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, ~~2022~~2023


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

Commission File No. 001-35049

_________________________________________________________

EARTHSTONE ENERGY, INC.

(Exact name of registrant as specified in its charter)

_________________________________________________________


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

1400 Woodloch Forest Drive, Suite 300

The Woodlands, Texas 77380

(Address of principal executive offices) (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

☐

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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, 79,091,777~~25, 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 ~~34,271,766~~34,259,641 shares of Class B Common Stock, $0.001 par value per ~~share, were outstanding.~~share.

Table of Contents

TABLE OF CONTENTS

Page

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of March 3 1 ~~, 202~~2 31, 2023 and December 31, 20 212022

Condensed Consolidated Statements of Operations for the Three Months Ended March 3 1 ~~, 202~~2 31, 2023 and 20 212022

Condensed Consolidated Statements of Equity for the T ~~hree~~Three Months Ended March 3 1 ~~, 202~~2 31, 2023 and 20 212022

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 3 1 ~~, 202~~2 31, 2023 and 20 212022

Notes to Unaudited Condensed Consolidated Financial Statements

Item 2.

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

3634

Item 4.

Controls and Procedures

3735

PART II – OTHER INFORMATION

Unregistered Sales of Equity Securities and Use of Proceeds

3837

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share amounts)


		March 31,		December 31,			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		—

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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.

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EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share amounts)


		Three Months Ended							Three Months Ended
		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.

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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


	Issued Shares
	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)	—	—		—		—		—		—		—		—

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

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


	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

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

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EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


		For the Three Months Ended March 31,					For the 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

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

Table of Contents

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 ~~records~~presents a noncontrolling interest in the Condensed Consolidated Financial Statements representing the economic interests of ~~EEH's~~EEH’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 ~~2021~~2022 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, ~~2021~~2022 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 Measurements~~Noncontrolling Interest

~~FASB Accounting Standards Codification (“ASC”) Topic 820, defines fair value as~~Earthstone consolidates the ~~price that would be received~~financial results of EEH and its subsidiaries and records a noncontrolling interest for the economic interest in Earthstone held by the members of EEH other than Earthstone and Lynden US. Net income (loss) 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 framework~~Condensed Consolidated Statements of Operations for ~~measuring fair value, establishes a three-level hierarchy for fair value measurements based upon~~ the ~~transparency~~three months ended March 31, 2023 and 2022 represents the portion of ~~inputs~~net income (loss) attributable to the ~~valuation~~economic interest in the Company held by the members of ~~an asset or liability~~EEH 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 consideration~~portion of net assets of the ~~counterparty’s creditworthiness when valuing certain assets.~~

~~The three-level fair value hierarchy for disclosure~~Company 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 date~~Earthstone 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.

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment,~~The 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 levels~~noncontrolling 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.

~~Table of Contents~~

~~EARTHSTONE ENERGY, INC.~~

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

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

March 31, 2022 Level 1 Level 2 Level 3 Total
Financial assets
Derivative asset - current $ — $ 1,849 $ — $ 1,849
Derivative asset - noncurrent — 5,810 — 5,810
Total financial assets $ — $ 7,659 $ — $ 7,659
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
December 31, 2021
Financial assets
Derivative asset - current $ — $ 1,348 $ — $ 1,348
Derivative asset - noncurrent — 157 — 157
Total financial assets $ — $ 1,505 $ — $ 1,505
Financial liabilities
Derivative liability - current $ — $ 45,310 $ — $ 45,310
Derivative liability - noncurrent — 571 — 571
Share-based compensation liability - current — 7,835 — 7,835
Share-based compensation liability - noncurrent — 6,324 — 6,324
Total financial liabilities $ — $ 60,040 $ — $ 60,040

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





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

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.

Share-based Compensation Liability

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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


March 31, 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

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

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.

Table of Contents

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.

~~Table~~The Company’s derivative instruments are cash flow hedge transactions in which it is hedging the variability of ~~Contents~~

~~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 had~~following table sets forth the ~~following~~Company'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

Table of Contents

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

~~Table of Contents~~

~~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):

Table of Contents

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 ~~Agreement~~Acquisition

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

On April 14, 2022, Earthstone, EEH and Bighorn consummated the transactions contemplated in the Bighorn Agreement whereby EEH acquired the Bighorn Assets for aggregate consideration of ~~$770~~approximately $628.2 million in cash, ~~and 6,808,511 shares~~net of ~~Class A Common Stock. The Bighorn Purchase Price is subject to~~ customary purchase price adjustments, ~~with~~and 5,650,977 shares Class A Common Stock.

The Bighorn Acquisition was accounted for as an ~~effective~~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 ~~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 noncurrent~~consideration transferred, assets inacquired and liabilities assumed by the ~~Condensed Consolidated Balance Sheet~~Company were recorded as follows (in thousands, except share amounts and stock price):

Table of March 31, 2022 and in Acquisition of oil and gas properties, net of cash acquired, on the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2022. For further discussion, see Note 15. Subsequent Events.Contents

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 and~~consisting of: (i) approximately $313.9 million in cash, net of customary purchase price adjustments, ~~consisting of: (i) approximately $307.5 million in cash, that continues to remain subject to post-closing settlement adjustments between EEH and Chisholm~~ paid at the closing of the Chisholm Acquisition, (ii) $70 million in cash paid on April 15, 2022 and ~~included in Deferred acquisition payment - Chisholm in the Condensed Consolidated Balance Sheet as of March 31, 2022; and~~ (iii) 19,417,476 shares of the ~~Company’s Class A common stock $0.001 par value per share (“~~Class A Common ~~Stock”).~~Stock. The fair value of each share of Class A Common Stock was determined using the closing sales price of $12.85 per share on February 15, 2022. A Significant Shareholder, as ~~described~~identified below, was the majority shareholder of Chisholm as of the closing of the Chisholm Acquisition. See Note 12. Related Party Transactions for further discussion.

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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):

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~~EARTHSTONE ENERGY, INC.~~

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


Consideration:
Shares of Class A Common Stock issued	19,417,476
Class A Common Stock price as of February 15, 2022	$	12.85
Class A Common Stock consideration	249,515
Cash consideration~~(1)~~	~~377,528~~383,877

Total consideration transferred	$	~~627,043~~633,392

Fair value of assets acquired:
Oil and gas properties	$	~~634,867~~642,391
Amount attributable to assets acquired	$	~~634,867~~642,391

Fair value of liabilities assumed:
Other current liabilities	$	~~1,853~~3,028
Asset retirement obligation - noncurrent	5,971
Amount attributable to liabilities assumed	$	~~7,824~~8,999

~~(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):

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~~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):

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~~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 million~~in Loss on sale of ~~legal~~oil and ~~professional fees related to the Chisholm Acquisition which are included in Transaction costs~~gas properties, net in the Condensed Consolidated Statements of Operations.

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~~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.

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~~

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~~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 properties~~material divestitures during the three months ended March 31, ~~2022 and 2021.~~2022.

Note 6. ~~Noncontrolling Interest~~Oil and Natural Gas Properties

~~Earthstone consolidates~~The Company follows the ~~financial results~~successful efforts method of ~~EEH~~accounting for its oil and ~~its subsidiaries~~natural gas properties. Under this method, costs to acquire oil and ~~records a noncontrolling interest for~~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 ~~economic interest~~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 ~~Earthstone held by the members of EEH other than Earthstone and Lynden US. Net loss attributable to noncontrolling interest~~Income from operations in the Condensed Consolidated Statements of ~~Operations~~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, 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.

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Our accrual basis capital expenditures for the three months ended March 31, ~~2022~~2023, 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 represents~~natural gas properties are reviewed for impairment on a nonrecurring basis. The impairment charge reduces the ~~portion of~~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 ~~loss~~cash flows attributable to the ~~economic interest~~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.

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 attributable~~Natural Gas Properties

No impairments were recorded to the ~~members of EEH other than Earthstone~~Company'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 for~~natural 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 ~~Loss~~Income (Loss) Per Common Share

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

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~~EARTHSTONE ENERGY, INC.~~

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

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

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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


		Three Months Ended March 31,						Three Months Ended 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 ~~losses~~loss for ~~those periods.~~the period.

The Class B Common Stock ~~par value $0.001~~has 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 “Class~~Energy, 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, ~~2022~~2023 and December 31, ~~2021,~~2022, there were ~~73,440,800~~106,303,568 and ~~53,467,307~~105,547,139 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 ~~770,143~~1,216,902 shares of Class A Common Stock, of which ~~286,892~~460,473 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 ~~721,259~~770,143 shares of Class A Common Stock, of which ~~257,764~~286,892 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.~~

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~~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, ~~2022~~2023 and December 31, ~~2021,~~2022, there were ~~34,271,766 and 34,344,532~~34,259,641 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~~

Table of ~~Class B Common Stock and EEH Units were exchanged for an equal number of shares of Class A Common Stock.~~Contents

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 ~~1.12~~1.14 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 ~~PSU~~performance 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 PSUs~~258,150 PRSUs (the ~~“2022 PSUs”~~“2023 RTSR PRSUs”) to certain officers pursuant to the 2014 ~~Plan (the “2022 Grant”).~~Plan. The ~~2022 PSUs~~2023 RTSR PRSUs are ~~expected to be paid~~payable in cash or shares of Class A Common Stock upon the achievement by Earthstone over a period commencing on January 1, ~~2022~~2023 and ending on December 31, ~~2024~~2025 (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 expected~~liability 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 to~~greater than 1.0x of the 2023 RTSR PRSUs are earned, such additional PRSUs may be ~~settled~~paid in cash ~~it is alternatively classified as a liability award.~~

rather than the issuance of shares of Class A Common Stock

2019

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~The 2022 PSUs are eligible to be earned based~~Total 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 Stock~~applicable performance period minus the volume weighted average price of a share of stock for the trading days during ~~a three-year period beginning~~the thirty calendar days ending on ~~February 1, 2022. Between 0x to 2.0x~~and including the first day of the ~~Performance Units are eligible to be earned based~~applicable 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 on~~and 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 ~~these~~the 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 ~~PSU~~PRSU to be ~~$19.42.~~$20.06.

On January ~~27, 2021,~~6, 2023, the Board granted ~~1,099,800 PSUs~~301,175 PRSUs (the “2023 ATSR PRSUs”) to certain officers pursuant to the 2014 ~~Plan (the “2021 PSUs”).~~Plan. The ~~PSUs~~2023 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 ~~awards~~awards. PRSU grants to be settled in shares are classified as ~~they~~equity 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 ~~expected~~eligible 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. As~~cash rather than the issuance of ~~March 31, 2022~~shares 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 million~~establishes 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 in~~volatility of 77%, the ~~Condensed Consolidated Balance Sheets related~~Company 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 ~~669,550~~1,043,800 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 ending~~settled on January 31, ~~2022 of performance criteria established by the Board. On January 31, 2022, the Company settled the remaining 608,125 PSUs, net of forfeitures, at a rate of 1.97x. 1.0x was settled through~~2023 resulting in the issuance of ~~608,125~~1,043,800 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 ~~1.06~~0.96 years.

For the three months ended March 31, ~~2022~~2023 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 is~~PSUs 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 ~~Sheet~~Sheets as of March 31, ~~2022.~~2023 and December 31, 2022, respectively.

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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 ~~Facility~~Agreement

On November 21, 2019, Earthstone, EEH (the “Borrower”), Wells Fargo Bank, National Association, as Administrative Agent and Issuing Bank (“Wells Fargo”), ~~Royal Bank of Canada, as Syndication Agent,~~ BOKF, NA dba Bank of Texas, ~~(“BOKF”)~~ as Issuing Bank with respect to Existing Letters of Credit, Royal Bank of Canada, as Syndication Agent, Truist Bank, as successor by merger to SunTrust Bank, as Documentation Agent, and the ~~lenders~~Lenders 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 ~~January~~March 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 Amendment~~amendment (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.~~

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~~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 ~~November~~October 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

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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, $624.2~~2023, $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 $320.0~~2022, $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 borrowings~~averaged 7.43% per annum, which excluded commitment fees of ~~$582.5~~$0.7 million, and ~~$278.3 million in repayments~~amortization 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 under~~2023, 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 fees~~to 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 assets~~Accrued 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~~

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~~EARTHSTONE ENERGY, INC.~~

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

On April 12, 2022, EEH issued $550.0 million aggregate principal amount of 8.000% senior notes due 2027. EEH received net proceeds 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.

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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, ~~2022~~2023 (in thousands):

~~2022~~2023

Beginning asset retirement obligations

~~15,866~~30,559

Liabilities incurred

5422

Liabilities settled

~~(201)~~(539)

Acquisitions

~~5,971~~—

Accretion expense

~~397~~629

Divestitures

(90)

Revision of estimates

31241

Ending asset retirement obligations

~~22,118~~30,822

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 ~~two~~three significant shareholders that consist of various investment funds managed by each of the ~~two~~three 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 ~~Agreement~~Acquisition was (1) approved by a majority of the voting power of all outstanding disinterested shares of the Common ~~stock~~Stock and (2) increased ~~their~~the Significant Stockholder's beneficial ownership of ~~Earthstone’s~~ Class A Common Stock from approximately 25% to 36% as of February 15, 2022.

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

~~Table of Contents~~

~~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 subsidiaries~~the 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.

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 14. Income Taxes

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

On February 15, 2022, the Company completed the Chisholm Acquisition which included the issuance of 19,417,476 shares of ~~our~~ Class A Common ~~Stock. When there is a~~Stock, which resulted in an ownership change ~~in ownership, as defined under~~within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”)~~, it results in~~. As a ~~limitation that applies~~result of the ownership change, the Company’s ability to ~~all~~utilize net operating losses (“NOLs”) and credits generated prior to the ownership change date ~~that can~~may be ~~used~~limited to offset taxable income incurred after the ownership change date (the “382 Limitation”). The annual limitation is based on the Company’s stock value prior to the ownership change, multiplied by the applicable federal long-term, tax-exempt interest rate (the “FLTR”). Based on the Company’s stock price at the close of business on February 15, 2022 of $12.85 and the applicable FLTR of 1.46%, the current limitation is estimated to be $10.1 million per year. Additionally, unutilized 382 Limitation amounts can be carried forward to future years, cumulatively.

As of both March 31, ~~2022~~2023 and December 31, ~~2021, a~~2022, current ~~liability~~liabilities of ~~$0.6~~$1.8 million ~~and $0.8 million, respectively, is~~are included in Other current liabilities in the Condensed Consolidated Balance ~~Sheets. The amounts represent~~Sheets related solely to current Texas Margin Tax ~~payable on~~payable.

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 ended~~Company’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

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EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~cannot be assured~~Accrued Expenses

The following table summarizes the Company’s current accrued expenses at March 31, 2023 and ~~(3) deferred income tax benefit~~December 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.

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

Statement Regarding Forward-Looking Information

This discussion and other items in this Quarterly Report on Form 10-Q contain forward-looking statements and information that are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this document, the words “believe,” “anticipate,” “estimate,” “expect,” “intend,” “may,” “will,” “project,” “forecast,” “plan,” and similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. These statements are subject to numerous risks, uncertainties and assumptions. Certain of these risks are summarized in this report and under “Item 1A. Risk Factors” in our ~~2021~~2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), which you should read carefully in connection with our forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. We undertake no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

You should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in conjunction with the corresponding sections and our audited ~~consolidated financial statements~~Condensed Consolidated Financial Statements for the year ended December 31, ~~2021,~~2022, which are included in our ~~2021~~2022 Annual Report on Form 10-K.

Overview

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

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Recent Developments

~~Bighorn Acquisition~~Credit 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.

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~~Securities Purchase Agreement~~

Also, on April 14, 2022, Earthstone, EnCap Energy Capital Fund XI, L.P. (“EnCap Fund XI”), an affiliate of EnCap Investments L.P. (“EnCap”), and Cypress Investments, LLC (“Cypress” and collectively with EnCap Fund XI, the “Investors”), a fund managed by Post Oak Energy Capital, L.P. (“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~~

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 Amendment~~amendment (the “Amendment”) to the Credit Agreement dated November 21, 2019, by and among EEH, as Borrower, Earthstone, as Parent, Wells Fargo as Administrative Agent and Issuing Bank, Royal Bank of Canada, as Syndication Agent, Truist Bank, Citizens Bank, N.A., KeyBank National Association, U.S. Bank National Association, Fifth Third Bank, PNC Bank, National Association, ~~and~~ Bank of America, N.A., 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 dated~~at $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~~

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~~corresponding elected commitments would increase to $1.325 billion, unless Earthstone completes an unsecured senior notes offering (“Notes Offering”) prior~~regularly 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 ~~changes~~changes.

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 ~~advance~~the 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 to~~used 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 ~~that~~inflation to continue based on current economic circumstances. In addition, the ~~longer~~attempts to reduce inflation by the ~~duration of any such disruption, the greater the adverse impact may be~~Federal Reserve have resulted in increased interest rates on ~~our business.~~

~~Operational Status~~

~~As a producer of oil, natural gas~~debt 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.

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~~Operational/Financial Challenges~~

It is difficult to model and predict how our operations and financial status may change as a result of COVID-19. In our industry, any forecast, plans and changes to operations and financial status are a function of commodity prices. If oil prices decline due to a resurgence of COVID-19, we believe we can continue to operate and produce our properties at a minimum in a cash flow neutral position for the next 12 months. A significant driver in the future may be the financial institutions’ view on commodity prices with respect to borrowing base redeterminations. If a resurgence of COVID-19 triggers additional volatility in our business or global economies, our borrowing base could be reduced. Significant reductions in the borrowing base under our Credit Agreement could create a borrowing base deficiency depending on our loans then outstanding which may lead to a default. We believe global as well as national mitigation efforts currently being implemented to fight COVID-19 have had, and may continue to have, a material impact on commodity prices and may continue to present significant challenges to our industry.

~~The effects of COVID-19, including a substantial decrease in economic activity, have~~ contributed to ~~significant credit,~~ debt and equity market volatility. ~~Similar~~We continue to ~~other producers in~~closely monitor costs and take all reasonable steps to mitigate the inflationary effect on our ~~business, we experienced volatility~~cost 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 for~~providing higher economic ~~returns.~~returns, increased operated inventory and greater operating efficiency. In short, we believe we are well qualified to continue to be a consolidator which could increase the scale of our operations and add value to our shareholders.

Operations Update

~~Areas~~The Company operated a five-rig drilling program in the first quarter of ~~Operation~~

~~Our primary focus is concentrated~~2023 with three rigs in the Delaware Basin and two in the Midland Basin.

Delaware Basin ~~in West Texas and~~Highlights

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 oil~~the 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,

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and ~~historically high~~both 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 completed~~2023, the Company began drilling six gross (3.9 net) wells, brought nine gross (nine net) wells online, and ~~turned to sales five~~had two gross ~~(5.0~~(1.3 net) ~~operated~~DUC wells ~~and commenced drilling ten gross (8.3 net) operated wells~~at 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) operated~~WTG 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 quarter~~had 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.

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~~Results of Operations~~

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

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

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Results of Operations

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 Foreland~~Titus 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.

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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 ~~increased~~decreased from ~~$57.56~~$97.24 for the three months ended March 31, ~~2021~~2022 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 ~~360~~2,737 MBbls, or ~~34%~~193%, which included an increase of ~~526~~2,790 MBbls related to the wells acquired in the Acquisitions ~~offset by~~and a decrease of ~~166~~53 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 $4.1~~partially offset by $12.9 million ~~was~~ attributable to ~~an increase~~a 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 ~~3,194~~11,172 MMcf, or ~~131%~~198%, which included an increase of ~~3,044~~11,742 MMcf related to the wells acquired in the Acquisitions, ~~and an increase~~partially offset by a decrease of ~~150~~570 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 $6.5~~partially offset by $12.9 million ~~was~~ attributable to ~~an increase~~a 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 ~~475~~1,606 MBbls, or ~~130%~~191%, ~~which included~~primarily resulting from an increase of ~~418 MMcf~~1,658 MBbls related to the wells acquired in the Acquisitions, ~~and an increase~~partially 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, ~~2022~~2023 relative to the comparable period in ~~2021,~~2022, due to ~~an $8.0~~a $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 ~~since~~and inflationary factors experienced in the ~~first quarter of 2021.~~current year period.

Production and ad valorem taxes

Production and ad valorem taxes for the three months ended March 31, ~~2022~~2023 increased by ~~$8.3~~$19.8 million, or ~~165%~~149%, relative to the comparable period in ~~2021~~2022 due to a ~~$6.1~~$22.2 million increase resulting from the properties acquired in the Acquisitions, ~~and~~partially offset by a ~~$2.2~~$2.4 million ~~increase~~decrease related to our other wells resulting from ~~improved~~lower commodity prices.

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

DD&A for the three months ended March 31, ~~2022~~2023 increased by ~~$9.9~~$76.4 million, or ~~41%~~223%, relative to the comparable period in ~~2021~~2022 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 base~~development 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, ~~2022~~2023 increased by ~~$3.9~~$5.3 million, or ~~47%~~43%, relative to the comparable period in ~~2021, primarily~~2022, due to ~~increases~~an 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 ~~increased~~legal and professional ~~fees.~~fees associated with the Chisholm Acquisition in the prior year period.

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~~Transaction costs~~Loss on sale of oil and gas properties, net

~~For~~During the three months ended March 31, ~~2022, transaction costs increased by $8.6~~2023, we sold certain non-core properties for approximately $1.8 million ~~primarily due to costs associated with~~in 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 ~~benefit~~expense of approximately ~~$1.5~~$18.6 million ~~which included~~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 ~~benefit~~expense for Lynden US of ~~$0.7~~$0.9 million as a result of its share of the distributable loss from EEH ~~(2) no net~~and (3) income tax ~~benefit for Earthstone as the $6.6 million income tax benefit resulting from its share~~expense 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 future~~Sources of Cash

With three drilling ~~locations. Drilling horizontal wells~~rigs operating in the ~~Midland~~Delaware 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-$440~~be funded by cash flows from operations. During the three months ended March 31, 2023, we generated $258.3 million ~~based~~of 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 ~~the~~our Credit Agreement to meet our ~~cash~~capital requirements for the next 12 months.

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Working Capital

Working capital (presented below) was a deficit of ~~$268.7~~$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 ~~31,2022~~31, 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, ~~2022~~2023 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 increased~~2023 decreased to ~~$380.7~~$180.8 million from ~~$143.8~~$380.7 million for the three months ended March 31, ~~2021, primarily~~2022, 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

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term loan borrowings. Cash flows provided by financing activities ~~were~~of $294.2 million for the three months ended March 31, 2022 ~~compared~~primarily 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 fund~~finance the acquisition of oil and natural gas properties.

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Capital Expenditures

Our accrual basis capital expenditures for the three months ended March 31, ~~2022~~2023 were as follows (in thousands):

Three Months Ended March 31, ~~2022~~2023

Drilling and completions

~~82,000~~201,384

Leasehold costs

~~109~~888

Total capital expenditures

~~82,109~~202,272

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 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

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~~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.

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Costless Collars
Period Commodity Volume
(Bbls / MMBtu) Sold Ceiling
($/Bbl / $/MMBtu) Bought Floor
($/Bbl / $/MMBtu)
Q2 - Q4 2022 Crude Oil Costless Collar 1,560,000 $ 83.59 $ 69.42
Q1 - Q4 2023 Crude Oil Costless Collar 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 ~~2021~~2022 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~~ ~~Notes~~There are no recent accounting pronouncements that are expected to ~~Unaudited Condensed Consolidated Financial Statements~~ ~~in this report for discussion of recently issued and adopted accounting standards affecting us.~~

have a material impact on our financial statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks associated with interest rate risks, commodity price risk and credit risk. We have established risk management processes to monitor and manage these market risks.

Commodity Price Risk, Derivative Instruments and Hedging Activity

We are exposed to various risks including energy commodity price risk. When oil, natural gas and natural gas liquid prices decline significantly our ability to finance our capital budget and operations may be adversely impacted. We expect energy prices to remain volatile and unpredictable. Our hedging activities consist of derivative instruments entered into in order to hedge against changes in oil and natural gas prices through the use of fixed price swaps, basis swaps, 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 ~~our~~its 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:

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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

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

Changes in fair value of commodity derivative instruments are reported in earnings in the period in which they occur. Our open commodity derivative instruments were in a net ~~liability~~asset 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 ~~liability~~asset 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 ~~liability~~asset position of ~~$209.7~~$5.9 million. There would also be a similar increase or decrease in ~~Loss~~loss on derivative contracts, net in the Condensed Consolidated Statements of Operations.

Interest Rate Sensitivity

~~Table of Contents~~

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

At March 31, ~~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

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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, ~~2022~~2023 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.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in various legal proceedings and claims in the ordinary course of business. 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 of~~We 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.

3839

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Item 6. Exhibits

Exhibit No.

Description

Filed Herewith

Furnished Herewith

31.1

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

31.2

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

32.1

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

32.2

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

101

Interactive Data Files (formatted as Inline XBRL).

104

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

3940

~~Table of Contents~~

SIGNATURES

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

EARTHSTONE ENERGY, INC.

Date:

May ~~4, 2022~~3, 2023

By:

/s/ Tony Oviedo

Tony Oviedo

Executive Vice President – Accounting and Administration


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

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

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

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