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 ~~March 31,~~September 30, 2022


☐			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~~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 such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

☐

Table of Contents

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 ~~April 28,~~October 27, 2022, ~~79,091,777~~there were 139,678,567 shares of common stock outstanding, including 105,416,926 shares of Class A Common Stock, $0.001 par value per share, and ~~34,271,766~~34,261,641 shares of Class B Common Stock, $0.001 par value per ~~share, were outstanding.~~share.

Table of Contents

TABLE OF CONTENTS

Page

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of ~~March~~ 3 1 ~~, 202~~2 September 30, 2022 and December 31, 20 212021

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended ~~March~~ 3 1 ~~, 202~~2September 30, 2022 and 20 212021

Condensed Consolidated Statements of Equity for the T ~~hree~~Three and Nine Months Ended ~~March~~ 3 1 ~~, 202~~2 September 30, 2022 and 20 212021

Condensed Consolidated Statements of Cash Flows for the ~~Three~~Nine Months Ended ~~March~~ 3 1 ~~, 202~~2 September 30, 2022 and 20 212021

810

Notes to Unaudited Condensed Consolidated Financial Statements

911

Item 2.

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

2632

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

3645

Item 4.

Controls and Procedures

3746

PART II – OTHER INFORMATION

Unregistered Sales of Equity Securities and Use of Proceeds

3848

Item 3.

Defaults Upon Senior Securities

3848

Item 4.

Mine Safety Disclosures

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share amounts)


		March 31,		December 31,			September 30,		December 31,
ASSETS	ASSETS	2022		2021		ASSETS	2022		2021
Current assets:	Current assets:					Current assets:
Cash	Cash	$	482	$	4,013	Cash	$	—	$	4,013
Accounts receivable:	Accounts receivable:					Accounts receivable:
Oil, natural gas, and natural gas liquids revenues	Oil, natural gas, and natural gas liquids revenues	98,182		50,575		Oil, natural gas, and natural gas liquids revenues	196,941		50,575
Joint interest billings and other, net of allowance of $19 and $19 at March 31, 2022 and December 31, 2021, respectively		11,980		2,930
Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2022 and December 31, 2021, respectively						Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2022 and December 31, 2021, respectively	20,328		2,930
Derivative asset	Derivative asset	1,849		1,348		Derivative asset	14,950		1,348
Prepaid expenses and other current assets	Prepaid expenses and other current assets	4,440		2,549		Prepaid expenses and other current assets	19,089		2,549
Total current assets	Total current assets	116,933		61,415		Total current assets	251,308		61,415

Oil and gas properties, successful efforts method:	Oil and gas properties, successful efforts method:					Oil and gas properties, successful efforts method:
Proved properties	Proved properties	2,278,496		1,625,367		Proved properties	3,832,991		1,625,367
Unproved properties	Unproved properties	280,805		222,025		Unproved properties	290,111		222,025
Land	Land	5,382		5,382		Land	5,482		5,382
Total oil and gas properties	Total oil and gas properties	2,564,683		1,852,774		Total oil and gas properties	4,128,584		1,852,774

Accumulated depreciation, depletion and amortization	Accumulated depreciation, depletion and amortization	(429,743)		(395,625)		Accumulated depreciation, depletion and amortization	(516,662)		(395,625)
Net oil and gas properties	Net oil and gas properties	2,134,940		1,457,149		Net oil and gas properties	3,611,922		1,457,149

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

Office and other equipment, net of accumulated depreciation and amortization of $4,636 and $4,547 at March 31, 2022 and December 31, 2021, respectively		2,389		1,986
Office and other equipment, net of accumulated depreciation and amortization of $5,059 and $4,547 at September 30, 2022 and December 31, 2021, respectively						Office and other equipment, net of accumulated depreciation and amortization of $5,059 and $4,547 at September 30, 2022 and December 31, 2021, respectively	5,070		1,986
Derivative asset	Derivative asset	5,810		157		Derivative asset	5,526		157
Operating lease right-of-use assets	Operating lease right-of-use assets	2,310		1,795		Operating lease right-of-use assets	2,255		1,795
Other noncurrent assets	Other noncurrent assets	58,889		33,865		Other noncurrent assets	16,216		33,865
TOTAL ASSETS	TOTAL ASSETS	$	2,321,271	$	1,556,367	TOTAL ASSETS	$	3,892,297	$	1,556,367
LIABILITIES AND EQUITY	LIABILITIES AND EQUITY					LIABILITIES AND EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	69,749	$	31,397	Accounts payable	$	75,162	$	31,397
Revenues and royalties payable	Revenues and royalties payable	52,167		36,189		Revenues and royalties payable	158,867		36,189
Accrued expenses	Accrued expenses	39,179		31,704		Accrued expenses	105,623		31,704
Deferred acquisition payment - Chisholm		70,000		—

Asset retirement obligation	Asset retirement obligation	609		395		Asset retirement obligation	941		395
Derivative liability	Derivative liability	150,055		45,310		Derivative liability	28,404		45,310
Advances	Advances	2,447		4,088		Advances	15,405		4,088
Operating lease liabilities	Operating lease liabilities	747		681		Operating lease liabilities	869		681

Finance lease liabilities						Finance lease liabilities	784		—
Other current liabilities	Other current liabilities	630		851		Other current liabilities	4,105		851
Total current liabilities	Total current liabilities	385,583		150,615		Total current liabilities	390,160		150,615

Noncurrent liabilities:	Noncurrent liabilities:					Noncurrent liabilities:
Long-term debt		624,229		320,000

Long-term debt, net						Long-term debt, net	1,174,549		320,000
Deferred tax liability	Deferred tax liability	14,404		15,731		Deferred tax liability	93,322		15,731
Asset retirement obligation	Asset retirement obligation	21,509		15,471		Asset retirement obligation	35,837		15,471
Derivative liability	Derivative liability	21,775		571		Derivative liability	7,840		571

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Operating lease liabilities	Operating lease liabilities	1,725		1,276		Operating lease liabilities	1,549		1,276

Finance lease liabilities						Finance lease liabilities	1,003		—
Other noncurrent liabilities	Other noncurrent liabilities	9,744		6,442		Other noncurrent liabilities	13,574		6,442
Total noncurrent liabilities	Total noncurrent liabilities	693,386		359,491		Total noncurrent liabilities	1,327,674		359,491

Commitments and Contingencies (Note 13)	Commitments and Contingencies (Note 13)	0		0		Commitments and Contingencies (Note 13)

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

Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 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		34		34
Series A Convertible Preferred Stock, $0.001 par value, none authorized, issued or outstanding						Series A Convertible Preferred Stock, $0.001 par value, none authorized, issued or outstanding	—		—
Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 108,416,926 and 53,467,307 issued and outstanding at September 30, 2022 and December 31, 2021, respectively						Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 108,416,926 and 53,467,307 issued and outstanding at September 30, 2022 and December 31, 2021, respectively	108		53
Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,261,641 and 34,344,532 issued and outstanding at September 30, 2022 and December 31, 2021, respectively						Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,261,641 and 34,344,532 issued and outstanding at September 30, 2022 and December 31, 2021, respectively	34		34
Additional paid-in capital	Additional paid-in capital	967,093		718,181		Additional paid-in capital	1,382,026		718,181
Accumulated deficit		(193,252)		(159,774)
Retained earnings (accumulated deficit)						Retained earnings (accumulated deficit)	163,089		(159,774)

Total Earthstone Energy, Inc. equity	Total Earthstone Energy, Inc. equity	773,948		558,494		Total Earthstone Energy, Inc. equity	1,545,257		558,494
Noncontrolling interest	Noncontrolling interest	468,354		487,767		Noncontrolling interest	629,206		487,767
Total equity	Total equity	1,242,302		1,046,261		Total equity	2,174,463		1,046,261

TOTAL LIABILITIES AND EQUITY	TOTAL LIABILITIES AND EQUITY	$	2,321,271	$	1,556,367	TOTAL LIABILITIES AND EQUITY	$	3,892,297	$	1,556,367

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

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EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share amounts)


		Three Months Ended						Three Months Ended				Nine Months Ended
		March 31,						September 30,				September 30,
			2022			2021				2022		2021		2022		2021
REVENUES	REVENUES				REVENUES
Oil	Oil		$	137,752		$	60,819		Oil	$	332,036	$	74,051	$	756,420	$	205,788
Natural gas	Natural gas		22,958			5,852			Natural gas	113,937		14,368		233,020		26,910
Natural gas liquids	Natural gas liquids		35,440			8,901			Natural gas liquids	85,522		21,965		210,756		42,929
Total revenues	Total revenues		196,150			75,572			Total revenues	531,495		110,384		1,200,196		275,627

OPERATING COSTS AND EXPENSES	OPERATING COSTS AND EXPENSES								OPERATING COSTS AND EXPENSES
Lease operating expense	Lease operating expense		21,631			10,849			Lease operating expense	75,829		12,983		147,974		35,579
Production and ad valorem taxes	Production and ad valorem taxes		13,315			5,027			Production and ad valorem taxes	40,219		7,225		87,729		17,428

Depreciation, depletion and amortization	Depreciation, depletion and amortization		34,326			24,407			Depreciation, depletion and amortization	90,880		27,059		191,669		77,493

General and administrative expense	General and administrative expense		12,306			8,380			General and administrative expense	14,188		7,650		40,571		25,200
Transaction costs	Transaction costs		10,742			2,106			Transaction costs	1,778		293		12,118		2,906
Accretion of asset retirement obligation	Accretion of asset retirement obligation		397			290			Accretion of asset retirement obligation	758		323		1,863		916
Exploration expense	Exploration expense		92			—			Exploration expense	2,248		296		2,340		326
Total operating costs and expenses	Total operating costs and expenses		92,809			51,059			Total operating costs and expenses	225,900		55,829		484,264		159,848

Gain on sale of oil and gas properties									Gain on sale of oil and gas properties	14,803		392		14,803		740

Income from operations	Income from operations		103,341			24,513			Income from operations	320,398		54,947		730,735		116,519

OTHER INCOME (EXPENSE)	OTHER INCOME (EXPENSE)								OTHER INCOME (EXPENSE)
Interest expense, net	Interest expense, net		(5,318)			(2,217)			Interest expense, net	(20,988)		(3,050)		(42,931)		(7,668)

Loss on derivative contracts, net			(151,480)			(33,263)
Gain (loss) on derivative contracts, net									Gain (loss) on derivative contracts, net	60,286		(33,128)		(141,101)		(117,566)

Other income, net	Other income, net		47			103			Other income, net	134		520		430		823
Total other expense			(156,751)			(35,377)
Total other income (expense)									Total other income (expense)	39,432		(35,658)		(183,602)		(124,411)

Loss before income taxes			(53,410)			(10,864)
Income tax benefit			1,533			308
Net loss			(51,877)			(10,556)
Income (loss) before income taxes									Income (loss) before income taxes	359,830		19,289		547,133		(7,892)
Income tax (expense) benefit									Income tax (expense) benefit	(60,518)		(451)		(81,673)		343
Net income (loss)									Net income (loss)	299,312		18,838		465,460		(7,549)

Less: Net loss attributable to noncontrolling interest			(18,399)			(4,723)
Less: Net income (loss) attributable to noncontrolling interest									Less: Net income (loss) attributable to noncontrolling interest	87,856		8,420		142,597		(3,263)

Net loss attributable to Earthstone Energy, Inc.			$	(33,478)		$	(5,833)
Net income (loss) attributable to Earthstone Energy, Inc.									Net income (loss) attributable to Earthstone Energy, Inc.	$	211,456	$	10,418	$	322,863	$	(4,286)

Net loss per common share attributable to Earthstone Energy, Inc.:
Basic and Diluted			$	(0.53)		$	(0.14)

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

Weighted average common shares outstanding:	Weighted average common shares outstanding:								Weighted average common shares outstanding:
Basic and Diluted			63,445,649			42,778,916
Basic									Basic	105,254,778		49,243,185		82,483,635		45,406,952
Diluted									Diluted	109,278,661		52,662,942		92,844,854		45,406,952

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

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EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

(In thousands, except share amounts)


		Issued Shares																	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			Series A Convertible Preferred Stock	Class A Common Stock	Class B Common Stock	Series A Conv Pref Stock		Class A Common Stock		Class B Common Stock		Additional Paid-in Capital		(Accumulated Deficit) Retained Earnings		Total Earthstone Energy, Inc. Equity		Noncontrolling Interest		Total Equity
At December 31, 2021	At December 31, 2021	53,467,307	34,344,532	$	53	$	34	$	718,181	$	(159,774)	$	558,494	$	487,767	$	1,046,261	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	Stock-based compensation expense - equity portion	—	—	—		—		2,301		—		2,301		—		2,301		Stock-based compensation expense - equity portion	—	—	—	—		—		—		2,301		—		2,301		—		2,301
Shares issued in connection with Chisholm Acquisition	Shares issued in connection with Chisholm Acquisition	19,417,476	—	19		—		249,496		—		249,515		—		249,515		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	Vesting of restricted stock units, net of taxes paid	483,251	—	1		—		(1)		—		—		—		—		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	Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings	286,892	—	—		—		(3,898)		—		(3,898)		—		(3,898)		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	Cancellation of Treasury shares	(286,892)	—	—		—		—		—		—		—		—		Cancellation of Treasury shares	—	(286,892)	—	—		—		—		—		—		—		—		—
Class B Common Stock converted to Class A Common Stock	Class B Common Stock converted to Class A Common Stock	72,766	(72,766)	—		—		1,014		—		1,014		(1,014)		—		Class B Common Stock converted to Class A Common Stock	—	72,766	(72,766)	—		—		—		1,014		—		1,014		(1,014)		—
Net loss	Net loss	—	—	—		—		—		(33,478)		(33,478)		(18,399)		(51,877)		Net loss	—	—	—	—		—		—		—		(33,478)		(33,478)		(18,399)		(51,877)
At March 31, 2022	At March 31, 2022	73,440,800	34,271,766	$	73	$	34	$	967,093	$	(193,252)	$	773,948	$	468,354	$	1,242,302	At March 31, 2022	—	73,440,800	34,271,766	—		$	73	$	34	$	967,093	$	(193,252)	$	773,948	$	468,354	$	1,242,302

Stock-based compensation expense - equity portion																		Stock-based compensation expense - equity portion	—	—	—	—		—		—		2,693		—		2,693		—		2,693
Issuance of Series A Convertible Preferred Stock, net of offering costs of $674																		Issuance of Series A Convertible Preferred Stock, net of offering costs of $674	280,000	—	—	—		—		—		279,326		—		279,326		—		279,326
Shares issued in connection with Bighorn Acquisition																		Shares issued in connection with Bighorn Acquisition	—	5,650,977	—	—		6		—		77,751		—		77,757		—		77,757
Vesting of restricted stock units, net of taxes paid																		Vesting of restricted stock units, net of taxes paid	—	115,521	—	—		—		—		—		—		—		—		—
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings																		Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings	—	48,232	—	—		—		—		(719)		—		(719)		—		(719)
Cancellation of Treasury shares																		Cancellation of Treasury shares	—	(48,232)	—	—		—		—		—		—		—		—		—
Class B Common Stock converted to Class A Common Stock																		Class B Common Stock converted to Class A Common Stock	—	10,125	(10,125)	—		—		—		149		—		149		(149)		—
Net income																		Net income	—	—	—	—		—		—		—		144,885		144,885		73,140		218,025
At June 30, 2022																		At June 30, 2022	280,000	79,217,423	34,261,641	—		$	79	$	34	$	1,326,293	$	(48,367)	$	1,278,039	$	541,345	$	1,819,384
Stock-based compensation expense - equity portion																		Stock-based compensation expense - equity portion	—	—	—��	—		—		—		2,745		—		2,745		—		2,745
Conversion of Series A Convertible Preferred Stock																		Conversion of Series A Convertible Preferred Stock	(280,000)	25,225,225	—	—		25		—		(25)		—		—		—		—

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

Issued Shares
Class A Common Stock Class B Common Stock Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Deficit Total Earthstone Energy, Inc. Equity Noncontrolling Interest Total Equity
At December 31, 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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	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

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

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EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


		For the Three Months Ended March 31,					For the Nine Months Ended September 30,
		2022		2021			2022		2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net loss		$	(51,877)	$	(10,556)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net income (loss)						Net income (loss)	$	465,460	$	(7,549)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:						Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization	Depreciation, depletion and amortization	34,326		24,407		Depreciation, depletion and amortization	191,669		77,493

Accretion of asset retirement obligations	Accretion of asset retirement obligations	397		290		Accretion of asset retirement obligations	1,863		916
Settlement of asset retirement obligations	Settlement of asset retirement obligations	(201)		(15)		Settlement of asset retirement obligations	(664)		(103)

Gain on sale of oil and gas properties						Gain on sale of oil and gas properties	(14,803)		(740)
Gain on sale of office and other equipment	Gain on sale of office and other equipment	(22)		—		Gain on sale of office and other equipment	(152)		(114)

Total loss on derivative contracts, net	Total loss on derivative contracts, net	151,480		33,263		Total loss on derivative contracts, net	141,101		117,566
Operating portion of net cash paid in settlement of derivative contracts	Operating portion of net cash paid in settlement of derivative contracts	(31,686)		(10,905)		Operating portion of net cash paid in settlement of derivative contracts	(169,708)		(46,311)
Stock-based compensation - equity portion		2,301		3,329
Stock-based compensation - equity and liability awards						Stock-based compensation - equity and liability awards	15,112		10,621
Deferred income taxes	Deferred income taxes	(1,327)		(308)		Deferred income taxes	77,591		(343)

Amortization of deferred financing costs	Amortization of deferred financing costs	627		141		Amortization of deferred financing costs	3,723		581

Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
(Increase) decrease in accounts receivable	(Increase) decrease in accounts receivable	(48,735)		(5,379)		(Increase) decrease in accounts receivable	(189,504)		(12,238)
(Increase) decrease in prepaid expenses and other current assets	(Increase) decrease in prepaid expenses and other current assets	(1,896)		367		(Increase) decrease in prepaid expenses and other current assets	(16,546)		900
Increase (decrease) in accounts payable and accrued expenses	Increase (decrease) in accounts payable and accrued expenses	21,783		5,389		Increase (decrease) in accounts payable and accrued expenses	92,450		6,090
Increase (decrease) in revenues and royalties payable	Increase (decrease) in revenues and royalties payable	14,932		(2,081)		Increase (decrease) in revenues and royalties payable	94,260		2,556
Increase (decrease) in advances	Increase (decrease) in advances	(7,100)		358		Increase (decrease) in advances	11,317		(2,015)

Net cash provided by operating activities	Net cash provided by operating activities	83,002		38,300		Net cash provided by operating activities	703,169		147,310
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Acquisition of oil and gas properties, net of cash acquired	Acquisition of oil and gas properties, net of cash acquired	(324,198)		(134,641)		Acquisition of oil and gas properties, net of cash acquired	(1,518,269)		(240,431)
Additions to oil and gas properties	Additions to oil and gas properties	(55,925)		(8,913)		Additions to oil and gas properties	(325,109)		(65,074)
Additions to office and other equipment	Additions to office and other equipment	(590)		(226)		Additions to office and other equipment	(1,694)		(886)

Proceeds from sales of oil and gas properties						Proceeds from sales of oil and gas properties	26,165		975
Net cash used in investing activities	Net cash used in investing activities	(380,713)		(143,780)		Net cash used in investing activities	(1,818,907)		(305,416)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from borrowings		582,498		177,114
Repayments of borrowings		(278,269)		(68,690)
Proceeds from borrowings under Credit Agreement						Proceeds from borrowings under Credit Agreement	2,348,728		503,734
Repayments of borrowings under Credit Agreement						Repayments of borrowings under Credit Agreement	(2,276,996)		(340,482)
Proceeds from issuance of 8% Senior Notes due 2027, net						Proceeds from issuance of 8% Senior Notes due 2027, net	537,256		—
Proceeds from term loan						Proceeds from term loan	244,209		—
Proceeds from issuance of Series A Convertible Preferred Stock, net of offering costs of $674						Proceeds from issuance of Series A Convertible Preferred Stock, net of offering costs of $674	279,326		—
Cash paid related to the exchange and cancellation of Class A Common Stock	Cash paid related to the exchange and cancellation of Class A Common Stock	(3,898)		(2,080)		Cash paid related to the exchange and cancellation of Class A Common Stock	(5,168)		(3,420)
Cash paid for finance leases	Cash paid for finance leases	—		(20)		Cash paid for finance leases	(408)		(70)
Deferred financing costs	Deferred financing costs	(6,151)		(891)		Deferred financing costs	(15,222)		(2,709)
Net cash provided by financing activities	Net cash provided by financing activities	294,180		105,433		Net cash provided by financing activities	1,111,725		157,053
Net decrease in cash	Net decrease in cash	(3,531)		(47)		Net decrease in cash	(4,013)		(1,053)
Cash at beginning of period	Cash at beginning of period	4,013		1,494		Cash at beginning of period	4,013		1,494
Cash at end of period	Cash at end of period	$	482	$	1,447	Cash at end of period	$	—	$	441
Supplemental disclosure of cash flow information	Supplemental disclosure of cash flow information					Supplemental disclosure of cash flow information
Cash paid for:	Cash paid for:					Cash paid for:
Interest	Interest	$	4,580	$	1,922	Interest	$	17,485	$	7,126

Income taxes						Income taxes	$	625	$	687
Non-cash investing and financing activities:	Non-cash investing and financing activities:					Non-cash investing and financing activities:
Class A Common Stock issued in IRM Acquisition	Class A Common Stock issued in IRM Acquisition	$	—	$	76,572	Class A Common Stock issued in IRM Acquisition	$	—	$	76,572

Class A Common Stock issued in Tracker/Sequel Acquisitions						Class A Common Stock issued in Tracker/Sequel Acquisitions	$	—	$	61,814
Class A Common Stock issued in Chisholm Acquisition	Class A Common Stock issued in Chisholm Acquisition	$	249,515	$	—	Class A Common Stock issued in Chisholm Acquisition	$	249,515	$	—
Deferred acquisition payment - Chisholm		$	70,000	$	—
Class A Common Stock issued in Bighorn Acquisition						Class A Common Stock issued in Bighorn Acquisition	$	77,757	$	—
Class A Common Stock issued in Titus Acquisition						Class A Common Stock issued in Titus Acquisition	$	53,574	$	—
Accrued capital expenditures	Accrued capital expenditures	$	49,853	$	7,775	Accrued capital expenditures	$	40,969	$	18,971
Lease asset additions - ASC 842	Lease asset additions - ASC 842	$	678	$	—	Lease asset additions - ASC 842	$	3,111	$	—
Asset retirement obligations	Asset retirement obligations	$	86	$	427	Asset retirement obligations	$	722	$	242

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

810

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation and Summary of Significant Accounting Policies

Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with its consolidated subsidiaries, the “Company”), is a growth-oriented independent oil and natural gas development and production company. In addition, the Company is active in corporate mergers and the acquisition of oil and natural gas properties that have production and future development opportunities. The Company's operations are all in the upstream segment of the oil and natural gas industry and all its properties are onshore in Texas and New Mexico.

Earthstone is the sole managing member of Earthstone Energy Holdings, LLC, a Delaware limited liability company (together with its wholly-owned consolidated subsidiaries, “EEH”), with a controlling interest in EEH. Earthstone, together with its wholly-owned subsidiary, Lynden Energy Corp., a corporation organized under the laws of British Columbia (“Lynden Corp”), and Lynden Corp’s wholly-owned consolidated subsidiary, Lynden USA Inc., a Utah corporation (“Lynden US”) and also 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 2021 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, 2021 is derived from the audited Consolidated Financial Statements at that date.

~~Recently Issued Accounting Standards~~

~~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. As discussed in ~~Note 10. Long-Term Debt~~, the Company amended its credit facility on January 30, 2022, which, among other things, provided mechanics relating to the transition from LIBOR to a benchmark replacement rate. The transition from LIBOR is not expected to have a material impact on 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.

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

~~Table of Contents~~

~~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 ~~three~~nine months ended ~~March 31,~~September 30, 2022.

Fair Value on a Recurring Basis

Derivative Financial Instruments

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

Share-based Compensation Liability

Certain of our performance-based stock awards (“PSUs” or “performance units”) may be payable in cash. The Company classifies the awards that may be settled in cash as liability awards. These awards are valued quarterly utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes grant date fair value based on the most likely outcome. The inputs for the Monte Carlo model are designated as Level 2 within the valuation hierarchy. The share-based compensation liability related to the PSU liability awards is included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of ~~March 31,~~September 30, 2022.

~~Table of Contents~~

~~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):


March 31, 2022		Level 1		Level 2		Level 3		Total
September 30, 2022										September 30, 2022	Level 1		Level 2		Level 3		Total
Financial assets	Financial assets									Financial assets
Derivative asset - current	Derivative asset - current	$	—	$	1,849	$	—	$	1,849	Derivative asset - current	$	—	$	14,950	$	—	$	14,950
Derivative asset - noncurrent	Derivative asset - noncurrent	—		5,810		—		5,810		Derivative asset - noncurrent	—		5,526		—		5,526
Total financial assets	Total financial assets	$	—	$	7,659	$	—	$	7,659	Total financial assets	$	—	$	20,476	$	—	$	20,476

Financial liabilities	Financial liabilities									Financial liabilities
Derivative liability - current	Derivative liability - current	$	—	$	150,055	$	—	$	150,055	Derivative liability - current	$	—	$	28,404	$	—	$	28,404
Derivative liability - noncurrent	Derivative liability - noncurrent	—		21,775		—		21,775		Derivative liability - noncurrent	—		7,840		—		7,840
Share-based compensation liability - noncurrent	Share-based compensation liability - noncurrent	—		9,630		—		9,630		Share-based compensation liability - noncurrent	—		13,474		—		13,474
Total financial liabilities	Total financial liabilities	$	—	$	181,460	$	—	$	181,460	Total financial liabilities	$	—	$	49,718	$	—	$	49,718

December 31, 2021	December 31, 2021									December 31, 2021
Financial assets	Financial assets									Financial assets
Derivative asset - current	Derivative asset - current	$	—	$	1,348	$	—	$	1,348	Derivative asset - current	$	—	$	1,348	$	—	$	1,348
Derivative asset - noncurrent	Derivative asset - noncurrent	—		157		—		157		Derivative asset - noncurrent	—		157		—		157
Total financial assets	Total financial assets	$	—	$	1,505	$	—	$	1,505	Total financial assets	$	—	$	1,505	$	—	$	1,505

Financial liabilities	Financial liabilities									Financial liabilities
Derivative liability - current	Derivative liability - current	$	—	$	45,310	$	—	$	45,310	Derivative liability - current	$	—	$	45,310	$	—	$	45,310
Derivative liability - noncurrent	Derivative liability - noncurrent	—		571		—		571		Derivative liability - noncurrent	—		571		—		571
Share-based compensation liability - current	Share-based compensation liability - current	—		7,835		—		7,835		Share-based compensation liability - current	—		7,835		—		7,835
Share-based compensation liability - noncurrent	Share-based compensation liability - noncurrent	—		6,324		—		6,324		Share-based compensation liability - noncurrent	—		6,324		—		6,324
Total financial liabilities	Total financial liabilities	$	—	$	60,040	$	—	$	60,040	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, 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

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

certain circumstances indicate that adjustments may be necessary. No triggering events that require assessment were observed during the ~~three~~nine months ended ~~March 31,~~September 30, 2022. See further discussion in Note 5. Oil and Natural Gas Properties.

Items Not Recorded at Fair Value

The carrying amounts reported on the unaudited consolidated balance sheets for cash, accounts receivable, prepaid expenses, other current assets accounts payable, revenues and royalties payable, accrued expenses and other current liabilities approximate their fair values.

The Company has not elected to account for its debt instruments at fair value. Borrowings under the revolving tranche and term loan tranche of the Company’s credit facility bear interest at floating market rates, therefore the carrying amounts and fair values were approximately equal as of September 30, 2022 and December 31, 2021. The carrying value of EEH’s 8.000% Senior Notes due 2027, net of $11.6 million deferred financing costs, of $538.4 million and accrued interest of $20.7 million had an estimated fair value of $518.9 million as of September 30, 2022. There were no other debt instruments outstanding at December 31, 2021.

Note 3. Derivative Financial Instruments

Commodity Derivative Instruments

The Company’s hedging activities primarily consist of derivative instruments entered into in order to hedge against changes in oil and natural gas prices through the use of fixed price swap agreements, costless collars and ~~costless collars.~~deferred premium put options. Swaps exchange floating price risk in the future for a fixed price at the time of the hedge. Costless collars set both a maximum (sold ceiling) and a minimum (bought floor) future price. A deferred premium put option represents a bought floor except, unlike a standard put option, the premium is not paid until the expiration of the option. Consistent with its hedging policy, the Company has entered into a series of derivative instruments to hedge a significant portion of its expected oil and natural gas production through December 31, 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.

~~Table of Contents~~

~~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 ~~March 31,~~September 30, 2022:


		Price Swaps					Price Swaps
Period	Period	Commodity	Volume (Bbls / MMBtu)	Weighted Average Price ($/Bbl / $/MMBtu)		Period	Commodity	Volume (Bbls / MMBtu)	Weighted Average Price ($/Bbl / $/MMBtu)
Q2 - Q4 2022		Crude Oil	3,247,250	$	65.96
Q4 2022						Q4 2022	Crude Oil	1,081,000	$	66.70
Q1 - Q4 2023	Q1 - Q4 2023	Crude Oil	1,277,500	$	76.20	Q1 - Q4 2023	Crude Oil	1,277,500	$	76.20
Q2 - Q4 2022		Crude Oil Basis Swap (1)	3,377,500	$	0.51
Q4 2022						Q4 2022	Crude Oil Basis Swap (1)	3,128,000	$	0.89
Q1 - Q4 2023	Q1 - Q4 2023	Crude Oil Basis Swap (1)	730,000	$	0.49	Q1 - Q4 2023	Crude Oil Basis Swap (1)	9,488,500	$	0.92
Q2 - Q4 2022		Natural Gas	8,062,000	$	3.55
Q4 2022						Q4 2022	Natural Gas	1,893,500	$	3.33
Q1 - Q4 2023	Q1 - Q4 2023	Natural Gas	3,670,000	$	3.35	Q1 - Q4 2023	Natural Gas	3,670,000	$	3.35
Q2 - Q4 2022		Natural Gas Basis Swap (2)	5,500,000	$	(0.33)
Q4 2022						Q4 2022	Natural Gas Basis Swap (2)	1,840,000	$	(0.33)
Q1 - Q4 2023	Q1 - Q4 2023	Natural Gas Basis Swap (2)	25,550,000	$	(1.28)	Q1 - Q4 2023	Natural Gas Basis Swap (2)	36,500,000	$	(1.47)
Q1 - Q4 2024	Q1 - Q4 2024	Natural Gas Basis Swap (2)	25,620,000	$	(1.04)	Q1 - Q4 2024	Natural Gas Basis Swap (2)	36,600,000	$	(1.05)

(1)The basis differential price is between WTI Midland Crude and the WTI NYMEX.

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(2)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.


		Costless Collars							Costless Collars
Period	Period	Commodity	Volume (Bbls / MMBtu)	Sold Ceiling ($/Bbl / $/MMBtu)		Bought Floor ($/Bbl / $/MMBtu)		Period	Commodity	Volume (Bbls / MMBtu)	Bought Floor ($/Bbl / $/MMBtu)		Sold Ceiling ($/Bbl / $/MMBtu)
Q2 - Q4 2022		Crude Oil Costless Collar	1,560,000	$	83.59	$	69.42
Q4 2022								Q4 2022	Crude Oil Costless Collar	805,000	$	73.14	$	96.49
Q1 - Q4 2023	Q1 - Q4 2023	Crude Oil Costless Collar	1,715,500	$	80.34	$	62.98	Q1 - Q4 2023	Crude Oil Costless Collar	1,715,500	$	62.98	$	80.34
Q2 - Q4 2022		Natural Gas Costless Collar	12,782,500	$	5.47	$	3.66
Q4 2022								Q4 2022	Natural Gas Costless Collar	8,686,500	$	4.57	$	10.17
Q1 - Q4 2023	Q1 - Q4 2023	Natural Gas Costless Collar	13,188,000	$	4.84	$	3.28	Q1 - Q4 2023	Natural Gas Costless Collar	17,298,000	$	3.77	$	7.49


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

The following table summarizes the location and fair value amounts of all derivative instruments in the Condensed Consolidated Balance Sheets as well as the gross recognized derivative assets, liabilities, and amounts offset in the Condensed Consolidated Balance Sheets (in thousands):

March 31, 2022 December 31, 2021
Derivatives not
designated as hedging
contracts under ASC
Topic 815 Balance Sheet Location Gross
Recognized
Assets /
Liabilities Gross
Amounts
Offset Net
Recognized
Assets /
Liabilities Gross
Recognized
Assets /
Liabilities Gross
Amounts
Offset Net
Recognized
Assets /
Liabilities
Commodity contracts Derivative asset - current $ 6,294 $ (4,445) $ 1,849 $ 3,191 $ (1,843) $ 1,348
Commodity contracts Derivative liability - current $ 154,500 $ (4,445) $ 150,055 $ 47,153 $ (1,843) $ 45,310
Commodity contracts Derivative asset - noncurrent $ 18,223 $ (12,413) $ 5,810 $ 2,721 $ (2,564) $ 157
Commodity contracts Derivative liability - noncurrent $ 34,188 $ (12,413) $ 21,775 $ 3,135 $ (2,564) $ 571

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~~EARTHSTONE ENERGY, INC.~~

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


		September 30, 2022						December 31, 2021
Derivatives not designated as hedging contracts under ASC Topic 815	Balance Sheet Location	Gross Recognized Assets / Liabilities		Gross Amounts Offset		Net Recognized Assets / Liabilities		Gross Recognized Assets / Liabilities		Gross Amounts Offset		Net Recognized Assets / Liabilities
Commodity contracts	Derivative asset - current	$	53,601	$	(38,651)	$	14,950	$	3,191	$	(1,843)	$	1,348
Commodity contracts	Derivative liability - current	$	67,055	$	(38,651)	$	28,404	$	47,153	$	(1,843)	$	45,310

Commodity contracts	Derivative asset - noncurrent	$	12,941	$	(7,415)	$	5,526	$	2,721	$	(2,564)	$	157
Commodity contracts	Derivative liability - noncurrent	$	15,255	$	(7,415)	$	7,840	$	3,135	$	(2,564)	$	571

The following table summarizes the location and amounts of the Company’s realized and unrealized gains and losses on derivatives instruments in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows (in thousands):


Derivatives not designated as hedging contracts under ASC Topic 815	Derivatives not designated as hedging contracts under ASC Topic 815			Three Months Ended March 31,			Derivatives not designated as hedging contracts under ASC Topic 815					Three Months Ended September 30,			Nine Months Ended September 30,
		Statement of Cash Flows Location	Statement of Operations Location		2022			2021			Statement of Cash Flows Location	Statement of Operations Location	2022		2021		2022		2021
Unrealized loss		Not separately presented	Not separately presented		$	(119,794)		$	(22,358)
Unrealized gain (loss)										Unrealized gain (loss)	Not separately presented	Not separately presented	$	119,209	$	(12,244)	$	28,607	$	(71,255)
Realized loss	Realized loss	Operating portion of net cash paid in settlement of derivative contracts	Not separately presented		(31,686)			(10,905)		Realized loss	Operating portion of net cash paid in settlement of derivative contracts	Not separately presented	(58,923)		(20,884)		(169,708)		(46,311)
		Total loss on derivative contracts, net	Loss on derivative contracts, net		$	(151,480)		$	(33,263)		Total (gain) loss on derivative contracts, net	Gain (loss) on derivative contracts, net	$	60,286	$	(33,128)	$	(141,101)	$	(117,566)

Note 4. Acquisitions and Divestitures

Titus Agreement

On June 27, 2022, Earthstone and EEH, together as buyer, and Titus Oil & Gas Production, LLC, a Delaware limited liability company, Titus Oil & Gas Corporation, a Delaware corporation, Lenox Minerals, LLC, a Delaware limited liability company and Lenox Mineral Title Holdings, Inc., a Delaware corporation (collectively, “Titus I”), as seller, entered into a purchase and

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

sale agreement (the “Titus I Purchase Agreement”) which provided that EEH or its designated wholly-owned subsidiary would acquire (the “Titus I Acquisition”) interests in oil and gas leases and related property of Titus I located in the Northern Delaware Basin of New Mexico (the “Titus I Assets”). Also on June 27, 2022, Earthstone and EEH, as buyer, and Titus Oil & Gas Production II, LLC, a Delaware limited liability company, Lenox Minerals II, LLC, a Delaware limited liability company and Lenox Mineral Holdings II, Inc., a Delaware limited liability company (collectively, “Titus II” and together with Titus I, “Titus”), as seller, entered into a purchase and sale agreement (the “Titus II Purchase Agreement” and together with the Titus I Purchase Agreement, the “Titus Purchase Agreements”) which provided that EEH or its designated wholly-owned subsidiary would acquire (the “Titus II Acquisition” and together with the Titus I Acquisition, the “Titus Acquisition”) interests in oil and gas leases and related property of Titus II located in the Northern Delaware Basin of New Mexico (the “Titus II Assets” and together with the Titus I Assets, the “Titus Assets”).

On August 10, 2022, the transactions contemplated in the Titus Purchase Agreements were consummated whereby EEH acquired the Titus Assets for aggregate consideration of approximately $565.8 million in cash, net of preliminary and customary purchase price adjustments and remains subject to final post-closing settlement between EEH and Titus, and 3,857,015 shares Class A Common Stock (the “Titus Acquisition”).

The Titus 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 Titus Acquisition is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the Company’s estimates of the acquired oil and gas properties resulting in changes to the purchase price allocation. These amounts will be finalized no later than one year from the acquisition date. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):


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

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

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

Bighorn ~~Agreement~~Acquisition

On January 30, 2022, Earthstone, EEH, and Bighorn Asset Company, LLC, a Delaware limited liability company (“Bighorn”), as seller, entered into a ~~Purchase~~purchase and ~~Sale Agreement~~sale agreement (the “Bighorn Agreement”). Pursuant to the Bighorn Agreement, EEH acquired (the “Bighorn Acquisition”) interests in oil and gas leases and related property of Bighorn located in the Midland Basin, Texas ~~for a purchase price~~ (the “Bighorn ~~Purchase Price”~~Assets”).

On April 14, 2022, Earthstone, EEH and Bighorn consummated the transactions contemplated in the Bighorn Agreement whereby EEH acquired the Bighorn Assets for aggregate consideration of ~~$770~~approximately $627.8 million in cash, ~~and 6,808,511 shares~~net of ~~Class A Common Stock. The Bighorn Purchase Price is subject to~~preliminary and customary purchase price adjustments ~~with~~and remains subject to final post-closing settlement between EEH and Bighorn, and 5,650,977 shares Class A Common Stock.

The Bighorn Acquisition was accounted for as an ~~effective~~asset acquisition. The fair value of the consideration paid by us and allocation of that amount to the underlying assets acquired, on a relative fair value basis, was recorded on our books as of the date of ~~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. Additionally, costs directly related to the Bighorn Acquisition ~~on April 14, 2022. The Bighorn Deposit~~were capitalized as a component of the purchase price. Although the purchase price allocation is ~~included in Other noncurrent assets in the Condensed Consolidated Balance Sheet~~substantially complete as of ~~March 31, 2022 and in Acquisition~~the date of this filing, there may be further adjustments to the Company’s estimates of the acquired oil and gas properties ~~net~~resulting in changes to the

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

purchase price allocation, on a relative fair value basis. These amounts will be finalized no later than one year from the acquisition date. The consideration transferred, fair value of assets acquired onand liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):


Consideration:
Shares of Class A Common Stock issued	5,650,977
Class A Common Stock price as of April 14, 2022	$	13.76
Class A Common Stock consideration	77,757
Cash consideration	625,801
Direct transaction costs (1)	2,048
Total consideration transferred	$	705,606

Fair value of assets acquired:
Current assets	$	770
Oil and gas properties	746,825
Amount attributable to assets acquired	$	747,595

Fair value of liabilities assumed:
Suspense payable	25,710
Other current liabilities	3,085
Noncurrent liabilities - ARO	13,194
Amount attributable to liabilities assumed	$	41,989

(1)Represents $2.0 million of estimated transaction costs associated with the ~~Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2022. For further discussion, see Note 15. Subsequent Events.~~Bighorn Acquisition which have been capitalized in accordance with ASC 805-50.

Chisholm Acquisition

On December 15, 2021, Earthstone, EEH, as buyer, Chisholm Energy Operating, LLC (“OpCo”) and Chisholm Energy Agent, Inc. (“Agent” and collectively with OpCo, “Chisholm”), collectively as seller, entered into a Purchase and Sale Agreement (the “Chisholm Agreement”), which provided that EEH would acquire (the “Chisholm Acquisition”) interests in oil and gas leases and related property of Chisholm located in Lea County and Eddy County, New Mexico (the “Chisholm Assets”).

On February 15, 2022, Earthstone, EEH and Chisholm consummated the transactions contemplated in the Chisholm Agreement whereby EEH acquired the Chisholm Assets for aggregate consideration ~~as adjusted for preliminary and~~consisting of: (i) approximately $313.9 million in cash, net of 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 Chisholm~~ paid at the closing of the Chisholm Acquisition, (ii) $70 million in cash paid on April 15, 2022 and ~~included in Deferred acquisition payment - Chisholm in the Condensed Consolidated Balance Sheet as of March 31, 2022; and~~ (iii) 19,417,476 shares of the ~~Company’s Class A common stock $0.001 par value per share (“~~Class A Common ~~Stock”).~~Stock. The fair value of each share of Class A Common Stock was determined using the closing sales price of $12.85 per share on February 15, 2022. A Significant Shareholder, as ~~described~~identified below, was the majority shareholder of Chisholm as of the closing of the Chisholm Acquisition. See Note 12. Related Party Transactions for further discussion.

The Chisholm Acquisition has been accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer. The preliminary allocation of the total purchase price in the Chisholm Acquisition is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the Company’s estimates of the acquired oil and gas properties resulting in changes to the purchase price allocation. These amounts will be finalized no later than one year from the acquisition date. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):

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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~~383,938

Total consideration transferred	$	~~627,043~~633,453

Fair value of assets acquired:
Oil and gas properties	$	~~634,867~~641,494
Amount attributable to assets acquired	$	~~634,867~~641,494

Fair value of liabilities assumed:
Other current liabilities	$	~~1,853~~2,070
Asset retirement obligation - noncurrent	5,971
Amount attributable to liabilities assumed	$	~~7,824~~8,041

~~(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):

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

Total consideration transferred	$	217,079

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

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

Tracker/Sequel Acquisitions

On March 31, 2021, Earthstone, EEH, Tracker Resource Development III, LLC, a Delaware limited liability company (“Tracker”), and TRD III Royalty Holdings (TX), LP, a Delaware limited partnership (“RoyaltyCo” and collectively with Tracker, the “Seller”), entered into a purchase and sale agreement (the “Tracker Agreement”), which provided that EEH would acquire (the “Tracker Acquisition”) interests in oil and gas leases and related property of Tracker located in Irion County, Texas (the “Tracker Assets”). Also on March 31, 2021, Earthstone, EEH, SEG-TRD LLC, a Delaware limited liability company (“SEG-I”), and SEG-TRD II LLC, a Delaware limited liability company (“SEG-II” and collectively with SEG-I, “Sequel”) entered into a purchase and sale agreement (the “Sequel Agreement” and collectively with the Tracker Agreement, the “Tracker/Sequel Purchase Agreements”), which provided that EEH would acquire (the “Sequel Acquisition” and collectively with the Tracker Acquisition, the “Tracker/Sequel Acquisitions”) certain well-bore interests and related equipment (the “Sequel Assets”).

On July 20, 2021, Earthstone, EEH and the Seller consummated the transactions contemplated in the Tracker Agreement. At the closing of the Tracker Agreement, among other things, EEH acquired the Tracker Assets for aggregate consideration consisting of: (i) $18.8 million in cash, net of customary purchase price adjustments, and (ii) 4.7 million shares of Class A Common Stock. Also, on July 20, 2021, Earthstone, EEH and Sequel consummated the transactions contemplated in the Sequel Agreement. At the closing of the Sequel Agreement, among other things, EEH acquired the Sequel Assets for aggregate consideration consisting of: (i) $41.4 million in cash, net of customary purchase price adjustments, and (ii) 1.5 million shares of Class A Common Stock. A Significant Shareholder, as ~~described~~identified below, owned approximately 49% of Tracker as of the closing of the Tracker Acquisition. See Note 12. Related Party Transactions for further discussion.

The Tracker/Sequel Acquisitions have been accounted for as asset ~~acquisitions in accordance with ASC Topic 805, Business Combinations (referred to as “ASC 805”).~~acquisitions. The ~~preliminary~~ allocation of the total purchase price in the Tracker/Sequel Acquisitions is based upon management’s estimates of and assumptions related to the relative fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the acquired oil and natural gas properties. These amounts will be finalized no later than one year from the acquisition date. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


	Total
Consideration:
Shares of Class A Common Stock issued	6,200,000
Class A Common Stock price as of July 20, 2021	$	9.97
Class A Common Stock consideration	61,814
Cash consideration~~(1)~~	60,159
Direct transaction costs ~~(2)~~(1)	1,715
Total consideration transferred	$	123,688

Fair value of assets acquired:
Oil and gas properties	$	124,288
Amount attributable to assets acquired	$	124,288

Fair value of liabilities assumed:
Noncurrent liabilities - asset retirement obligations	600
Amount attributable to liabilities assumed	$	600

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

~~(2)~~Represents $1.7 million of transaction costs associated with the Tracker Acquisition and the Sequel Acquisition that have been capitalized in accordance with ASC 805-50.

The 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 Titus Acquisition, Bighorn Acquisition, Chisholm Acquisition, IRM Acquisition and Tracker/Sequel Acquisitions had been completed as of January 1, 2021. The unaudited supplemental pro forma financial information was derived from the historical statements of revenues and direct operating expenses of Titus and the historical consolidated and combined statements of operations for Bighorn, Chisholm, IRM, Tracker, Sequel and Earthstone and adjusted to include depletion expense applied to the adjusted basis of the properties acquired. These unaudited supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future. Future results may vary significantly from the results reflected in this unaudited supplemental pro forma ~~financial information~~results of operations (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)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Revenue	$	1,016,529	$	450,618	$	1,910,133	$	963,414
Income before taxes	671,440		53,933		1,004,806		41,410
Net income	610,922		53,127		923,133		40,808
Less: Net income attributable to noncontrolling interest	179,944		23,093		282,808		17,639
Net income attributable to Earthstone Energy, Inc.	430,978		30,034		640,325		23,169
Pro forma net income per common share attributable to Earthstone Energy, Inc.:
Basic	$	3.98	$	0.29	$	5.92	$	0.24
Diluted	$	3.85	$	0.28	$	5.52	$	0.24

The Company has included in its Condensed Consolidated Statements of Operations, revenues of ~~$37.8~~$88.9 million and operating expenses of ~~$14.4~~$39.7 million for the period from August 10, 2022 to September 30, 2022 related to the Titus Acquisition. The Company has included in its Condensed Consolidated Statements of Operations, revenues of $338.7 million and operating expenses of $112.0 million for the period from April 14, 2022 to September 30, 2022 related to the Bighorn Acquisition. The Company has included in its Condensed Consolidated Statements of Operations, revenues of $219.8 million and operating expenses of $86.7 million for the period from February 15, 2022 to ~~March 31,~~September 30, 2022 related to the Chisholm Acquisition. During the three and nine months ended ~~March 31,~~September 30, 2022, the Company recorded ~~$10.0~~$0.3 million and $10.6 million, respectively, of legal and professional fees related to the Chisholm Acquisition which are included in Transaction costs in the Condensed Consolidated Statements of Operations. The Company recorded $0.7 million of legal and professional fees related

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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 $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~~Titus Acquisition during the three and nine months ended September 30, 2022 which are included in Transaction costs in the Condensed Consolidated Statements of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the acquired oil and natural gas properties. These amounts will be finalized no later than one year from the acquisition date.Operations.

Foreland-BCC Acquisition

On November 2, 2021, Earthstone, EEH and Foreland Investments LP, a Delaware limited partnership (“Foreland”), consummated the transactions contemplated in the Purchase and Sale Agreement dated as of September 30, 2021 by and among Earthstone, EEH and Foreland (the “Foreland Purchase Agreement”). Net of customary purchase price adjustments, EEH acquired (the “Foreland Acquisition”) interests in oil and gas leases and related property of Foreland located in Irion County and Crockett County, Texas, for a purchase price consisting of: (i) $13.4 million in cash and (ii) 2,611,111 shares of Class A Common Stock.

Also, on November 2, 2021, Earthstone, EEH and BCC-Foreland LLC, a Delaware limited liability company (“BCC”), consummated the transactions contemplated in the Purchase and Sale Agreement dated as of September 30, 2021 by and among Earthstone, EEH and BCC (the “BCC Purchase Agreement”). Net of customary purchase price adjustments, EEH acquired (the “BCC Acquisition” and with the Foreland Acquisition, the “Foreland-BCC Acquisition”) certain well-bore interests and related equipment held by BCC that were part of a joint development agreement between Foreland, Foreland Operating, LLC, and BCC involving portions of the acreage covered by the Foreland Purchase Agreement for a purchase price of $20.5 million in cash.

Eagle Ford Acquisitions

In May and June 2021, the Company completed acquisitions of working interests in certain assets it operates located in southern Gonzales County, Texas (collectively, the “Eagle Ford Acquisitions”) from four separate sellers. The aggregate purchase price of the Eagle Ford Acquisitions was approximately $45.2 million. One of the four separate sellers was a related party. See Note 12. Related Party Transactions for further discussion. The Eagle Ford Acquisitions have been accounted for as asset acquisitions in accordance with ASC 805. The preliminary allocation of each purchase was based upon management’s estimates of and assumptions related to the relative fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the acquired oil and natural gas properties.

Eagle Ford Divestiture

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

Note 5. Oil and Natural Gas Properties

The Company follows the successful efforts method of accounting for its oil and natural gas properties. Under this method, costs to acquire oil and natural gas properties, drill and equip exploratory wells that find proved reserves, and drill and equip development wells are capitalized. Exploration costs, including unsuccessful exploratory wells and geological and geophysical costs, are charged to operations as incurred. Upon sale or retirement of oil and natural gas properties, the costs and related accumulated depreciation, depletion and amortization are eliminated from the accounts and the resulting gain or loss is recognized.

Costs incurred to maintain wells and related equipment, lease and well operating costs, and other exploration costs are charged to expense as incurred. Gains and losses arising from the sale of properties are included in Income from operations in the Condensed Consolidated Statements of Operations.

The Company’s lease acquisition costs and development costs of proved oil and natural gas properties are amortized using the units-of-production method, at the field level, based on total proved reserves and proved developed reserves, respectively. For the three and nine months ended ~~March 31,~~September 30, 2022, depletion expense for oil and gas producing property and related equipment was ~~$34.1 million.~~$90.4 million and $190.8 million, respectively. For the three and nine months ended ~~March 31,~~September 30, 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~~

$26.9 million and $77.0 million, respectively.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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


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

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 ~~March 31,~~September 30, 2022 and 2021.

Note 6. Noncontrolling Interest

Earthstone consolidates the financial results of EEH and its subsidiaries and records a noncontrolling interest for the economic interest in Earthstone held by the members of EEH other than Earthstone and Lynden US. Net ~~loss~~income (loss) attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021 represents the portion of net ~~loss~~income (loss) attributable to the economic interest in the Company held by the members of EEH other than Earthstone and Lynden US. Noncontrolling interest in the Condensed Consolidated Balance Sheets as of ~~March 31,~~September 30, 2022 and December 31, 2021 represents the portion of net assets of the Company attributable to the members of EEH other than Earthstone and Lynden US. The term “EEH Unit” means the units of limited liability company interests of EEH denominated as common units.

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table presents the changes in noncontrolling interest for the ~~three~~nine months ended ~~March 31,~~September 30, 2022:


		EEH Units Held By Earthstone and Lynden US	%		EEH Units Held By Others	%		Total EEH Units Outstanding		EEH Units Held By Earthstone and Lynden US	%		EEH Units Held By Others	%		Total EEH Units Outstanding
As of December 31, 2021	As of December 31, 2021	53,467,307	60.9	%	34,344,532	39.1	%	87,811,839	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	EEH Units issued in connection with the Chisholm Acquisition	19,417,476			—			19,417,476	EEH Units issued in connection with the Chisholm Acquisition	19,417,476			—			19,417,476

EEH Units issued in connection with the Bighorn Acquisition									EEH Units issued in connection with the Bighorn Acquisition	5,650,977			—			5,650,977
EEH Units issued in connection with the Conversion of Preferred Stock									EEH Units issued in connection with the Conversion of Preferred Stock	25,225,225			—			25,225,225
EEH Units issued in connection with the Titus Acquisition									EEH Units issued in connection with the Titus Acquisition	3,857,015			—			3,857,015
EEH Units and Class B Common Stock converted to Class A Common Stock	EEH Units and Class B Common Stock converted to Class A Common Stock	72,766			(72,766)			—	EEH Units and Class B Common Stock converted to Class A Common Stock	82,891			(82,891)			—
EEH Units issued in connection with the vesting of restricted stock units and performance-based units	EEH Units issued in connection with the vesting of restricted stock units and performance-based units	483,251			—			483,251	EEH Units issued in connection with the vesting of restricted stock units and performance-based units	716,035			—			716,035
As of March 31, 2022		73,440,800	68.2	%	34,271,766	31.8	%	107,712,566
As of September 30, 2022									As of September 30, 2022	108,416,926	76.0	%	34,261,641	24.0	%	142,678,567

Note 7. Net ~~Loss~~Income (Loss) Per Common Share

Net ~~loss~~income (loss) per common share—basic is calculated by dividing Net ~~loss~~income (loss) by the weighted average number of shares of common stock outstanding during the period. Net ~~loss~~income (loss) per common share—diluted assumes the conversion of all potentially dilutive securities and is calculated by dividing Net ~~loss~~income (loss) by the sum of the weighted average number of shares of common stock, as defined above, outstanding plus potentially dilutive securities. Net ~~loss~~income (loss) per common share—diluted considers the impact of

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~~EARTHSTONE ENERGY, INC.~~

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

potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares, as defined above, would have an anti-dilutive effect.

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

A reconciliation of Net ~~loss~~income (loss) per common share is as follows:


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share amounts)	(In thousands, except per share amounts)		2022		2021			(In thousands, except per share amounts)	2022		2021		2022		2021
Net loss attributable to Earthstone Energy, Inc.			$	(33,478)	$	(5,833)
Net income (loss) attributable to Earthstone Energy, Inc.								Net income (loss) attributable to Earthstone Energy, Inc.	$	211,456	$	10,418	$	322,863	$	(4,286)

Net loss per common share attributable to Earthstone Energy, Inc.:
Basic and Diluted			$	(0.53)	$	(0.14)
Net income (loss) attributable to Earthstone Energy, Inc. from assumed conversion of Series A Convertible Preferred Stock (2)								Net income (loss) attributable to Earthstone Energy, Inc. from assumed conversion of Series A Convertible Preferred Stock (2)	1,068		—		12,388		—

Net income (loss) attributable to Earthstone Energy, Inc. - Diluted								Net income (loss) attributable to Earthstone Energy, Inc. - Diluted	$	212,524	$	10,418	$	335,251	$	(4,286)

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

Weighted average common shares outstanding	Weighted average common shares outstanding							Weighted average common shares outstanding
Basic	Basic		63,445,649		42,778,916			Basic	105,254,778		49,243,185		82,483,635		45,406,952
Add potentially dilutive securities:	Add potentially dilutive securities:							Add potentially dilutive securities:
Unvested restricted stock units (1)	Unvested restricted stock units (1)		—		—			Unvested restricted stock units (1)	353,889		525,475		466,453		—
Unvested performance units (1)	Unvested performance units (1)		—		—			Unvested performance units (1)	2,024,871		2,894,282		2,133,158		—
Series A Convertible Preferred Stock (2)								Series A Convertible Preferred Stock (2)	1,645,123		—		7,761,608		—
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding		63,445,649		42,778,916			Diluted weighted average common shares outstanding	109,278,661		52,662,942		92,844,854		45,406,952

(1)~~For the three months ended March 31, 2022 and 2021, the~~The 1,099,800 performance units granted on January 27, 2021 were excluded for all periods presented due to an assumed settlement in cash and the liability treatment described in Note 9. Stock-Based ~~Compensation~~.Compensation. For the ~~three~~nine months ended ~~March 31, 2022 and~~September 30, 2021, there were no dilutive effects related to unvested restricted stock units or performance units due to the ~~losses~~loss for ~~those periods.~~the period.

(2)On April 14, 2022, Earthstone issued 280,000 shares of Series A Convertible Preferred Stock which automatically converted into 25,225,225 shares of Class A Common Stock on July 6, 2022. Under the “If-Converted” method, the shares would have been assumed issued on April 14, 2022, which would have resulted in an additional allocation of Net income (loss) attributable to Earthstone Energy, Inc. of $1.1 million and $12.4 million for the three and nine months ended September 30, 2022, respectively.

The Class B Common Stock, par value $0.001 per share of Earthstone (the “Class B Common ~~Stock~~Stock” and with the Class A Common Stock, the “Common Stock”), has been excluded, as its conversion would eliminate noncontrolling interest and net income attributable to noncontrolling interest of $87.9 million for the three months ended September 30, 2022 and net income attributable to noncontrolling interest of $142.6 million for the nine months ended September 30, 2022 would be added back to Net income attributable to Earthstone Energy, Inc. for the periods then ended, having an antidilutive effect on Net income per common share attributable to Earthstone Energy, Inc.

The Class B Common Stock has been excluded, as its conversion would eliminate noncontrolling interest and net income attributable to noncontrolling interest of $8.4 million for the three months ended September 30, 2021 and net loss attributable to noncontrolling interest of ~~$18.4 million and $4.7~~$3.3 million for the ~~three~~nine months ended ~~March 31, 2022 and~~September 30, 2021 ~~respectively~~ would be added back to Net loss attributable to Earthstone Energy, Inc. for the periods then ended, having ~~no dilutive~~an antidilutive effect on Net loss per common share attributable to Earthstone Energy, Inc.

Note 8. Common Stock and Preferred Stock

Class A Common Stock

At ~~March 31,~~September 30, 2022 and December 31, 2021, there were ~~73,440,800~~108,416,926 and 53,467,307 shares of Class A Common Stock issued and outstanding, respectively. In connection with the Chisholm Acquisition, on February 15, 2022, Earthstone issued 19,417,476 shares of Class A Common Stock valued at approximately $249.5 million on that date. In connection with the Bighorn Acquisition, on April 14, 2022, Earthstone issued 5,650,977 shares of Class A Common Stock valued at approximately $77.8 million on that date. In connection with the Titus Acquisition, on August 10, 2022, Earthstone issued 3,857,015 shares of Class A Common Stock valued at approximately $53.6 million on that date.

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

During the three and nine months ended ~~March 31,~~September 30, 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 issued ~~770,143~~165,336 and 1,099,232 shares, respectively, of Class A Common Stock, of which ~~286,892~~48,073 and 383,197 shares, respectively, of Class A Common Stock were retained as treasury stock and canceled to satisfy the related employee income tax liability. For further discussion, see Note 9. Stock-Based Compensation.

During the three and nine months ended ~~March 31,~~September 30, 2021, (1) in connection with the IRM Acquisition, on January 7, 2021, Earthstone issued 12,719,594 shares of Class A Common Stock valued at approximated $76.6 million on that date, (2) as a result of the vesting and settlement of performance units and restricted stock units under the 2014 Plan, Earthstone issued ~~721,259~~220,219 and 1,162,879 shares, respectively, of Class A Common Stock, of which ~~257,764~~65,106 and 389,213 shares, respectively, of Class A Common Stock were retained as treasury stock and canceled to satisfy the related employee income tax liability and (3) as discussed below, shares of Class A Common Stock were issued as the result of conversions of Class B Common Stock.

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~~EARTHSTONE ENERGY, INC.~~

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

Class B Common Stock

At ~~March 31,~~September 30, 2022 and December 31, 2021, there were ~~34,271,766~~34,261,641 and 34,344,532 shares of Class B Common Stock issued and outstanding, respectively. Each share of Class B Common Stock, together with 1one EEH Unit, is convertible into 1one share of Class A Common Stock. ~~During~~There were no conversions of shares of Class B Common Stock during the three months ended ~~March 31,~~September 30, 2022. During the nine months ended September 30, 2022, ~~72,766~~82,891 shares of Class B Common Stock and EEH Units were exchanged for an equal number of shares of Class A Common Stock. During the three and nine months ended ~~March 31,~~September 30, 2021, ~~578,031~~43,882 and 655,376 shares, respectively, of Class B Common Stock and EEH Units were exchanged for an equal number of shares of Class A Common Stock.

Series A Convertible Preferred Stock

On January 30, 2022, Earthstone entered into a securities purchase agreement (the “SPA”) with EnCap Energy Capital Fund XI, L.P. (“EnCap Fund XI”), an affiliate of EnCap Investments L.P. (“EnCap”), and Cypress Investments, LLC, a fund managed by Post Oak Energy Capital, LP (“Post Oak” and collectively with EnCap Fund XI, the “Investors”) to sell, in a private placement (the “Private Placement”), 280,000 shares of newly authorized convertible preferred stock, $0.001 par value per share (the “Series A Convertible Preferred Stock”), each share of which would be convertible into 90.0900900900901 shares of Class A Common Stock for anticipated gross proceeds of $280.0 million, at a price of $1,000.00 per share of Series A Convertible Preferred Stock (or $11.10 per share of Class A Common Stock on an as-converted basis). The Private Placement was contingent upon the closing of the Bighorn Acquisition. The Company used the net proceeds from the sale of the Series A Convertible Preferred Stock to partially fund the Bighorn Acquisition. See Note 12. Related Party Transactions for further discussion.

On April 14, 2022, Earthstone, EnCap Fund XI and Cypress consummated the sale and issuance of 280,000 shares of Series A Convertible Preferred Stock pursuant to the SPA in exchange for cash proceeds of $279.3 million, net of offering costs.

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

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

At September 30, 2022 and December 31, 2021, there were no shares of Series A Convertible Preferred Stock issued or outstanding.

Note 9. Stock-Based Compensation

Restricted Stock Units

The 2014 Plan, allows, among other things, for the grant of restricted stock units (“RSUs”). As of ~~March 31,~~September 30, 2022, the maximum number of shares of Class A Common Stock that may be issued under the 2014 Plan was 12.0 million shares.

Each RSU represents the contingent right to receive 1one share of Class A Common Stock. The holders of outstanding RSUs do not receive dividends or have voting rights prior to vesting and settlement. The Company determines the fair value of granted RSUs based on the market price of the Class A Common Stock on the date of the grant. Compensation expense for granted RSUs is recognized on a straight-line basis over the vesting period and is net of forfeitures, as incurred. Stock-based

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

compensation is included in General and administrative expense in the Condensed Consolidated Statements of Operations and is recorded with a corresponding increase in Additional paid-in capital within the Condensed Consolidated Balance Sheets.

The table below summarizes RSU award activity for the ~~three~~nine months ended ~~March 31,~~September 30, 2022:


		Shares	Weighted-Average Grant Date Fair Value			Shares	Weighted-Average Grant Date Fair Value
Unvested RSUs at December 31, 2021	Unvested RSUs at December 31, 2021	771,817	$	5.91	Unvested RSUs at December 31, 2021	771,817	$	5.91
Granted	Granted	393,515	$	13.63	Granted	511,615	$	13.75
Forfeited	Forfeited	(3,033)	$	6.43	Forfeited	(14,934)	$	7.93
Vested	Vested	(162,018)	$	7.55	Vested	(491,107)	$	7.77
Unvested RSUs at March 31, 2022		1,000,281	$	8.68
Unvested RSUs at September 30, 2022					Unvested RSUs at September 30, 2022	777,391	$	9.86

As of ~~March 31,~~September 30, 2022, there was ~~$8.6~~$7.2 million of unrecognized compensation expense related to the RSU awards which will be recognized over a weighted average period of ~~1.12~~1.28 years.

For the three and nine months ended ~~March 31,~~September 30, 2022, Stock-based compensation related to RSUs was $1.5 million and $4.2 million, respectively. For the three and nine months ended September 30, 2021, Stock-based compensation related to RSUs was $1.2 million and ~~$1.5~~$3.9 million, respectively.

Performance Units

The table below summarizes PSU activity for the ~~three~~nine months ended ~~March 31,~~September 30, 2022:


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

Vested	Vested	(608,125)	$	9.30	Vested	(608,125)	$	9.30
Unvested PSUs at March 31, 2022		2,616,085	$	10.20
Unvested PSUs at September 30, 2022					Unvested PSUs at September 30, 2022	2,616,085	$	10.20

On ~~February 1, 2022,~~January 30, 2020, the Board of Directors of Earthstone (the “Board”) granted 1,043,800 PSUs (the “2020 PSUs”) to certain officers pursuant to the 2014 Plan. The 2020 PSUs are expected to be paid in shares of Class A Common Stock upon the achievement by Earthstone over a period commencing on February 1, 2020 and ending on January 31, 2023 (the “2020 Performance Period”) of certain performance criteria established by the Board.

On February 1, 2022, the Board granted 472,485 PSUs (the “2022 PSUs”) to certain officers pursuant to the 2014 ~~Plan (the “2022 Grant”).~~Plan. The 2022 PSUs are expected to be paid in shares of Class A Common Stock upon the achievement by Earthstone over a period commencing on January 1, 2022 and ending on December 31, 2024 (the ~~“Performance~~“2022 Performance Period”) of certain performance criteria established by the Board.

The Company classifies ~~these awards~~2020 PSUs and 2022 PSUs as equity awards as they are expected to be settled in shares. In the event that a PSU grant is expected to be settled in cash, it is alternatively classified as a liability award.

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~~EARTHSTONE ENERGY, INC.~~

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

The 2020 PSUs and 2022 PSUs are eligible to be earned based on the annualized Total Shareholder Return (“TSR”) of the Class A Common Stock during ~~a three-year period beginning on February 1, 2022.~~2020 Performance Period and 2022 Performance Period, respectively. Between 0x to 2.0x of the Performance Units are eligible to be earned based on Earthstone achieving an annualized TSR based on the following pre-established goals:


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

The Company accounts for ~~these awards~~2020 PSUs and 2022 PSUs as market-based awards which ~~are~~were valued ~~quarterly~~ utilizing the Monte Carlo Simulation pricing model, which ~~calculates~~calculated multiple potential outcomes for an award and ~~establishes~~established grant date fair value

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

based on the most likely outcome. For the 2020 PSUs, assuming a risk-free rate of 1.4% and volatility of 62.0%, the Company calculated the weighted average grant date fair value per PSU to be $5.36. For the 2022 PSUs, assuming a risk-free rate of 1.4% and volatility of 86.0%, the Company calculated the weighted average grant date fair value per PSU to be $19.42.

On January 27, 2021, the Board granted 1,099,800 PSUs to certain officers pursuant to the 2014 Plan (the “2021 PSUs”). The 2021 PSUs are payable in cash or shares of Class A Common Stock upon the achievement by the Company over a period commencing on January 1, 2021 and ending on December 31, 2023 of certain 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,~~September 30, 2022 and December 31, 2021, ~~$9.6~~$13.5 million and $6.3 million, respectively, have been included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheets related to the 2021 PSUs.

On January 28, 2019, the Board granted 669,550 PSUs to certain named executive officers pursuant to the 2014 ~~Plan.~~Plan (the “2019 PSUs”). The 2019 PSUs were payable in shares of Class A Common Stock based upon the achievement by Earthstone over a period commencing on February 1, 2019 and ending on January 31, 2022 of performance criteria established by the Board. On January 31, 2022, the Company settled the remaining 608,125 PSUs, net of forfeitures, at a rate of 1.97x. 1.0x was settled through the issuance of 608,125 shares of Class A Common Stock and the remainder was settled in cash.

As of ~~March 31,~~September 30, 2022, there was ~~$24.5~~$17.7 million of unrecognized compensation expense related to all PSU awards which will be amortized over a weighted average period of ~~1.06~~1.10 years.

For the three and nine months ended ~~March 31,~~September 30, 2022, Stock-based compensation related to all PSUs was approximately $1.8 million and $10.9 million, respectively. For the three and nine months ended September 30, 2021, Stock-based compensation related to all PSUs was approximately ~~$4.6~~$1.7 million and ~~$1.8~~$6.7 million, respectively. A liability of ~~$9.6~~$13.5 million related to the PSU liability awards is included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of ~~March 31,~~September 30, 2022.

Note 10. Long-Term Debt

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


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

(1)Related to the revolving credit facility borrowings, the Company had debt issuance costs of $16.2 million and $6.7 million, net of accumulated amortization of $5.7 million and $3.3 million, as of September 30, 2022 and December 31, 2021, respectively. Unamortized deferred financing costs on the revolving credit facility borrowings are included in Other noncurrent assets in the Condensed Consolidated Balance Sheets.

Credit ~~Facility~~Agreement

On November 21, 2019, Earthstone, EEH (the “Borrower”), Wells Fargo Bank, National Association, as Administrative Agent and Issuing Bank (“Wells Fargo”), Royal Bank of Canada, as Syndication Agent, BOKF, NA dba Bank of Texas (“BOKF”) as Issuing Bank with respect to Existing Letters of Credit, SunTrust Bank, as Documentation Agent, and the lenders party thereto (the “Lenders”) entered into a credit agreement ~~(the~~(together with all amendments or other modifications, the “Credit Agreement”), which replaced the prior credit facility, which was terminated on November 21, 2019.

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

On April 12, 2022, EEH issued $550.0 million aggregate principal amount 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 8.000% senior notes due 2027 (the “Notes”). EEH received net proceeds from the offering (the “Notes Offering”) ~~prior to the closing of the Bighorn Acquisition in~~ which ~~case~~reduced the elected commitments ~~would be reduced~~ by ~~the amount of the net proceeds from a Notes Offering up to~~ $500 ~~million~~(the “Notes Offering Elected Commitments Reduction); provided for an increase in interest rates by 0.50% in the event a Notes Offering has not been completed prior to the closing of the Bighorn Acquisition; provided mechanics relating to the transition from LIBOR to a benchmark replacement rate to be effective contemporaneously with the effectiveness of the Amendment on January 30, 2022; added certain hedging requirements relating to anticipated oil and natural gas production of the properties to be acquired pursuant to the Bighorn Acquisition; adjusted some financial covenants; redefined the limitations on certain restricted payments the Borrower may make; and made certain administrative changes to the Credit Agreement.million.

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

On April 14, 2022, in ~~advance of~~connection with 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.

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

On August 10, 2022, Earthstone, EEH, Wells Fargo as Administrative Agent, the Lenders and the guarantors party thereto entered into an amendment (the “Seventh Amendment”) to the Credit Agreement. Among other things, the Seventh Amendment increased the borrowing base from $1.4 billion to $1.7 billion and increased elected commitments from $800 million to $1.2 billion.

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

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

The next regularly scheduled redetermination of the borrowing base is expected to occur on or around ~~November~~May 1, ~~2022.~~2023. Subsequent redeterminations are expected to occur on or about each ~~May~~November 1st and ~~November~~May 1st thereafter. The amounts borrowed under the Credit Agreement bear annual interest rates at either (a) the adjusted SOFR Rate ~~(as customarily defined)~~ (the “Adjusted Term SOFR Rate”) plus ~~2.50%~~2.25% to ~~4.25%~~3.25% or (b) the sum of (i) the greatest of (A) the prime rate of Wells Fargo, (B) the federal funds rate plus ½ of 1.0%, and (C) the Adjusted Term SOFR Rate for an interest rate period of one month plus 1.0%, (ii) plus ~~1.50%~~1.25% to ~~3.25%~~2.25%, depending on the amount borrowed under the Credit Agreement. Principal amounts outstanding under the Credit Agreement are due and payable in full at maturity on ~~November 21, 2024.~~June 2, 2027. All of the obligations under the Credit Agreement, and the guarantees of those obligations, are secured by substantially all of EEH’s assets. Additional payments due under the Credit Agreement include paying a commitment fee of 0.375% to 0.50% per year, depending on the amount borrowed under the Credit Agreement, to the Lenders in respect of the unutilized commitments thereunder. EEH is also required to pay customary letter of credit fees.

The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, EEH’s ability to incur additional indebtedness, create liens on assets, make investments, pay dividends and distributions or repurchase its limited liability interests, engage in mergers or consolidations, sell certain assets, sell or discount any notes receivable or accounts receivable and engage in certain transactions with affiliates.

In addition, the Credit Agreement requires EEH to maintain the following financial covenants: a current ratio, (as such term is defined in the Credit Agreement) of not less than 1.0 to 1.0 and a consolidated leverage ratio of not greater than 3.5 to 1.0. Consolidated leverage ratio means the ratio of (i) the aggregate debt of EEH and its consolidated subsidiaries as at the last day of the fiscal quarter to (ii) EBITDAX for the applicable period, which, for the period ended September 30, 2022, was calculated asby multiplying EBITDAX for the ~~four~~two consecutive fiscal quarters ending on such ~~date.~~date by two. The term “EBITDAX” means, for any period, the sum of consolidated net income (loss) for such period plus (a) the following expenses or charges to the extent deducted from consolidated net income (loss) in such period: (i) interest, (ii) taxes, (iii) depreciation, (iv) depletion, (v) amortization, (vi) certain distributions to employees related to the stock compensation, (vii) certain transaction related expenses, (viii) reimbursed indemnification expenses related to certain dispositions and investments, (ix) non-cash extraordinary, usual, or nonrecurring expenses or losses, (x) other non-cash charges and minus (b) to the extent included in consolidated net income (loss) in such period: (i) non-cash income, (ii) gains on asset dispositions, disposals and abandonments outside of the ordinary course of business and (iii) to the extent not otherwise deducted from consolidated net income (loss), the aggregate amount of any pass-through cash distributions received by Borrower during such period in an amount equal to the aggregate amount of pass-through cash distributions actually made by Borrower during such period.

The Credit Agreement contains customary affirmative covenants and defines events of default to include failure to pay principal or interest, breach of covenants, breach of representations and warranties, insolvency, judgment default and a change in control. Upon the occurrence and continuance of an event of default, the Lenders have the right to accelerate repayment of the loans and exercise their remedies with respect to the collateral. As of ~~March 31,~~September 30, 2022, EEH was in compliance with the covenants under the Credit Agreement.

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of ~~March 31,~~September 30, 2022, ~~$624.2~~$391.7 million and $250.0 million of borrowings were outstanding under the revolving tranche and the term loan tranche of the Credit Agreement, respectively, bearing annual interest of ~~3.812%~~5.824% and 6.100%, respectively, resulting in an additional ~~$200.8~~$558.3 million of borrowing base availability under the Credit Agreement. At December 31, 2021, there were $320.0 million of borrowings outstanding under the Credit Agreement.

For the three and nine months ended ~~March 31, 2022, under the Credit Agreement, the Company had borrowings of $582.5 million and $278.3 million in repayments of borrowings.~~

~~For the three months ended March 31,~~September 30, 2022, interest on borrowings under the revolving tranche of the Credit Agreement averaged ~~3.67%~~4.75% and 4.29% per annum, respectively, which excluded commitment fees of ~~$0.2~~$1.0 million and $1.1 million, respectively, and amortization of deferred financing costs of $0.8 million and ~~$0.6 million.~~$2.4 million, respectively. For the three and nine months ended ~~March 31,~~September 30, 2022, interest on borrowings under the term loan tranche of the Credit Agreement averaged 6.01% and 6.01% per annum, respectively, which excluded amortization of deferred financing costs of $0.2 million and $0.2 million, respectively. For the three and nine months ended September 30, 2021, interest on borrowings under the Credit Agreement averaged ~~3.19%~~3.66% and 3.47% per annum, respectively, which excluded commitment fees of ~~$0.3~~$0.2 million and $0.6 million, respectively, and amortization of deferred financing costs of ~~$0.1 million.~~$0.2 million and $0.6 million, respectively.

During the three and nine months ended September 30, 2022, the Company capitalized $3.6 million and $15.2 million, respectively, of costs associated with the revolving tranche of the Credit Agreement and $5.8 million and $5.8 million, respectively, associated with the term loan tranche of the Credit Agreement. During the three and nine months ended September 30, 2021, the Company capitalized $1.0 million and $2.8 million, respectively, of costs associated with the Credit Agreement. The Company’s policy is to capitalize the financing costs associated with ~~its debt~~the Credit Agreement 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 months ended March 31, 2022, the Company capitalized $5.9 million, of costs associated with the Credit Agreement. No costs associated with the Credit Agreement were capitalized during the three months ended March 31, 2021.

8.000% Senior Notes

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~~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 from the Notes Offering of approximately ~~$540.4~~$537.2 million (after deducting underwriting discounts and commissions) which was used primarily to fund the Bighorn Acquisition and the remainder for general corporate purposes. ~~For further discussion, see~~

On April 12, 2022, in connection with the completion of the Notes Offering, EEH entered into an indenture, dated as of April 12, 2022 (the “Indenture”), among EEH, the guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee.

The Notes will mature on April 15, 2027 with interest accruing at a rate of 8.000% per annum payable semi-annually in cash in arrears on April 15 and October 15 of each year, commencing October 15, 2022. Before April 15, 2024, EEH may redeem some or all of the Notes at a redemption price equal to 100% of the aggregate principal amount of the Notes redeemed plus the “applicable premium” as of and accrued and unpaid interest, if any, to, but excluding, the date of redemption. EEH may redeem, at its option, all or part of the Notes at any time on or after April 15, 2024, at the applicable redemption price plus accrued and unpaid interest to, but not including, the date of redemption. Further, before April 15, 2024, EEH may on one or more occasions redeem up to 35% of the aggregate principal amount of the Notes in an amount not exceeding the net proceeds from one or more private or public equity offerings at a redemption price of 108.000% of the principal amount of the Notes, plus accrued and unpaid interest to the date of redemption, if at least 65% of the aggregate principal amount of the Notes remains outstanding immediately after such redemption and the redemption occurs within 180 days of the closing date of each such equity offering. Upon a Change of Control (as defined in the Indenture) EEH must offer to repurchase the Notes on terms and conditions set forth in detail in the Indenture.

The Notes are guaranteed on a senior unsecured basis by the Company and its subsidiaries (the “Guarantors”) and may be guaranteed by certain of EEH’s future restricted subsidiaries. The Notes are unsecured, rank equally in right of payment with all existing and future senior unsecured indebtedness of EEH and the Guarantors and rank senior in right of payment to any future subordinated indebtedness of EEH and the Guarantors. The Notes will rank effectively junior to all secured indebtedness of EEH and the Guarantors, including indebtedness under EEH’s revolving credit facility, to the extent of the value of the assets securing such indebtedness. The Notes will rank structurally junior in right of payment to all indebtedness and other liabilities, including trade payables, of any future subsidiary of EEH that are not guarantors.

The Indenture restricts EEH’s ability and the ability of its Restricted Subsidiaries (as defined in the Indenture), including the Guarantors, to: (i) incur or guarantee additional indebtedness or issue certain types of preferred stock; (ii) pay dividends on capital stock or redeem, repurchase or retire its capital stock or subordinated indebtedness; (iii) transfer or sell assets; (iv) make investments; (v) create certain liens; (vi) enter into agreements that restrict dividends or other payments from its Restricted Subsidiaries to EEH; (vii) consolidate, merge or transfer all or substantially all of its assets; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries. These covenants are subject to important exceptions and qualifications set forth in the Indenture. If the Notes achieve an Investment Grade Rating (as defined in the Indenture) or better from two of three of Moody’s Investors Service, Inc., S&P Global Ratings, or Fitch Ratings, Inc., many of these covenants will be suspended.

~~Note 15. Subsequent Events.~~Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Indenture contains customary events of default (each an “Event of Default”). If an Event of Default occurs and is continuing, the Trustee or the holders of not less than 25% in aggregate principal amount of the outstanding Notes may declare the unpaid principal of, premium, if any, and accrued but unpaid interest on, all the Notes then outstanding to be due and payable. Upon such a declaration, such principal, premium, if any, and interest will be due and payable immediately. If an Event of Default relating to certain events of bankruptcy or insolvency of EEH or any Significant Subsidiary (as defined in the Indenture) occurs, the principal of, premium, if any, and the interest on, all the Notes will become immediately due and payable without any declaration or other act on the part of the Trustee or any holders of the Notes. Under certain circumstances, the holders of a majority in principal amount of the outstanding Notes may rescind any such acceleration with respect to the Notes and its consequences.

During the three and nine months ended September 30, 2022, the Company capitalized $12.7 million of costs associated with the Notes. No costs associated with the Notes were capitalized during the three and nine months ended September 30, 2021. The Company’s policy is to capitalize the debt issuance costs associated with the Notes and amortize those costs on a straight-line basis over the term of the Notes.

As of September 30, 2022, accrued interest of $20.7 million associated with the Notes was included in Accrued expenses in the Condensed Consolidated Balance Sheets.

Note 11. Asset Retirement Obligations

The Company has asset retirement obligations associated with the future plugging and abandonment of oil and gas properties and related facilities. Revisions to the liability typically occur due to changes in the estimated abandonment costs, well economic lives, and the discount rate.

The following table summarizes the Company’s asset retirement obligation transactions recorded during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 (in thousands):

2022

Beginning asset retirement obligations

15,866

Liabilities incurred

54342

Liabilities settled

~~(201)~~(665)

Acquisitions

~~5,971~~20,078

Accretion expense

~~397~~1,863

Divestitures

(1,087)

Revision of estimates

31381

Ending asset retirement obligations

~~22,118~~36,778

Note 12. Related Party Transactions

FASB ASC Topic 850, Related Party Disclosures, requires that information about transactions with related parties that would make a difference in decision making shall be disclosed so that users of the financial statements can evaluate their significance. The Audit Committee of the Board independently reviews and approves all related party transactions.

Earthstone has two significant shareholders that consist of various investment funds managed by each of the two private equity firms who may manage other investments in entities with which the Company interacts in the normal course of business (the “Significant Shareholders” or separately, each a “Significant Shareholder”).

As discussed in Note 4. Acquisitions, the Chisholm Acquisition was consummated on February 15, 2022, whereby the Company acquired the Chisholm Assets for a purchase price of $377.5 million in cash, net of ~~preliminary and~~ customary purchase price adjustments, and approximately 19.4 million shares of Class A Common Stock. A Significant Shareholder was the majority owner of Chisholm as of the closing of the Chisholm Acquisition. The deferred payment of $70 million as of March 31, 2022 was paid on April 15, 2022 and included in Deferred acquisition payment – Chisholm in the Condensed Consolidated Balance Sheet as of March 31, 2022. The issuance of approximately 19.4 million shares of Class A Common Stock in connection with the closing of the Chisholm Agreement was (1) approved by a majority of the voting power of all outstanding disinterested shares of the Common ~~stock~~Stock and (2) increased ~~their~~the Significant Stockholder's beneficial ownership of ~~Earthstone’s~~ Class A Common Stock from approximately 25% to 36% as of February 15, 2022.

As discussed in Note 4. Acquisitions, on March 31, 2021, Earthstone and EEH entered into the Tracker/Sequel Purchase Agreements. The Tracker/Sequel Acquisitions were consummated on July 20, 2021, whereby the Company acquired the

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Tracker Assets for a purchase price of $18.8 million in cash and 4.7 million shares of Class A Common Stock. A Significant Shareholder owned approximately 49% of Tracker as of the closing of the Tracker Acquisition. A majority of the non-affiliated stockholders of Earthstone approved the issuance of 6.2 million shares of Class A Common Stock in connection with the closing of the Tracker/Sequel Purchase Agreements at Earthstone’s Annual Meeting of Stockholders held on July 20, 2021.

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

OnAs described in Note 8. Common Stock and Preferred Stock, on January 30, 2022, Earthstone entered into ~~a securities purchase agreement (the “SPA”)~~the SPA with ~~EnCap Capital Energy Fund XI, L.P. (“EnCap Fund XI”), an affiliate~~certain affiliates 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,~~(collectively, the “Investors”) to ~~sell,~~issue 220,000 shares and 60,000 shares, respectively, of the Series A Convertible Preferred Stock. On April 14, 2022, the SPA was consummated resulting in ~~a private placement (the “Private Placement”),~~the issuance of the total of 280,000 shares of ~~newly authorized convertible preferred stock, $0.001 par value per share (the~~

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~~EARTHSTONE ENERGY, INC.~~

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

“the Series A Convertible Preferred ~~Stock”),~~Stock in exchange for ~~anticipated gross~~cash proceeds of ~~$280.0~~$279.3 million, ~~at a price~~net of ~~$1,000.00 per share of~~offering costs.

On July 6, 2022, the Series A Convertible Preferred Stock (or $11.10 per share of Class A Common Stock on an as-converted basis). The Private Placement was contingent upon the closing of the Bighorn Acquisition. The Company used the net proceeds from the sale of the Preferred Stock to fund, in conjunction with the Notes Offering, the Bighorn Acquisition. Each share of Preferred Stock will automatically ~~convert~~converted into ~~90.0900900900901~~25,225,225 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.

On October 11, 2022, Earthstone repurchased an aggregate of 3,000,000 shares of Class A Common Stock, held by affiliates of Warburg Pincus LLC (“Warburg”) in a private transaction, for an aggregate purchase price of approximately $43.7 million, or $14.58 per share (the “Repurchase”). Additionally, on October 11, 2022, Warburg sold 3,750,000 shares of Class A Common Stock to an unrelated party for $14.58 per share (collectively with the Repurchase, the “Warburg Sales”). Immediately preceding the Warburg Sales, Warburg owned approximately 18.7% of our outstanding Class A Common Stock and 14.1% of our Class A Common Stock and Class B Common Stock combined. Immediately following the Warburg Sales and through the date of this filing, Warburg owned approximately 12.3% of our Class A Common Stock and 9.3% of our Class A Common Stock and Class B Common Stock combined.

Note 13. Commitments and Contingencies

Legal

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

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

Commitment to Purchase Materials

The Company entered into an agreement to purchase certain materials related to its drilling and completion activities through 2024 (the “Materials Purchase Agreement”). The Company has already fulfilled its 2022 financial obligation under the Materials Purchase Agreement and the Company has committed to payments of $29.8 million in 2023 and $6.9 million in 2024.

Environmental and Regulatory

As of ~~March 31,~~September 30, 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.

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 14. Income Taxes

The Company’s corporate structure requires the filing of two separate ~~consolidated~~ U.S. Federal income tax returns and one Canadian income tax return which include Lynden US, Earthstone, and Lynden ~~Corp.~~Corp, respectively. As such, taxable income of Earthstone cannot be offset by tax attributes, including net operating losses, of Lynden US, nor can taxable income of Lynden US be offset by tax attributes of Earthstone. Earthstone and Lynden US record a tax provision, respectively, for their share of the book income or loss of EEH, net of the non-controlling interest. As EEH is treated as a partnership for U.S. Federal income tax purposes, it is not subject to income tax at the federal level and only recognizes the Texas Margin Tax.

On February 15, 2022, the Company completed the Chisholm Acquisition which included the issuance of 19,417,476 shares of ~~our~~ Class A Common ~~Stock. When there is a~~Stock, which resulted in an ownership change ~~in ownership, as defined under~~within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”)~~, it results in~~. As a ~~limitation that applies~~result of the ownership change, the Company’s ability to ~~all~~utilize net operating losses (“NOLs”) and credits generated prior to the ownership change date ~~that can~~may be ~~used~~limited to offset taxable income incurred after the ownership change date (the “382 Limitation”). The annual limitation is based on 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 ~~March 31,~~September 30, 2022 and December 31, 2021, a current ~~liability~~liabilities of ~~$0.6~~$4.1 million and ~~$0.8~~$0.9 million, respectively, isare included in Other current liabilities in the Condensed Consolidated Balance Sheets. ~~The~~As of September 30, 2022, amount includes $2.0 million current federal income tax payable and $2.1 million current Texas Margin Tax payable. As of December 31, 2021, the amounts solely represent current Texas Margin Tax ~~payable on~~payable.

During the nine months ended September 30, 2022, the Company recorded income tax expense of approximately $81.7 million comprised of (1) income tax expense for Earthstone of $70.0 million, which included a deferred income tax expense of $74.5 million and a current income tax expense of $2.0 million, resulting from its share of the distributable income from EEH, offset by a $6.5 million release of valuation allowance, (2) a deferred income tax expense for Lynden US of $5.5 million as a result of its share of the distributable loss from EEH and (3) income tax expense of $6.2 million related to state taxes, which included a deferred income tax expense of $4.1 million and a current income tax expense of $2.1 million. Lynden Corp incurred no material income or ~~before May 16,~~loss, or related income tax expense or benefit, for the nine months ended September 30, 2022.

During the ~~three~~nine months ended ~~March 31, 2022,~~September 30, 2021, the Company recorded income tax benefit of approximately ~~$1.5~~$0.3 million ~~which included~~comprised of (1) a deferred income tax benefit for Lynden US of ~~$0.7~~$0.1 million as a result of its share of the distributable loss from EEH, (2) no net income tax benefit for Earthstone as the ~~$6.6~~$0.8 million income tax benefit resulting from its share of the distributable loss from EEH had a full valuation allowance recorded against it as future realization of the net deferred tax asset cannot be assured and (3) deferred income tax benefit of $0.8 million related to the Texas Margin ~~Tax. Lynden Corp incurred no material income or loss, or related~~Tax, offset by (4) current income tax expense ~~or benefit, for the three months ended March 31, 2022.~~

~~During the three months ended March 31, 2021, the Company recorded income tax benefit~~ of approximately $0.3 million which included (1) a deferred income tax benefit for Lynden US of $0.2 million as a result of its share of the distributable income from EEH, (2) no net income tax benefit for Earthstone as the $1.2 million income tax benefit resulting from its share of the distributable loss from EEH had a full valuation allowance recorded against it as future realization of the net deferred tax asset

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~~EARTHSTONE ENERGY, INC.~~

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

~~cannot be assured and (3) deferred income tax benefit of $0.1~~$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 ~~three~~nine months ended ~~March 31,~~September 30, 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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statement Regarding Forward-Looking Information

This discussion and other items in this Quarterly Report on Form 10-Q contain forward-looking statements and information that are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this document, the words “believe,” “anticipate,” “estimate,” “expect,” “intend,” “may,” “will,” “project,” “forecast,” “plan,” and similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. These statements are subject to numerous risks, uncertainties and assumptions. Certain of these risks are summarized under “Item 1A. Risk Factors” in our 2021 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, 2021, which are included in our 2021 Annual Report on Form 10-K.

Overview

Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with ~~our~~its consolidated subsidiaries, the “Company,” “our,” “we,” “us,” or similar terms), is a growth-oriented independent oil and gas company engaged in the acquisition and development of oil and gas reserves through activities that include the acquisition, drilling and development of undeveloped leases, asset and corporate acquisitions and mergers. Our operations are all in the upstream segment of the oil and natural gas industry and all our properties are onshore in the United States. At present, our assets are located in the Midland Basin in West Texas, the Eagle Ford Trend in South Texas and the Delaware Basin in New Mexico.

Recent Developments

Share Repurchase

On October 11, 2022, Earthstone repurchased an aggregate of 3,000,000 shares of Class A Common Stock, held by affiliates of Warburg Pincus LLC in a private transaction, for an aggregate purchase price of approximately $43.7 million, or $14.58 per share.

Titus Acquisition

On August 10, 2022, Earthstone Energy, Inc. (“Earthstone”), Earthstone Energy Holdings, LLC, a subsidiary of Earthstone (“EEH”), as buyer, and Titus Oil & Gas Production, LLC, a Delaware limited liability company (“TOGI”), Titus Oil & Gas Corporation, a Delaware corporation, Lenox Minerals, LLC, a Delaware limited liability company, and Lenox Mineral Title Holdings, Inc., a Delaware corporation (collectively, “Titus I”), as seller, consummated the transactions contemplated in that certain Purchase and Sale Agreement dated June 27, 2022, by and among Earthstone, EEH and Titus I (the “Titus I Purchase Agreement”) that was previously reported on Form 8-K filed on June 29, 2022 with the Securities and Exchange Commission (“SEC”). Also on August 10, 2022, Earthstone, EEH, as buyer, and Titus Oil & Gas Production II, LLC, a Delaware limited liability company (“TOGII”), Lenox Minerals II, LLC, a Delaware limited liability company, and Lenox Mineral Holdings II, LLC, a Delaware limited liability company (collectively, “Titus II” and together with Titus I, “Titus”), as seller, consummated the transactions contemplated in that certain Purchase and Sale Agreement dated June 27, 2022, by and among Earthstone, EEH and Titus II (the “Titus II Purchase Agreement,” and together with the Titus I Purchase Agreement, the “Purchase Agreements”) that was previously reported on Form 8-K filed on June 29, 2022 with the SEC. At the closing of the Purchase Agreements, among other things, EEH acquired (the “Titus Acquisition”) interests in oil and gas leases and related property of Titus I and Titus II located in the Delaware Basin, New Mexico, for an aggregate purchase price (the “Purchase Price”) of approximately $565.8 million in cash (“Cash Consideration”), net of preliminary and customary purchase price adjustments and subject to final post-closing settlement between EEH and Titus, and an aggregate 3,857,015 shares (the “Shares” and such issuance, the “Stock Issuance”) of Class A Common Stock, net of preliminary and customary purchase price adjustments. At the closing of the Titus Acquisition, $64.5 million of the Cash Consideration was deposited in an escrow account to support Titus’ indemnity obligations under the Purchase Agreements, 1,811,132 of the Shares (the “Titus I Closing Shares”) were issued to Titus Oil & Gas, LLC, an affiliate of TOGI (“Titus O&G”), and 2,045,883 of the Shares (the “Titus II Closing Shares”) were issued to Titus Oil & Gas Investments II, LLC, an affiliate of TOGII (“Titus O&G II”). On August 10, 2022, in

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

Conversion of Series A Convertible Preferred Stock

On July 6, 2022, the 280,000 shares of Series A Convertible Preferred Stock, par value $0.001 per share of Earthstone (the “Series A Convertible Preferred Stock”) automatically converted into 25,225,225 shares of Class A Common Stock. As such, the Series A Convertible Preferred Stock is no longer outstanding and the Investors were issued the 25,225,225 shares of Class A Common Stock upon the conversion of the Series A Convertible Preferred Stock.

Credit Agreement

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

On August 10, 2022, Earthstone, EEH, as Borrower, Wells Fargo Bank, National Association (“Wells Fargo”) as Administrative Agent, the lenders party thereto (the “Lenders”) and the guarantors party thereto entered into an amendment (the “Seventh Amendment”) to the credit agreement dated November 21, 2019, by and among EEH, as Borrower, Earthstone, as Parent, Wells Fargo, as Administrative Agent and Issuing Bank, Royal Bank of Canada, as Syndication Agent, Truist Bank, Citizens Bank, N.A., KeyBank National Association, U.S. Bank National Association, Fifth Third Bank, PNC Bank, National Association, and Bank of America, N.A., as Documentation Agents, and the Lenders party thereto (together with all amendments or other modifications, the “Credit Agreement”). Among other things, the Seventh Amendment increased the borrowing base from $1.4 billion to $1.7 billion and increased elected commitments from $800 million to $1.2 billion. The Seventh Amendment also established a fully funded $250 million term loan tranche as a portion of the $1.2 billion of available commitments under the Credit Agreement (the “Term Loan”), with the remaining $950 million of commitments in the form of revolving commitments. The Term Loan is fully pre-payable without premium or penalty, subject to the satisfaction of certain specified conditions, and bears an interest rate of Term SOFR plus 3.25%, increasing by 0.25% each 180-day period following the Term Loan funding. The Term Loan is co-terminus with the revolving loans' maturity date of June 2, 2027, subject to the Springing Maturity Date (as defined in the Credit Agreement) applicable to revolving loans and term loans. The interest rate applicable to revolving loans remains a rate of Term SOFR plus an applicable margin between 2.25% and 3.25%, depending upon borrowing base utilization.

On April 14, 2022, in connection with the Notes Offering, the Company voluntarily elected to reduce commitments under the borrowing base of the Credit Agreement to $800 million.

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

Bighorn Acquisition

On April 14, 2022, Earthstone, ~~Earthstone Energy Holdings, LLC, a subsidiary of the Company (“EEH”),~~EEH, and Bighorn Asset Company, LLC (“Bighorn”) as seller, consummated the transactions contemplated in the Purchase and Sale Agreement dated January 30, 2022, by and among Earthstone, EEH and Bighorn (the “Bighorn Purchase Agreement”) that was previously reported on Form 8-K filed on February 2, 2022 with the SEC. At the closing of the Bighorn Purchase Agreement, among other things, EEH acquired (the “Bighorn Acquisition”) interests in oil and gas leases and related property of Bighorn located in the Midland Basin, Texas, for a purchase price (the “Purchase Price”) of approximately ~~$638.9~~$641.8 million in cash, net of ~~preliminary and~~ customary purchase price adjustments, ~~and remains subject to final post-closing settlement between EEH and Bighorn,~~ and 5,650,977 shares (the “Bighorn Shares”) of Class A ~~common stock, par value $0.001 per share, of Earthstone (the “Class A~~ Common ~~Stock”).~~Stock. At the closing of the Bighorn Acquisition, 510,638 of the Bighorn Shares were deposited in a stock escrow account for Bighorn’s indemnity obligations and 5,140,339 of the Bighorn Shares (the “Closing Shares”) were issued to Bighorn Permian Resources, LLC, an affiliate of Bighorn (“Bighorn Permian”). On April 14, 2022, in connection with the closing of the Bighorn Purchase Agreement, Earthstone and Bighorn Permian entered into a customary registration rights agreement relating to the Bighorn Shares.

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

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Securities Purchase Agreement

Also, on April 14, 2022, Earthstone, EnCap Energy Capital Fund XI, L.P. (“EnCap Fund XI”), an affiliate of EnCap Investments L.P. (“EnCap”), and Cypress Investments, LLC (“Cypress” and collectively with EnCap Fund XI, the “Investors”), a fund managed by Post Oak Energy Capital, ~~L.P.~~LP (“Post Oak”), consummated the sale and issuance of 280,000 shares of ~~newly authorized~~ Series A ~~convertible preferred stock, par value $0.001 per share, of Earthstone (the “Preferred Stock”),~~Convertible Preferred Stock pursuant to that certain Securities Purchase Agreement dated as of January 30, 2022, by and among Earthstone and the Investors (the “SPA”) that was previously reported on Form 8-K filed on February 2, 2022 with the SEC. At the closing of the SPA, Earthstone issued 280,000 shares (the “PIPE Shares”) of Series A Convertible Preferred Stock in exchange for gross cash proceeds of $280 million (the “Private Placement”).

~~Each share~~On July 6, 2022, all of the PIPE Shares were converted into 25,225,225 shares of Class A Common Stock. The Series A Convertible Preferred Stock is ~~expected to convert into 90.0900900900901~~no longer outstanding and the Investors were issued 25,225,225 shares of Class A Common Stock onupon 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 Class A Common Stock and Class B common stock, par value $0.001 per share (“Class B Common Stock” and collectively with the Class A Common Stock, the “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 Series A Convertible 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 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~~ On July 15, 2022, a registration statement on Form S-3 with respect to the ~~closing~~resale of the ~~SPA, on April 14, 2022, Earthstone, Cypress, EnCap, and affiliates of Warburg Pincus LLC entered into a voting agreement (the “Voting Agreement”) containing provisions~~PIPE shares was declared effective 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 affiliates, in the aggregate, no longer own at least 5.5% of the outstanding Common Stock; and (ii) the one year anniversary of the Voting Agreement.

In connection with the closing of the 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.SEC.

Notes Offering

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~~$537.2 million (after deducting underwriting discounts and commissions) which was used primarily to fund the Bighorn Acquisition and the remainder for general corporate purposes.

~~Credit Agreement~~

On January 30, 2022, Earthstone, EEH, as Borrower, Wells Fargo Bank, National Association (“Wells Fargo”) as Administrative Agent, the lenders party thereto (the “Lenders”) and the guarantors party thereto entered into an amended and restated Fifth Amendment (the “Amendment”) to the Credit Agreement dated November 21, 2019, by and among EEH, as Borrower, Earthstone, as Parent, Wells Fargo, as Administrative Agent and Issuing Bank, Royal Bank of Canada, as Syndication Agent, Truist Bank, Citizens Bank, N.A., KeyBank National Association, U.S. Bank National Association, Fifth Third Bank, PNC Bank, National Association, and Bank of America, N.A., as Documentation Agents, and the Lenders party thereto (together with all amendments or other modifications, the “Credit Agreement”). Among other things, the Amendment increased the borrowing base and corresponding elected commitments from $650 million to $825 million upon the closing (“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

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corresponding elected commitments would increase to $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 event a Notes Offering has not been completed prior to the closing of the Bighorn Acquisition; provides mechanics relating to the transition from LIBOR to a benchmark replacement rate, the Secured Overnight Financing Rate (“SOFR”), to be effective contemporaneously with the effectiveness of the Amendment on January 30, 2022; adds certain hedging requirements relating to anticipated oil and natural gas production of the properties to be acquired pursuant to the Bighorn Acquisition; adjusts some financial covenants; redefines the limitations on certain restricted payments the Borrower may make; and made certain administrative changes to the Credit Agreement.

On April 14, 2022, in advance of the potential aforementioned 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 February 15, 2022, Earthstone, EEH, and Chisholm, as seller, consummated the transactions contemplated in the Chisholm Agreement that was previously reported on Form 8-K filed with the SEC on December 17, 2021. At the closing of the Chisholm Agreement, among other things, EEH acquired (the “Chisholm Acquisition”) interests in oil and gas leases and related property of Chisholm located in Lea County and Eddy County, New Mexico, for aggregate consideration, as adjusted for preliminary and customary purchase price adjustments, consisting of: (i) approximately ~~$307.5~~$313.8 million in cash that continues to remain subject to post-closing settlement adjustments between EEH and Chisholm paid at the closing of the Chisholm Acquisition, (ii) $70 million in cash paid on April 15, 2022; and (iii) 19,417,476 shares of Class A Common Stock. See further discussion in Note ~~14.~~12. Related Party Transactions~~and~~ ~~Note 19. Subsequent Events~~ in the Notes to Unaudited Condensed Consolidated Financial Statements.

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

Inflation

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

COVID-19

Despite the recoveries in commodity prices from 2020 lows, recent surges from COVID-19 variants continue to 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

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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 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 In 2022, we have emphasized the respective guidelines to support our mitigation efforts. Our field personnel are performing their job responsibilities and practicing mitigation guidelines with no issues to date. While our non-field personnel returned to the office in 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.

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~~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 could be reduced. Significant reductions in the borrowing base under our Credit Agreement could create a borrowing base deficiency depending on our loans then outstanding which may lead to a default. We believe global as well as national mitigation efforts currently being implemented to fight COVID-19 have had, and may continue to have,not experienced a material impact ~~on commodity prices and may continue~~ to ~~present significant challenges~~date to our ~~industry.~~business processes, but our management team continues to evaluate COVID-19 factors as they occur.

~~The effects~~

Areas of COVID-19, including a substantial decrease in economic activity, have contributed to significant credit, debt and equity market volatility. Similar to other producers in our business, we experienced volatilityOperation

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

Consolidation Focus

~~We believe that the current industry environment will move to more consolidations; however, execution may be hampered by producers with high debt levels.~~ We continue to pursue value-accretive and scale-enhancing consolidation opportunities, as we believe we are in a position to operate effectively despite the ~~COVID-19 induced~~ volatility in ~~oil price.~~commodity prices. We are focusing our attention on acquisition and corporate merger opportunities that would increase the scale of our operations. In addition, we believe the current industry environment presents unique opportunities which could provide us the potential for further consolidation because of our financial strength. At the same time, we will seek to block up acreage in close proximity to our existing acreage that would allow for longer horizontal laterals ~~that would provide for~~providing higher economic ~~returns.~~returns, increased operated inventory and greater operating efficiency. In short, we believe we are well qualified to continue to be a consolidator which could increase the scale of our operations and add value to our shareholders.

~~Areas of Operation~~

Our primary focus is concentrated in the Midland Basin in 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~~Operations Update

During the ~~first~~third quarter of 2022, for our Company-operated activity, we ~~completed and turned to sales five~~commenced drilling 12 gross ~~(5.0~~(12.0 net) ~~operated~~ wells and ~~commenced drilling ten~~brought seven gross ~~(8.3~~(6.3 net) ~~operated~~ wells online in the Midland Basin. ~~With two rigs operating in the Midland Basin, we anticipate spudding 40~~We began drilling six gross ~~(35.8~~(3.3 net) ~~operated wells and bringing 40 gross (36.7 net) operated wells online in 2022.~~

~~Delaware Basin~~

~~After acquiring the Delaware assets on February 15, 2022, we commenced drilling three gross (1.9 net) operated~~ wells in the Delaware Basin and brought 12 gross (10.5 net) wells online.

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

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

We operated a four-rig drilling program in the third quarter ~~of 2022. With~~with two rigs ~~operating~~ in each of the Midland and Delaware basins. We have recently added our fifth rig in the Delaware Basin and expect to continue a five-rig operated drilling program in 2023 with two rigs in the Midland Basin and three rigs in the Delaware Basin. For full year 2022 and only for our Company-operated activity, we anticipate spudding 36 gross (32.4 net) wells and bringing 34 gross (30.7 net) wells online in the Midland Basin. In the Delaware Basin, we anticipate spudding 2028 gross ~~(11.8~~(18.2 net) ~~operated~~ wells and bringing 1827 gross ~~(11.6~~(19.3 net) ~~operated~~ wells ~~online in 2022.~~online. Actual results of our drilling activities are as follows:

We continue to seek acreage trades and acquisition opportunities in the Midland and Delaware Basins which would allow for longer laterals, increased operated inventory and greater operating efficiency.


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

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Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to use our judgment to make estimates and assumptions that affect certain amounts reported in our financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. Critical accounting policies are those accounting policies that involve judgment and uncertainties affecting the application of those policies and the likelihood that materially different amounts would be reported under different conditions or using differing assumptions. We periodically update our estimates used in the preparation of the financial statements based on our latest assessment of the current and projected business and general economic environment. There have been no significant changes to our critical accounting policies during the ~~three~~nine months ended ~~March 31,~~September 30, 2022.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that are expected to have a material impact on our financial statements.

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Results of Operations

Three Months Ended September 30, 2022, compared to the Three Months Ended September 30, 2021


	Three Months Ended September 30,
	2022		2021		Change
Sales volumes:
Oil (MBbl)	3,566		1,055		238	%
Natural gas (MMcf)	16,514		4,119		301	%
Natural gas liquids (MBbl)	2,360		636		271	%
Barrels of oil equivalent (MBoe)	8,678		2,377		265	%
Average Daily Production (Boepd)	94,329		25,836		265	%

Average prices:
Oil (per Bbl)	$	93.12	$	70.20	33	%
Natural gas (per Mcf)	$	6.90	$	3.49	98	%
Natural gas liquids (per Bbl)	$	36.23	$	34.56	5	%

Average prices adjusted for realized derivatives settlements:
Oil ($/Bbl)	$	83.75	$	52.94	58	%
Natural gas ($/Mcf)	$	5.36	$	2.85	88	%
Natural gas liquids ($/Bbl)	$	36.23	$	34.56	5	%

(In thousands)
Oil revenues	$	332,036	$	74,051	348	%
Natural gas revenues	$	113,937	$	14,368	693	%
Natural gas liquids revenues	$	85,522	$	21,965	289	%

Lease operating expense	$	75,829	$	12,983	484	%
Production and ad valorem taxes	$	40,219	$	7,225	457	%


Depreciation, depletion and amortization	$	90,880	$	27,059	236	%

General and administrative expense (excluding stock-based compensation)	$	10,866	$	4,770	128	%
Stock-based compensation - equity and liability awards	$	3,322	$	2,880	15	%
General and administrative expense	$	14,188	$	7,650	85	%

Transaction costs	$	1,778	$	293	NM
Gain (loss) on sale of oil and gas properties	$	14,803	$	392	NM
Interest expense, net	$	(20,988)	$	(3,050)	588	%


Unrealized gain (loss) on derivative contracts	$	119,209	$	(12,244)	(1,074)	%
Realized (loss) on derivative contracts	$	(58,923)	$	(20,884)	182	%
Gain (loss) on derivative contracts, net	$	60,286	$	(33,128)	(282)	%


Income tax expense	$	(60,518)	$	(451)	NM

NM – Not Meaningful

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Results of Operations

~~Three Months Ended March 31, 2022, compared to the Three Months Ended March 31, 2021~~

Three Months Ended
March 31,
2022 2021 Change
Sales volumes:
Oil (MBbl) 1,417 1,057 34 %
Natural gas (MMcf) 5,639 2,445 131 %
Natural gas liquids (MBbl) 839 365 130 %
Barrels of oil equivalent (MBoe) 3,196 1,829 75 %
Average Daily Production (Boepd) 35,509 20,321 75 %
Average prices:
Oil (per Bbl) $ 97.24 $ 57.56 69 %
Natural gas (per Mcf) $ 4.07 $ 2.39 70 %
Natural gas liquids (per Bbl) $ 42.22 $ 24.40 73 %
Average prices adjusted for realized derivatives settlements:
Oil ($/Bbl) $ 75.61 $ 47.67 59 %
Natural gas ($/Mcf) $ 3.89 $ 2.23 74 %
Natural gas liquids ($/Bbl) $ 42.22 $ 24.40 73 %
(In thousands)
Oil revenues $ 137,752 $ 60,819 126 %
Natural gas revenues $ 22,958 $ 5,852 292 %
Natural gas liquids revenues $ 35,440 $ 8,901 298 %
Lease operating expense $ 21,631 $ 10,849 99 %
Production and ad valorem taxes $ 13,315 $ 5,027 165 %
Depreciation, depletion and amortization $ 34,326 $ 24,407 41 %
General and administrative expense (excluding stock-based compensation)
$ 6,476 $ 5,051 28 %
Stock-based compensation $ 5,830 $ 3,329 75 %
General and administrative expense $ 12,306 $ 8,380 47 %
Transaction costs $ 10,742 $ 2,106 410 %
Interest expense, net $ (5,318) $ (2,217) 140 %
Unrealized loss on derivative contracts $ (119,794) $ (22,358) 436 %
Realized loss on derivative contracts $ (31,686) $ (10,905) 191 %
Loss on derivative contracts, net $ (151,480) $ (33,263) 355 %
Income tax benefit $ 1,533 $ 308 398 %

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~~Results of Operations~~ Highlights

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

Oil revenues

For the three months ended ~~March 31,~~September 30, 2022, oil revenues increased by ~~$76.9~~$258.0 million, or ~~126%~~348%, relative to the comparable period in 2021. Of the increase, ~~$41.9~~$233.8 million was attributable to an increase in sales volume and $24.2 million was attributable to an increase in our realized ~~price and $35.0 million was attributable to an increase in volume.~~price. Our average realized price per Bbl increased from ~~$57.56~~$70.20 for the three months ended ~~March 31,~~September 30, 2021 to ~~$97.24~~$93.12, or ~~69%~~33%, for the three months ended ~~March 31,~~September 30, 2022. Additionally, we had a net increase in the volume of oil sold of ~~360~~2,511 MBbls, or ~~34%~~238%, which included an increase of ~~526~~2,457 MBbls related to the wells acquired in the Acquisitions ~~offset by a decrease~~and an increase of ~~166~~54 MBbls ~~in our other wells~~ primarily resulting from ~~natural declines, partially offset by the impact of~~ new wells ~~brought~~coming online ~~since the first quarter of 2021.~~related to our 2022 drilling program.

Natural gas revenues

For the three months ended ~~March 31,~~September 30, 2022, natural gas revenues increased by ~~$17.1~~$99.6 million, or ~~292%~~693%, relative to the comparable period in 2021. Of the increase, ~~$13.0~~$85.5 million was due to increased sales volume and ~~$4.1~~$14.1 million was attributable to an increase in realized price. Our average realized price per Mcf increased ~~70%~~98% from ~~$2.39~~$3.49 for the three months ended ~~March 31,~~September 30, 2021 to ~~$4.07~~$6.90 for the three months ended ~~March 31,~~September 30, 2022. The total volume of natural gas produced and sold increased ~~3,194~~12,396 MMcf, or ~~131%~~301%, which included an increase of ~~3,044~~12,870 MMcf related to the wells acquired in the Acquisitions, ~~and an increase~~partially offset by a decrease of ~~150~~474 MMcf in our other wells primarily resulting from ~~new wells brought online since the first quarter of 2021.~~natural declines.

Natural gas liquids revenues

For the three months ended ~~March 31,~~September 30, 2022, natural gas liquids revenues increased by ~~$26.5~~$63.6 million, or ~~298%~~289%, relative to the comparable period in 2021. Of the increase, ~~$20.0 million was attributable to increased volume and $6.5~~$1.1 million was attributable to an increase in our realized ~~price.~~price and $62.5 million was attributable to increased volume. The volume of natural gas liquids produced and sold increased by ~~475~~1,725 MBbls, or ~~130%~~271%, ~~which included~~primarily resulting from an increase of ~~418 MMcf~~1,776 MBbls related to the wells acquired in the Acquisitions, ~~and an increase~~partially offset by a decrease of 5751 MBbls in our other wells primarily resulting from ~~new wells coming online since the first quarter of 2021.~~natural declines.

Lease operating expense (“LOE”)

LOE increased by ~~$10.8~~$62.8 million, or ~~99%~~484%, for the three months ended ~~March 31,~~September 30, 2022 relative to the comparable period in 2021, due to ~~an $8.0~~a $56.0 million increase resulting from the LOE of the properties acquired in the Acquisitions and a ~~$2.8~~$6.8 million increase resulting from ~~higher production volumes from new wells coming online since~~additional well count as a result of our 2022 drilling program and inflationary factors experienced in the ~~first quarter of 2021.~~current year period.

Production and ad valorem taxes

Production and ad valorem taxes for the three months ended ~~March 31,~~September 30, 2022 increased by ~~$8.3~~$33.0 million, or ~~165%~~457%, relative to the comparable period in 2021 due to a ~~$6.1~~$30.7 million increase resulting from the properties acquired in the Acquisitions and a ~~$2.2~~$2.3 million increase related to our other wells resulting from improved commodity prices.

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

DD&A for the three months ended ~~March 31,~~September 30, 2022 increased by ~~$9.9~~$63.8 million, or ~~41%~~236%, relative to the comparable period in 2021, primarily due to a ~~$7.6~~$61.9 million increase in DD&A related to the assets acquired in the Acquisitions and a ~~$2.3~~$1.9 million increase in DD&A driven by higher production volumes and increased depletable costs related to ~~our other wells primarily resulting from additional volumes added to~~ the ~~depletable base~~development of our properties ~~resulting from the impact of improved commodity prices on our estimated proved reserves.~~which were also affected by inflationary factors.

General and administrative expense (“G&A”)

G&A for the three months ended ~~March 31,~~September 30, 2022 increased by ~~$3.9~~$6.5 million, or ~~47%~~85%, relative to the comparable period in 2021, primarily due to ~~increases of $2.5~~a $4.5 million increase in ~~non-cash performance-based~~payroll and employee costs associated with increased headcount, a $1.6 million increase primarily due to higher professional fees resulting from overall increased operating activity and a $0.4 million increase in stock-based compensation expense ~~resulting~~of which $0.3 million related to performance-based equity awards and $0.2 million related to non-performance based equity awards, both due to an increased award base from ~~increases~~the prior year period,

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partially offset by a $0.1 million decrease in performance-based liability awards due to a decrease in the market value of our Class A Common Stock ~~$0.9 million attributable to higher payroll and employee costs associated with increased headcount and $0.5 million primarily due to increased professional fees.~~

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in the three months ended September 30, 2022.

Transaction ~~costs~~Costs

For the three months ended ~~March 31,~~September 30, 2022, transaction costs ~~increased by $8.6~~consisted of $1.8 million ~~primarily due to costs~~in legal and professional fees associated with certain of our acquisition and divestiture transactions, including $0.7 million associated with the Titus Acquisition and $0.3 million associated with the Chisholm Acquisition. For the three months ended September 30, 2021, transaction costs included legal and professional fees of $0.2 million associated with the IRM Acquisition and $0.1 million associated with other acquisition target companies.

Gain on sale of oil and gas properties

During the three months ended September 30, 2022, we sold certain non-operated oil and gas properties located in Fayette and Gonzales Counties of Texas. In connection with these sales, we recorded gains totaling $14.8 million. See Note 4. Acquisitions and Divestitures in the Notes to Unaudited Condensed Consolidated Financial Statements.

Interest expense, net

Interest expense increased from ~~$2.2~~$3.1 million for the three months ended ~~March 31,~~September 30, 2021 to ~~$5.3~~$21.0 million for the three months ended ~~March 31,~~September 30, 2022, due to higher average borrowings outstanding compared to the prior year period primarily resulting from borrowings related to the Acquisitions and higher effective interest ~~rates.~~rates resulting from the issuance of the 8.000% Senior Notes. See Note 10. Long-Term Debt in the Notes to Unaudited Condensed Consolidated Financial Statements.

Gain (loss) on derivative contracts, net

For the three months ended September 30, 2022, we recorded a net gain on derivative contracts of $60.3 million, consisting of unrealized mark-to-market gains of $119.2 million related to our commodity hedges, offset by net realized losses on settlements of our commodity hedges of $58.9 million. For the three months ended September 30, 2021, we recorded a net loss on derivative contracts of $33.1 million, consisting of unrealized mark-to-market losses of $12.2 million related to our commodity hedges along with net realized losses on settlements of our commodity hedges of $20.8 million and net realized losses on our interest rate swap of $0.1 million.

Income tax expense

During the three months ended September 30, 2022, the Company recorded income tax expense of approximately $60.5 million which included (1) a deferred income tax expense for Earthstone of $52.1 million, which included a deferred income tax expense of $50.2 million and a current income tax expense of $2.0 million, resulting from its share of the distributable income from EEH, offset by a $0.1 million release of valuation allowance, (2) a deferred income tax expense for Lynden US of $3.5 million as a result of its share of the distributable loss from EEH and (3) income tax expense of $4.9 million related to state taxes, which included a deferred income tax expense of $3.6 million and a current income tax expense of $1.3 million. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the nine months ended September 30, 2022. The combined Earthstone and Lynden deferred income tax expense amounts of $53.7 million in the period were deferred as a result of substantial forecasted current year income tax deductions generated by the Acquisitions, as well as forecasted intangible drilling cost income tax deductions resulting from our drilling program.

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Results of Operations

Nine Months Ended September 30, 2022, compared to the Nine Months Ended September 30, 2021


	Nine Months Ended September 30,
	2022		2021		Change
Sales volumes:
Oil (MBbl)	7,569		3,195		137	%
Natural gas (MMcf)	36,567		9,490		285	%
Natural gas liquids (MBbl)	5,229		1,497		249	%
Barrels of oil equivalent (MBoe)	18,892		6,273		201	%
Average Daily Production (Boepd)	69,203		22,978		201	%

Average prices:
Oil (per Bbl)	$	99.93	$	64.42	55	%
Natural gas (per Mcf)	$	6.37	$	2.84	124	%
Natural gas liquids (per Bbl)	$	40.31	$	28.69	41	%

Average prices adjusted for realized derivatives settlements:
Oil ($/Bbl)	$	83.44	$	51.01	64	%
Natural gas ($/Mcf)	$	5.15	$	2.49	107	%
Natural gas liquids ($/Bbl)	$	40.31	$	28.69	41	%

(In thousands)
Oil revenues	$	756,420	$	205,788	268	%
Natural gas revenues	$	233,020	$	26,910	766	%
Natural gas liquids revenues	$	210,756	$	42,929	391	%

Lease operating expense	$	147,974	$	35,579	316	%
Production and ad valorem taxes	$	87,729	$	17,428	403	%


Depreciation, depletion and amortization	$	191,669	$	77,493	147	%

General and administrative expense (excluding stock-based compensation)	$	25,459	$	14,579	75	%
Stock-based compensation - equity and liability awards	$	15,112	$	10,621	42	%
General and administrative expense	$	40,571	$	25,200	61	%

Transaction costs	$	12,118	$	2,906	317	%
Gain (loss) on sale of oil and gas properties	$	14,803	$	740	1900	%
Interest expense, net	$	(42,931)	$	(7,668)	460	%


Unrealized gain (loss) on derivative contracts	$	28,607	$	(71,255)	(140)	%
Realized loss on derivative contracts	$	(169,708)	$	(46,311)	266	%
Loss on derivative contracts, net	$	(141,101)	$	(117,566)	20	%


Income tax (expense) benefit	$	(81,673)	$	343	(23,911)	%

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Oil revenues

For the nine months ended September 30, 2022, oil revenues increased by $550.6 million, or 268%, relative to the comparable period in 2021. Of the increase, $437.2 million was attributable to an increase in volume and $113.4 million was attributable to an increase in our realized price. Our average realized price per Bbl increased from $64.42 for the nine months ended September 30, 2021 to $99.93, or 55%, for the nine months ended September 30, 2022. Additionally, we had a net increase in the volume of oil sold of 4,374 MBbls, or 137%, which included an increase of 4,292 MBbls related to the wells acquired in the Acquisitions and an increase of 82 MBbls in our other wells primarily resulting from new wells brought online since the third quarter of 2021.

Natural gas revenues

For the nine months ended September 30, 2022, natural gas revenues increased by $206.1 million, or 766%, relative to the comparable period in 2021. Of the increase, $172.5 million was due to increased sales volume and $33.6 million was attributable to an increase in realized price. Our average realized price per Mcf increased 124% from $2.84 for the nine months ended September 30, 2021 to $6.37 for the nine months ended September 30, 2022. The total volume of natural gas produced and sold increased 27,077 MMcf, or 285%, which included an increase of 27,618 MMcf related to the wells acquired in the Acquisitions, partially offset by a decrease of 541 MMcf in our other wells primarily resulting from natural declines.

Natural gas liquids revenues

For the nine months ended September 30, 2022, natural gas liquids revenues increased by $167.8 million, or 391%, relative to the comparable period in 2021. Of the increase, $150.4 million was attributable to increased volume and $17.4 million was attributable to an increase in our realized price. The volume of natural gas liquids produced and sold increased by 3,732 MBbls, or 249%, primarily resulting from an increase of 3,745 MBbls related to the wells acquired in the Acquisitions, partially offset by a decrease of 13 MBbls in our other wells primarily resulting from natural declines.

Lease operating expense (“LOE”)

LOE increased by $112.4 million, or 316%, for the nine months ended September 30, 2022 relative to the comparable period in 2021, due to a $100.0 million increase resulting from the LOE of the properties acquired in the Acquisitions and a $12.4 million increase resulting from both higher production volumes from new wells coming online and inflationary factors experienced in the current year period.

Production and ad valorem taxes

Production and ad valorem taxes for the nine months ended September 30, 2022 increased by $70.3 million, or 403%, relative to the comparable period in 2021 due to a $59.9 million increase resulting from the properties acquired in the Acquisitions and a $10.4 million increase related to our other wells resulting from improved commodity prices.

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

DD&A for the nine months ended September 30, 2022 increased by $114.2 million, or 147%, relative to the comparable period in 2021 primarily due to a $106.5 million increase in DD&A related to the assets acquired in the Acquisitions and a $7.7 million increase in DD&A driven by higher production volumes and increased depletable costs related to the development of our properties.

General and administrative expense (“G&A”)

G&A for the nine months ended September 30, 2022 increased by $15.4 million, or 61%, relative to the comparable period in 2021, due to an increase of $7.9 million in payroll and employee costs associated with increased headcount, $3.0 million primarily related to an increase in professional fees due to overall increased operating activity of the Company and a $4.5 million increase in performance-based stock-based compensation expense of which $0.6 million related to performance-based equity awards and $0.2 million related to non-performance based equity awards, both due to an increased award base from the prior year period, and a $3.7 million increase in performance-based liability awards due to an increase in the market value of our Class A Common Stock in the nine months ended September 30, 2022.

Transaction Costs

For the nine months ended September 30, 2022, transaction costs increased by $9.2 million primarily due to legal and professional fees associated with the Chisholm Acquisition.

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Gain on sale of oil and gas properties

During the nine months ended September 30, 2022, we sold certain non-operated oil and gas properties located in Fayette and Gonzales Counties of Texas. In connection with these sales, we recorded gains totaling $14.8 million. See Note 4. Acquisitions and Divestitures in the Notes to Unaudited Condensed Consolidated Financial Statements.

Interest expense, net

Interest expense increased from $7.7 million for the nine months ended September 30, 2021 to $42.9 million for the nine months ended September 30, 2022, due to higher average borrowings outstanding compared to the prior year period primarily resulting from borrowings related to the Acquisitions and higher effective interest rates resulting from the issuance of the 8.000% Senior Notes. See Note 10. Long-Term Debt in the Notes to Unaudited Condensed Consolidated Financial Statements.

Loss on derivative contracts, net

For the ~~three~~nine months ended ~~March 31,~~September 30, 2022, we recorded a net loss on derivative contracts of ~~$151.5~~$141.1 million, consisting of unrealized mark-to-market ~~losses~~gains of ~~$119.8~~$28.6 million related to our commodity hedges, along with net realized losses on settlements of our commodity hedges of ~~$31.7~~$169.7 million. For the ~~three~~nine months ended ~~March 31,~~September 30, 2021, we recorded a net loss on derivative contracts of ~~$33.3~~$117.6 million, consisting of unrealized mark-to-market losses of ~~$23.0~~$71.9 million related to our commodity hedges, partially offset by unrealized mark-to-market gains of ~~$0.7~~$0.6 million related to our interest rate swap, along with net realized losses on settlements of our commodity hedges of ~~$10.9~~$46.1 million and net realized losses on our interest rate swap of ~~$0.1~~$0.2 million.

Income tax (expense) benefit

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, wethe Company recorded an income tax ~~benefit~~expense of approximately ~~$1.5~~$81.7 million which included (1) income tax expense for Earthstone of $70.0 million, which included a deferred income tax ~~benefit~~expense of $74.5 million and a current income tax expense of $2.0 million, resulting from its share of the distributable income from EEH, offset by a $6.5 million release of valuation allowance, (2) a deferred income tax expense for Lynden US of ~~$0.7~~$5.5 million as a result of its share of the distributable loss from EEH ~~(2) no net~~and (3) income tax ~~benefit for Earthstone as the $6.6~~expense of $6.2 million ~~income tax benefit resulting from its share of the distributable loss from EEH had~~related to state taxes, which included 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~~expense of ~~$0.8~~$4.1 million ~~related to the Texas Margin Tax.~~and a current income tax expense of $2.1 million. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the ~~three~~nine months ended ~~March 31,~~September 30, 2022.

~~During the three months ended March 31, 2021, we recorded an income tax benefit of approximately $0.3 million which included (1) a~~ The combined Earthstone and Lynden deferred income tax ~~benefit for Lynden US~~expense amounts of ~~$0.2~~$80.0 million in the period were deferred as a result of ~~its share of the distributable income from EEH, (2) no net~~substantial forecasted current year income tax ~~benefit for Earthstone~~deductions generated by the Acquisitions, as ~~the $1.2 million~~well as forecasted intangible drilling cost income tax ~~benefit~~deductions 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 $0.1 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 March 31, 2021.our drilling program.

Liquidity and Capital Resources

~~We have significant undeveloped acreage and future drilling locations. Drilling horizontal wells in the Midland and Delaware Basins, generally consisting~~Sources of 7,500 to 15,000-foot lateral lengths, is capital intensive. As of March 31, 2022, we had $0.5 million in cash and $624.2 million of long-term debt outstanding under our Credit Agreement with a borrowing base of $825.0 million. With the $200.8 million of undrawn borrowing base capacity and $0.5 million in cash, we had total cash and available borrowings of approximately $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.Cash

With two drilling rigs operating in the Midland Basin, ~~and~~ two additional rigs operating in the Delaware Basin and a third Delaware Basin rig expected to be added in the fourth quarter of 2022, we expect total 2022 drilling plan spending of $519-$534 million which we expect to ~~spend $410-$440~~be funded by cash flows from operations. During the nine months ended September 30, 2022, we generated $703.2 million ~~based~~of cash flows from operating activities. As of September 30, 2022, we had available borrowings under our Credit Agreement of approximately $558.3 million. Additionally, on April 12, 2022, we issued $550.0 million of 8.000% senior notes due 2027 for net proceeds of approximately $537.2 million and, on April 14, 2022, we issued 280,000 shares of Series A Convertible Preferred Stock for net proceeds of approximately $279.3 million.

Although we expect cash flows and capacity under our ~~current~~Credit Agreement to be sufficient to fund our expected 2022 ~~drilling plan.~~ capital program, we may also elect to raise funds through new debt or equity offerings or from other sources of financing. All of our sources of liquidity can be affected by the general conditions of the broader economy, the global pandemic, force majeure events, challenging environmental regulations and fluctuations in commodity prices, operating costs and volumes produced, all of which affect us and our industry. We have no control over market prices for natural gas, NGLs or oil, although we may be able to influence the amount of realized revenues through the use of derivative contracts as part of our commodity price risk management.

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

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Working Capital

Working capital (presented below) was a deficit of ~~$268.7~~$138.9 million as of ~~March 31,~~September 30, 2022. Of the ~~$268.7~~$138.9 million working capital deficit, ~~$148.2~~$13.5 million relates to our derivative contracts expected to settle in the next 12 months (subsequent to ~~March 31,~~September 30, 2022) resulting from increased oil price futures as of ~~March 31,~~September 30, 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 working capital deficit of ~~$120.5~~$125.5 million is ~~$80.8~~$432.8 million less than our cash and available borrowings as of ~~March 31,2022~~September 30, 2022 of ~~$201.3~~$558.3 million. The components of working capital are presented below:


		March 31,		December 31,			September 30,		December 31,
(In thousands)	(In thousands)	2022		2021		(In thousands)	2022		2021
Current assets:	Current assets:					Current assets:
Cash	Cash	$	482	$	4,013	Cash	$	—	$	4,013
Accounts receivable:	Accounts receivable:					Accounts receivable:
Oil, natural gas, and natural gas liquids revenues	Oil, natural gas, and natural gas liquids revenues	98,182		50,575		Oil, natural gas, and natural gas liquids revenues	196,941		50,575
Joint interest billings and other, net of allowance of $19 and $19 at March 31, 2022 and December 31, 2021, respectively		11,980		2,930
Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2022 and December 31, 2021, respectively						Joint interest billings and other, net of allowance of $19 and $19 at September 30, 2022 and December 31, 2021, respectively	20,328		2,930
Derivative asset	Derivative asset	1,849		1,348		Derivative asset	14,950		1,348
Prepaid expenses and other current assets	Prepaid expenses and other current assets	4,440		2,549		Prepaid expenses and other current assets	19,089		2,549
Total current assets	Total current assets	116,933		61,415		Total current assets	251,308		61,415

Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	69,749	$	31,397	Accounts payable	$	75,162	$	31,397
Revenues and royalties payable	Revenues and royalties payable	52,167		36,189		Revenues and royalties payable	158,867		36,189
Accrued expenses	Accrued expenses	39,179		31,704		Accrued expenses	105,623		31,704
Deferred acquisition payment - Chisholm		70,000		—

Asset retirement obligation	Asset retirement obligation	609		395		Asset retirement obligation	941		395
Derivative liability	Derivative liability	150,055		45,310		Derivative liability	28,404		45,310
Advances	Advances	2,447		4,088		Advances	15,405		4,088
Operating lease liabilities	Operating lease liabilities	747		681		Operating lease liabilities	869		681

Finance lease liabilities						Finance lease liabilities	784		—
Other current liabilities	Other current liabilities	630		851		Other current liabilities	4,105		851
Total current liabilities	Total current liabilities	385,583		150,615		Total current liabilities	390,160		150,615

Working Capital	Working Capital	$	(268,650)	$	(89,200)	Working Capital	$	(138,852)	$	(89,200)

Cash Flows from Operating Activities

Cash flows provided by operating activities for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 increased to ~~$83.0~~$703.2 million compared to ~~$38.3~~$147.3 million for the ~~three~~nine months ended ~~March 31,~~September 30, 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 compared to the prior year period.

Cash Flows from Investing Activities

Cash flows used in investing activities for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 increased to ~~$380.7 million~~$1.8 billion from ~~$143.8~~$305.4 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2021, ~~primarily~~ due to approximately $1.5 billion in acquisition of oil and gas properties, $325.1 million related to the ~~acquisition~~execution of our drilling program and $1.7 million related to other property additions, partially offset by $26.2 million in proceeds from sales of oil and gas properties.

Cash Flows from Financing Activities

Cash flows provided by financing activities were ~~$294.2 million~~$1.1 billion for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 compared to cash flows ~~used in~~provided by financing activities of ~~$105.4~~$157.1 million for the ~~three~~nine months ended ~~March 31, 2021, primarily due to borrowings required to fund the acquisition of oil and gas properties.~~September 30, 2021. On April 12, 2022, we

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issued $550.0 million of 8.000% senior notes due 2027 for net proceeds of approximately $537.2 million. On April 14, 2022, we issued 280,000 shares of Series A Convertible Preferred Stock for net proceeds of approximately $279.3 million.

Capital Expenditures

Our accrual basis capital expenditures for the three and nine months ended ~~March 31,~~September 30, 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~~


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

Hedging Activities

The following table sets forth our outstanding derivative contracts at ~~March 31,~~September 30, 2022. When aggregating multiple contracts, the weighted average contract price is disclosed.


		Price Swaps					Price Swaps
Period	Period	Commodity	Volume (Bbls / MMBtu)	Weighted Average Price ($/Bbl / $/MMBtu)		Period	Commodity	Volume (Bbls / MMBtu)	Weighted Average Price ($/Bbl / $/MMBtu)
Q2 - Q4 2022		Crude Oil	3,247,250	$	65.96
Q4 2022						Q4 2022	Crude Oil	1,081,000	$	66.70
Q1 - Q4 2023	Q1 - Q4 2023	Crude Oil	1,277,500	$	76.20	Q1 - Q4 2023	Crude Oil	1,277,500	$	76.20
Q2 - Q4 2022		Crude Oil Basis Swap (1)	3,377,500	$	0.51
Q4 2022						Q4 2022	Crude Oil Basis Swap (1)	3,128,000	$	0.89
Q1 - Q4 2023	Q1 - Q4 2023	Crude Oil Basis Swap (1)	730,000	$	0.49	Q1 - Q4 2023	Crude Oil Basis Swap (1)	9,488,500	$	0.92
Q2 - Q4 2022		Natural Gas	8,062,000	$	3.55
Q4 2022						Q4 2022	Natural Gas	1,893,500	$	3.33
Q1 - Q4 2023	Q1 - Q4 2023	Natural Gas	3,670,000	$	3.35	Q1 - Q4 2023	Natural Gas	3,670,000	$	3.35
Q2 - Q4 2022		Natural Gas Basis Swap (2)	5,500,000	$	(0.33)
Q4 2022						Q4 2022	Natural Gas Basis Swap (2)	1,840,000	$	(0.33)
Q1 - Q4 2023	Q1 - Q4 2023	Natural Gas Basis Swap (2)	25,550,000	$	(1.28)	Q1 - Q4 2023	Natural Gas Basis Swap (2)	36,500,000	$	(1.47)
Q1 - Q4 2024	Q1 - Q4 2024	Natural Gas Basis Swap (2)	25,620,000	$	(1.04)	Q1 - Q4 2024	Natural Gas Basis Swap (2)	36,600,000	$	(1.05)

(1)The basis differential price is between WTI Midland Crude and the WTI NYMEX.

(2)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.


		Costless Collars							Costless Collars
Period	Period	Commodity	Volume (Bbls / MMBtu)	Sold Ceiling ($/Bbl / $/MMBtu)		Bought Floor ($/Bbl / $/MMBtu)		Period	Commodity	Volume (Bbls / MMBtu)	Bought Floor ($/Bbl / $/MMBtu)		Sold Ceiling ($/Bbl / $/MMBtu)
Q2 - Q4 2022		Crude Oil Costless Collar	1,560,000	$	83.59	$	69.42
Q4 2022								Q4 2022	Crude Oil Costless Collar	805,000	$	73.14	$	96.49
Q1 - Q4 2023	Q1 - Q4 2023	Crude Oil Costless Collar	1,715,500	$	80.34	$	62.98	Q1 - Q4 2023	Crude Oil Costless Collar	1,715,500	$	62.98	$	80.34
Q2 - Q4 2022		Natural Gas Costless Collar	12,782,500	$	5.47	$	3.66
Q4 2022								Q4 2022	Natural Gas Costless Collar	8,686,500	$	4.57	$	10.17
Q1 - Q4 2023	Q1 - Q4 2023	Natural Gas Costless Collar	13,188,000	$	4.84	$	3.28	Q1 - Q4 2023	Natural Gas Costless Collar	17,298,000	$	3.77	$	7.49

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~~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 Midland Crude and the WTI NYMEX.~~

~~(2)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.~~


		Costless Collars							Premium Puts
Period	Period	Commodity	Volume (Bbls / MMBtu)	Sold Ceiling ($/Bbl / $/MMBtu)		Bought Floor ($/Bbl / $/MMBtu)		Period	Commodity	Volume (Bbls / MMBtu)	$/Bbl (Put Price)		$/Bbl (Net of Premium)
Q2 - Q4 2022		Crude Oil Costless Collar	1,560,000	$	83.59	$	69.42
Q4 2022								Q4 2022	Crude Oil	253,000	$	80.00	$	75.79
Q1 - Q4 2023	Q1 - Q4 2023	Crude Oil Costless Collar	2,190,000	$	85.73	$	64.50	Q1 - Q4 2023	Crude Oil	1,750,500	$	70.00	$	64.53
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

Obligations and Commitments

There have been no material changes from the obligations and commitments disclosed in the Obligations and Commitments section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 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.

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Environmental Regulations

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

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

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

Recently Issued Accounting Standards

~~See~~ ~~Note 1. Basis of Presentation and Summary of Significant Accounting Policies~~ ~~in the~~ ~~Notes~~There are no recent accounting pronouncements that are expected to ~~Unaudited Condensed Consolidated Financial Statements~~ ~~in this report for discussion of recently issued and adopted accounting standards affecting us.~~

have a material impact on our financial statements.

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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 fixed price at the time of the hedge. Costless collars set both a maximum (sold ceiling) and a 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 :~~September 30, 2022:


		Price Swaps					Price Swaps
Period	Period	Commodity	Volume (Bbls / MMBtu)	Weighted Average Price ($/Bbl / $/MMBtu)		Period	Commodity	Volume (Bbls / MMBtu)	Weighted Average Price ($/Bbl / $/MMBtu)
Q2 - Q4 2022		Crude Oil	3,247,250	$	65.96
Q4 2022						Q4 2022	Crude Oil	1,081,000	$	66.70
Q1 - Q4 2023	Q1 - Q4 2023	Crude Oil	1,277,500	$	76.20	Q1 - Q4 2023	Crude Oil	1,277,500	$	76.20
Q2 - Q4 2022		Crude Oil Basis Swap (1)	3,377,500	$	0.51
Q4 2022						Q4 2022	Crude Oil Basis Swap (1)	3,128,000	$	0.89
Q1 - Q4 2023	Q1 - Q4 2023	Crude Oil Basis Swap (1)	730,000	$	0.49	Q1 - Q4 2023	Crude Oil Basis Swap (1)	9,488,500	$	0.92
Q2 - Q4 2022		Natural Gas	8,062,000	$	3.55
Q4 2022						Q4 2022	Natural Gas	1,893,500	$	3.33
Q1 - Q4 2023	Q1 - Q4 2023	Natural Gas	3,670,000	$	3.35	Q1 - Q4 2023	Natural Gas	3,670,000	$	3.35
Q2 - Q4 2022		Natural Gas Basis Swap (2)	5,500,000	$	(0.33)
Q4 2022						Q4 2022	Natural Gas Basis Swap (2)	1,840,000	$	(0.33)
Q1 - Q4 2023	Q1 - Q4 2023	Natural Gas Basis Swap (2)	25,550,000	$	(1.28)	Q1 - Q4 2023	Natural Gas Basis Swap (2)	36,500,000	$	(1.47)
Q1 - Q4 2024	Q1 - Q4 2024	Natural Gas Basis Swap (2)	25,620,000	$	(1.04)	Q1 - Q4 2024	Natural Gas Basis Swap (2)	36,600,000	$	(1.05)

(1)The basis differential price is between WTI Midland Crude and the WTI NYMEX.

(2)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.

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		Costless Collars							Costless Collars
Period	Period	Commodity	Volume (Bbls / MMBtu)	Sold Ceiling ($/Bbl / $/MMBtu)		Bought Floor ($/Bbl / $/MMBtu)		Period	Commodity	Volume (Bbls / MMBtu)	Bought Floor ($/Bbl / $/MMBtu)		Sold Ceiling ($/Bbl / $/MMBtu)
Q2 - Q4 2022		Crude Oil Costless Collar	1,560,000	$	83.59	$	69.42
Q4 2022								Q4 2022	Crude Oil Costless Collar	805,000	$	73.14	$	96.49
Q1 - Q4 2023	Q1 - Q4 2023	Crude Oil Costless Collar	1,715,500	$	80.34	$	62.98	Q1 - Q4 2023	Crude Oil Costless Collar	1,715,500	$	62.98	$	80.34
Q2 - Q4 2022		Natural Gas Costless Collar	12,782,500	$	5.47	$	3.66
Q4 2022								Q4 2022	Natural Gas Costless Collar	8,686,500	$	4.57	$	10.17
Q1 - Q4 2023	Q1 - Q4 2023	Natural Gas Costless Collar	13,188,000	$	4.84	$	3.28	Q1 - Q4 2023	Natural Gas Costless Collar	17,298,000	$	3.77	$	7.49


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

Changes in fair value of commodity derivative instruments are reported in earnings in the period in which they occur. Our open commodity derivative instruments were in a net liability position with a fair value of ~~$164.2~~$15.8 million at ~~March 31,~~September 30, 2022. Based on the published commodity futures price curves for the underlying commodity as of ~~March 31,~~September 30, 2022, a 10% increase in per unit commodity prices would cause the total fair value of our commodity derivative financial instruments to decrease by approximately ~~$45.5~~$10.5 million to an overall net liability position of ~~$118.7~~$5.3 million. A 10% decrease in per unit commodity prices would cause the total fair value of our commodity derivative financial instruments to increase by approximately ~~$45.5~~$10.5 million to an overall net liability position of ~~$209.7~~$26.3 million. There would also be a similar increase or decrease in ~~Loss~~loss on derivative contracts, net in the Condensed Consolidated Statements of Operations.

Interest Rate Sensitivity

~~Table of Contents~~

We are also exposed to market risk related to adverse changes in interest rates. Our interest rate risk exposure results primarily from fluctuations in short-term rates, which are based on SOFR and the prime rate and may result in reductions of earnings or cash flows due to increases in the interest rates we pay on these obligations.

At ~~March 31,~~September 30, 2022, the combined outstanding borrowings under the revolving tranche and term loan tranche of the Credit Agreement were ~~$624.2~~$641.7 million bearing interest at rates described in Note 10. Long-Term Debt in the Notes to Unaudited Condensed Consolidated Financial Statements. Fluctuations in interest rates will cause our annual interest costs to fluctuate. At ~~March 31,~~September 30, 2022, the weighted average interest rate on borrowings under the revolving tranche and term loan tranche of the Credit Agreement was ~~3.812%~~5.930% 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~~$3.8 million per year.

Disclosure of Limitations

Because the information above included only those exposures that existed at ~~March 31,~~September 30, 2022, it does not consider those exposures or positions which could arise after that date. As a result, our ultimate realized gain or loss with respect to interest rate and commodity price fluctuations will depend on the exposures that arise during future periods.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In accordance with 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 ~~March 31,~~September 30, 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.

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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in various legal proceedings and claims in the ordinary course of business. As of ~~March 31,~~September 30, 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, 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, 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~~nine months ended ~~March 31,~~September 30, 2022 were reported in our Current ~~Report~~Reports on Form 8-K filed with the SEC on February 18, 2022, ~~which report is incorporated herein by reference.~~April 18, 2022 and August 11, 2022.

Repurchase of Equity Securities

The following table sets forth information regarding our acquisition of shares of Class A Common Stock for the periods presented:

Total Number of Shares Purchased (1)
Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan or Programs
January 2022 1,024 $ 10.94 — —
February 2022 236,076 13.66 — —
March 2022 49,792 $ 13.27 — —


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

(1)All of the shares were surrendered by employees (via net settlement) in satisfaction of tax obligations upon the vesting of restricted stock unit awards and performance unit awards. The acquisition of the surrendered shares was not part of a publicly announced program to repurchase shares of our Class A Common Stock.

Additionally, on October 11, 2022, Earthstone repurchased an aggregate of 3,000,000 shares of Class A Common Stock, held by affiliates of Warburg Pincus LLC in a private transaction, for an aggregate purchase price of approximately $43.7 million, or $14.58 per share.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits

Exhibit No.

Description

Filed Herewith

Furnished Herewith

31.1

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

31.2

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

32.1

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

32.2

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

101

Interactive Data Files (formatted as Inline XBRL).

104

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EARTHSTONE ENERGY, INC.

Date:

~~May 4,~~November 2, 2022

By:

/s/ Tony Oviedo

Tony Oviedo

Executive Vice President – Accounting and Administration

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