47,599 | | | (197) | % |
(Loss) gain on derivative contracts, net | | $ | (117,566) | | | $ | 73,065 | | | (261) | % |
| | | | | | |
| | | | | | |
Income tax benefit (expense) | | $ | 343 | | | $ | (112) | | | NM |
NM – Not Meaningful
Oil revenues
For the nine months ended September 30, 2021, oil revenues increased by $112.8 million or 121% relative to the comparable period in 2020. Of the increase, $69.3 million was attributable to an increase in our realized price and $43.5 million was attributable to an increase in volume. Our average realized price per Bbl increased from $36.92 for the nine months ended September 30, 2020 to $64.42 or 74% for the nine months ended September 30, 2021. Additionally, we had a net increase in the volume of oil sold of 675 MBbls or 27%, which included an increase of 1,029 MBbls related to the wells acquired in the Acquisitions, offset by a decrease of 354 MBbls in our other wells primarily resulting from natural declines, partially offset by new wells coming online related to our 2021 drilling program.
Natural gas revenues
For the nine months ended September 30, 2021, natural gas revenues increased by $22.1 million or 454% relative to the comparable period in 2020. Of the increase, $12.6 million was due to increased sales volume and $9.4 million was attributable to an increase in realized price. Our average realized price per Mcf increased 196% from $0.96 for the nine months ended September 30, 2020 to $2.84 for the nine months ended September 30, 2021. The total volume of natural gas produced and sold increased 4,459 MMcf or 89% which included an increase of 3,022 MMcf related to the wells acquired in the Acquisitions and an increase of 1,437 MMcf in our other wells primarily resulting from a higher mix of natural gas in the wells brought on in the current year, as well as prior year period volumes being impacted by voluntary production shut-ins.
Natural gas liquids revenues
For the nine months ended September 30, 2021, natural gas liquids revenues increased by $33.0 million or 330% relative to the comparable period in 2020. Of the increase, $15.0 million was attributable to an increase in our realized price and $18.0 million was attributable to increased volume. The volume of natural gas liquids produced and sold increased by 626 MBbls or 72%, which included an increase of 477 MMcf related to the wells acquired in the Acquisitions and an increase of 149 MBbls in our other wells primarily resulting from new wells coming online related to our 2021 drilling program, as well as prior year period volumes being impacted by voluntary production shut-ins.
Lease operating expense (“LOE”)
LOE increased by $13.6 million or 62% for the nine months ended September 30, 2021 relative to the comparable period in 2020, due to a $12.5 million increase resulting from the LOE of the properties acquired in the Acquisitions and a $1.1 million increase resulting from higher production volumes from new wells coming online related to our 2021 drilling program, as well as prior year period volumes being impacted by voluntary production shut-ins.
Production and ad valorem taxes
Production and ad valorem taxes for the nine months ended September 30, 2021 increased by $10.2 million or 142% relative to the comparable period in 2020 due to a $5.9 million increase resulting from the properties acquired in the Acquisitions and a $4.3 million increase related to our other wells resulting from improved commodity prices, as well as prior year period volumes being impacted by voluntary production shut-ins.
Impairment expense
During the prior year period, we recorded non-cash impairments totaling $62.5 million, which consisted of $25.3 million to proved oil and natural gas properties, $19.7 million to unproved oil and natural gas properties and $17.6 million to goodwill. No such impairments were recorded during the nine months ended September 30, 2021.
Depreciation, depletion and amortization (“DD&A”)
DD&A for the nine months ended September 30, 2021 increased by $1.4 million, or 2% relative to the comparable period in 2020 primarily due to a $19.2 million increase in DD&A related to the assets acquired in the Acquisitions, offset by a $17.8 million decrease in DD&A related to our other wells primarily resulting from lower prior year period volumes due to the impact of voluntary production shut-ins, as well as additional volumes added to the depletable base of our properties resulting from the impact of improved commodity prices on our estimated proved reserves.
General and administrative expense (“G&A”)
G&A for the nine months ended September 30, 2021 increased by $5.6 million, or 28% relative to the comparable period in 2020, primarily due to an increase of $3.0 million in non-cash performance-based stock-based compensation expense resulting from increases in the market value of our Class A Common Stock, an increase of $2.1 million resulting from the reinstatement
of certain cash-based compensation expenses which were suspended in the prior year period and an increase of $0.5 million related to professional fees and lower administrative overhead reimbursements.
Transaction costs
For the nine months ended September 30, 2021, transaction costs increased by $3.2 million primarily due to a $3.9 million increase in legal and professional fees, and severance costs primarily associated with the Acquisitions, partially offset by a decrease of $1.2 million primarily due to reimbursements received related to the Olenik litigation.
Interest expense, net
Interest expense increased from $4.2 million for the nine months ended September 30, 2020 to $7.7 million for the nine months ended September 30, 2021, due to higher average borrowings outstanding compared to the prior year period primarily resulting from borrowings related to the Acquisitions. See Note 10. Long-Term Debt in the Notes to Unaudited Condensed Consolidated Financial Statements.
(Loss) gain on derivative contracts, net
For the nine months ended September 30,March 31, 2021, we recorded a net loss on derivative contracts of $117.6$33.3 million, consisting of unrealized mark-to-market losses of $71.9$23.0 million related to our commodity hedges, partially offset by unrealized mark-to-market gains of $0.6$0.7 million related to our interest rate swap, along with net realized losses on settlements of our commodity hedges of $46.1$10.9 million and net realized losses on our interest rate swap of $0.2 million. For the nine months ended September 30, 2020, we recorded a net gain on derivative contracts of $73.1 million, consisting of unrealized mark-to-market gains of $25.9 million related to our commodity hedges, unrealized mark-to-market losses of $0.4 million related to our interest rate swap and net realized gains on settlements of our commodity hedges of $47.6$0.1 million.
Income tax benefit (expense)
ForDuring the ninethree months ended September 30, 2021,March 31, 2022, we recorded an income tax benefit of approximately $0.3$1.5 million which included (1) a deferred income tax benefit for Lynden US of $0.1$0.7 million as a result of its share of the distributable loss from EEH, (2) no net income tax benefit for Earthstone as the $0.8$6.6 million income tax benefit resulting from its share of the distributable loss from EEH had a full valuation allowance recorded against it as future realization of the net deferred tax asset cannot be assured and (3) a deferred income tax benefit of $0.8 million related to the Texas Margin Tax, offset by (4) current income tax expense of $0.6 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the ninethree months ended September 30, 2021.March 31, 2022.
ForDuring the ninethree months ended September 30, 2020,March 31, 2021, we recorded an income tax expensebenefit of approximately $0.1$0.3 million which included (1) noa deferred income tax expensebenefit for Lynden US of $0.2 million as a result of its share of the distributable income from EEH, (2) a deferredno net income tax benefit for Earthstone of $0.8as the $1.2 million as a result ofincome tax benefit resulting from its share of the distributable incomeloss from EEH which was used to reduce thehad a full valuation allowance recorded against its deferred tax asset which was previously recordedit as future realization of the net deferred tax asset cannot be assured and (3) deferred income tax expensebenefit of $0.1 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the ninethree months ended September 30, 2020.March 31, 2021.
Liquidity and Capital Resources
We have significant undeveloped acreage and future drilling locations. Drilling horizontal wells in the Midland Basin,and Delaware Basins, generally consisting of 7,500 to 12,000-foot15,000-foot lateral lengths, is capital intensive. As of September 30, 2021,March 31, 2022, we had $0.4$0.5 million in cash and $278.3$624.2 million of long-term debt outstanding under our Credit Agreement with a borrowing base of $650.0$825.0 million. With the $371.7$200.8 million of undrawn borrowing base capacity and $0.4$0.5 million in cash, we had total liquiditycash and available borrowings of approximately $372.2$201.3 million. Subsequent to March 31, 2022, we closed the Bighorn Acquisition, closed the $550 million Notes Offering, closed the $280 million Private Placement and paid the $70 million of deferred cash consideration for the Chisholm Acquisition.
With improvement in oil prices during 2021, we resumedtwo drilling operations with the deployment of a drilling rigrigs operating in the first quarter of 2021 while adding a second drilling rigMidland Basin and two additional rigs operating in August. Wethe Delaware Basin, we expect to spend $130-$410-$140440 million based on our current 20212022 drilling plan. We believe we will have sufficient liquidity with cash flows from operations and available borrowings under the Credit Agreement to meet our cash requirements for the next 12 months.
Working Capital
Working capital (presented below) was a deficit of $105.0$268.7 million as of September 30, 2021, compared to aMarch 31, 2022. Of the $268.7 million working capital deficit, of $20.8$148.2 million as of December 31, 2020, representing an increase in the deficit of $84.3 million. Of the $84.3 million increase in the working capital deficit $73.9 million resulted from a decrease in the net fair value ofrelates to our derivative contracts expected to settle in the next 12 months subsequent(subsequent to September 30, 2021March 31, 2022) resulting from increased oil price futures as of September 30, 2021. TheMarch 31, 2022. However, commodity hedges are settled in proximity of the receipt of the revenues to which they relate. Additionally, we are hedged at less than 100% of our production. As such, our commodity hedges are expected to settle at an amount less than the additional revenues received as a result of increased commodity prices. When removed, the remaining decreaseworking capital deficit of $10.4$120.5 million primarily resulted from increased drilling in the current year.is $80.8 million less than our cash and available borrowings as of March 31,2022 of $201.3 million. The components of working capital are presented below:
| | | | September 30, | | December 31, | | | March 31, | | December 31, |
(In thousands) | (In thousands) | | 2021 | | 2020 | (In thousands) | | 2022 | | 2021 |
Current assets: | Current assets: | | | | | Current assets: | | | | |
Cash | Cash | | $ | 441 | | | $ | 1,494 | | Cash | | $ | 482 | | | $ | 4,013 | |
Accounts receivable: | Accounts receivable: | | Accounts receivable: | |
Oil, natural gas, and natural gas liquids revenues | Oil, natural gas, and natural gas liquids revenues | | 45,076 | | | 16,255 | | Oil, natural gas, and natural gas liquids revenues | | 98,182 | | | 50,575 | |
Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2021 and December 31, 2020, respectively | | 3,058 | | | 7,966 | | |
Joint interest billings and other, net of allowance of $19 and $19 at March 31, 2022 and December 31, 2021, respectively | | Joint interest billings and other, net of allowance of $19 and $19 at March 31, 2022 and December 31, 2021, respectively | | 11,980 | | | 2,930 | |
Derivative asset | Derivative asset | | 17 | | | 7,509 | | Derivative asset | | 1,849 | | | 1,348 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 1,565 | | | 1,509 | | Prepaid expenses and other current assets | | 4,440 | | | 2,549 | |
Total current assets | Total current assets | | 50,157 | | | 34,733 | | Total current assets | | 116,933 | | | 61,415 | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | | $ | 33,602 | | | $ | 6,232 | | Accounts payable | | $ | 69,749 | | | $ | 31,397 | |
Revenues and royalties payable | Revenues and royalties payable | | 30,139 | | | 27,492 | | Revenues and royalties payable | | 52,167 | | | 36,189 | |
Accrued expenses | Accrued expenses | | 20,620 | | | 16,504 | | Accrued expenses | | 39,179 | | | 31,704 | |
Deferred acquisition payment - Chisholm | | Deferred acquisition payment - Chisholm | | 70,000 | | | — | |
Asset retirement obligation | Asset retirement obligation | | 543 | | | 447 | | Asset retirement obligation | | 609 | | | 395 | |
Derivative liability | Derivative liability | | 67,575 | | | 1,135 | | Derivative liability | | 150,055 | | | 45,310 | |
Advances | Advances | | 1,325 | | | 2,277 | | Advances | | 2,447 | | | 4,088 | |
Operating lease liabilities | Operating lease liabilities | | 732 | | | 773 | | Operating lease liabilities | | 747 | | | 681 | |
Finance lease liabilities | | — | | | 69 | | |
| Other current liabilities | Other current liabilities | | 634 | | | 565 | | Other current liabilities | | 630 | | | 851 | |
Total current liabilities | Total current liabilities | | 155,170 | | | 55,494 | | Total current liabilities | | 385,583 | | | 150,615 | |
| Working Capital | Working Capital | | $ | (105,013) | | | $ | (20,761) | | Working Capital | | $ | (268,650) | | | $ | (89,200) | |
|
Cash Flows from Operating Activities
Cash flows provided by operating activities for the ninethree months ended September 30, 2021March 31, 2022 increased to $147.3$83.0 million compared to $104.7$38.3 million for the ninethree months ended September 30, 2020,March 31, 2021, primarily due to the impact of oil and natural gas property acquisitions and the timing of payments and receipts partially offset by the cash settlement of derivative contracts as compared to the prior year period.
Cash Flows from Investing Activities
Cash flows used in investing activities for the ninethree months ended September 30, 2021March 31, 2022 increased to $305.4$380.7 million from $72.6$143.8 million for the ninethree months ended September 30, 2020,March 31, 2021, primarily due to acquisitionsthe acquisition of oil and gas properties.
Cash Flows from Financing Activities
Cash flows provided by financing activities were $157.1$294.2 million for the ninethree months ended September 30, 2021 asMarch 31, 2022 compared to cash flows used in financing activities of $40.7$105.4 million for the ninethree months ended September 30, 2020,March 31, 2021, primarily due to borrowings required to fund acquisitionsthe acquisition of oil and gas properties.
Capital Expenditures
Our accrual basis capital expenditures for the three and nine months ended September 30, 2021March 31, 2022 were as follows (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 |
Drilling and completions | | $ | 42,179 | | | $ | 74,346 | |
Leasehold costs | | 1,990 | | | 2,444 | |
Total capital expenditures | | $ | 44,169 | | | $ | 76,790 | |
| | | | |
Credit Facility
On September 17, 2021, the parties entered into an amendment (the “Fourth Amendment”) to the Credit Agreement. Among other things, the Fourth Amendment increased the borrowing base from $550 million to $650 million in connection with its regularly scheduled semi-annual redetermination, added provisions to provide for the eventual replacement of LIBOR as a benchmark interest rate, made certain changes to the lenders, and made certain other administrative changes to the Credit Agreement. The increase in our borrowing base is primarily the result of the previously discussed Acquisitions and improved commodity prices.
The next regularly scheduled redetermination of our borrowing base is expected to occur on or around May 1, 2022.
As of September 30, 2021, $278.3 million of borrowings were outstanding, bearing annual interest of 3.153%, resulting in an additional $371.7 million of borrowing base availability under the Credit Facility. As of December 31, 2020, the Company had a $240.0 million borrowing base under the Credit Agreement, of which $115.0 million was outstanding, bearing annual interest of 2.400%, resulting in an additional $125.0 million of borrowing base availability under the Credit Agreement. The increase in our borrowing base is a result of acquisitions, our drilling program in 2021 and an improvement in commodity prices.
Commodity Prices
There has been continued improvement in commodity prices compared to 2020, mostly resulting from improvements in oil demand as COVID-19 began to abate and actions taken by OPEC to reduce the worldwide supply of oil through production cuts. We can provide no assurances as to when or to what extent economic disruptions resulting from COVID-19 and the corresponding decrease in oil demand may continue to improve. Prices for natural gas and NGLs have also improved compared to 2020. | | | | | | | | | | |
| | | | Three Months Ended March 31, 2022 |
Drilling and completions | | | | $ | 82,000 | |
Leasehold costs | | | | 109 | |
Total capital expenditures | | | | $ | 82,109 | |
| | | | |
Hedging Activities
The following table sets forth our outstanding derivative contracts at September 30, 2021.March 31, 2022. When aggregating multiple contracts, the weighted average contract price is disclosed.
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q4 2021 | | Crude Oil | | 941,475 | | | $ | 50.63 | |
Q1 - Q4 2022 | | Crude Oil | | 2,462,250 | | | $ | 56.31 | |
Q4 2021 | | Crude Oil Basis Swap (1) | | 757,475 | | | $ | 0.80 | |
Q4 2021 | | Crude Oil Roll Swap (2) | | 228,475 | | | $ | (0.27) | |
Q1 - Q4 2022 | | Crude Oil Basis Swap (1) | | 2,007,500 | | | $ | 0.68 | |
Q4 2021 | | Natural Gas | | 2,576,000 | | | $ | 2.87 | |
Q1 - Q4 2022 | | Natural Gas | | 4,295,000 | | | $ | 2.92 | |
Q4 2021 | | Natural Gas Basis Swap (3) | | 2,698,000 | | | $ | (0.29) | |
Q1 - Q4 2022 | | Natural Gas Basis Swap (3) | | 9,100,000 | | | $ | (0.26) | |
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q2 - Q4 2022 | | Crude Oil | | 3,247,250 | | | $ | 65.96 | |
Q1 - Q4 2023 | | Crude Oil | | 1,277,500 | | | $ | 76.20 | |
Q2 - Q4 2022 | | Crude Oil Basis Swap (1) | | 3,377,500 | | | $ | 0.51 | |
Q1 - Q4 2023 | | Crude Oil Basis Swap (1) | | 730,000 | | | $ | 0.49 | |
Q2 - Q4 2022 | | Natural Gas | | 8,062,000 | | | $ | 3.55 | |
Q1 - Q4 2023 | | Natural Gas | | 3,670,000 | | | $ | 3.35 | |
Q2 - Q4 2022 | | Natural Gas Basis Swap (2) | | 5,500,000 | | | $ | (0.33) | |
Q1 - Q4 2023 | | Natural Gas Basis Swap (2) | | 25,550,000 | | | $ | (1.28) | |
Q1 - Q4 2024 | | Natural Gas Basis Swap (2) | | 25,620,000 | | | $ | (1.04) | |
(1)The basis differential price is between WTI Midland Crude and the WTI NYMEX.
(2)The swapbasis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) |
Q2 - Q4 2022 | | Crude Oil Costless Collar | | 1,560,000 | | | $ | 83.59 | | | $ | 69.42 | |
Q1 - Q4 2023 | | Crude Oil Costless Collar | | 1,715,500 | | | $ | 80.34 | | | $ | 62.98 | |
Q2 - Q4 2022 | | Natural Gas Costless Collar | | 12,782,500 | | | $ | 5.47 | | | $ | 3.66 | |
Q1 - Q4 2023 | | Natural Gas Costless Collar | | 13,188,000 | | | $ | 4.84 | | | $ | 3.28 | |
Hedging Update
The following table sets forth our outstanding derivative contracts at May 2, 2022. When aggregating multiple contracts, the weighted average contract price is disclosed.
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q2 - Q4 2022 | | Crude Oil | | 3,247,250 | | | $ | 65.96 | |
Q1 - Q4 2023 | | Crude Oil | | 1,277,500 | | | $ | 76.20 | |
Q2 - Q4 2022 | | Crude Oil Basis Swap (1) | | 3,377,500 | | | $ | 0.51 | |
Q1 - Q4 2023 | | Crude Oil Basis Swap (1) | | 1,825,000 | | | $ | 0.57 | |
Q2 - Q4 2022 | | Natural Gas | | 8,062,000 | | | $ | 3.55 | |
Q1 - Q4 2023 | | Natural Gas | | 3,670,000 | | | $ | 3.35 | |
Q2 - Q4 2022 | | Natural Gas Basis Swap (2) | | 5,500,000 | | | $ | (0.33) | |
Q1 - Q4 2023 | | Natural Gas Basis Swap (2) | | 25,550,000 | | | $ | (1.28) | |
Q1 - Q4 2024 | | Natural Gas Basis Swap (2) | | 25,620,000 | | | $ | (1.04) | |
(1)The basis differential price is between WTI RollMidland Crude and the WTI NYMEX.
(3)(2)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) |
Q2 - Q4 2022 | | Crude Oil Costless Collar | | 1,560,000 | | | $ | 83.59 | | | $ | 69.42 | |
Q1 - Q4 2023 | | Crude Oil Costless Collar | | 2,190,000 | | | $ | 85.73 | | | $ | 64.50 | |
Q2 - Q4 2022 | | Natural Gas Costless Collar | | 15,355,000 | | | $ | 6.33 | | | $ | 4.05 | |
Q1 - Q4 2023 | | Natural Gas Costless Collar | | 14,133,000 | | | $ | 5.34 | | | $ | 3.46 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) |
Q1 - Q4 2022 | | Crude Oil Costless Collar | | 365,000 | | | $ | 68.75 | | | $ | 55.00 | |
Q4 2021 | | Natural Gas Costless Collar | | 122,000 | | | $ | 4.10 | | | $ | 3.50 | |
Q1 - Q4 2022 | | Natural Gas Costless Collar | | 2,905,000 | | | $ | 4.00 | | | $ | 3.06 | |
Obligations and Commitments
There have been no material changes from the obligations and commitments disclosed in the Obligations and Commitments section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 20202021 Annual Report on Form 10-K other than those described in Note 13. Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements.
Environmental Regulations
Our operations are subject to risks normally associated with the drilling for and the production of oil and natural gas, including blowouts, fires, and environmental risks such as oil spills or natural gas leaks that could expose us to liabilities associated with these risks.
In our acquisition of existing or previously drilled well bores, we may not be aware of prior environmental safeguards, if any, that were taken at the time such wells were drilled or during such time the wells were operated. We maintain comprehensive insurance coverage that we believe is adequate to mitigate the risk of any adverse financial effects associated with these risks.
However, should it be determined that a liability exists with respect to any environmental cleanup or restoration, the liability to cure such a violation could still accrue to us. No claim has been made, nor are we aware of any liability which we may have, as it relates to any environmental cleanup, restoration, or the violation of any rules or regulations relating thereto.
Recently Issued Accounting Standards
See Note 1. Basis of Presentation and Summary of Significant Accounting Policies in the Notes to Unaudited Condensed Consolidated Financial Statements in this report for discussion of recently issued and adopted accounting standards affecting us.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks associated with interest rate risks, commodity price risk and credit risk. We have established risk management processes to monitor and manage these market risks.
Commodity Price Risk, Derivative Instruments and Hedging Activity
We are exposed to various risks including energy commodity price risk. When oil, natural gas and natural gas liquid prices decline significantly our ability to finance our capital budget and operations may be adversely impacted. We expect energy prices to remain volatile and unpredictable. Our hedging activities consist of derivative instruments entered into in order to hedge against changes in oil and natural gas prices through the use of fixed price swaps, basis swaps and costless collars. Swaps exchange floating price risk in the future for a smaller reporting company as defined by Rule 12b-2fixed price at the time of the Exchange Acthedge. Costless collars set both a maximum (sold ceiling) and thereforea minimum (bought floor) future price.
We have entered into a series of derivative instruments to hedge a significant portion of our expected oil and natural gas production through December 31, 2024. Typically, these derivative instruments require payments to (receipts from) counterparties based on specific indices as required by the derivative agreements. Although not risk free, we believe these instruments reduce our exposure to oil and natural gas price fluctuations and, thereby, allow us to achieve a more predictable cash flow.
The following is a summary of our open oil and natural gas derivative contracts as of March 31, 2022 :
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q2 - Q4 2022 | | Crude Oil | | 3,247,250 | | | $ | 65.96 | |
Q1 - Q4 2023 | | Crude Oil | | 1,277,500 | | | $ | 76.20 | |
Q2 - Q4 2022 | | Crude Oil Basis Swap (1) | | 3,377,500 | | | $ | 0.51 | |
Q1 - Q4 2023 | | Crude Oil Basis Swap (1) | | 730,000 | | | $ | 0.49 | |
Q2 - Q4 2022 | | Natural Gas | | 8,062,000 | | | $ | 3.55 | |
Q1 - Q4 2023 | | Natural Gas | | 3,670,000 | | | $ | 3.35 | |
Q2 - Q4 2022 | | Natural Gas Basis Swap (2) | | 5,500,000 | | | $ | (0.33) | |
Q1 - Q4 2023 | | Natural Gas Basis Swap (2) | | 25,550,000 | | | $ | (1.28) | |
Q1 - Q4 2024 | | Natural Gas Basis Swap (2) | | 25,620,000 | | | $ | (1.04) | |
(1)The basis differential price is between WTI Midland Crude and the WTI NYMEX.
(2)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.
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| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) |
Q2 - Q4 2022 | | Crude Oil Costless Collar | | 1,560,000 | | | $ | 83.59 | | | $ | 69.42 | |
Q1 - Q4 2023 | | Crude Oil Costless Collar | | 1,715,500 | | | $ | 80.34 | | | $ | 62.98 | |
Q2 - Q4 2022 | | Natural Gas Costless Collar | | 12,782,500 | | | $ | 5.47 | | | $ | 3.66 | |
Q1 - Q4 2023 | | Natural Gas Costless Collar | | 13,188,000 | | | $ | 4.84 | | | $ | 3.28 | |
Changes in fair value of commodity derivative instruments are not requiredreported in earnings in the period in which they occur. Our open commodity derivative instruments were in a net liability position with a fair value of $164.2 million at March 31, 2022. Based on the published commodity futures price curves for the underlying commodity as of March 31, 2022, a 10% increase in per unit commodity prices would cause the total fair value of our commodity derivative financial instruments to providedecrease by approximately $45.5 million to an overall net liability position of $118.7 million. A 10% decrease in per unit commodity prices would cause the total fair value of our commodity derivative financial instruments to increase by approximately $45.5 million to an overall net liability position of $209.7 million. There would also be a similar increase or decrease in Loss on derivative contracts, net in the Consolidated Statements of Operations.
Interest Rate Sensitivity
We are also exposed to market risk related to adverse changes in interest rates. Our interest rate risk exposure results primarily from fluctuations in short-term rates, which are based on SOFRand the prime rate and may result in reductions of earnings or cash flows due to increases in the interest rates we pay on these obligations.
At March 31, 2022, the outstanding borrowings under the Credit Agreement were $624.2 million bearing interest at rates described in Note 10. Long-Term Debt in the Notes to Consolidated Financial Statements. Fluctuations in interest rates will cause our annual interest costs to fluctuate. At March 31, 2022, the interest rate on borrowings under the Credit Agreement was 3.812% per year. If borrowings at December 31, 2021 were to remain constant, a 10% change in interest rates would impact our future cash flows by approximately $2.4 million per year.
Disclosure of Limitations
Because the information required under this item. above included only those exposures that existed at March 31, 2022, it does not consider those exposures or positions which could arise after that date. As a result, our ultimate realized gain or loss with respect to interest rate and commodity price fluctuations will depend on the exposures that arise during future periods.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Securities Exchange Act, of 1934, as amended (the “Exchange Act”), Rules 13a-15(e) and 15d-15(e), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Principal Accounting Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Principal Accounting Officer concluded that our disclosure controls and procedures were effective as of September 30, 2021March 31, 2022 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in various legal proceedings and claims in the ordinary course of business. As of September 30, 2021,March 31, 2022, and through the filing date of this report, we do not believe the ultimate resolution of any such actions or potential actions of which we are currently aware will have a material effect on our consolidated financial position or results of operations.
See Note 13. Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements under Part I, Item 1 of this report, for material matters that have occurred since the filing of our Annual Report on Form 10-K for the year ended December 31, 2020.2021.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risk factors and other cautionary statements described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020.2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sale of Equity Securities
Unregistered sales of equity securities during the three months ended September 30, 2021March 31, 2022 were reported in our Current Report on Form 8-K filed with the SEC on July 23, 2021,February 18, 2022, which report is incorporated herein by reference.
Repurchase of Equity Securities
The following table sets forth information regarding our acquisition of shares of Class A Common Stock for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan or Programs |
July 2021 | | — | | | $ | — | | | — | | | — | |
August 2021 | | — | | | — | | | — | | | — | |
September 2021 | | 65,106 | | | $ | 9.19 | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan or Programs |
January 2022 | | 1,024 | | | $ | 10.94 | | | — | | | — | |
February 2022 | | 236,076 | | | 13.66 | | | — | | | — | |
March 2022 | | 49,792 | | | $ | 13.27 | | | — | | | — | |
(1)All of the shares were surrendered by employees (via net settlement) in satisfaction of tax obligations upon the vesting of restricted stock unit awards and performance unit awards. The acquisition of the surrendered shares was not part of a publicly announced program to repurchase shares of our Class A Common Stock.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
| | | | | | | | | | | | | | | | | | | | |
Exhibit No. | | Description | | Filed Herewith | | Furnished Herewith |
31.1 | | | | X | | |
31.2 | | | | X | | |
32.1 | | | | | | X |
32.2 | | | | | | X |
101 | | Interactive Data Files (formatted as Inline XBRL). | | X | | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | | X | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | | |
| | | | EARTHSTONE ENERGY, INC. |
| | | | |
Date: | November 3, 2021May 4, 2022 | | By: | /s/ Tony Oviedo |
| | | Tony Oviedo |
| | | Executive Vice President – Accounting and Administration |