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, 20222023
Or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 001-35049
_________________________________________________________
EARTHSTONE ENERGY, INC.
(Exact name of registrant as specified in its charter)
_________________________________________________________
| | | | | | | | |
Delaware | | 84-0592823 |
(State or other jurisdiction | | (I.R.SI.R.S. Employer |
of incorporation or organization) | | Identification No.) |
1400 Woodloch Forest Drive, Suite 300
The Woodlands, Texas 77380
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (281) 298-4246
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock, $0.001 par value per share | ESTE | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☐ | | Accelerated filer | | ☒ |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
Emerging growth company | | ☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 28, 2022, 79,091,77725, 2023, there were 140,457,315 shares of common stock outstanding, including 106,197,674 shares of Class A Common Stock, $0.001 par value per share, and 34,271,76634,259,641 shares of Class B Common Stock, $0.001 par value per share, were outstanding.share.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
| | | | March 31, | | December 31, | | | March 31, | | December 31, |
ASSETS | ASSETS | | 2022 | | 2021 | ASSETS | | 2023 | | 2022 |
Current assets: | Current assets: | | | | | Current assets: | | | | |
Cash | Cash | | $ | 482 | | | $ | 4,013 | | Cash | | $ | — | | | $ | — | |
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 | | 133,633 | | | 161,531 | |
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 March 31, 2023 and December 31, 2022, respectively | | Joint interest billings and other, net of allowance of $19 and $19 at March 31, 2023 and December 31, 2022, respectively | | 27,518 | | | 34,549 | |
Derivative asset | Derivative asset | | 1,849 | | | 1,348 | | Derivative asset | | 14,444 | | | 31,331 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 4,440 | | | 2,549 | | Prepaid expenses and other current assets | | 24,658 | | | 18,854 | |
Total current assets | Total current assets | | 116,933 | | | 61,415 | | Total current assets | | 200,253 | | | 246,265 | |
| Oil and gas properties, successful efforts method: | Oil and gas properties, successful efforts method: | | Oil and gas properties, successful efforts method: | |
Proved properties | Proved properties | | 2,278,496 | | | 1,625,367 | | Proved properties | | 4,195,206 | | | 3,987,901 | |
Unproved properties | Unproved properties | | 280,805 | | | 222,025 | | Unproved properties | | 282,228 | | | 282,589 | |
Land | Land | | 5,382 | | | 5,382 | | Land | | 5,482 | | | 5,482 | |
Total oil and gas properties | Total oil and gas properties | | 2,564,683 | | | 1,852,774 | | Total oil and gas properties | | 4,482,916 | | | 4,275,972 | |
| Accumulated depreciation, depletion and amortization | Accumulated depreciation, depletion and amortization | | (429,743) | | | (395,625) | | Accumulated depreciation, depletion and amortization | | (729,318) | | | (619,196) | |
Net oil and gas properties | Net oil and gas properties | | 2,134,940 | | | 1,457,149 | | Net oil and gas properties | | 3,753,598 | | | 3,656,776 | |
| 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 $5,657 and $5,273 at March 31, 2023 and December 31, 2022, respectively | | Office and other equipment, net of accumulated depreciation and amortization of $5,657 and $5,273 at March 31, 2023 and December 31, 2022, respectively | | 5,571 | | | 5,394 | |
Derivative asset | Derivative asset | | 5,810 | | | 157 | | Derivative asset | | 73 | | | 9,117 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | | 2,310 | | | 1,795 | | Operating lease right-of-use assets | | 6,573 | | | 4,569 | |
Other noncurrent assets | Other noncurrent assets | | 58,889 | | | 33,865 | | Other noncurrent assets | | 17,407 | | | 15,280 | |
TOTAL ASSETS | TOTAL ASSETS | | $ | 2,321,271 | | | $ | 1,556,367 | | TOTAL ASSETS | | $ | 3,983,475 | | | $ | 3,937,401 | |
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 | | $ | 40,148 | | | $ | 91,815 | |
Revenues and royalties payable | Revenues and royalties payable | | 52,167 | | | 36,189 | | Revenues and royalties payable | | 194,900 | | | 163,368 | |
Accrued expenses | Accrued expenses | | 39,179 | | | 31,704 | | Accrued expenses | | 123,704 | | | 80,942 | |
Deferred acquisition payment - Chisholm | | 70,000 | | | — | | |
| Asset retirement obligation | Asset retirement obligation | | 609 | | | 395 | | Asset retirement obligation | | 881 | | | 948 | |
Derivative liability | Derivative liability | | 150,055 | | | 45,310 | | Derivative liability | | 3,864 | | | 14,053 | |
Advances | Advances | | 2,447 | | | 4,088 | | Advances | | 8,242 | | | 7,312 | |
Operating lease liabilities | Operating lease liabilities | | 747 | | | 681 | | Operating lease liabilities | | 890 | | | 842 | |
| Finance lease liabilities | | Finance lease liabilities | | 880 | | | 802 | |
Other current liabilities | Other current liabilities | | 630 | | | 851 | | Other current liabilities | | 11,447 | | | 16,202 | |
Total current liabilities | Total current liabilities | | 385,583 | | | 150,615 | | Total current liabilities | | 384,956 | | | 376,284 | |
| Noncurrent liabilities: | Noncurrent liabilities: | | Noncurrent liabilities: | |
Long-term debt | | 624,229 | | | 320,000 | | |
| Long-term debt, net | | Long-term debt, net | | 991,855 | | | 1,053,879 | |
Deferred tax liability | Deferred tax liability | | 14,404 | | | 15,731 | | Deferred tax liability | | 156,937 | | | 138,336 | |
Asset retirement obligation | Asset retirement obligation | | 21,509 | | | 15,471 | | Asset retirement obligation | | 29,941 | | | 29,611 | |
Derivative liability | Derivative liability | | 21,775 | | | 571 | | Derivative liability | | 3,698 | | | — | |
| Operating lease liabilities | Operating lease liabilities | | 1,725 | | | 1,276 | | Operating lease liabilities | | 3,758 | | | 3,889 | |
| Finance lease liabilities | | Finance lease liabilities | | 865 | | | 876 | |
Other noncurrent liabilities | Other noncurrent liabilities | | 9,744 | | | 6,442 | | Other noncurrent liabilities | | 3,735 | | | 10,509 | |
Total noncurrent liabilities | Total noncurrent liabilities | | 693,386 | | | 359,491 | | Total noncurrent liabilities | | 1,190,789 | | | 1,237,100 | |
| Commitments and Contingencies (Note 13) | Commitments and Contingencies (Note 13) | | 0 | | 0 | Commitments and Contingencies (Note 13) | |
| Equity: | Equity: | | Equity: | |
Preferred stock, $0.001 par value, 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 | | |
| Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 106,303,568 and 105,547,139 issued and outstanding at March 31, 2023 and December 31, 2022, respectively | | Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 106,303,568 and 105,547,139 issued and outstanding at March 31, 2023 and December 31, 2022, respectively | | 106 | | | 106 | |
Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,259,641 and 34,259,641 issued and outstanding at March 31, 2023 and December 31, 2022, respectively | | Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,259,641 and 34,259,641 issued and outstanding at March 31, 2023 and December 31, 2022, respectively | | 34 | | | 34 | |
Additional paid-in capital | Additional paid-in capital | | 967,093 | | | 718,181 | | Additional paid-in capital | | 1,343,965 | | | 1,346,463 | |
Accumulated deficit | | (193,252) | | | (159,774) | | |
Retained earnings | | Retained earnings | | 353,259 | | | 292,711 | |
| Total Earthstone Energy, Inc. equity | Total Earthstone Energy, Inc. equity | | 773,948 | | | 558,494 | | Total Earthstone Energy, Inc. equity | | 1,697,364 | | | 1,639,314 | |
Noncontrolling interest | Noncontrolling interest | | 468,354 | | | 487,767 | | Noncontrolling interest | | 710,366 | | | 684,703 | |
Total equity | Total equity | | 1,242,302 | | | 1,046,261 | | Total equity | | 2,407,730 | | | 2,324,017 | |
| TOTAL LIABILITIES AND EQUITY | TOTAL LIABILITIES AND EQUITY | | $ | 2,321,271 | | | $ | 1,556,367 | | TOTAL LIABILITIES AND EQUITY | | $ | 3,983,475 | | | $ | 3,937,401 | |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
| | | | | Three Months Ended | | | Three Months Ended |
| | | | March 31, | | | | March 31, |
| | | | 2022 | | 2021 | | | | 2023 | | 2022 |
REVENUES | REVENUES | | | | REVENUES | | | |
Oil | Oil | | | $ | 137,752 | | | $ | 60,819 | | Oil | | | $ | 317,378 | | | $ | 137,752 | |
Natural gas | Natural gas | | | 22,958 | | | 5,852 | | Natural gas | | | 30,018 | | | 22,958 | |
Natural gas liquids | Natural gas liquids | | | 35,440 | | | 8,901 | | Natural gas liquids | | | 65,740 | | | 35,440 | |
Total revenues | Total revenues | | | 196,150 | | | 75,572 | | Total revenues | | | 413,136 | | | 196,150 | |
| 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 | | | 87,978 | | | 21,631 | |
Production and ad valorem taxes | Production and ad valorem taxes | | | 13,315 | | | 5,027 | | Production and ad valorem taxes | | | 33,153 | | | 13,315 | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | | | 34,326 | | | 24,407 | | Depreciation, depletion and amortization | | | 110,750 | | | 34,326 | |
| General and administrative expense | General and administrative expense | | | 12,306 | | | 8,380 | | General and administrative expense | | | 17,579 | | | 12,306 | |
Transaction costs | Transaction costs | | | 10,742 | | | 2,106 | | Transaction costs | | | 193 | | | 10,742 | |
Accretion of asset retirement obligation | Accretion of asset retirement obligation | | | 397 | | | 290 | | Accretion of asset retirement obligation | | | 629 | | | 397 | |
Exploration expense | Exploration expense | | | 92 | | | — | | Exploration expense | | | 466 | | | 92 | |
Total operating costs and expenses | Total operating costs and expenses | | | 92,809 | | | 51,059 | | Total operating costs and expenses | | | 250,748 | | | 92,809 | |
| | Loss on sale of oil and gas properties | | Loss on sale of oil and gas properties | | | (3,140) | | | — | |
| Income from operations | Income from operations | | | 103,341 | | | 24,513 | | Income from operations | | | 159,248 | | | 103,341 | |
| OTHER INCOME (EXPENSE) | OTHER INCOME (EXPENSE) | | | OTHER INCOME (EXPENSE) | | | |
Interest expense, net | Interest expense, net | | | (5,318) | | | (2,217) | | Interest expense, net | | | (22,856) | | | (5,318) | |
| Write-off of deferred financing costs | | Write-off of deferred financing costs | | | (5,109) | | | — | |
Loss on derivative contracts, net | Loss on derivative contracts, net | | | (151,480) | | | (33,263) | | Loss on derivative contracts, net | | | (26,464) | | | (151,480) | |
| Other income, net | Other income, net | | | 47 | | | 103 | | Other income, net | | | (7) | | | 47 | |
Total other expense | | | (156,751) | | | (35,377) | | |
Total other income (expense) | | Total other income (expense) | | | (54,436) | | | (156,751) | |
| 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 | | | 104,812 | | | (53,410) | |
Income tax (expense) benefit | | Income tax (expense) benefit | | | (18,601) | | | 1,533 | |
Net income (loss) | | Net income (loss) | | | 86,211 | | | (51,877) | |
| 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 | | | 25,663 | | | (18,399) | |
| 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. | | | $ | 60,548 | | | $ | (33,478) | |
| 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 | | | $ | 0.57 | | | $ | (0.53) | |
Diluted | | Diluted | | | $ | 0.56 | | | $ | (0.53) | |
| 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 | | | 105,972,734 | | | 63,445,649 | |
Diluted | | Diluted | | | 107,525,017 | | | 63,445,649 | |
| |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(In thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued Shares | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Earthstone Energy, Inc. Equity | | Noncontrolling Interest | | Total Equity |
At December 31, 2021 | 53,467,307 | | | 34,344,532 | | | $ | 53 | | | $ | 34 | | | $ | 718,181 | | | $ | (159,774) | | | $ | 558,494 | | | $ | 487,767 | | | $ | 1,046,261 | |
Stock-based compensation expense - equity portion | — | | | — | | | — | | | — | | | 2,301 | | | — | | | 2,301 | | | — | | | 2,301 | |
Shares issued in connection with Chisholm Acquisition | 19,417,476 | | | — | | | 19 | | | — | | | 249,496 | | | — | | | 249,515 | | | — | | | 249,515 | |
Vesting of restricted stock units, net of taxes paid | 483,251 | | | — | | | 1 | | | — | | | (1) | | | — | | | — | | | — | | | — | |
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings | 286,892 | | | — | | | — | | | — | | | (3,898) | | | — | | | (3,898) | | | — | | | (3,898) | |
Cancellation of Treasury shares | (286,892) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 72,766 | | | (72,766) | | | — | | | — | | | 1,014 | | | — | | | 1,014 | | | (1,014) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | (33,478) | | | (33,478) | | | (18,399) | | | (51,877) | |
At March 31, 2022 | 73,440,800 | | | 34,271,766 | | | $ | 73 | | | $ | 34 | | | $ | 967,093 | | | $ | (193,252) | | | $ | 773,948 | | | $ | 468,354 | | | $ | 1,242,302 | |
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| | | Class A Common Stock | | Class B Common Stock | | | | Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Total Earthstone Energy, Inc. Equity | | Noncontrolling Interest | | Total Equity |
At December 31, 2022 | | | 105,547,139 | | | 34,259,641 | | | | | $ | 106 | | | $ | 34 | | | $ | 1,346,463 | | | $ | 292,711 | | | $ | 1,639,314 | | | $ | 684,703 | | | $ | 2,324,017 | |
Stock-based compensation expense | | | — | | | — | | | | | — | | | — | | | 3,844 | | | — | | | 3,844 | | | — | | | 3,844 | |
Vesting of restricted stock units, net of taxes paid | | | 756,429 | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings | | | 460,473 | | | — | | | | | — | | | — | | | (6,342) | | | — | | | (6,342) | | | — | | | (6,342) | |
Cancellation of Treasury shares | | | (460,473) | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
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Net income | | | — | | | — | | | | | — | | | — | | | — | | | 60,548 | | | 60,548 | | | 25,663 | | | 86,211 | |
At March 31, 2023 | | | 106,303,568 | | | 34,259,641 | | | | | $ | 106 | | | $ | 34 | | | $ | 1,343,965 | | | $ | 353,259 | | | $ | 1,697,364 | | | 710,366 | | | $ | 2,407,730 | |
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| Issued Shares | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Earthstone Energy, Inc. Equity | | Noncontrolling Interest | | Total Equity |
At December 31, 2020 | 30,343,421 | | | 35,009,371 | | | $ | 30 | | | $ | 35 | | | $ | 540,074 | | | $ | (195,258) | | | $ | 344,881 | | | $ | 470,655 | | | $ | 815,536 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | 2,605 | | | — | | | 2,605 | | | — | | | 2,605 | |
Shares issued in connection with the IRM Acquisition | 12,719,594 | | | — | | | 13 | | | — | | | 76,559 | | | — | | | 76,572 | | | — | | | 76,572 | |
Vesting of restricted stock units and performance units, net of taxes paid | 463,495 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Vested restricted stock units and performance units retained by the Company in exchange for payment of recipient mandatory tax withholdings | 257,764 | | | — | | | — | | | — | | | (2,080) | | | — | | | (2,080) | | | — | | | (2,080) | |
Cancellation of treasury shares | (257,764) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | 578,031 | | | (578,031) | | | 1 | | | (1) | | | 7,758 | | | — | | | 7,758 | | | (7,758) | | | — | |
Net loss | — | | | — | | | — | | | — | | | — | | | (5,833) | | | (5,833) | | | (4,723) | | | (10,556) | |
At March 31, 2021 | 44,104,541 | | | 34,431,340 | | | $ | 44 | | | $ | 34 | | | $ | 624,916 | | | $ | (201,091) | | | $ | 423,903 | | | $ | 458,174 | | | $ | 882,077 | |
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| | | Issued Shares | | | | | | | | | | | | | | | | |
| | | Class A Common Stock | | Class B Common Stock | | | | Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | (Accumulated Deficit) | | Total Earthstone Energy, Inc. Equity | | Noncontrolling Interest | | Total Equity |
At December 31, 2021 | | | 53,467,307 | | | 34,344,532 | | | | | $ | 53 | | | $ | 34 | | | $ | 718,181 | | | $ | (159,774) | | | $ | 558,494 | | | $ | 487,767 | | | $ | 1,046,261 | |
Stock-based compensation expense - equity portion | | | — | | | — | | | | | — | | | — | | | 2,301 | | | — | | | 2,301 | | | — | | | 2,301 | |
Shares issued in connection with Chisholm Acquisition | | | 19,417,476 | | | — | | | | | 19 | | | — | | | 249,496 | | | — | | | 249,515 | | | — | | | 249,515 | |
Vesting of restricted stock units, net of taxes paid | | | 483,251 | | | — | | | | | 1 | | | — | | | (1) | | | — | | | — | | | — | | | — | |
Class A Shares retained by the Company in exchange for payment of recipient mandatory tax withholdings | | | 286,892 | | | — | | | | | — | | | — | | | (3,898) | | | — | | | (3,898) | | | — | | | (3,898) | |
Cancellation of Treasury shares | | | (286,892) | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Class B Common Stock converted to Class A Common Stock | | | 72,766 | | | (72,766) | | | | | — | | | — | | | 1,014 | | | — | | | 1,014 | | | (1,014) | | | — | |
Net loss | | | — | | | — | | | | | — | | | — | | | — | | | (33,478) | | | (33,478) | | | (18,399) | | | (51,877) | |
At March 31, 2022 | | | 73,440,800 | | | 34,271,766 | | | | | $ | 73 | | | $ | 34 | | | $ | 967,093 | | | $ | (193,252) | | | $ | 773,948 | | | $ | 468,354 | | | $ | 1,242,302 | |
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The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
EARTHSTONE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| | | | For the Three Months Ended March 31, | | | For the Three Months Ended March 31, |
| | | 2022 | | 2021 | | | 2023 | | 2022 |
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) | | $ | 86,211 | | | $ | (51,877) | |
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 | | 110,750 | | | 34,326 | |
| Accretion of asset retirement obligations | Accretion of asset retirement obligations | | 397 | | | 290 | | Accretion of asset retirement obligations | | 629 | | | 397 | |
Settlement of asset retirement obligations | Settlement of asset retirement obligations | | (201) | | | (15) | | Settlement of asset retirement obligations | | (539) | | | (201) | |
| Loss on sale of oil and gas properties | | Loss on sale of oil and gas properties | | 3,140 | | | — | |
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 | | (33) | | | (22) | |
| Total loss on derivative contracts, net | Total loss on derivative contracts, net | | 151,480 | | | 33,263 | | Total loss on derivative contracts, net | | 26,464 | | | 151,480 | |
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 | | (7,025) | | | (31,686) | |
Stock-based compensation - equity portion | | 2,301 | | | 3,329 | | |
Stock-based compensation - equity and liability awards | | Stock-based compensation - equity and liability awards | | 4,618 | | | 5,830 | |
Deferred income taxes | Deferred income taxes | | (1,327) | | | (308) | | Deferred income taxes | | 18,601 | | | (1,327) | |
| Write-off of deferred financing costs | | Write-off of deferred financing costs | | 5,109 | | | — | |
Amortization of deferred financing costs | Amortization of deferred financing costs | | 627 | | | 141 | | Amortization of deferred financing costs | | 1,769 | | | 627 | |
| 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 | | 34,955 | | | (48,735) | |
(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 | | (5,752) | | | (1,896) | |
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 | | (53,028) | | | 18,254 | |
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 | | 31,532 | | | 14,932 | |
Increase (decrease) in advances | Increase (decrease) in advances | | (7,100) | | | 358 | | Increase (decrease) in advances | | 929 | | | (7,100) | |
| Net cash provided by operating activities | Net cash provided by operating activities | | 83,002 | | | 38,300 | | Net cash provided by operating activities | | 258,330 | | | 83,002 | |
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 | | (737) | | | (324,198) | |
Additions to oil and gas properties | Additions to oil and gas properties | | (55,925) | | | (8,913) | | Additions to oil and gas properties | | (181,569) | | | (55,925) | |
Additions to office and other equipment | Additions to office and other equipment | | (590) | | | (226) | | Additions to office and other equipment | | (291) | | | (590) | |
| Proceeds from sales of oil and gas properties | | Proceeds from sales of oil and gas properties | | 1,843 | | | — | |
Net cash used in investing activities | Net cash used in investing activities | | (380,713) | | | (143,780) | | Net cash used in investing activities | | (180,754) | | | (380,713) | |
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 | | 958,360 | | | 582,498 | |
Repayments of borrowings under Credit Agreement | | Repayments of borrowings under Credit Agreement | | (776,338) | | | (278,269) | |
| Repayment of term loan | | Repayment of term loan | | (250,000) | | | — | |
| 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 | | (6,342) | | | (3,898) | |
Cash paid for finance leases | Cash paid for finance leases | | — | | | (20) | | Cash paid for finance leases | | (204) | | | — | |
Deferred financing costs | Deferred financing costs | | (6,151) | | | (891) | | Deferred financing costs | | (3,052) | | | (6,151) | |
Net cash provided by financing activities | | 294,180 | | | 105,433 | | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | | (77,576) | | | 294,180 | |
Net decrease in cash | Net decrease in cash | | (3,531) | | | (47) | | Net decrease in cash | | — | | | (3,531) | |
Cash at beginning of period | Cash at beginning of period | | 4,013 | | | 1,494 | | Cash at beginning of period | | — | | | 4,013 | |
Cash at end of period | Cash at end of period | | $ | 482 | | | $ | 1,447 | | Cash at end of period | | $ | — | | | $ | 482 | |
Supplemental disclosure of cash flow information | | | | | |
Cash paid for: | | |
Interest | | $ | 4,580 | | | $ | 1,922 | | |
| Non-cash investing and financing activities: | | |
Class A Common Stock issued in IRM Acquisition | | $ | — | | | $ | 76,572 | | |
| Class A Common Stock issued in Chisholm Acquisition | | $ | 249,515 | | | $ | — | | |
Deferred acquisition payment - Chisholm | | $ | 70,000 | | | $ | — | | |
Accrued capital expenditures | | $ | 49,853 | | | $ | 7,775 | | |
Lease asset additions - ASC 842 | | $ | 678 | | | $ | — | | |
Asset retirement obligations | | $ | 86 | | | $ | 427 | | |
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The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with its consolidated subsidiaries, the “Company”), is a growth-oriented independent oil and natural gas development and production company. In addition, the Company is active in corporate mergers and the acquisition of oil and natural gas properties that have production and future development opportunities. The Company's operations are all in the upstream segment of the oil and natural gas industry and all its properties are onshore in Texas and New Mexico.
Earthstone is the sole managing member of Earthstone Energy Holdings, LLC, a Delaware limited liability company (together with its wholly-owned consolidated subsidiaries, “EEH”), with a controlling interest in EEH. Earthstone, together with its wholly-owned subsidiary, Lynden Energy Corp., a corporation organized under the laws of British Columbia (“Lynden Corp”), and Lynden Corp’s wholly-owned consolidated subsidiary, Lynden USA Inc., a Utah corporation (“Lynden US”) and also, collectively own a member of EEH,75.6% interest in EEH. The Company consolidates the financial results of EEH and recordspresents a noncontrolling interest in the Condensed Consolidated Financial Statements representing the economic interests of EEH'sEEH’s members other than Earthstone and Lynden US. Each of the outstanding shares of Class A common stock, $0.001 par value per share of Earthstone (the “Class A Common Stock”), has a corresponding unit of limited liability company interests denominated as a common unit in EEH (an “EEH Unit”). Each of the outstanding shares of Class B common stock, $0.001 par value per share of Earthstone (the “Class B Common Stock” and with the Class A Common Stock, “Common Stock”), has a corresponding EEH Unit and collectively represent the noncontrolling interests in the Condensed Consolidated Financial Statements.
At any time, at the holder’s discretion, a holder of an EEH Unit and a share of Class B Common Stock may receive a share of Class A Common Stock in exchange for an EEH Unit and a corresponding share of Class B Common Stock, resulting in the immediate cancellation of both the EEH Unit and share of Class B Common Stock exchanged. As of March 31, 2023, outstanding common shares of Earthstone, along with the equal number of corresponding outstanding EEH Units, were approximately 140.6 million, consisting of 106.3 million shares of Class A Common Stock and 34.3 million shares of Class B Common Stock.
The accompanying unaudited Condensed Consolidated Financial Statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The accompanying unaudited Condensed Consolidated Financial Statements and notes should be read in conjunction with the financial statements and notes included in Earthstone’s 20212022 Annual Report on Form 10-K.
The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for the fair presentation of the Company's financial position, results of operations and cash flows for the periods presented. Any such adjustments are of a normal, recurring nature. The Company’s Condensed Consolidated Balance Sheet atas of December 31, 20212022 is derived from the audited Condensed 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 MeasurementsNoncontrolling Interest
FASB Accounting Standards Codification (“ASC”) Topic 820, defines fair value asEarthstone consolidates the price that would be receivedfinancial results of EEH and its subsidiaries and records a noncontrolling interest for the economic interest in Earthstone held by the members of EEH other than Earthstone and Lynden US. Net income (loss) attributable to sell an asset, or paid to transfer a liability,noncontrolling interest in an orderly transaction between market participants at the measurement date. ASC 820 provides a frameworkCondensed Consolidated Statements of Operations for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the transparencythree months ended March 31, 2023 and 2022 represents the portion of inputsnet income (loss) attributable to the valuationeconomic interest in the Company held by the members of an asset or liabilityEEH other than Earthstone and Lynden US. Noncontrolling interest in the Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 represents the measurement date and requires considerationportion of net assets of the counterparty’s creditworthiness when valuing certain assets.
The three-level fair value hierarchy for disclosureCompany attributable to the members 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,EEH 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 dateEarthstone 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 suchLynden US.
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 following table presents 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 periodchanges in which the availability of observable inputs no longer justifies classification in the original level. There were no transfers between fair value hierarchy levelsnoncontrolling interest for the three months ended March 31, 2022.2023:
Fair Value on a Recurring Basis
Derivative Financial Instruments
Derivative financial instruments are carried at fair value and measured on a recurring basis. The derivative financial instruments consist of swaps and costless collars for crude oil and natural gas and interest rate swaps. The Company’s commodity price hedges and interest rate swaps are valued based on discounted future cash flow models that are primarily based on published forward commodity price curves and published LIBOR forward curves; thus, these inputs are designated as Level 2 within the valuation hierarchy.
The fair values of derivative instruments in asset positions include measures of counterparty nonperformance risk, and the fair values of derivative instruments in liability positions include measures of the Company’s nonperformance risk. These measurements were not material to the Condensed Consolidated Financial Statements.
Share-based Compensation Liability
Certain of our performance-based stock awards (“PSUs” or “performance units”) may be payable in cash. The Company classifies the awards that may be settled in cash as liability awards. These awards are valued quarterly utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes grant date fair value based on the most likely outcome. The inputs for the Monte Carlo model are designated as Level 2 within the valuation hierarchy. The share-based compensation liability related to the PSU liability awards is included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of March 31, 2022.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the fair value of the Company’s financial assets and liabilities, by level within the fair-value hierarchy (in thousands):
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March 31, 2022 | | Level 1 | | Level 2 | | Level 3 | | Total |
Financial assets | | | | | | | | |
Derivative asset - current | | $ | — | | | $ | 1,849 | | | $ | — | | | $ | 1,849 | |
Derivative asset - noncurrent | | — | | | 5,810 | | | — | | | 5,810 | |
Total financial assets | | $ | — | | | $ | 7,659 | | | $ | — | | | $ | 7,659 | |
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Financial liabilities | | | | | | | | |
Derivative liability - current | | $ | — | | | $ | 150,055 | | | $ | — | | | $ | 150,055 | |
Derivative liability - noncurrent | | — | | | 21,775 | | | — | | | 21,775 | |
Share-based compensation liability - noncurrent | | — | | | 9,630 | | | — | | | 9,630 | |
Total financial liabilities | | $ | — | | | $ | 181,460 | | | $ | — | | | $ | 181,460 | |
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December 31, 2021 | | | | | | | | |
Financial assets | | | | | | | | |
Derivative asset - current | | $ | — | | | $ | 1,348 | | | $ | — | | | $ | 1,348 | |
Derivative asset - noncurrent | | — | | | 157 | | | — | | | 157 | |
Total financial assets | | $ | — | | | $ | 1,505 | | | $ | — | | | $ | 1,505 | |
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Financial liabilities | | | | | | | | |
Derivative liability - current | | $ | — | | | $ | 45,310 | | | $ | — | | | $ | 45,310 | |
Derivative liability - noncurrent | | — | | | 571 | | | — | | | 571 | |
Share-based compensation liability - current | | — | | | 7,835 | | | — | | | 7,835 | |
Share-based compensation liability - noncurrent | | — | | | 6,324 | | | — | | | 6,324 | |
Total financial liabilities | | $ | — | | | $ | 60,040 | | | $ | — | | | $ | 60,040 | |
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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 certain circumstances indicate that adjustments may be necessary. No triggering events that require assessment were observed during the three months ended March 31, 2022. See further discussion in Note 5. Oil and Natural Gas Properties. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | EEH Units Held By Earthstone and Lynden US | | % | | EEH Units Held By Others | | % | | Total EEH Units Outstanding |
As of December 31, 2022 | | 105,547,139 | | | 75.5 | % | | 34,259,641 | | | 24.5 | % | | 139,806,780 | |
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EEH Units issued in connection with the vesting of restricted stock units and performance-based units | | 756,429 | | | | | — | | | | | 756,429 | |
As of March 31, 2023 | | 106,303,568 | | | 75.6 | % | | 34,259,641 | | | 24.4 | % | | 140,563,209 | |
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Note 3. Fair Value Measurements
The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820 provides a framework for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the counterparty’s creditworthiness when valuing certain assets.
The three-level fair value hierarchy for disclosure of fair value measurements defined by FASB ASC Topic 820 is as follows:
Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Inputs, other than quoted prices within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 – Prices or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation under Level 3 generally involves a significant degree of judgment from management.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level. There were no transfers between fair value hierarchy levels for the three months ended March 31, 2023.
Fair Value on a Recurring Basis
Derivative Financial Instruments
Derivative financial instruments are carried at fair value and measured on a recurring basis. The derivative financial instruments consist of fixed price swaps, basis swaps, costless collars and deferred premium put options. The Company’s commodity price hedges are valued based on discounted future cash flow models that are primarily based on published forward commodity price curves; thus, these inputs are designated as Level 2 within the valuation hierarchy.
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, 2023.
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):
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March 31, 2023 | | Level 1 | | Level 2 | | Level 3 | | Total |
Financial assets | | | | | | | | |
Derivative asset - current | | $ | — | | | $ | 14,444 | | | $ | — | | | $ | 14,444 | |
Derivative asset - noncurrent | | — | | | 73 | | | — | | | 73 | |
Total financial assets | | $ | — | | | $ | 14,517 | | | $ | — | | | $ | 14,517 | |
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Financial liabilities | | | | | | | | |
Derivative liability - current | | $ | — | | | $ | 3,864 | | | $ | — | | | $ | 3,864 | |
Derivative liability - noncurrent | | — | | | 3,698 | | | — | | | 3,698 | |
Share-based compensation liability - current | | — | | | 9,563 | | | — | | | 9,563 | |
Share-based compensation liability - noncurrent | | — | | | 1,440 | | | — | | | 1,440 | |
Total financial liabilities | | $ | — | | | $ | 18,565 | | | $ | — | | | $ | 18,565 | |
| | | | | | | | |
December 31, 2022 | | | | | | | | |
Financial assets | | | | | | | | |
Derivative asset - current | | $ | — | | | $ | 31,331 | | | $ | — | | | $ | 31,331 | |
Derivative asset - noncurrent | | — | | | 9,117 | | | — | | | 9,117 | |
Total financial assets | | $ | — | | | $ | 40,448 | | | $ | — | | | $ | 40,448 | |
| | | | | | | | |
Financial liabilities | | | | | | | | |
Derivative liability - current | | $ | — | | | $ | 14,053 | | | $ | — | | | $ | 14,053 | |
| | | | | | | | |
Share-based compensation liability - current | | — | | | 14,411 | | | — | | | 14,411 | |
Share-based compensation liability - noncurrent | | — | | | 10,357 | | | — | | | 10,357 | |
Total financial liabilities | | $ | — | | | $ | 38,821 | | | $ | — | | | $ | 38,821 | |
| | | | | | | | |
Other financial instruments include cash, accounts receivable and payable, and revenue royalties. The carrying amount of these instruments approximates fair value because of their short-term nature. The Company’s 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 certain circumstances indicate that adjustments may be necessary. No triggering events that require assessment were observed during the three months ended March 31, 2023. See further discussion in Note 6. 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 March 31, 2023 and December 31, 2022. The carrying value of EEH’s 8.000% Senior Notes due 2027, net of $10.3 million of deferred financing costs, of $539.7 million and accrued interest of $20.3 million had an estimated fair value of $542.2 million as of March 31, 2023. There were no other debt instruments outstanding at December 31, 2022.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 4. Derivative Financial Instruments
Commodity Derivative Instruments
The Company’s hedging activities primarily consist of derivative instruments entered into in order to hedge against changes in oil and natural gas prices through the use of fixed price swap agreements, costless collars and 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, 2024.2024 and maintains certain natural gas basis swaps through December 31, 2025. Typically, these derivative instruments require payments to (receipts from) counterparties based on specific indices as required by the derivative agreements. Although not risk free, the Company believes these instruments reduce its exposure to oil and natural gas price fluctuations and, thereby, allow the Company to achieve a more predictable cash flow. The Company does not enter into derivative instruments for trading or other speculative purposes.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
cash flow related to a forecasted transaction. These transactions are recorded in the Condensed Consolidated Financial Statements in accordance with FASB ASC Topic 815. The Company has accounted for these transactions using the mark-to-market accounting method. Generally, the Company incurs accounting losses on derivatives during periods where prices are rising and gains during periods where prices are falling which may cause significant fluctuations in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations.
The Company nets its derivative instrument fair value amounts executed with each counterparty pursuant to an International Swap Dealers Association Master Agreement (“ISDA”), which provides for net settlement over the term of the contract. The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.
The Company hadfollowing table sets forth the followingCompany's open crude oil and natural gas derivative contracts as of March 31, 2022:2023. When aggregating multiple contracts, the weighted average contract price is disclosed.
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q2 - Q4 2022 | | Crude Oil | | 3,247,250 | | | $ | 65.96 | |
Q1 - Q4 2023 | | Crude Oil | | 1,277,500 | | | $ | 76.20 | |
Q2 - Q4 2022 | | Crude Oil Basis Swap (1) | | 3,377,500 | | | $ | 0.51 | |
Q1 - Q4 2023 | | Crude Oil Basis Swap (1) | | 730,000 | | | $ | 0.49 | |
Q2 - Q4 2022 | | Natural Gas | | 8,062,000 | | | $ | 3.55 | |
Q1 - Q4 2023 | | Natural Gas | | 3,670,000 | | | $ | 3.35 | |
Q2 - Q4 2022 | | Natural Gas Basis Swap (2) | | 5,500,000 | | | $ | (0.33) | |
Q1 - Q4 2023 | | Natural Gas Basis Swap (2) | | 25,550,000 | | | $ | (1.28) | |
Q1 - Q4 2024 | | Natural Gas Basis Swap (2) | | 25,620,000 | | | $ | (1.04) | |
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q2 - Q4 2023 | | Crude Oil | | 1,237,500 | | | $ | 76.94 | |
| | | | | | |
Q2 - Q4 2023 | | Crude Oil Basis Swap (1) | | 7,103,500 | | | $ | 0.92 | |
| | | | | | |
Q2 - Q4 2023 | | Natural Gas | | 3,437,500 | | | $ | 3.35 | |
| | | | | | |
Q2 - Q4 2023 | | Natural Gas Basis Swap (2) | | 38,500,000 | | | $ | (1.67) | |
Q1 - Q4 2024 | | Natural Gas Basis Swap (2) | | 36,600,000 | | | $ | (1.05) | |
Q1 - Q4 2025 | | Natural Gas Basis Swap (2) | | 14,600,000 | | | $ | (0.74) | |
(1)The basis differential price is between WTI Midland Crude and the WTI NYMEX.
(2)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) |
Q2 - Q4 2022 | | Crude Oil Costless Collar | | 1,560,000 | | | $ | 83.59 | | | $ | 69.42 | |
Q1 - Q4 2023 | | Crude Oil Costless Collar | | 1,715,500 | | | $ | 80.34 | | | $ | 62.98 | |
Q2 - Q4 2022 | | Natural Gas Costless Collar | | 12,782,500 | | | $ | 5.47 | | | $ | 3.66 | |
Q1 - Q4 2023 | | Natural Gas Costless Collar | | 13,188,000 | | | $ | 4.84 | | | $ | 3.28 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) |
Q2 - Q4 2023 | | Crude Oil Costless Collar | | 2,117,500 | | | $ | 62.47 | | | $ | 87.56 | |
| | | | | | | | |
Q2 - Q4 2023 | | Natural Gas Costless Collar | | 14,797,500 | | | $ | 3.37 | | | $ | 5.61 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Deferred Premium Puts |
Period | | Commodity | | Volume (Bbls / MMBtu) | | $/Bbl (Put Price) | | $/Bbl (Net of Premium) |
Q2 - Q4 2023 | | Crude Oil | | 1,364,500 | | | $ | 69.67 | | | $ | 64.24 | |
| | | | | | | | |
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the location and fair value amounts of all derivative instruments in the Condensed Consolidated Balance Sheets as well as the gross recognized derivative assets, liabilities, and amounts offset in the Condensed Consolidated Balance Sheets (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | March 31, 2023 | | December 31, 2022 |
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 | | $ | 34,046 | | | $ | (19,602) | | | $ | 14,444 | | | $ | 51,803 | | | $ | (20,472) | | | $ | 31,331 | |
Commodity contracts | | Derivative liability - current | | $ | 23,466 | | | $ | (19,602) | | | $ | 3,864 | | | $ | 34,525 | | | $ | (20,472) | | | $ | 14,053 | |
| | | | | | | | | | | | | | |
Commodity contracts | | Derivative asset - noncurrent | | $ | 462 | | | $ | (389) | | | $ | 73 | | | $ | 9,117 | | | $ | — | | | $ | 9,117 | |
Commodity contracts | | Derivative liability - noncurrent | | $ | 4,087 | | | $ | (389) | | | $ | 3,698 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
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 March 31, |
| | Statement of Cash Flows Location | | Statement of Operations Location | | | 2022 | | 2021 | | Statement of Cash Flows Location | | Statement of Operations Location | | | 2023 | | 2022 |
Unrealized loss | Unrealized loss | | Not separately presented | | Not separately presented | | | $ | (119,794) | | | $ | (22,358) | | Unrealized loss | | Not separately presented | | Not separately presented | | | $ | (19,439) | | | $ | (119,794) | |
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 | | | (7,025) | | | (31,686) | |
| | 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 | | | $ | (26,464) | | | $ | (151,480) | |
|
Note 4.5. Acquisitions and Divestitures
Titus Agreement
On June 27, 2022, Earthstone and EEH, together as buyer, and Titus Oil & Gas Production, LLC, a Delaware limited liability company, Titus Oil & Gas Corporation, a Delaware corporation, Lenox Minerals, LLC, a Delaware limited liability company and Lenox Mineral Title Holdings, Inc., a Delaware corporation (collectively, “Titus I”), as seller, entered into a purchase and sale agreement (the “Titus I Purchase Agreement”) which provided that EEH or its designated wholly-owned subsidiary would acquire (the “Titus I Acquisition”) interests in oil and gas leases and related property of Titus I located in the Northern Delaware Basin of New Mexico (the “Titus I Assets”). Also on June 27, 2022, Earthstone and EEH, as buyer, and Titus Oil & Gas Production II, LLC, a Delaware limited liability company, Lenox Minerals II, LLC, a Delaware limited liability company and Lenox Mineral Holdings II, Inc., a Delaware limited liability company (collectively, “Titus II” and together with Titus I, “Titus”), as seller, entered into a purchase and sale agreement (the “Titus II Purchase Agreement” and together with the Titus I Purchase Agreement, the “Titus Purchase Agreements”) which provided that EEH or its designated wholly-owned subsidiary would acquire (the “Titus II Acquisition” and together with the Titus I Acquisition, the “Titus Acquisition”) interests in oil and gas leases and related property of Titus II located in the Northern Delaware Basin of New Mexico (the “Titus II Assets” and together with the Titus I Assets, the “Titus Assets”).
On August 10, 2022, the transactions contemplated in the Titus Purchase Agreements were consummated whereby EEH acquired the Titus Assets for aggregate consideration of approximately $568.5 million in cash, net of customary purchase price adjustments, and 3,857,015 shares Class A Common Stock (the “Titus Acquisition”).
The Titus Acquisition was accounted for as an asset acquisition. The consideration paid by us and allocation of that amount to the underlying assets acquired, on a relative fair value basis, was recorded on our books as of the date of the closing of the Titus Acquisition. Additionally, costs directly related to the Titus Acquisition were capitalized as a component of the purchase price. The consideration transferred, assets acquired and liabilities assumed by the Company were recorded as follows (in thousands, except share amounts and stock price):
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | |
Consideration: | | |
Shares of Class A Common Stock issued | | 3,857,015 | |
Class A Common Stock price as of August 10, 2022 | | $ | 13.89 | |
Class A Common Stock consideration | | 53,574 | |
Cash consideration | | 567,288 | |
Direct transaction costs | | 1,173 | |
Total consideration transferred | | $ | 622,035 | |
| | |
Assets acquired: | | |
Oil and gas properties | | $ | 634,877 | |
Amount attributable to assets acquired | | $ | 634,877 | |
| | |
Liabilities assumed: | | |
Current liabilities | | $ | 11,928 | |
Noncurrent liabilities - ARO | | 914 | |
Amount attributable to liabilities assumed | | $ | 12,842 | |
| | |
Bighorn AgreementAcquisition
On January 30, 2022, Earthstone, EEH, as buyer, and Bighorn Asset Company, LLC, a Delaware limited liability company (“Bighorn”), as seller, entered into a Purchasepurchase and Sale Agreementsale 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 $770approximately $628.2 million in cash, and 6,808,511 sharesnet of Class A Common Stock. The Bighorn Purchase Price is subject to customary purchase price adjustments, withand 5,650,977 shares Class A Common Stock.
The Bighorn Acquisition was accounted for as an effectiveasset acquisition. 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.were capitalized as a component of the purchase price. The Bighorn Deposit is included in Other noncurrentconsideration transferred, assets inacquired and liabilities assumed by the Condensed Consolidated Balance SheetCompany were recorded as follows (in thousands, except share amounts and stock price):
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | |
Consideration: | | |
Shares of Class A Common Stock issued | | 5,650,977 | |
Class A Common Stock price as of April 14, 2022 | | $ | 13.76 | |
Class A Common Stock consideration | | 77,757 | |
Cash consideration | | 625,888 | |
Direct transaction costs | | 2,352 | |
Total consideration transferred | | $ | 705,997 | |
| | |
Assets acquired: | | |
Current assets | | $ | 769 | |
Oil and gas properties | | 746,167 | |
Amount attributable to assets acquired | | $ | 746,936 | |
| | |
Liabilities assumed: | | |
Suspense payable | | $ | 25,710 | |
Other current liabilities | | 2,035 | |
Noncurrent liabilities - ARO | | 13,194 | |
Amount attributable to liabilities assumed | | $ | 40,939 | |
| | |
Chisholm Acquisition
On 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 andconsisting 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 describedidentified below, was the majority shareholder of Chisholm as of the closing of the Chisholm Acquisition. See Note 12. Related Party Transactions for further discussion.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Chisholm Acquisition has been accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer. The 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):
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
Consideration: | |
Shares of Class A Common Stock issued | 19,417,476 | |
Class A Common Stock price as of February 15, 2022 | $ | 12.85 | |
Class A Common Stock consideration | 249,515 | |
Cash consideration(1) | 377,528383,877 | |
| |
Total consideration transferred | $ | 627,043633,392 | |
| |
Fair value of assets acquired: | |
Oil and gas properties | $ | 634,867642,391 | |
Amount attributable to assets acquired | $ | 634,867642,391 | |
| |
Fair value of liabilities assumed: | |
Other current liabilities | $ | 1,8533,028 | |
Asset retirement obligation - noncurrent | 5,971 | |
Amount attributable to liabilities assumed | $ | 7,8248,999 | |
(1)Includes $307.5 million of cash paid at closing, net of customary purchase price adjustments, and $70.0 million of cash consideration paid subsequent to closing based on the terms of the Chisholm Agreement.
IRM Acquisition
On January 7, 2021, the Company completed the acquisition (the “IRM Acquisition”) of all of the issued and outstanding limited liability company interests of Independence Resources Management, LLC (“IRM”) and certain of its wholly owned subsidiaries for consideration consisting of the following: (i) net cash of approximately $140.5 million (the “Cash Consideration”) and (ii) 12,719,594 shares of the Company’s Class A Common Stock. The fair value of each share of Class A Common Stock was determined using the closing price of $6.02 per share on January 7, 2021.
The IRM Acquisition has been accounted for as a business combination using the acquisition method of accounting, with Earthstone identified as the acquirer. The allocation of the total purchase price in the IRM Acquisition is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
Consideration: | |
Shares of Class A Common Stock issued | 12,719,594 | |
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 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”). 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):
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | |
| | | | | | Total |
Consideration: | | | | | | |
Shares of Class A Common Stock issued | | | | | | 6,200,000 | |
Class A Common Stock price as of July 20, 2021 | | | | | | $ | 9.97 | |
Class A Common Stock consideration | | | | | | 61,814 | |
Cash consideration (1)
| | | | | | 60,159 | |
Direct transaction costs (2)
| | | | | | 1,715 | |
Total consideration transferred | | | | | | $ | 123,688 | |
| | | | | | |
Fair value of assets acquired: | | | | | | |
Oil and gas properties | | | | | | $ | 124,288 | |
Amount attributable to assets acquired | | | | | | $ | 124,288 | |
| | | | | | |
Fair value of liabilities assumed: | | | | | | |
Noncurrent liabilities - asset retirement obligations | | | | | | 600 | |
Amount attributable to liabilities assumed | | | | | | $ | 600 | |
| | | | | | |
(1)Includes customary purchase price adjustments.
(2)Represents $1.7 million of transaction costs associated with the Tracker Acquisition and the Sequel Acquisition that have been capitalized in accordance with ASC 805-50.
The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair value of oil and gas properties and asset retirement obligations were measured using the discounted cash flow technique of valuation.
Significant inputs to the valuation of oil and gas properties include estimates of: (i) reserves, (ii) future operating and development costs, (iii) future commodity prices, (iv) future plugging and abandonment costs, (v) estimated future cash flows, and (vi) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates and are the most sensitive and subject to change.
The following unaudited supplemental pro forma condensed results of operations present consolidated information as though the Chisholm Acquisition, IRM Acquisition and Tracker/Sequel Acquisitions had been completed as of January 1, 2021. The unaudited supplemental pro forma financial information was derived from the historical consolidated and combined statements of operations for Chisholm, IRM, Tracker, Sequel and Earthstone and adjusted to include depletion expense applied to the adjusted basis of the properties acquired. These unaudited supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future. Future results may vary significantly from the results reflected in this unaudited pro forma financial information (in thousands, except per share amounts):Divestitures
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| | | | March 31, |
| | | | | | 2022 | | 2021 |
Revenue | | | | | | $ | 232,155 | | | $ | 133,854 | |
Loss before taxes | | | | | | (32,996) | | | (24,497) | |
Net loss | | | | | | (31,463) | | | (24,189) | |
Less: Net loss attributable to noncontrolling interest | | | | | | (11,159) | | | (10,823) | |
Net loss attributable to Earthstone Energy, Inc. | | | | | | (20,304) | | | (13,366) | |
Pro forma net loss per common share attributable to Earthstone Energy, Inc.: | | | | | | | | |
Basic and Diluted | | | | | | $ | (0.32) | | | $ | (0.20) | |
| | | | | | | | |
| | | | | | | | |
The Company has included in its Condensed Consolidated Statements of Operations, revenues of $37.8 million and operating expenses of $14.4 million for the period February 15, 2022 to March 31, 2022 related to the Chisholm Acquisition. During the three months ended March 31, 2022,2023, the Company sold certain non-core properties for approximately $1.8 million in cash, resulting in net losses of approximately $3.1 million recorded $10.0 millionin Loss on sale of legaloil and professional fees related to the Chisholm Acquisition which are included in Transaction costsgas properties, net in the Condensed Consolidated Statements of Operations.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Eagle Ford Acquisitions
In May and June 2021, the Company completed acquisitions of working interests in certain assets it operates located in southern Gonzales County, Texas (collectively, the “Eagle Ford Acquisitions”) from 4 separate sellers. The aggregate purchase price of the Eagle Ford Acquisitions was approximately $45.2 million. One of the 4 separate sellers was a related party. See Note 12. Related Party Transactions for further discussion. The Eagle Ford Acquisitions have been accounted for as asset acquisitions in accordance with ASC 805. The preliminary allocation of each purchase was based upon management’s estimates of and assumptions related to the relative fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the acquired oil and natural gas properties. These amounts will be finalizedThere were no later than one year from the acquisition date.
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.
Note 5. Oil and Natural Gas Properties
The Company follows the successful efforts method of accounting for its oil and natural gas properties. Under this method, costs to acquire oil and natural gas properties, drill and equip exploratory wells that find proved reserves, and drill and equip development wells are capitalized. Exploration costs, including unsuccessful exploratory wells and geological and geophysical costs, are charged to operations as incurred. Upon sale or retirement of oil and natural gas properties, the costs and related accumulated depreciation, depletion and amortization are eliminated from the accounts and the resulting gain or loss is recognized.
Costs incurred to maintain wells and related equipment, lease and well operating costs, and other exploration costs are charged to expense as incurred. Gains and losses arising from the sale of properties are included in Income from operations in the Condensed Consolidated Statements of Operations.
The Company’s lease acquisition costs and development costs of proved oil and natural gas properties are amortized using the units-of-production method, at the field level, based on total proved reserves and proved developed reserves, respectively. For the three months ended March 31, 2022, depletion expense for oil and gas producing property and related equipment was $34.1 million. For the three months ended March 31, 2021, depletion expense for oil and gas producing property and related equipment was $24.2 million.
Our accrual basis capital expenditures for the three months ended March 31, 2022 were as follows (in thousands):
| | | | | | | | | | |
| | | | Three Months Ended March 31, 2022 |
Drilling and completions | | | | $ | 82,000 | |
Leasehold costs | | | | 109 | |
Total capital expenditures | | | | $ | 82,109 | |
| | | | |
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 propertiesmaterial divestitures during the three months ended March 31, 2022 and 2021.2022.
Note 6. Noncontrolling InterestOil and Natural Gas Properties
Earthstone consolidatesThe Company follows the financial resultssuccessful efforts method of EEHaccounting for its oil and its subsidiariesnatural gas properties. Under this method, costs to acquire oil and records a noncontrolling interest fornatural 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 economic interestcosts 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 Earthstone held by the members of EEH other than Earthstone and Lynden US. Net loss attributable to noncontrolling interestIncome from operations in the Condensed Consolidated Statements of OperationsOperations.
The Company’s lease acquisition costs and development costs of proved oil and natural gas properties are amortized using the units-of-production method, at the field level, based on total proved reserves and proved developed reserves, respectively. For the three months ended March 31, 2023, depletion expense for oil and gas producing property and related equipment was $110.3 million. For the three months ended March 31, 2022, depletion expense for oil and gas producing property and related equipment was $34.1 million.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our accrual basis capital expenditures for the three months ended March 31, 20222023, were as follows (in thousands):
| | | | | | | | | | |
| | | | Three Months Ended March 31, 2023 |
Development costs | | | | $ | 201,384 | |
Leasehold costs | | | | 888 | |
Total capital expenditures | | | | $ | 202,272 | |
| | | | |
Proved Properties
Proved oil and 2021 representsnatural gas properties are reviewed for impairment on a nonrecurring basis. The impairment charge reduces the portion ofcarrying 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 losscash flows attributable to the economic interestassets. 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 Company held bylease term for the members of EEH other than Earthstoneproperty.
Impairments to Oil and Lynden US. Noncontrolling interest in the Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 represents the portion of net assets of the Company attributableNatural Gas Properties
No impairments were recorded to the members of EEH other than EarthstoneCompany's oil and Lynden US. The term “EEH Unit” means the units of limited liability company interests of EEH denominated as common units.
The following table presents the changes in noncontrolling interest fornatural gas properties during the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | EEH Units Held By Earthstone and Lynden US | | % | | EEH Units Held By Others | | % | | Total EEH Units Outstanding |
As of December 31, 2021 | | 53,467,307 | | | 60.9 | % | | 34,344,532 | | | 39.1 | % | | 87,811,839 | |
EEH Units issued in connection with the Chisholm Acquisition | | 19,417,476 | | | | | — | | | | | 19,417,476 | |
| | | | | | | | | | |
EEH Units and Class B Common Stock converted to Class A Common Stock | | 72,766 | | | | | (72,766) | | | | | — | |
EEH Units issued in connection with the vesting of restricted stock units and performance-based units | | 483,251 | | | | | — | | | | | 483,251 | |
As of March 31, 2022 | | 73,440,800 | | | 68.2 | % | | 34,271,766 | | | 31.8 | % | | 107,712,566 | |
| | | | | | | | | | |
2023 or 2022.
Note 7. Net LossIncome (Loss) Per Common Share
Net lossincome (loss) per common share—basic is calculated by dividing Net lossincome (loss) by the weighted average number of shares of common stock outstanding during the period. Net lossincome (loss) per common share—diluted assumes the conversion of all potentially dilutive securities and is calculated by dividing Net lossincome (loss) by the sum of the weighted average number of shares of common stock, as defined above, outstanding plus potentially dilutive securities. Net lossincome (loss) per common share—diluted considers the impact of
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.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
A reconciliation of Net lossincome (loss) per common share is as follows:
| | | | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
(In thousands, except per share amounts) | (In thousands, except per share amounts) | | | 2022 | | 2021 | (In thousands, except per share amounts) | | | 2023 | | 2022 |
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. | | | $ | 60,548 | | | $ | (33,478) | |
| 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 | | | $ | 0.57 | | | $ | (0.53) | |
Diluted | | Diluted | | | $ | 0.56 | | | $ | (0.53) | |
| Weighted average common shares outstanding | Weighted average common shares outstanding | | | | Weighted average common shares outstanding | | | |
Basic | Basic | | | 63,445,649 | | | 42,778,916 | | Basic | | | 105,972,734 | | | 63,445,649 | |
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) | | | 335,455 | | | — | |
Unvested performance units (1) | Unvested performance units (1) | | | — | | | — | | Unvested performance units (1) | | | 1,216,828 | | | — | |
| Diluted weighted average common shares outstanding | Diluted weighted average common shares outstanding | | | 63,445,649 | | | 42,778,916 | | Diluted weighted average common shares outstanding | | | 107,525,017 | | | 63,445,649 | |
|
(1)For the three months ended March 31, 2022, and 2021, the 1,099,800 performance units granted on January 27, 2021 were excluded due to an assumed settlement in cash and the liability treatment described in Note 9. Stock-Based Compensation. For the three months ended March 31, 2022 and 2021, there were no dilutive effects related to unvested restricted stock units or performance units due to the lossesloss for those periods.the period.
The Class B Common Stock par value $0.001has been excluded, as its conversion would eliminate noncontrolling interest and net income attributable to noncontrolling interest of $25.7 million for the three months ended March 31, 2023 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 ofattributable to Earthstone (the “ClassEnergy, Inc.
The Class B Common Stock and with the Class A Common Stock, the “Common Stock”) has been excluded, as its conversion would eliminate noncontrolling interest and net loss attributable to noncontrolling interest of $18.4 million and $4.7 million for the three months ended March 31, 2022 and 2021, respectively would be added back to Net loss attributable to Earthstone Energy, Inc. for the periods then ended, having no dilutive effect on Net loss per common share attributable to Earthstone Energy, Inc.
Note 8. Common Stock
Class A Common Stock
At March 31, 20222023 and December 31, 2021,2022, there were 73,440,800106,303,568 and 53,467,307105,547,139 shares of Class A Common Stock issued and outstanding, respectively. In connection with the Chisholm Acquisition, on February 15, 2022, Earthstone issued 19,417,476 shares of Class A Common Stock valued at approximately $249.5 million on that date.
During the three months ended March 31, 2022,2023, as a result of the vesting and settlement of performance units and restricted stock units under the Earthstone Energy, Inc. Amended and Restated 2014 Long-Term Incentive Plan, as amended (the “2014 Plan”), Earthstone issued 770,1431,216,902 shares of Class A Common Stock, of which 286,892460,473 shares 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 months ended March 31, 2021, (1) in connection with the IRM Acquisition, on January 7, 2021, Earthstone issued 12,719,594 shares of Class A Common Stock valued at approximated $76.6 million on that date, (2)2022, as a result of the vesting and settlement of performance units and restricted stock units under the 2014 Plan, Earthstone issued 721,259770,143 shares of Class A Common Stock, of which 257,764286,892 shares 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,liability. In connection with the Chisholm Acquisition, on February 15, 2022, Earthstone issued 19,417,476 shares of Class A Common Stock were issued as the result of conversions of Class B Common Stock.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
valued at approximately $249.5 million on that date.Class B Common Stock
At both March 31, 20222023 and December 31, 2021,2022, there were 34,271,766 and 34,344,53234,259,641 shares of Class B Common Stock issued and outstanding, respectively.outstanding. Each share of Class B Common Stock, together with 1one EEH Unit, is convertible into 1one share of Class A Common Stock. There were no conversions of shares of Class B Common Stock during the three months ended March 31, 2023. During the three months ended March 31, 2022, 72,766 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 months ended March 31, 2021, 578,031 shares
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 9. Stock-Based Compensation
Restricted Stock Units
The 2014 Plan, allows, among other things, for the grant of restricted stock units (“RSUs”). As of March 31, 2022,2023, the maximum number of shares of Class A Common Stock that may be issued under the 2014 Plan was 12.0 million shares.
Each RSU represents the contingent right to receive 1one share of Class A Common Stock. The holders of outstanding RSUs do not receive dividends or have voting rights prior to vesting and settlement. Holders of outstanding RSUs granted prior to December 1, 2022 do not have dividend rights prior to vesting and settlement. Holders of outstanding RSUs granted subsequent to December 1, 2022 do have dividend rights. The Company determines the fair value of granted RSUs based on the market price of the Class A Common Stock on the date of the grant. Compensation expense for granted RSUs is recognized on a straight-line basis over the vesting period and is net of forfeitures, as incurred. Stock-based compensation is included in General and administrative expense in the Condensed Consolidated Statements of Operations and is recorded with a corresponding increase in Additional paid-in capital within the Condensed Consolidated Balance Sheets.
The table below summarizes RSU award activity for the three months ended March 31, 2022:2023:
| | | | Shares | | Weighted-Average Grant Date Fair Value | | | Shares | | Weighted-Average Grant Date Fair Value |
Unvested RSUs at December 31, 2021 | | 771,817 | | | $ | 5.91 | | |
Unvested RSUs at December 31, 2022 | | Unvested RSUs at December 31, 2022 | | 869,978 | | | $ | 11.40 | |
Granted | Granted | | 393,515 | | | $ | 13.63 | | Granted | | 404,955 | | | $ | 13.38 | |
Forfeited | Forfeited | | (3,033) | | | $ | 6.43 | | Forfeited | | (15,100) | | | $ | 12.33 | |
Vested | Vested | | (162,018) | | | $ | 7.55 | | Vested | | (173,102) | | | $ | 10.87 | |
Unvested RSUs at March 31, 2022 | | 1,000,281 | | | $ | 8.68 | | |
Unvested RSUs at March 31, 2023 | | Unvested RSUs at March 31, 2023 | | 1,086,731 | | | $ | 12.21 | |
|
As of March 31, 2022,2023, there was $8.6$12.7 million of unrecognized compensation expense related to the RSU awards which will be recognized over a weighted average period of 1.121.14 years.
For the three months ended March 31, 2023, Stock-based compensation related to RSUs was $1.8 million. For the three months ended March 31, 2022, and 2021, Stock-based compensation related to RSUs was $1.2 million and $1.5 million, respectively.million.
Performance Units
Performance units include both performance-based stock units (“PSUs”) and performance-based restricted stock units (“PRSUs”). The table below summarizes PSUperformance unit activity for the three months ended March 31, 2022:2023:
| | | | Shares | | Weighted-Average Grant Date Fair Value | | | Shares | | Weighted-Average Grant Date Fair Value |
Unvested PSUs at December 31, 2021 | | 2,751,725 | | | $ | 8.42 | | |
Unvested Performance Units at December 31, 2022 | | Unvested Performance Units at December 31, 2022 | | 2,616,085 | | | $ | 10.21 | |
Granted | Granted | | 472,485 | | | $ | 19.42 | | Granted | | 559,325 | | | $ | 18.86 | |
| Vested | Vested | | (608,125) | | | $ | 9.30 | | Vested | | (1,043,800) | | | $ | 5.36 | |
Unvested PSUs at March 31, 2022 | | 2,616,085 | | | $ | 10.20 | | |
Unvested Performance Units at March 31, 2023 | | Unvested Performance Units at March 31, 2023 | | 2,131,610 | | | $ | 14.85 | |
|
On February 1, 2022,January 6, 2023, the Board of Directors of Earthstone (the “Board”) granted 472,485 PSUs258,150 PRSUs (the “2022 PSUs”“2023 RTSR PRSUs”) to certain officers pursuant to the 2014 Plan (the “2022 Grant”).Plan. The 2022 PSUs2023 RTSR PRSUs are expected to be paidpayable in cash or shares of Class A Common Stock upon the achievement by Earthstone over a period commencing on January 1, 20222023 and ending on December 31, 20242025 (the “Performance“2023 Performance Period”) of certain performance criteria established by the Board. The Company classifies these awards that will be settled in cash as equity awards as they are expectedliability awards. PRSU grants to be settled in shares.shares are classified as equity awards. The holders of 2023 RTSR PRSUs do not have any voting rights with respect to such PRSUs until vesting and settlement; however, such holders do have dividend rights.
The number of shares of Class A Common Stock that may be earned will be determined based on the TSR (as defined below) achieved by Earthstone relative to the TSR of each of the companies in the predetermined peer group during the Performance Period. Between 0x to 2.0x of the PRSUs are eligible to be earned based on Earthstone’s ranking relative to the companies in the predetermined peer group. In the event that a PSU grant is expected togreater than 1.0x of the 2023 RTSR PRSUs are earned, such additional PRSUs may be settledpaid in cash it is alternatively classified as a liability award.
rather than the issuance of shares of Class A Common Stock
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The 2022 PSUs are eligible to be earned basedTotal shareholder return is generally determined by dividing (A) the volume weighted average price of a share of stock for the trading days during the thirty calendar days ending on and including the annualized Total Shareholder Return (“TSR”)last calendar day of the Class A Common Stockapplicable performance period minus the volume weighted average price of a share of stock for the trading days during a three-year period beginningthe thirty calendar days ending on February 1, 2022. Between 0x to 2.0xand including the first day of the Performance Units are eligible to be earned basedapplicable performance period plus cash dividends paid over the applicable performance period by (B) the volume weighted average price of a share of stock for the trading days during the thirty calendar days ending on Earthstone achieving an annualized TSR based onand including 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 |
first day of the applicable performance period (“TSR”).The Company accounts for thesethe 2023 RTSR PRSU awards as market-based awards which are valued quarterly utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes grant date fair value based on the most likely outcome. For the 2022 PSUs,2023 RTSR PRSUs, assuming a risk-free rate of 1.4%3.89% and volatility of 86.0%volatilities ranging from 40.6% to 142.5%, the Company calculated the weighted average grant date fair value per PSUPRSU to be $19.42.$20.06.
On January 27, 2021,6, 2023, the Board granted 1,099,800 PSUs301,175 PRSUs (the “2023 ATSR PRSUs”) to certain officers pursuant to the 2014 Plan (the “2021 PSUs”).Plan. The PSUs2023 ATSR PRSUs are payable in cash or shares of Class A Common Stock upon the achievement by Earthstone over the Company over a period commencing on January 1, 2021 and ending on December 31, 2023 Performance Period of certain performance criteria established by the Board. The Company classifies these awards that will be settled in cash as liability awardsawards. PRSU grants to be settled in shares are classified as theyequity awards. The holders of 2023 ATSR PRSUs do not have any voting rights with respect to such PRSUs until vesting and settlement; however, such holders do have dividend rights.
The 2023 ATSR PRSUs are expectedeligible to be earned based on the annualized TSR of the Class A Common Stock during the 2023 Performance Period. Between 0x to 2.0x of the Performance Units are eligible to be earned based on Earthstone achieving an annualized TSR based on the following pre-established goals:
| | | | | |
Earthstone’s Annualized TSR | TSR Multiplier |
23.9% or greater | 2.0 |
14.5% | 1.0 |
8.4% | 0.5 |
Less than 8.4% | 0.0 |
In the event that greater than 1.0x of the 2023 ATSR PRSUs are earned, such additional PRSUs may be paid in cash. Ascash rather than the issuance of March 31, 2022shares of Class A Common Stock.
The Company accounts for the 2023 ATSR PRSUs as market-based awards which are valued utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and December 31, 2021, $9.6 millionestablishes grant date fair value based on the most likely outcome. For the 2023 ATSR PRSUs, assuming a risk-free rate of 3.89% and $6.3 million, respectively, have been included in Other noncurrent liabilities involatility of 77%, the Condensed Consolidated Balance Sheets relatedCompany calculated the weighted average grant date fair value per PRSU to the 2021 PSUs.be $17.84.
On January 28, 2019,30, 2020, the Board granted 669,5501,043,800 PSUs (the “2020 PSUs”) to certain named executive officers pursuant to the 2014 Plan. Plan (the “2020 Grant”).
The 2020 PSUs were payable in shares of Class A Common Stock based upon the achievement by Earthstone over a period commencing on February 1, 2019 and endingsettled 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 through2023 resulting in the issuance of 608,1251,043,800 shares of Class A Common Stock and the remainder was settled in cash.cash payments totaling approximately $14.5 million.
As of March 31, 2022,2023, there was $24.5$20.6 million of unrecognized compensation expense related to all PSU awards which will be amortized over a weighted average period of 1.060.96 years.
For the three months ended March 31, 20222023 and 2021,2022, Stock-based compensation related to all PSUs was approximately $2.8 million. and $4.6 million, and $1.8 million, respectively. A
The Company classifies awards that will be settled in cash as liability awards. PSU grants to be settled in shares are classified as equity awards. Corresponding liabilities of $9.6 million and $14.4 million related to the PSU liability awards isPSUs were included in Other current liabilities and Accrued expenses, respectively, in the Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022, respectively. Additionally, corresponding liabilities of $1.4 million and $10.4 million related to the PSUs were included in Other noncurrent liabilities in the Condensed Consolidated Balance SheetSheets as of March 31, 2022.2023 and December 31, 2022, respectively.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 10. Long-Term Debt
The Company's long-term debt consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
Revolving credit facility(1) | | $ | 452,159 | | | $ | 270,136 | |
Term loan under credit facility due 2027 | | — | | | 250,000 | |
8.000% Senior notes due 2027 | | 550,000 | | | 550,000 | |
| | 1,002,159 | | | 1,070,136 | |
Unamortized debt issuance costs on term loan | | — | | | (5,309) | |
Unamortized debt issuance costs on 8.000% Senior notes | | (10,304) | | | (10,948) | |
Long-term debt, net | | $ | 991,855 | | | $ | 1,053,879 | |
| | | | |
(1)Related to the borrowings under the revolving credit facility, the Company had debt issuance costs of $17.4 million and $15.3 million, net of accumulated amortization of $7.5 million and $6.5 million, as of March 31, 2023 and December 31, 2022, respectively. Unamortized deferred financing costs on the borrowings under the revolving credit facility are included in Other noncurrent assets in the Condensed Consolidated Balance Sheets.
Credit FacilityAgreement
On November 21, 2019, Earthstone, EEH (the “Borrower”), Wells Fargo Bank, National Association, as Administrative Agent and Issuing Bank (“Wells Fargo”), Royal Bank of Canada, as Syndication Agent, BOKF, NA dba Bank of Texas, (“BOKF”) as Issuing Bank with respect to Existing Letters of Credit, Royal Bank of Canada, as Syndication Agent, Truist Bank, as successor by merger to SunTrust Bank, as Documentation Agent, and the lendersLenders party thereto (the “Lenders”(collectively, the “Parties”) entered into a credit agreement (the(together with all amendments or other modifications, the “Credit Agreement”), which replaced the prior credit facility, which was terminated on November 21, 2019.
On JanuaryMarch 30, 2022,2023, Earthstone, EEH, as Borrower, Wells Fargo, as Administrative Agent, the lenders party thereto (the “Lenders”) and the guarantors party thereto entered into an amended and restated Fifth Amendmentamendment (the “Fifth Amendment”“Amendment”) to the Credit Agreement. Among other things, the Amendment (i) increased elected commitments from $1.2 billion to $1.4 billion, (ii) settled the $250 million term loan tranche under the Credit Agreement (the “Term Loan”) through an elected revolving commitment, (iii) redetermined the borrowing base and corresponding elected commitments from $650 million to $825 million upon the closing (“Chisholm Closing”)at $1.65 billion as a part of the Chisholm Agreement; provided that upon the closing of the Bighorn Acquisition (assuming the occurrence of the Chisholm Closing), the borrowing base and corresponding elected commitments would increase to $1.325 billion, unless Earthstone completed an unsecured senior notes offering (the “Notes Offering”) priorregularly scheduled redetermination, (iv) added new banks to the closing of the Bighorn Acquisition in which case 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 oillending group, 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(v) made certain administrative changes to the Credit Agreement.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
On April 14, 2022, in advance of the potential aforementioned Notes Offering Elected Commitments Reduction, the Company voluntarily elected to reduce commitments under the borrowing base of the Credit Agreement to $800 million.changes.
The next regularly scheduled redetermination of the borrowing base is expected to occur on or around NovemberOctober 1, 2022.2023. Subsequent redeterminations are expected to occur on or about each May 1st and November 1st thereafter. The amounts borrowed under the Credit Agreement bear annual interest rates at either (a) the adjusted SOFR Rate (as customarily defined) (the “Adjusted Term SOFR Rate”) plus 2.50%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 was calculated as EBITDAX for the four consecutive fiscal quarters ending on such date. The term “EBITDAX” means, for any period, the sum of consolidated net income (loss) for such period plus (a) the following expenses or charges to the extent deducted from consolidated net income (loss) in such period: (i) interest, (ii) taxes, (iii) depreciation, (iv) depletion, (v) amortization, (vi) certain distributions to employees related to the stock compensation, (vii) certain transaction related expenses, (viii) reimbursed indemnification expenses related to certain dispositions and investments, (ix) non-cash extraordinary, usual, or nonrecurring expenses or losses, (x) other non-cash charges
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2022,2023, EEH was in compliance with the covenants under the Credit Agreement.
As of March 31, 2022, $624.22023, $452.2 million of borrowings were outstanding under the revolving tranche of the Credit Agreement, bearing annual interest of 3.812%7.768%, resulting in an additional $200.8$947.8 million of borrowing base availability under the Credit Agreement. Upon settlement of the Term Loan, $5.1 million of remaining unamortized financing costs were written off. At December 31, 2021, there were $320.02022, $270.1 million and $250.0 million of borrowings were outstanding under the revolving tranche and the term loan tranche of the Credit Agreement.Agreement, respectively.
For the three months ended March 31, 2022,2023, the interest rate on borrowings under the revolving tranche of the Credit Agreement the Company had borrowingsaveraged 7.43% per annum, which excluded commitment fees of $582.5$0.7 million, and $278.3 million in repaymentsamortization of borrowings.
deferred financing costs of $0.9 million. For the three months ended March 31, 2023, interest on borrowings under the term loan tranche of the Credit Agreement averaged 8.10% per annum, which excluded amortization of deferred financing costs of $0.2 million. For the three months ended March 31, 2022, interest on borrowings under the Credit Agreement averaged 3.67% per annum, which excluded commitment fees of $0.2 million, and amortization of deferred financing costs of and $0.6 million. For
During the three months ended March 31, 2021, interest on borrowings under2023, the Company capitalized $3.1 million of costs associated with the revolving tranche of the Credit Agreement. There were no costs associated with the term loan tranche of the Credit Agreement averaged 3.19% per annum, which excluded commitment feesto capitalize during the three months ended March 31, 2023. During the three months ended March 31, 2022, the Company capitalized $5.9 million, of $0.3 million, and amortization of deferred financing costs of $0.1 million.
associated with the Credit Agreement. The Company’s policy is to capitalize the financing costs associated with its debt and amortize those costs on a straight-line basis over the term of the associated debt, which approximates the effective interest method over the term of the related debt. These capitalized costs
8.000% Senior Notes
At March 31, 2023, there were $550.0 million of outstanding senior notes due 2027 (the “Notes”). 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. 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 the Credit Agreement, 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 dated April 12, 2022 under which the Notes were issued also contains certain restrictive covenants, redemption rights, events of default and other customary provisions.
As of March 31, 2023, accrued interest of $20.3 million associated with the Notes was included in Other noncurrent assetsAccrued expenses 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
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
On April 12, 2022, EEH issued $550.0 million aggregate principal amount of 8.000% senior notes due 2027. EEH received net proceeds of approximately $540.4 million (after deducting underwriting discounts and commissions) which was used primarily to fund the Bighorn Acquisition and the remainder for general corporate purposes. For further discussion, see Note 15. Subsequent Events.
Note 11. Asset Retirement Obligations
The Company has asset retirement obligations associated with the future plugging and abandonment of oil and gas properties and related facilities. Revisions to the liability typically occur due to changes in the estimated abandonment costs, well economic lives, and the discount rate.
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the Company’s asset retirement obligation transactions recorded during the three months ended March 31, 20222023 (in thousands):
| | | | | | | | | | |
| | 20222023 | | |
Beginning asset retirement obligations | | $ | 15,86630,559 | | | |
Liabilities incurred | | 5422 | | | |
Liabilities settled | | (201)(539) | | | |
Acquisitions | | 5,971— | | | |
Accretion expense | | 397629 | | | |
Divestitures | | (90) | | | |
Revision of estimates | | 31241 | | | |
Ending asset retirement obligations | | $ | 22,11830,822 | | | |
| | | | |
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 twothree significant shareholders that consist of various investment funds managed by each of the twothree private equity firms who may manage other investments in entities with which the Company interacts in the normal course of business (the “Significant Shareholders” or separately, each a “Significant Shareholder”).
As discussed in Note 4.5. Acquisitions, the Chisholm Acquisition was consummated on February 15, 2022, whereby the Company acquired the Chisholm Assets for a purchase price of $377.5$383.9 million in cash, net of preliminary and customary purchase price adjustments, and approximately 19.4 million shares of Class A Common Stock. A Significant Shareholder was the majority owner of Chisholm as of the closing of the Chisholm Acquisition. The deferred payment of $70 million as of March 31, 2022 was paid on April 15, 2022 and included in Deferred acquisition payment – Chisholm in the Condensed Consolidated Balance Sheet as of March 31, 2022. The issuance of approximately 19.4 million shares of Class A Common Stock in connection with the closing of the Chisholm AgreementAcquisition was (1) approved by a majority of the voting power of all outstanding disinterested shares of the Common stockStock and (2) increased theirthe 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 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 4 sellers. After participating in a competitive sales process, the Company acquired the aforementioned assets for $8.2 million in cash from that related party entity.
On January 30, 2022, Earthstone entered into a securities purchase agreement (the “SPA”) with EnCap Capital Energy Fund XI, L.P. (“EnCap Fund XI”), an affiliate of EnCap Investments L.P. (“EnCap”), and Cypress Investments, LLC, a fund managed by Post Oak Energy Capital, LP (“Post Oak” and collectively with EnCap Fund XI, the “Investors”) to sell, in a private placement (the “Private Placement”), 280,000 shares of newly authorized convertible preferred stock, $0.001 par value per share (the
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
“Preferred Stock”), for anticipated gross proceeds of $280.0 million, at a price of $1,000.00 per share of Preferred Stock (or $11.10 per share of Class A Common Stock on an as-converted basis). The Private Placement was contingent upon the closing of the Bighorn Acquisition. The Company used the net proceeds from the sale of the Preferred Stock to fund, in conjunction with the Notes Offering, the Bighorn Acquisition. Each share of Preferred Stock will automatically convert into 90.0900900900901 shares of Class A Common Stock on the 21st calendar day after Earthstone mails an information statement on Schedule 14C pursuant to Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to its stockholders notifying the stockholders that on January 30, 2022, holders of 61.6% of the voting power of all outstanding shares of Common Stock delivered to Earthstone an irrevocable written consent in lieu of a special meeting of stockholders approving the conversion feature of the Preferred Stock and the issuance of the Class A Common Stock upon conversion of the Preferred Stock. If conversion has not occurred on or before October 1, 2022, holders of the Preferred Stock will be entitled to receive quarterly dividends accruing from the date of initial issuance at a rate of 8.0% per annum.
The Company paid $0.2 million to one of our Significant Shareholders for reimbursement of certain costs associated with the aforementioned SPA.
Note 13. Commitments and Contingencies
Legal
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 Securities Purchase Agreement dated as of January 30, 2022, by and among Earthstone and the Investors. The plaintiff requested the Court to declare that the defendants breached their fiduciary duties, award of unspecified monetary damages, including interest and costs, and/ or rescind the stock purchase transaction. On October 14, 2022, the defendants filed a motion to dismiss the amended Complaint. Earthstone believes the Complaint is completely without merit and intends to contest vigorously the allegations made therein and to seek reimbursement for its costs and expenses in so doing. Earthstone carries insurance for the claims asserted against it and the officer and director defendants in the Complaint, and the carrier has accepted coverage subject to applicable self-retentions and limits of liability. The Company does not expect this case to have a material adverse effect on the results of operations, financial position or cash flows of the Company.
From time to time, Earthstone and its subsidiariesthe Company may be involved in other various legal proceedings and claims in the ordinary course of business.
Environmental and Regulatory
As of March 31, 2022,2023, 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.
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 aStock, which resulted in an ownership change in ownership, as defined underwithin the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), it results in. As a limitation that appliesresult of the ownership change, the Company’s ability to allutilize net operating losses (“NOLs”) and credits generated prior to the ownership change date that canmay be usedlimited 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 both March 31, 20222023 and December 31, 2021, a2022, current liabilityliabilities of $0.6$1.8 million and $0.8 million, respectively, isare included in Other current liabilities in the Condensed Consolidated Balance Sheets. The amounts representSheets related solely to current Texas Margin Tax payable onpayable.
During the three months ended March 31, 2023, the Company recorded income tax expense of approximately $18.6 million comprised of (1) deferred federal income tax expense for Earthstone of $15.8 million resulting from its share of the distributable income from EEH, (2) a deferred federal income tax expense for Lynden US of $0.9 million as a result of its share of the distributable loss from EEH and (3) income tax expense of $1.9 million related to deferred state income taxes. Lynden Corp incurred no material income or before May 16, 2022.loss, or related income tax expense or benefit, for the three months ended March 31, 2023.
During the three months ended March 31, 2022, the Company recorded income tax benefit of approximately $1.5 million which included (1) a deferred income tax benefit for Lynden US of $0.7 million as a result of its share of the distributable loss from EEH, (2) no net income tax benefit for Earthstone as the $6.6 million income tax benefit resulting from its share of the distributable loss from EEH had a full valuation allowance recorded against it as future realization of the net deferred tax asset cannot be assured and (3) deferred income tax benefit of $0.8 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the three months ended March 31, 2022.
During
Note 15. Supplemental Disclosures
Accounts Payable
The following table summarizes the three months endedCompany’s current accounts payable at March 31, 2021,2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2023 | | 2022 |
Accounts payable related to vendors | $ | 28,798 | | | $ | 76,044 | |
Accounts payable related to severance taxes | 8,554 | | | 10,380 | |
Other | 2,796 | | | 5,391 | |
Total accounts payable | $ | 40,148 | | | $ | 91,815 | |
| | | |
Revenue and Royalties Payable
The following table summarizes 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 assetCompany’s current revenues and royalties payable at March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2023 | | 2022 |
Revenue held in suspense | $ | 126,248 | | | $ | 101,838 | |
Revenue and royalties payable | 68,652 | | | 61,530 | |
Total revenue and royalties payable | $ | 194,900 | | | $ | 163,368 | |
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
cannot be assuredAccrued Expenses
The following table summarizes the Company’s current accrued expenses at March 31, 2023 and (3) deferred income tax benefitDecember 31, 2022 (in thousands):
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2023 | | 2022 |
Accrued capital expenditures | $ | 68,333 | | | $ | 38,482 | |
Accrued lease operating expenses | 12,818 | | | 14,173 | |
Accrued interest | 20,883 | | | 10,995 | |
Accrued general and administrative expense | 3,958 | | | 7,351 | |
Accrued ad valorem taxes | 11,041 | | | 4,243 | |
Other | 6,671 | | | 5,698 | |
Total accrued expenses | $ | 123,704 | | | $ | 80,942 | |
Supplemental Cash Flow Information
The following table provides supplemental disclosures 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,cash flow information for the three months ended March 31, 2021.2023 and 2022, (in thousands):
| | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2023 | | 2022 |
Cash paid for: | | | |
Interest | $ | 11,198 | | | $ | 4,580 | |
Income taxes | $ | 285 | | | $ | — | |
Non-cash investing and financing activities: | | | |
| | | |
| | | |
Class A Common Stock issued in Chisholm Acquisition | $ | — | | | $ | 249,515 | |
| | | |
| | | |
Deferred acquisition payment - Chisholm | $ | — | | | $ | 70,000 | |
Accrued capital expenditures | $ | 77,150 | | | $ | 49,853 | |
Lease asset additions - ASC 842 | $ | 271 | | | $ | 678 | |
Asset retirement obligations | $ | 262 | | | $ | 86 | |
| | | |
| | | |
Note 15. Subsequent Events
Bighorn Acquisition
On April 14, 2022, Earthstone, EEH and Bighorn, consummated the transactions contemplated in the Bighorn Agreement. At the closing of the Bighorn Agreement, among other things, EEH acquired the Bighorn Assets for a purchase price of approximately $638.9 million in cash, net of preliminary and customary purchase price adjustments that remain subject to final post-closing settlement between EEH and Bighorn, and 5,650,977 shares of Class A Common Stock.
Securities Purchase Agreement
Also, on April 14, 2022, Earthstone, EnCap Fund XI and Cypress consummated the sale and issuance of 280,000 shares of Preferred Stock pursuant to the SPA. Each share of Preferred Stock will be convertible into 90.0900900900901 shares of Class A Common Stock. At the closing of the SPA, Earthstone issued 280,000 shares of Preferred Stock in exchange for gross cash proceeds of $280 million.
If the outstanding Preferred Stock has not been converted into Class A Common Stock on or before October 1, 2022, then the Preferred Stock will accrue dividends from April 14, 2022, the date of initial issuance, at a rate of 8% per annum until such time as it has converted. In addition, Earthstone will be required to redeem all of the outstanding Preferred Stock if the Preferred Stock has not converted into Class A Common Stock on or before November 22, 2025. The price per share for redemption would be the initial liquidation preference amount of $1,000.00 per share of Preferred Stock plus any accrued but unpaid dividends thereon.
Notes Offering
On April 7, 2022, EEH and four of its wholly-owned subsidiaries, Earthstone Operating, LLC, a Texas limited liability company (“Earthstone Operating”), Earthstone Permian LLC, a Texas limited liability company (“Earthstone Permian”), Sabine River Energy, LLC, a Texas limited liability company (“Sabine River Energy”), and Independence Resources Technologies, LLC, a Delaware limited liability company (“Independence Technology” and, together with Earthstone Operating, Earthstone Permian, Sabine River Energy and Earthstone, the “Guarantors”), entered into a purchase agreement (the “Purchase Agreement”) with RBC Capital Markets, LLC, as representative of the several initial purchasers named in the Purchase Agreement (together, the “Initial Purchasers”), providing for the private offer and sale by EEH (the “Notes Offering”) of $550.0 million aggregate principal amount of EEH’s 8.000% senior notes due 2027 (the “Notes”), along with related guarantees (the “Guarantees”) of the Notes.
The Notes Offering was made pursuant to an offering memorandum dated April 7, 2022 and closed on April 12, 2022. EEH received net proceeds from the Notes Offering of approximately $540.4 million (after deducting underwriting discounts and commissions). EEH used the net proceeds from the Notes Offering primarily to fund the Bighorn Acquisiton and the remainder for general corporate purposes.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Statement Regarding Forward-Looking Information
This discussion and other items in this Quarterly Report on Form 10-Q contain forward-looking statements and information that are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this document, the words “believe,” “anticipate,” “estimate,” “expect,” “intend,” “may,” “will,” “project,” “forecast,” “plan,” and similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. These statements are subject to numerous risks, uncertainties and assumptions. Certain of these risks are summarized in this report and under “Item 1A. Risk Factors” in our 20212022 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 statementsCondensed Consolidated Financial Statements for the year ended December 31, 2021,2022, which are included in our 20212022 Annual Report on Form 10-K.
Overview
Earthstone Energy, Inc., a Delaware corporation (“Earthstone” and together with ourits consolidated subsidiaries, the “Company,” “our,” “we,” “us,” or similar terms), is a growth-oriented independent oil and gas company engaged in the acquisition and development of oil and gas reserves through activities that include the acquisition, drilling and development of undeveloped leases, asset and corporate acquisitions and mergers. Our operations are all in the upstream segment of the oil and natural gas industry and all our properties are onshore in the United States. At present, our assets are located primarily in the Delaware Basin in New Mexico and in the Midland Basin in West Texas,Texas.
As of March 31, 2023, outstanding common shares of Earthstone, along with the Eagle Ford Trend in South Texasequal number of corresponding outstanding EEH Units, were approximately 140.6 million, consisting of 106.3 million shares of Class A Common Stock and 34.3 million shares of Class B Common Stock. The following diagram indicates our simplified ownership structure as of the Delaware Basin in New Mexico.date of this report. This diagram is provided for illustrative purposes only and does not represent all legal entities affiliated with us.
Recent Developments
Bighorn AcquisitionCredit Agreement
On April 14, 2022,March 30, 2023, Earthstone, Earthstone Energy Holdings, LLC, a subsidiary of the Company (“EEH” or the “Borrower”), 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 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”). At the closing of the Bighorn Acquisition, 510,638 of the Bighorn Shares were deposited in a stock escrow account for Bighorn’s indemnity obligations and 5,140,339 of the Bighorn Shares (the “Closing Shares”) were issued to Bighorn Permian Resources, LLC (“Bighorn Permian”). On April 14, 2022, in connection with the closing of the Bighorn Purchase Agreement, Earthstone and Bighorn Permian entered into a customary registration rights agreement relating to the Bighorn Shares.
In connection with the closing of the Bighorn Purchase Agreement, Earthstone entered into a customary lock-up agreement (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.
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. (“Post Oak”), consummated the sale and issuance of 280,000 shares of newly authorized Series A convertible preferred stock, par value $0.001 per share, of Earthstone (the “Preferred Stock”), pursuant to that certain Securities Purchase Agreement dated as of January 30, 2022, by and among Earthstone and the Investors (the “SPA”) that was previously reported on Form 8-K filed on February 2, 2022 with the SEC. At the closing of the SPA, Earthstone issued 280,000 shares (the “PIPE Shares”) of Preferred Stock in exchange for gross cash proceeds of $280 million (the “Private Placement”).
Each share of Preferred Stock is expected to convert into 90.0900900900901 shares of Class A Common Stock on the 21st calendar day after Earthstone mails an information statement on 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 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 with the closing 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 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.
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) 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 and Issuing Bank, the lenders party thereto (the “Lenders”) and the guarantors party thereto entered into an amended and restated Fifth Amendmentamendment (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., Mizuho Bank, Ltd., and Capital One, National Association, as Documentation Agents, and the Lenders party thereto (together with all amendments or other modifications, the “Credit Agreement”). Among other things, the Amendment (i) increased elected commitments from $1.2 billion to $1.4 billion, (ii) settled the $250 million term loan tranche under the Credit Agreement (the “Term Loan”) through an elected revolving commitment, (iii) redetermined the borrowing base and corresponding elected commitments from $650 million to $825 million upon the closing (“Chisholm Closing”) of that certain Purchase and Sale Agreement datedat $1.65 billion 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 closinga part of the Bighorn Acquisition, the borrowing base and
corresponding elected commitments would increase to $1.325 billion, unless Earthstone completes an unsecured senior notes offering (“Notes Offering”) priorregularly scheduled redetermination, (iv) added new banks 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 oillending group, 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(v) made certain administrative changeschanges.
Natural Gas Takeaway Capacity
The Permian Basin has been experiencing a lack of sufficient pipeline transportation that is connected to markets which are purchasing the Credit Agreement.gas. This has resulted in negative gas prices at times, whereby the seller is actually paying the purchaser to take the gas. If these depressed natural gas prices continue in the region, our natural gas revenues will be negatively impacted.
On April 14, 2022,Inflation
Inflation has increased costs associated with our capital program and production operations. We have experienced increases in advancethe costs of many 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 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. Related Party Transactions and Note 19. Subsequent Events in the Notes to Consolidated Financial Statements.
Cash consideration for the Chisholm Acquisition was funded by borrowings under our senior secured revolving credit facility whose borrowing base was increased from $650 million to $825 million upon consummation of the Chisholm Acquisition.
COVID-19
Despite the recoveries in commodity prices, 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,materials, supplies, equipment and services critical toused in our ability to operate our properties and the impact of potential governmental restrictions on travel, transports and operations. There is uncertainty around the extent and duration of disruption, including any resurgence,operations and we expect thatinflation to continue based on current economic circumstances. In addition, the longerattempts to reduce inflation by the duration of any such disruption, the greater the adverse impact may beFederal Reserve have resulted in increased interest rates on our business.
Operational Status
As a producer of oil, natural gasdebt 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 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.
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, a material impact on commodity prices and may continue to present significant challenges to our industry.
The effects of COVID-19, including a substantial decrease in economic activity, have contributed to significant credit, debt and equity market volatility. SimilarWe continue to other producers inclosely monitor costs and take all reasonable steps to mitigate the inflationary effect on our business, we experienced volatilitycost structure and also work to enhance our efficiency to minimize additional cost increases where possible.
Areas of Operation
Our primary focus is concentrated in the price of our Class A Common Stock.Delaware Basin in New Mexico and in the Midland Basin in West Texas, 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 with 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 forproviding 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.
Operations Update
AreasThe Company operated a five-rig drilling program in the first quarter of Operation
Our primary focus is concentrated2023 with three rigs in the Delaware Basin and two in the Midland Basin.
Delaware Basin in West Texas andHighlights
In the Delaware Basin, during the first quarter of 2023, Earthstone commenced drilling ten gross (8.4 net) wells, brought six gross (3.8 net) wells online, and had six gross (5.2 net) drilled but uncompleted (“DUC”) wells at quarter end in the Delaware Basin.
Earthstone completed the Jade 34-3 Fed Com pad on acreage acquired from Chisholm in the northern Delaware Basin in Lea County, New Mexico. The wells targeted the First and Second Bone Spring intervals. The four wells had an average peak IP-30 rate of 1,240 Boepd from laterals averaging approximately 9,900 feet with an average oil percentage of 91%.
In Eddy County, New Mexico, a high oilthe Company completed the Dark Canyon 15-22 State Com. The 2-well pad had an average peak IP-30 of 1,422 Boepd and liquids rich resource which provides us with multiple horizontal targets with proven production results, long-lived reserves was approximately 69% oil. The average lateral length of the two wells was about 7,100 feet,
and historically highboth wells are producing from the Wolfcamp A zone. The Dark Canyon 15-22 State Com pad is located on acreage acquired through the Chisholm acquisition.
At the Company’s El Campeon project, acquired in the Titus acquisition, Earthstone is currently operating two drilling success rates.rigs on the six-well project. The lateral lengths for the six wells will range from 9,400 to 10,000 feet. The Company expects the wells to start producing in August. These will be the first wells completed across the New Mexico-Texas state line.
Midland Basin Highlights
During the first quarter of 2022, we completed2023, the Company began drilling six gross (3.9 net) wells, brought nine gross (nine net) wells online, and turned to sales fivehad two gross (5.0(1.3 net) operatedDUC wells and commenced drilling ten gross (8.3 net) operated wellsat quarter end in the Midland Basin. With two rigs operating in
In Reagan County, Texas, the Midland Basin, we anticipate spudding 40 gross (35.8 net) operatedWTG 5-234 two-well pad is producing from the Wolfcamp Upper and Lower B zones. These wells were drilled with a lateral length of approximately 9,850 feet 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 in the first quarterhad an average peak IP-30 rate of 2022. With two rigs operating in the Delaware Basin, we anticipate spudding 20 gross (11.8 net) operated wells and bringing 18 gross (11.6 net) operated wells online in 2022.
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.about 945 Boepd with a production stream of approximately 77% oil.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to use our judgment to make estimates and assumptions that affect certain amounts reported in our financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. Critical accounting policies are those accounting policies that involve judgment and uncertainties affecting the application of those policies and the likelihood that materially different amounts would be reported under different conditions or using differing assumptions. We periodically update our estimates used in the preparation of the financial statements based on our latest assessment of the current and projected business and general economic environment. There have been no significant changes to our critical accounting policies during the three months ended March 31, 2022.2023.
Recent Accounting Pronouncements
There are no recent accounting pronouncements that are expected to have a material impact on our financial statements.
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 | % |
Results of Operations
Three Months Ended March 31, 2023, compared to the Three Months Ended March 31, 2022
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | Change |
Sales volumes: | | | | | | |
Oil (MBbl) | | 4,153 | | | 1,417 | | | 193 | % |
Natural gas (MMcf) | | 16,811 | | | 5,639 | | | 198 | % |
Natural gas liquids (MBbl) | | 2,445 | | | 839 | | | 191 | % |
Barrels of oil equivalent (MBoe) | | 9,400 | | | 3,196 | | | 194 | % |
Average Daily Production (Boepd) | | 104,450 | | | 35,509 | | | 194 | % |
| | | | | | |
Average prices: | | | | | | |
Oil (per Bbl) | | $ | 76.42 | | | $ | 97.24 | | | (21) | % |
Natural gas (per Mcf) | | $ | 1.79 | | | $ | 4.07 | | | (56) | % |
Natural gas liquids (per Bbl) | | $ | 26.88 | | | $ | 42.22 | | | (36) | % |
| | | | | | |
Average prices adjusted for realized derivatives settlements: | | | | | | |
Oil ($/Bbl) | | $ | 75.32 | | | $ | 75.61 | | | — | % |
Natural gas ($/Mcf) | | $ | 1.64 | | | $ | 3.89 | | | (58) | % |
Natural gas liquids ($/Bbl) | | $ | 26.88 | | | $ | 42.22 | | | (36) | % |
| | | | | | |
(In thousands) | | | | | | |
Oil revenues | | $ | 317,378 | | | $ | 137,752 | | | 130 | % |
Natural gas revenues | | $ | 30,018 | | | $ | 22,958 | | | 31 | % |
Natural gas liquids revenues | | $ | 65,740 | | | $ | 35,440 | | | 85 | % |
| | | | | | |
Lease operating expense | | $ | 87,978 | | | $ | 21,631 | | | 307 | % |
Production and ad valorem taxes | | $ | 33,153 | | | $ | 13,315 | | | 149 | % |
| | | | | | |
| | | | | | |
Depreciation, depletion and amortization | | $ | 110,750 | | | $ | 34,326 | | | 223 | % |
| | | | | | |
General and administrative expense (excluding stock-based compensation) | | $ | 12,961 | | | $ | 6,476 | | | 100 | % |
Stock-based compensation - equity and liability awards | | $ | 4,618 | | | $ | 5,830 | | | (21) | % |
General and administrative expense | | $ | 17,579 | | | $ | 12,306 | | | 43 | % |
| | | | | | |
Transaction costs | | $ | 193 | | | $ | 10,742 | | | (98) | % |
Loss on sale of oil and gas properties | | $ | (3,140) | | | $ | — | | | NM |
Interest expense, net | | $ | (22,856) | | | $ | (5,318) | | | 330 | % |
Write-off of deferred financing costs | | $ | (5,109) | | | $ | — | | | NM |
| | | | | | |
Unrealized gain (loss) on derivative contracts | | $ | (19,439) | | | $ | (119,794) | | | (84) | % |
Realized loss on derivative contracts | | $ | (7,025) | | | $ | (31,686) | | | (78) | % |
Loss on derivative contracts, net | | $ | (26,464) | | | $ | (151,480) | | | (83) | % |
| | | | | | |
| | | | | | |
Income tax (expense) benefit | | $ | (18,601) | | | $ | 1,533 | | | (1,313) | % |
NM – Not Meaningful
Results of Operations Highlights
The Eagle Ford Acquisitions, the Tracker/Sequel Acquisitions, the ForelandTitus Acquisition, Bighorn Acquisition and the Chisholm Acquisition (collectively, the “Acquisitions”) have had a significant and pervasive impact on our results of operations for the three months ended March 31, 2023 as compared to the first quarter of 2021. In addition, commodity prices have improved compared to the first quarter of 2021 further impacting our results of operations.corresponding period in 2022. Below is a detailed discussion highlighting the impact of our recent acquisitions.
Oil revenues
For the three months ended March 31, 2022,2023, oil revenues increased by $76.9$179.6 million, or 126%130%, relative to the comparable period in 2021.2022. Of the increase, $41.9$209.1 million was attributable to an increase in volume, partially offset by $29.5 million attributable to a decrease in our realized price and $35.0 million was attributable to an increase in volume.prices. Our average realized price per Bbl increaseddecreased from $57.56$97.24 for the three months ended March 31, 20212022 to $97.24$76.42, or 69%21%, for the three months ended March 31, 2022.2023. Additionally, we had a net increase in the volume of oil sold of 3602,737 MBbls, or 34%193%, which included an increase of 5262,790 MBbls related to the wells acquired in the Acquisitions offset byand a decrease of 16653 MBbls in our other wells primarily resulting from natural declines, partially offset by the impact of new wells brought online since the first quarter of 2021.declines.
Natural gas revenues
For the three months ended March 31, 2022,2023, natural gas revenues increased by $17.1$7.1 million, or 292%31%, relative to the comparable period in 2021.2022. Of the increase, $13.0$20.0 million was due to increased sales volume, and $4.1partially offset by $12.9 million was attributable to an increasea decrease in realized price.prices. Our average realized price per Mcf increased 70%decreased 56% from $2.39 for the three months ended March 31, 2021 to $4.07 for the three months ended March 31, 2022.2022 to $1.79 for the three months ended March 31, 2023. The total volume of natural gas produced and sold increased 3,19411,172 MMcf, or 131%198%, which included an increase of 3,04411,742 MMcf related to the wells acquired in the Acquisitions, and an increasepartially offset by a decrease of 150570 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, 2022,2023, natural gas liquids revenues increased by $26.5$30.3 million, or 298%85%, relative to the comparable period in 2021.2022. Of the increase, $20.0$43.2 million was attributable to increased volume, and $6.5partially offset by $12.9 million was attributable to an increasea decrease in our realized price.prices. Our average realized price per Bbl decreased 36% from $42.22 for the three months ended March 31, 2022 to $26.88 for the three months ended March 31, 2023. The volume of natural gas liquids produced and sold increased by 4751,606 MBbls, or 130%191%, which includedprimarily resulting from an increase of 418 MMcf1,658 MBbls related to the wells acquired in the Acquisitions, and an increasepartially offset by a decrease of 5752 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$66.3 million, or 99%307%, for the three months ended March 31, 20222023 relative to the comparable period in 2021,2022, due to an $8.0a $64.2 million increase resulting from the LOE of the properties acquired in the Acquisitions and a $2.8$2.1 million increase resulting from both higher production volumes from new wells coming online sinceand 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, 20222023 increased by $8.3$19.8 million, or 165%149%, relative to the comparable period in 20212022 due to a $6.1$22.2 million increase resulting from the properties acquired in the Acquisitions, andpartially offset by a $2.2$2.4 million increasedecrease related to our other wells resulting from improvedlower commodity prices.
Depreciation, depletion and amortization (“DD&A”)
DD&A for the three months ended March 31, 20222023 increased by $9.9$76.4 million, or 41%223%, relative to the comparable period in 20212022 primarily due to a $7.6$75.8 million increase in DD&A related to the assets acquired in the Acquisitions and a $2.3$0.6 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 basedevelopment of our properties resulting from the impact of improved commodity prices on our estimated proved reserves.properties.
General and administrative expense (“G&A”)
G&A for the three months ended March 31, 20222023 increased by $3.9$5.3 million, or 47%43%, relative to the comparable period in 2021, primarily2022, due to increasesan increase of $2.5$4.7 million in non-cash performance-based stock-based compensation expense resulting from increases 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$1.8 million primarily related to an increase in professional fees due to overall increased operating activity of the Company, offset by a $1.2 million decrease in stock-based compensation.
Transaction Costs
For the three months ended March 31, 2023, transaction costs decreased by $10.5 million primarily due to increasedlegal and professional fees.fees associated with the Chisholm Acquisition in the prior year period.
Transaction costsLoss on sale of oil and gas properties, net
ForDuring the three months ended March 31, 2022, transaction costs increased by $8.62023, we sold certain non-core properties for approximately $1.8 million primarily due to costs associated within cash, resulting in net losses of approximately $3.1 million. There were no material divestitures during the Chisholm Acquisition.three months ended March 31, 2022.
Interest expense, net
Interest expense increased from $2.2 million for the three months ended March 31, 2021 to $5.3 million for the three months ended March 31, 2022 to $22.9 million for the three months ended March 31, 2023, due to higher average borrowings outstanding compared to the prior year period primarily resulting from borrowings related to the Acquisitions and higher effective interest rates.rates resulting from the issuance of the 8.000% Senior Notes and higher interest rates on borrowings under the Credit Agreement. See Note 10. Long-Term Debt in the Notes to Unaudited Condensed Consolidated Financial Statements.
Write-off of deferred financing costs
On March 30, 2023, we settled the $250.0 million term loan tranche of borrowings under the Credit Agreement through an elected revolving commitment and $5.1 million of remaining unamortized deferred financing costs were written off.
Loss on derivative contracts, net
For the three months ended March 31, 2023, we recorded a net loss on derivative contracts of $26.5 million, consisting of unrealized mark-to-market losses of $19.4 million related to our commodity hedges, along with net realized losses on settlements of our commodity hedges of $7.0 million. For the three months ended March 31, 2022, we recorded a net loss on derivative contracts of $151.5 million, consisting of unrealized mark-to-market losses of $119.8 million related to our commodity hedges, along with net realized losses on settlements of our commodity hedges of $31.7 million. For the three months ended March 31, 2021, we recorded a net loss on derivative contracts of $33.3 million, consisting of unrealized mark-to-market losses of $23.0 million related to our commodity hedges, partially offset by unrealized mark-to-market gains of $0.7 million related to our interest rate swap, along with net realized losses on settlements of our commodity hedges of $10.9 million and net realized losses on our interest rate swap of $0.1 million.
Income tax (expense) benefit
During the three months ended March 31, 2022,2023, we recorded an income tax benefitexpense of approximately $1.5$18.6 million which includedcomprised of (1) deferred federal income tax expense for Earthstone of $15.8 million resulting from its share of the distributable income from EEH, (2) a deferred federal income tax benefitexpense for Lynden US of $0.7$0.9 million as a result of its share of the distributable loss from EEH (2) no netand (3) income tax benefit for Earthstone as the $6.6 million income tax benefit resulting from its shareexpense 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$1.9 million related to the Texas Margin Tax.deferred state income taxes. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the three months ended March 31, 2022.
During the three months ended March 31, 2021, we recorded an 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 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, 2021.2023.
Liquidity and Capital Resources
We have significant undeveloped acreage and futureSources of Cash
With three drilling locations. Drilling horizontal wellsrigs operating in the MidlandDelaware Basin and Delaware Basins, generally consisting 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.
With two drilling rigs operating in the Midland Basin and two additional rigs operating in the Delaware Basin,we expect total 2023 capital expenditures of $725 to $775 million which we expect to spend $410-$440be funded by cash flows from operations. During the three months ended March 31, 2023, we generated $258.3 million basedof cash flows from operating activities. We incurred $202.3 million of capital expenditures on an accrual basis during the three months ended March 31, 2023. As of March 31, 2023, we had available borrowings under our current 2022 drilling plan. Credit Agreement of approximately $947.8 million.
Although we expect cash flows and capacity under our Credit Agreement to be sufficient to fund our expected 2023 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, 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 theour Credit Agreement to meet our cashcapital requirements for the next 12 months.
Working Capital
Working capital (presented below) was a deficit of $268.7$184.7 million as of March 31, 2022.2023. Of the $268.7$184.7 million working capital deficit, $148.2$10.6 million relates to our derivative contracts expected to settle in the next 12 months (subsequent to March 31, 2022)2023) resulting from increased oil price futures as of March 31, 2022.2023. However, commodity hedges are settled in proximity of the receipt of the revenues to which they relate. Additionally, we are hedged at less than 100% of our production. As such, our commodity hedges are expected to settle at an amount less than the additional revenues received as a result of increased commodity prices. When removed, the remaining working capital deficit of $120.5$195.3 million is $80.8$752.5 million less than our cash and available borrowings as of March 31,202231, 2023 of $201.3$947.8 million. The components of working capital are presented below:
| | | | March 31, | | December 31, | | | March 31, | | December 31, |
(In thousands) | (In thousands) | | 2022 | | 2021 | (In thousands) | | 2023 | | 2022 |
Current assets: | Current assets: | | | | | Current assets: | | | | |
Cash | Cash | | $ | 482 | | | $ | 4,013 | | Cash | | $ | — | | | $ | — | |
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 | | 133,633 | | | 161,531 | |
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 March 31, 2023 and December 31, 2022, respectively | | Joint interest billings and other, net of allowance of $19 and $19 at March 31, 2023 and December 31, 2022, respectively | | 27,518 | | | 34,549 | |
Derivative asset | Derivative asset | | 1,849 | | | 1,348 | | Derivative asset | | 14,444 | | | 31,331 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 4,440 | | | 2,549 | | Prepaid expenses and other current assets | | 24,658 | | | 18,854 | |
Total current assets | Total current assets | | 116,933 | | | 61,415 | | Total current assets | | 200,253 | | | 246,265 | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | | $ | 69,749 | | | $ | 31,397 | | Accounts payable | | $ | 40,148 | | | $ | 91,815 | |
Revenues and royalties payable | Revenues and royalties payable | | 52,167 | | | 36,189 | | Revenues and royalties payable | | 194,900 | | | 163,368 | |
Accrued expenses | Accrued expenses | | 39,179 | | | 31,704 | | Accrued expenses | | 123,704 | | | 80,942 | |
Deferred acquisition payment - Chisholm | | 70,000 | | | — | | |
| Asset retirement obligation | Asset retirement obligation | | 609 | | | 395 | | Asset retirement obligation | | 881 | | | 948 | |
Derivative liability | Derivative liability | | 150,055 | | | 45,310 | | Derivative liability | | 3,864 | | | 14,053 | |
Advances | Advances | | 2,447 | | | 4,088 | | Advances | | 8,242 | | | 7,312 | |
Operating lease liabilities | Operating lease liabilities | | 747 | | | 681 | | Operating lease liabilities | | 890 | | | 842 | |
| Finance lease liabilities | | Finance lease liabilities | | 880 | | | 802 | |
Other current liabilities | Other current liabilities | | 630 | | | 851 | | Other current liabilities | | 11,447 | | | 16,202 | |
Total current liabilities | Total current liabilities | | 385,583 | | | 150,615 | | Total current liabilities | | 384,956 | | | 376,284 | |
| Working Capital | Working Capital | | $ | (268,650) | | | $ | (89,200) | | Working Capital | | $ | (184,703) | | | $ | (130,019) | |
|
Cash Flows from Operating Activities
Cash flows provided by operating activities for the three months ended March 31, 20222023 increased to $83.0$258.3 million compared to $38.3$83.0 million for the three months ended March 31, 2021,2022, primarily due to the impact of oil and natural gas property acquisitions and the timing of payments and receipts partially offset by the cash settlement of derivative contracts compared to the prior year period.
Cash Flows from Investing Activities
Cash flows used in investing activities for the three months ended March 31, 2022 increased2023 decreased to $380.7$180.8 million from $143.8$380.7 million for the three months ended March 31, 2021, primarily2022, due to the impact of approximately $324 million in prior year quarter acquisition of oil and gas properties.properties, partially offset by increased current year quarter spending related to the execution of our drilling program.
Cash Flows from Financing Activities
Cash flows used in financing activities of $77.6 million for the three months ended March 31, 2023 primarily resulted from the use of operating cash flows and borrowings under the revolving tranche of the Credit Agreement to pay off $250 million in
term loan borrowings. Cash flows provided by financing activities wereof $294.2 million for the three months ended March 31, 2022 comparedprimarily resulted from net borrowings used to cash flows used in financing activities of $105.4 million for the three months ended March 31, 2021, primarily due to borrowings required to fundfinance the acquisition of oil and natural gas properties.
Capital Expenditures
Our accrual basis capital expenditures for the three months ended March 31, 20222023 were as follows (in thousands):
| | | | | | | | | | |
| | | | Three Months Ended March 31, 20222023 |
Drilling and completions | | | | $ | 82,000201,384 | |
Leasehold costs | | | | 109888 | |
Total capital expenditures | | | | $ | 82,109202,272 | |
| | | | |
Hedging Activities
The following table sets forth our outstanding derivative contracts at March 31, 2022.2023. When aggregating multiple contracts, the weighted average contract price is disclosed.
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q2 - Q4 2022 | | Crude Oil | | 3,247,250 | | | $ | 65.96 | |
Q1 - Q4 2023 | | Crude Oil | | 1,277,500 | | | $ | 76.20 | |
Q2 - Q4 2022 | | Crude Oil Basis Swap (1) | | 3,377,500 | | | $ | 0.51 | |
Q1 - Q4 2023 | | Crude Oil Basis Swap (1) | | 730,000 | | | $ | 0.49 | |
Q2 - Q4 2022 | | Natural Gas | | 8,062,000 | | | $ | 3.55 | |
Q1 - Q4 2023 | | Natural Gas | | 3,670,000 | | | $ | 3.35 | |
Q2 - Q4 2022 | | Natural Gas Basis Swap (2) | | 5,500,000 | | | $ | (0.33) | |
Q1 - Q4 2023 | | Natural Gas Basis Swap (2) | | 25,550,000 | | | $ | (1.28) | |
Q1 - Q4 2024 | | Natural Gas Basis Swap (2) | | 25,620,000 | | | $ | (1.04) | |
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q2 - Q4 2023 | | Crude Oil | | 1,237,500 | | | $ | 76.94 | |
| | | | | | |
Q2 - Q4 2023 | | Crude Oil Basis Swap (1) | | 7,103,500 | | | $ | 0.92 | |
| | | | | | |
Q2 - Q4 2023 | | Natural Gas | | 3,437,500 | | | $ | 3.35 | |
| | | | | | |
Q2 - Q4 2023 | | Natural Gas Basis Swap (2) | | 38,500,000 | | | $ | (1.67) | |
Q1 - Q4 2024 | | Natural Gas Basis Swap (2) | | 36,600,000 | | | $ | (1.05) | |
Q1 - Q4 2025 | | Natural Gas Basis Swap (2) | | 14,600,000 | | | $ | (0.74) | |
(1)The basis differential price is between WTI Midland Crude and the WTI NYMEX.
(2)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) |
Q2 - Q4 2022 | | Crude Oil Costless Collar | | 1,560,000 | | | $ | 83.59 | | | $ | 69.42 | |
Q1 - Q4 2023 | | Crude Oil Costless Collar | | 1,715,500 | | | $ | 80.34 | | | $ | 62.98 | |
Q2 - Q4 2022 | | Natural Gas Costless Collar | | 12,782,500 | | | $ | 5.47 | | | $ | 3.66 | |
Q1 - Q4 2023 | | Natural Gas Costless Collar | | 13,188,000 | | | $ | 4.84 | | | $ | 3.28 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) |
Q2 - Q4 2023 | | Crude Oil Costless Collar | | 2,117,500 | | | $ | 62.47 | | | $ | 87.56 | |
| | | | | | | | |
Q2 - Q4 2023 | | Natural Gas Costless Collar | | 14,797,500 | | | $ | 3.37 | | | $ | 5.61 | |
| | | | | | | | |
Hedging Update | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Premium Puts |
Period | | Commodity | | Volume (Bbls / MMBtu) | | $/Bbl (Put Price) | | $/Bbl (Net of Premium) |
Q2 - Q4 2023 | | Crude Oil | | 1,364,500 | | | $ | 69.67 | | | $ | 64.24 | |
| | | | | | | | |
The following table sets forth our outstanding derivative contracts at May 2, 2022.1, 2023. 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) | |
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q2 - Q4 2023 | | Crude Oil | | 1,102,500 | | | $ | 76.94 | |
| | | | | | |
Q2 - Q4 2023 | | Crude Oil Basis Swap (1) | | 6,308,500 | | | $ | 0.92 | |
| | | | | | |
Q2 - Q4 2023 | | Natural Gas | | 3,062,500 | | | $ | 3.35 | |
| | | | | | |
Q2 - Q4 2023 | | Natural Gas Basis Swap (2) | | 34,300,000 | | | $ | (1.67) | |
Q1 - Q4 2024 | | Natural Gas Basis Swap (2) | | 36,600,000 | | | $ | (1.05) | |
Q1 - Q4 2025 | | Natural Gas Basis Swap (2) | | 14,600,000 | | | $ | (0.74) | |
(1)The basis differential price is between WTI Midland Crude and the WTI NYMEX.
(2)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) |
Q2 - Q4 2022 | | Crude Oil Costless Collar | | 1,560,000 | | | $ | 83.59 | | | $ | 69.42 | |
Q1 - Q4 2023 | | Crude Oil Costless Collar | | 2,190,000 | | | $ | 85.73 | | | $ | 64.50 | |
Q2 - Q4 2022 | | Natural Gas Costless Collar | | 15,355,000 | | | $ | 6.33 | | | $ | 4.05 | |
Q1 - Q4 2023 | | Natural Gas Costless Collar | | 14,133,000 | | | $ | 5.34 | | | $ | 3.46 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) |
Q2 - Q4 2023 | | Crude Oil Costless Collar | | 2,346,500 | | | $ | 62.96 | | | $ | 86.51 | |
Q1 - Q4 2024 | | Crude Oil Costless Collar | | 915,000 | | | $ | 65.00 | | | $ | 82.20 | |
Q2 - Q4 2023 | | Natural Gas Costless Collar | | 13,066,500 | | | $ | 3.37 | | | $ | 5.59 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Deferred Premium Puts |
Period | | Commodity | | Volume (Bbls / MMBtu) | | $/Bbl (Put Price) | | $/Bbl (Net of Premium) |
Q2 - Q4 2023 | | Crude Oil | | 1,175,500 | | | $ | 69.74 | | | $ | 64.31 | |
| | | | | | | | |
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 20212022 Annual Report on Form 10-K other than those described in Note 13. Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements.
Environmental Regulations
Our operations are subject to risks normally associated with the drilling for and the production of oil and natural gas, including blowouts, fires, and environmental risks such as oil spills or natural gas leaks that could expose us to liabilities associated with these risks.
In our acquisition of existing or previously drilled well bores, we may not be aware of prior environmental safeguards, if any, that were taken at the time such wells were drilled or during such time the wells were operated. We maintain comprehensive insurance coverage that we believe is adequate to mitigate the risk of any adverse financial effects associated with these risks.
However, should it be determined that a liability exists with respect to any environmental cleanup or restoration, the liability to cure 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 NotesThere 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks associated with interest rate risks, commodity price risk and credit risk. We have established risk management processes to monitor and manage these market risks.
Commodity Price Risk, Derivative Instruments and Hedging Activity
We are exposed to various risks including energy commodity price risk. When oil, natural gas and natural gas liquid prices decline significantly our ability to finance our capital budget and operations may be adversely impacted. We expect energy prices to remain volatile and unpredictable. Our hedging activities consist of derivative instruments entered into in order to hedge against changes in oil and natural gas prices through the use of fixed price swaps, basis swaps, costless collars and costless collars.deferred premium put options. Swaps exchange floating price risk in the future for a fixed price at the time of the hedge. Costless collars set both a maximum (sold ceiling) and a minimum (bought floor) future price. A deferred premium put option represents a bought floor except, unlike a standard put option, the premium is not paid until the expiration of the option.
We have entered into a series of derivative instruments to hedge a significant portion of ourits expected oil and natural gas production through December 31, 2024.2024 and maintain certain natural gas basis swaps through December 31, 2025. Typically, these derivative instruments require payments to (receipts from) counterparties based on specific indices as required by the derivative agreements. Although not risk free, we believe these instruments reduce our exposure to oil and natural gas price fluctuations and, thereby, allow us to achieve a more predictable cash flow.
The following is a summary of our open oil and natural gas derivative contracts as of March 31, 2022 :2023:
Table of Contents | | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q2 - Q4 2022 | | Crude Oil | | 3,247,250 | | | $ | 65.96 | |
Q1 - Q4 2023 | | Crude Oil | | 1,277,500 | | | $ | 76.20 | |
Q2 - Q4 2022 | | Crude Oil Basis Swap (1) | | 3,377,500 | | | $ | 0.51 | |
Q1 - Q4 2023 | | Crude Oil Basis Swap (1) | | 730,000 | | | $ | 0.49 | |
Q2 - Q4 2022 | | Natural Gas | | 8,062,000 | | | $ | 3.55 | |
Q1 - Q4 2023 | | Natural Gas | | 3,670,000 | | | $ | 3.35 | |
Q2 - Q4 2022 | | Natural Gas Basis Swap (2) | | 5,500,000 | | | $ | (0.33) | |
Q1 - Q4 2023 | | Natural Gas Basis Swap (2) | | 25,550,000 | | | $ | (1.28) | |
Q1 - Q4 2024 | | Natural Gas Basis Swap (2) | | 25,620,000 | | | $ | (1.04) | |
| | | | | | | | | | | | | | | | | | | | |
| | Price Swaps |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Weighted Average Price ($/Bbl / $/MMBtu) |
Q2 - Q4 2023 | | Crude Oil | | 1,237,500 | | | $ | 76.94 | |
| | | | | | |
Q2 - Q4 2023 | | Crude Oil Basis Swap (1) | | 7,103,500 | | | $ | 0.92 | |
| | | | | | |
Q2 - Q4 2023 | | Natural Gas | | 3,437,500 | | | $ | 3.35 | |
| | | | | | |
Q2 - Q4 2023 | | Natural Gas Basis Swap (2) | | 38,500,000 | | | $ | (1.67) | |
Q1 - Q4 2024 | | Natural Gas Basis Swap (2) | | 36,600,000 | | | $ | (1.05) | |
Q1 - Q4 2025 | | Natural Gas Basis Swap (2) | | 14,600,000 | | | $ | (0.74) | |
(1)The basis differential price is between WTI Midland Crude and the WTI NYMEX.
(2)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) |
Q2 - Q4 2023 | | Crude Oil Costless Collar | | 2,117,500 | | | $ | 62.47 | | | $ | 87.56 | |
| | | | | | | | |
Q2 - Q4 2023 | | Natural Gas Costless Collar | | 14,797,500 | | | $ | 3.37 | | | $ | 5.61 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Costless Collars |
Period | | Commodity | | Volume (Bbls / MMBtu) | | Sold Ceiling ($/Bbl / $/MMBtu) | | Bought Floor ($/Bbl / $/MMBtu) |
Q2 - Q4 2022 | | Crude Oil Costless Collar | | 1,560,000 | | | $ | 83.59 | | | $ | 69.42 | |
Q1 - Q4 2023 | | Crude Oil Costless Collar | | 1,715,500 | | | $ | 80.34 | | | $ | 62.98 | |
Q2 - Q4 2022 | | Natural Gas Costless Collar | | 12,782,500 | | | $ | 5.47 | | | $ | 3.66 | |
Q1 - Q4 2023 | | Natural Gas Costless Collar | | 13,188,000 | | | $ | 4.84 | | | $ | 3.28 | |
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| | Premium Puts |
Period | | Commodity | | Volume (Bbls / MMBtu) | | $/Bbl (Put Price) | | $/Bbl (Net of Premium) |
Q2 - Q4 2023 | | Crude Oil | | 1,364,500 | | | $ | 69.67 | | | $ | 64.24 | |
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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 liabilityasset position with a fair value of $164.2$7.0 million at March 31, 2022.2023. Based on the published commodity futures price curves for the underlying commodity as of March 31, 2022,2023, a 10% increase in per unit commodity prices would cause the total fair value of our commodity derivative financial instruments to decrease by approximately $45.5$1.1 million to an overall net liabilityasset position of $118.7$8.1 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$1.1 million to an overall net liabilityasset position of $209.7$5.9 million. There would also be a similar increase or decrease in Lossloss on derivative contracts, net in the Condensed Consolidated Statements of Operations.
Interest Rate Sensitivity
We are also exposed to market risk related to adverse changes in interest rates. Our interest rate risk exposure results primarily from fluctuations in short-term rates, which are based on 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, 2022,2023, the combined outstanding borrowings under the revolving tranche and term loan tranche of the Credit Agreement were $624.2$452.2 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, 2022,2023, the weighted average interest rate on borrowings under the revolving tranche and term loan tranche of the Credit Agreement was 3.812%7.768% 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$3.5 million per year.
Disclosure of Limitations
Because the information above included only those exposures that existed at March 31, 2022,2023, it does not consider those exposures or positions which could arise after that date. As a result, our ultimate realized gain or loss with respect to commodity price fluctuations and interest expense incurred with respect to interest rate and commodity price fluctuations will depend on the exposures that arise during future periods.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act, Rules 13a-15(e) and 15d-15(e), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Principal Accounting Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Principal Accounting Officer concluded that our disclosure controls and procedures were effective as of March 31, 20222023 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in various legal proceedings and claims in the ordinary course of business. The Company’s threshold for disclosing material environmental legal proceedings involving a governmental authority where potential monetary sanctions are involved is $1 million. As of March 31, 2022,2023, and through the filing date of this report, we do not believe the ultimate resolution of any such actions or potential actions of which we are currently aware will have a material effect on our consolidated financial position or results of operations.
See Note 13. Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements under Part I, Item 1 of this report, for material matters that have occurred since the filing of our Annual Report on Form 10-K for the year ended December 31, 2021.which is incorporated herein by reference.
Item 1A. Risk Factors
In addition to the other information set forth in this report, including the risk factor set forth below, you should carefully consider the risk factors and other cautionary statements described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021.2022.
Macroeconomic conditions could have a materially adverse impact on our business, financial condition or results of operations.
Macroeconomic conditions, such as high inflation, changes to monetary policy, increasing interest rates, concerns about the stability and liquidity of certain financial institutions, and global or local recessions can adversely impact demand for oil and natural gas, which could negatively impact our business, financial condition, or results of operations.
Adverse developments that affect financial institutions, transactional counterparties, or other third parties, or concerns or rumors about these events, have in the past and may in the future lead to market-wide liquidity problems. For example, in March 2023, banking regulators closed two U.S. banks and appointed the Federal Deposit Insurance Corporation (“FDIC”) to act as receiver. Similarly, other institutions have been and may continue to be swept into receivership. We have no borrowing or deposit exposure to directly impacted institutions and have not experienced an adverse impact to our liquidity or to our business operations, financial condition, or results of operations as a result of these recent events. However, we do maintain our cash at financial institutions in balances that exceed the current FDIC insurance limits and uncertainty may remain over liquidity concerns in the broader financial services industry, and there may be unpredictable impacts to our business and our industry. Moreover, liquidity concerns among certain financial institutions could cause lending and credit availability to contract, which in turn could negatively impact the economy as a whole, including the demand for, and price of, oil and natural gas. Sustained economic weakness as a result of credit and liquidity issues in the global financial system could negatively impact the price we receive for our oil and natural gas production, which in turn could adversely impact our business, financial condition and results of operations.
In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all. As a result, any reduction in our borrowing base could, among other risks, adversely impact our business, financial condition, or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sale of Equity Securities
Unregistered sales ofWe sold no unregistered equity securities during the three months ended March 31, 2022 were reported in our Current Report on Form 8-K filed with the SEC on February 18, 2022, which report is incorporated herein by reference.2023.
Repurchase of Equity Securities
The following table sets forth information regarding our acquisition of shares of Class A Common Stock for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan or Programs |
January 2022 | | 1,024 | | | $ | 10.94 | | | — | | | — | |
February 2022 | | 236,076 | | | 13.66 | | | — | | | — | |
March 2022 | | 49,792 | | | $ | 13.27 | | | — | | | — | |
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| | 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 2023 | | — | | | $ | — | | | — | | | — | |
February 2023 | | — | | | — | | | — | | | — | |
March 2023 | | 53,065 | | | $ | 13.01 | | | — | | | — | |
(1)All of the shares were surrendered by employees (via net settlement) in satisfaction of tax obligations upon the vesting of restricted stock unit awards and performance unit awards. The acquisition of the surrendered shares was not part of a publicly announced program to repurchase shares of our Class A Common Stock.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
| | | | | | | | | | | | | | | | | | | | |
Exhibit No. | | Description | | Filed Herewith | | Furnished Herewith |
31.1 | | | | X | | |
31.2 | | | | X | | |
32.1 | | | | | | X |
32.2 | | | | | | X |
101 | | Interactive Data Files (formatted as Inline XBRL). | | X | | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | | X | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | | EARTHSTONE ENERGY, INC. |
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Date: | May 4, 20223, 2023 | | By: | /s/ Tony Oviedo |
| | | Tony Oviedo |
| | | Executive Vice President – Accounting and Administration |