UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________________________

FORM 10-Q

_________________________________________________________

(Mark One)

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

For the Quarterly Period Ended ~~September~~June 30, ~~2020~~

2021

☐
☐			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~~

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

1400 Woodloch Forest Drive, Suite 300

The Woodlands, Texas 77380

(Address of principal executive offices)

Registrant’s telephone number, including area code: (281) 298-4246

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $0.001 par value per share	ESTE	New York Stock Exchange

Indicate by check mark whether the ~~issuer~~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 the 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~~

filer

☒

Non-accelerated filer

☐

Smaller reporting company

☒

Emerging growth company

☐

Table of Contents

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~October~~July 29, ~~2020, 30,210,749~~2021, 50,493,800 shares of Class A Common Stock, $0.001 par value per share, and ~~35,009,371~~34,397,877 shares of Class B Common Stock, $0.001 par value per share, were outstanding.

Table of Contents

TABLE OF CONTENTS

~~TABLE OF CONTENTS~~

~~Page~~

Page

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020

Condensed Consolidated Statements of Operations for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020

Condensed Consolidated Statements of Equity for the ~~Nine~~Six Months Ended ~~September 30,~~June 3 0 , 2021 and 2020 ~~and 2019~~

Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September 30,~~June 3 0 , 2021 and 2020 ~~and 2019~~

Notes to Unaudited Condensed Consolidated Financial Statements

810

Item 2.

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

1925

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

2837

Item 4.

Controls and Procedures

2837

PART II – OTHER INFORMATION

Unregistered Sales of Equity Securities and Use of Proceeds

2938

Item 3.

Defaults Upon Senior Securities

2938

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)


	*September 30,*			*December 31,*				June 30,		December 31,
ASSETS	*2020*			*2019*			ASSETS	2021		2020
Current assets:							Current assets:
Cash	$	5,311		$	13,822		Cash	$	478	$	1,494
Accounts receivable:							Accounts receivable:
Oil, natural gas, and natural gas liquids revenues		12,097			29,047		Oil, natural gas, and natural gas liquids revenues	35,063		16,255
Joint interest billings and other, net of allowance of $80 and $83 at September 30, 2020 and December 31, 2019, respectively		11,548			6,672
Joint interest billings and other, net of allowance of $19 and $19 at June 30, 2021 and December 31, 2020, respectively							Joint interest billings and other, net of allowance of $19 and $19 at June 30, 2021 and December 31, 2020, respectively	4,843		7,966
Derivative asset		25,097			8,860		Derivative asset	72		7,509
Prepaid expenses and other current assets		1,560			1,867		Prepaid expenses and other current assets	2,109		1,509
Total current assets		55,613			60,268		Total current assets	42,565		34,733

Oil and gas properties, successful efforts method:							Oil and gas properties, successful efforts method:
Proved properties		995,666			970,808		Proved properties	1,321,064		1,017,496
Unproved properties		236,482			260,271		Unproved properties	233,699		233,767
Land		5,382			5,382		Land	5,382		5,382
Total oil and gas properties		1,237,530			1,236,461		Total oil and gas properties	1,560,145		1,256,645

Accumulated depreciation, depletion and amortization		(271,012	)		(195,567	)	Accumulated depreciation, depletion and amortization	(340,091)		(291,213)
Net oil and gas properties		966,518			1,040,894		Net oil and gas properties	1,220,054		965,432

Other noncurrent assets:							Other noncurrent assets:
Goodwill		0			17,620
Office and other equipment, net of accumulated depreciation and amortization of $3,558 and $3,180 at September 30, 2020 and December 31, 2019, respectively		1,044			1,311

Office and other equipment, net of accumulated depreciation and amortization of $4,286 and $3,675 at June 30, 2021 and December 31, 2020, respectively							Office and other equipment, net of accumulated depreciation and amortization of $4,286 and $3,675 at June 30, 2021 and December 31, 2020, respectively	1,364		931
Derivative asset		4,727			770		Derivative asset	694		396
Operating lease right-of-use assets		2,769			3,108		Operating lease right-of-use assets	2,130		2,450
Other noncurrent assets		1,331			1,572		Other noncurrent assets	10,854		1,315
TOTAL ASSETS	$	1,032,002		$	1,125,543		TOTAL ASSETS	$	1,277,661	$	1,005,257
LIABILITIES AND EQUITY							LIABILITIES AND EQUITY
Current liabilities:							Current liabilities:
Accounts payable	$	6,910		$	25,284		Accounts payable	$	25,555	$	6,232
Revenues and royalties payable		28,047			35,815		Revenues and royalties payable	29,398		27,492
Accrued expenses		12,844			19,538		Accrued expenses	16,224		16,504
Asset retirement obligation		308			308		Asset retirement obligation	541		447
Derivative liability		1,040			6,889		Derivative liability	57,957		1,135
Advances		93			11,505		Advances	330		2,277
Operating lease liabilities		768			570		Operating lease liabilities	782		773
Finance lease liabilities		96			206		Finance lease liabilities	4		69
Other current liabilities		11			43		Other current liabilities	498		565
Total current liabilities		50,117			100,158		Total current liabilities	131,289		55,494

Noncurrent liabilities:							Noncurrent liabilities:
Long-term debt		130,000			170,000		Long-term debt	241,360		115,000
Deferred tax liability		15,294			15,154		Deferred tax liability	13,316		14,497
Asset retirement obligation		2,027			1,856		Asset retirement obligation	14,016		2,580
Derivative liability		577			0		Derivative liability	5,401		173
Operating lease liabilities		2,001			2,539
Finance lease liabilities		15			85
Other noncurrent liabilities		138			0
Total noncurrent liabilities		150,052			189,634

Commitments and Contingencies (Note 13)

Equity:
Preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued or outstanding		0			0
Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 30,210,749 and 29,421,131 issued and outstanding at September 30, 2020 and December 31, 2019, respectively		30			29
Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 35,009,371 and 35,260,680 issued and outstanding at September 30, 2020 and December 31, 2019, respectively		35			35
Additional paid-in capital		537,990			527,246
Accumulated deficit		(186,787	)		(181,711	)
Total Earthstone Energy, Inc. equity		351,268			345,599
Noncontrolling interest		480,565			490,152
Total equity		831,833			835,751
TOTAL LIABILITIES AND EQUITY	$	1,032,002		$	1,125,543

Table of Contents


Operating lease liabilities	1,510		1,840
Finance lease liabilities	0		5
Other noncurrent liabilities	3,089		132
Total noncurrent liabilities	278,692		134,227

Commitments and Contingencies (Note 13)	0		0

Equity:
Preferred stock, $0.001 par value, 20,000,000 shares authorized; NaN issued or outstanding	0		0

Class A Common Stock, $0.001 par value, 200,000,000 shares authorized; 44,293,062 and 30,343,421 issued and outstanding at June 30, 2021 and December 31, 2020, respectively	44		30
Class B Common Stock, $0.001 par value, 50,000,000 shares authorized; 34,397,877 and 35,009,371 issued and outstanding at June 30, 2021 and December 31, 2020, respectively	34		35
Additional paid-in capital	626,791		540,074
Accumulated deficit	(209,962)		(195,258)

Total Earthstone Energy, Inc. equity	416,907		344,881
Noncontrolling interest	450,773		470,655
Total equity	867,680		815,536

TOTAL LIABILITIES AND EQUITY	$	1,277,661	$	1,005,257

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

Table of Contents

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share amounts)


	*Three Months Ended*						*Nine Months Ended*							Three Months Ended				Six Months Ended
	*September 30,*						*September 30,*							June 30,				June 30,
	*2020*			*2019*			*2020*			*2019*				2021		2020		2021		2020
REVENUES													REVENUES
Oil	$	33,158		$	35,443		$	93,017		$	111,657		Oil	$	70,918	$	18,847	$	131,737	$	59,859
Natural gas		2,642			903			4,855			2,126		Natural gas	6,690		1,127		12,542		2,213
Natural gas liquids		5,247			2,858			9,976			10,691		Natural gas liquids	12,063		1,689		20,964		4,729
Total revenues		41,047			39,204			107,848			124,474		Total revenues	89,671		21,663		165,243		66,801

OPERATING COSTS AND EXPENSES													OPERATING COSTS AND EXPENSES
Lease operating expense		7,044			6,419			21,971			20,485		Lease operating expense	11,747		5,588		22,596		14,927
Production and ad valorem taxes		2,696			2,698			7,198			8,001		Production and ad valorem taxes	5,176		1,479		10,203		4,502
Rig termination expense		0			0			426			0		Rig termination expense	0		426		0		426
Depreciation, depletion and amortization		28,538			14,079			76,096			42,281		Depreciation, depletion and amortization	26,027		22,902		50,434		47,558
Impairment expense		2,115			0			62,548			0		Impairment expense	0		62		0		60,433
General and administrative expense		5,796			6,057			19,615			19,948		General and administrative expense	9,170		6,687		17,550		13,819
Transaction costs		(705	)		215			(324	)		797		Transaction costs	507		(463)		2,613		381
Accretion of asset retirement obligation		47			52			137			160		Accretion of asset retirement obligation	303		46		593		90
Exploration expense		0			0			298			0		Exploration expense	30		(3)		30		298
Total operating costs and expenses		45,531			29,520			187,965			91,672		Total operating costs and expenses	52,960		36,724		104,019		142,434

(Loss) gain on sale of oil and gas properties		0			(120	)		198			(446	)
Gain on sale of oil and gas properties													Gain on sale of oil and gas properties	348		(6)		348		198

(Loss) income from operations		(4,484	)		9,564			(79,919	)		32,356
Income (loss) from operations													Income (loss) from operations	37,059		(15,067)		61,572		(75,435)

OTHER INCOME (EXPENSE)													OTHER INCOME (EXPENSE)
Interest expense, net		(1,186	)		(1,609	)		(4,207	)		(4,735	)	Interest expense, net	(2,401)		(1,285)		(4,618)		(3,021)

(Loss) gain on derivative contracts, net		(6,040	)		18,726			73,065			(19,672	)	(Loss) gain on derivative contracts, net	(51,175)		(20,679)		(84,438)		79,105
Other income (expense), net		(18	)		21			120			(1	)
Total other income (expense)		(7,244	)		17,138			68,978			(24,408	)

Other income, net													Other income, net	200		12		303		138
Total other (expense) income													Total other (expense) income	(53,376)		(21,952)		(88,753)		76,222

(Loss) income before income taxes		(11,728	)		26,702			(10,941	)		7,948		(Loss) income before income taxes	(16,317)		(37,019)		(27,181)		787
Income tax expense		(130	)		(575	)		(112	)		(728	)
Income tax benefit													Income tax benefit	486		1,110		794		18
Net (loss) income		(11,858	)		26,127			(11,053	)		7,220		Net (loss) income	(15,831)		(35,909)		(26,387)		805

Less: Net (loss) income attributable to noncontrolling interest		(6,413	)		14,357			(5,977	)		3,877		Less: Net (loss) income attributable to noncontrolling interest	(6,960)		(19,570)		(11,683)		436

Net (loss) income attributable to Earthstone Energy, Inc.	$	(5,445	)	$	11,770		$	(5,076	)	$	3,343		Net (loss) income attributable to Earthstone Energy, Inc.	$	(8,871)	$	(16,339)	$	(14,704)	$	369

Net (loss) income per common share attributable to Earthstone Energy, Inc.:													Net (loss) income per common share attributable to Earthstone Energy, Inc.:
Basic	$	(0.18	)	$	0.41		$	(0.17	)	$	0.12		Basic	$	(0.20)	$	(0.55)	$	(0.34)	$	0.01
Diluted	$	(0.18	)	$	0.41		$	(0.17	)	$	0.12		Diluted	$	(0.20)	$	(0.55)	$	(0.34)	$	0.01

Weighted average common shares outstanding:													Weighted average common shares outstanding:
Basic		30,073,635			29,032,842			29,810,705			28,883,907		Basic	44,127,718		29,858,162		43,457,043		29,677,795
Diluted		30,073,635			29,032,842			29,810,705			28,883,907		Diluted	44,127,718		29,858,162		43,457,043		29,677,795

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

Table of Contents

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*				Issued Shares
At December 31, 2019		29,421,131			35,260,680		$	29	$	35	$	527,246		$	(181,711	)	$	345,599		$	490,152		$	835,751
																											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																										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		—			—			0		0		2,694			0			2,694						2,694		Stock-based compensation expense	—	—	—		—		2,605		—		2,605				2,605
Vesting of restricted stock units, net of taxes paid		231,834			0			1		0		0			0			1			0			1
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings		75,695			0			0		0		(214	)		0			(214	)		0			(214	)
Shares issued in connection with the IRM Acquisition																										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																										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																										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		(75,695	)		0			—		—		—			—			—			—			—		Cancellation of treasury shares	(257,764)	—	—		—		—		—		—		—		—
Class B Common Stock converted to Class A Common Stock		199,993			(199,993	)		0		0		2,897			0			2,897			(2,897	)		0		Class B Common Stock converted to Class A Common Stock	578,031	(578,031)	1		(1)		7,758		—		7,758		(7,758)		0
Net income		—			—			0		0		0			16,708			16,708			20,006			36,714
At March 31, 2020		29,852,958			35,060,687		$	30	$	35	$	532,623		$	(165,003	)	$	367,685		$	507,261		$	874,946
Net loss																										Net loss	—	—	—		—		—		(5,833)		(5,833)		(4,723)		(10,556)
At March 31, 2021																										At March 31, 2021	44,104,541	34,431,340	$	44	$	34	$	624,916	$	(201,091)	$	423,903	$	458,174	$	882,077
Stock-based compensation expense		—			—			0		0		2,568			0			2,568			0			2,568		Stock-based compensation expense	—	—	—		—		2,175		—		2,175		—		2,175
Vesting of restricted stock units, net of taxes paid		165,399			0			0		0		0			0			0			0			0		Vesting of restricted stock units, net of taxes paid	155,058	—	—		—		—		—		—		—		—
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings		57,810			0			0		0		(170	)		0			(170	)		0			(170	)	Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings	66,343	—	—		—		(741)		—		(741)		—		(741)
Cancellation of treasury shares		(57,810	)		0			—		—		—			—			—			—			—		Cancellation of treasury shares	(66,343)	—	—		—		—		—		—		—		—
Class B Common Stock converted to Class A Common Stock		2,000			(2,000	)		0		0		28			0			28			(28	)		0		Class B Common Stock converted to Class A Common Stock	33,463	(33,463)	—		—		441		—		441		(441)		0
Net loss		—			—			0		0		0			(16,339	)		(16,339	)		(19,570	)		(35,909	)	Net loss	—	—	—		—		—		(8,871)		(8,871)		(6,960)		(15,831)
At June 30, 2020		30,020,357			35,058,687		$	30	$	35	$	535,049		$	(181,342	)	$	353,772		$	487,663		$	841,435
Stock-based compensation expense		—			—			0		0		2,403			0			2,403			0			2,403
Vesting of restricted stock units, net of taxes paid		141,076			0			0		0		0			0			0			0			0
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings		54,268			0			0		0		(147	)		0			(147	)		0			(147	)
Cancellation of treasury shares		(54,268	)		0			—		—		—			—			—			—			—
Class B Common Stock converted to Class A Common Stock		49,316			(49,316	)		0		0		685			0			685			(685	)		0
Net loss		—			—			0		0		0			(5,445	)		(5,445	)		(6,413	)		(11,858	)
At September 30, 2020		30,210,749			35,009,371		$	30	$	35	$	537,990		$	(186,787	)	$	351,268		$	480,565		$	831,833
At June 30, 2021																										At June 30, 2021	44,293,062	34,397,877	$	44	$	34	$	626,791	$	(209,962)	$	416,907	$	450,773	$	867,680

Table of Contents


	Issued Shares
	Class A Common Stock	Class B Common Stock	Class A Common Stock		Class B Common Stock		Additional Paid-in Capital		Accumulated Deficit		Total Earthstone Energy, Inc. Equity		Noncontrolling Interest		Total Equity
At December 31, 2019	29,421,131	35,260,680	$	29	$	35	$	527,246	$	(181,711)	$	345,599	$	490,152	$	835,751
Stock-based compensation expense	—	—	—		—		2,694		—		2,694				2,694
Vesting of restricted stock units, net of taxes paid	231,834	—	1		—		—		—		1		—		1
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings	75,695	—	—		—		(214)		—		(214)		—		(214)
Cancellation of treasury shares	(75,695)	—	—		—		—		—		—		—		—
Class B Common Stock converted to Class A Common Stock	199,993	(199,993)	—		—		2,897		—		2,897		(2,897)		0
Net income	—	—	—		—		—		16,708		16,708		20,006		36,714
At March 31, 2020	29,852,958	35,060,687	$	30	$	35	$	532,623	$	(165,003)	$	367,685	$	507,261	$	874,946
Stock-based compensation expense	—	—	—		—		2,568		—		2,568		—		2,568
Vesting of restricted stock units, net of taxes paid	165,399	—	—		—		—		—		—		—		0
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings	57,810	—	—		—		(170)		—		(170)		—		(170)
Cancellation of treasury shares	(57,810)	—	—		—		—		—		—		—		—
Class B Common Stock converted to Class A Common Stock	2,000	(2,000)	—		—		28		—		28		(28)		0
Net loss	—	—	—		—		—		(16,339)		(16,339)		(19,570)		(35,909)
At June 30, 2020	30,020,357	35,058,687	$	30	$	35	$	535,049	$	(181,342)	$	353,772	$	487,663	$	841,435

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

Table of Contents

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	For the Six Months Ended June 30,
	2021		2020
Cash flows from operating activities:
Net (loss) income	$	(26,387)	$	805
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, depletion and amortization	50,434		47,558
Impairment of proved and unproved oil and gas properties	0		42,813
Impairment of goodwill	0		17,620
Accretion of asset retirement obligations	593		90
Settlement of asset retirement obligations	(53)		0
(Gain) on sale of oil and gas properties	(348)		(198)
(Gain) on sale of office and other equipment	(114)		0

Total loss (gain) on derivative contracts, net	84,438		(79,105)
Operating portion of net cash (paid) received in settlement of derivative contracts	(25,427)		39,096
Stock-based compensation	7,741		5,262
Deferred income taxes	(794)		(18)

Amortization of deferred financing costs	339		161

Changes in assets and liabilities:
(Increase) decrease in accounts receivable	(4,181)		15,060
(Increase) decrease in prepaid expenses and other current assets	(114)		(747)
Increase (decrease) in accounts payable and accrued expenses	8,352		(3,410)
Increase (decrease) in revenues and royalties payable	1,795		(16,491)
Increase (decrease) in advances	(2,830)		(11,412)

Net cash provided by operating activities	93,444		57,084
Cash flows from investing activities:
Acquisition of oil and gas properties, net of cash acquired	(187,803)		0
Additions to oil and gas properties	(28,238)		(67,493)
Additions to office and other equipment	(370)		(108)
Proceeds from sales of oil and gas properties	200		409
Net cash used in investing activities	(216,211)		(67,192)
Cash flows from financing activities:
Proceeds from borrowings	360,078		69,906
Repayments of borrowings	(233,718)		(71,318)
Cash paid related to the exchange and cancellation of Class A Common Stock	(2,821)		(382)
Cash paid for finance leases	(70)		(110)
Deferred financing costs	(1,718)		0
Net cash provided by (used in) financing activities	121,751		(1,904)
Net decrease in cash	(1,016)		(12,012)
Cash at beginning of period	1,494		13,822
Cash at end of period	$	478	$	1,810
Supplemental disclosure of cash flow information
Cash paid for:
Interest	$	4,272	$	2,659
Income taxes	$	797	$	0
Non-cash investing and financing activities:
Class A Common Stock issued in IRM Acquisition	$	76,572	$	0
Accrued capital expenditures	$	11,416	$	6,220

Asset retirement obligations	$	161	$	43

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, 2018
28,696,321 35,452,178 $ 29 $ 35 $ 517,073 $ (182,497 ) $ 334,640 $ 491,852 $ 826,492
ASC 842 implementation
— — 0 0 0 67 67 99 166
Stock-based compensation expense
— — 0 0 2,212 0 2,212 0 2,212
Vesting of restricted stock units, net of taxes paid
166,140 0 0 0 0 0 0 0 0
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings
59,261 0 0 0 (396 ) 0 (396 ) 0 (396 )
Cancellation of treasury shares
(59,261 ) 0 — — — — — — —
Net loss
— — 0 0 0 (17,204 ) (17,204 ) (21,239 ) (38,443 )
At March 31, 2019
28,862,461 35,452,178 $ 29 $ 35 $ 518,889 $ (199,634 ) $ 319,319 $ 470,712 $ 790,031
Stock-based compensation expense
— — 0 0 2,261 0 2,261 2,261
Vesting of restricted stock units, net of taxes paid
133,311 0 0 0 0 0 0 0 0
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings
43,344 0 0 0 (265 ) 0 (265 ) 0 (265 )
Cancellation of treasury shares
(43,344 ) 0 — — — — — — —
Class B Common Stock converted to Class A Common Stock
35,732 (35,732 ) 0 0 476 0 476 (476 ) 0
Net income
— — 0 0 0 8,777 8,777 10,759 19,536
At June 30, 2019
29,031,504 35,416,446 $ 29 $ 35 $ 521,361 $ (190,857 ) $ 330,568 $ 480,995 $ 811,563
Stock-based compensation expense — — 0 0 2,207 0 2,207 2,207
Vesting of restricted stock units, net of taxes paid
118,716 0 0 0 0 0 0 0 0
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings
49,111 0 0 0 (166 ) 0 (166 ) 0 (166 )
Cancellation of treasury shares
(49,111 ) 0 — — — — — — —
Class B Common Stock converted to Class A Common Stock
0 0 0 0 0 0 0 0 0
Net income
— — 0 0 0 11,770 11,770 14,357 26,127
At September 30, 2019
29,150,220 35,416,446 $ 29 $ 35 $ 523,402 $ (179,087 ) $ 344,379 $ 495,352 $ 839,731

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

Table of Contents

EARTHSTONE ENERGY, INC.

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)~~

~~(In thousands)~~

For the Nine Months Ended

September 30,

2020

2019

Cash flows from operating activities:

Net (loss) income
$ (11,053 ) $ 7,220
Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation, depletion and amortization
76,096 42,281
Impairment of proved and unproved oil and gas properties
44,928 0
Impairment of goodwill
17,620 0
Accretion of asset retirement obligations
137 160
Settlement of asset retirement obligations
0 (179 )
(Gain) loss on sale of oil and gas properties
(198 ) 446
Total (gain) loss on derivative contracts, net
(73,065 ) 19,672
Operating portion of net cash received in settlement of derivative contracts
47,599 13,660
Stock-based compensation
7,665 6,680
Deferred income taxes
112 728
Amortization of deferred financing costs
241 336
Changes in assets and liabilities:

(Increase) decrease in accounts receivable
12,102 (5,585 )
(Increase) decrease in prepaid expenses and other current assets
(264 ) (28 )
Increase (decrease) in accounts payable and accrued expenses
1,976 (8,330 )
Increase (decrease) in revenues and royalties payable
(7,768 ) (9,042 )
Increase (decrease) in advances
(11,412 ) 17,720
Net cash provided by operating activities
104,716 85,739
Cash flows from investing activities:

Additions to oil and gas properties
(72,869 ) (120,685 )
Additions to office and other equipment
(111 ) (379 )
Proceeds from sales of oil and gas properties
409 2
Net cash used in investing activities
(72,571 ) (121,062 )
Cash flows from financing activities:

Proceeds from borrowings
93,923 165,272
Repayments of borrowings
(133,923 ) (119,099 )
Cash paid related to the exchange and cancellation of Class A Common Stock
(531 ) (827 )
Cash paid for finance leases
(125 ) (355 )
Deferred financing costs
0 (228 )
Net cash (used in) provided by financing activities
(40,656 ) 44,763
Net (decrease) increase in cash
(8,511 ) 9,440
Cash at beginning of period
13,822 376
Cash at end of period
$ 5,311 $ 9,816
Supplemental disclosure of cash flow information

Cash paid for:

Interest
$ 3,613 $ 4,235
Non-cash investing and financing activities:

Accrued capital expenditures
$ 2,213 $ 50,615
Lease asset additions - ASC 842
$ 0 $ 4,710
Asset retirement obligations
$ 44 $ 43

~~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 the United States.

Earthstone is the sole managing member of Earthstone Energy Holdings, LLC, a Delaware limited liability company (together with its wholly-owned consolidated subsidiaries, “EEH”), with a controlling interest in EEH. Earthstone, together with its wholly-owned subsidiary, Lynden Energy Corp., a corporation organized under the laws of British Columbia (“Lynden Corp”), and Lynden Corp’s wholly-owned consolidated subsidiary, Lynden USA Inc., a Utah corporation (“Lynden US”) and also a member of EEH, consolidates the financial results of EEH and records a noncontrolling interest in the Condensed Consolidated Financial Statements representing the economic interests of EEH's members other than Earthstone and Lynden US.

The accompanying unaudited Condensed Consolidated Financial Statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The accompanying unaudited Condensed Consolidated Financial Statements and notes should be read in conjunction with the financial statements and notes included in Earthstone’s ~~2019~~2020 Annual Report on Form 10~~-K.~~

10-K.

The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for the fair presentation of the Company's financial position, results of operations and cash flows for the periods presented. Any such adjustments are of a normal, recurring nature. The Company’s Condensed Consolidated Balance Sheet at December 31, ~~2019~~2020 is derived from the audited Consolidated Financial Statements at that date.

Certain prior period amounts have been reclassified to conform to current period presentation within the Condensed Consolidated Financial Statements. Prior period ad valorem taxes which were previously included in Lease operating expenses within the Operating Costs and Expenses section of the Condensed Consolidated Statements of Operations have been reclassified from Lease operating expenses and combined with the previously presented Severance taxes line-item and the combined total presented as Production and ad valorem taxes, also within Operating Costs and Expenses, in order to conform to current period presentation. Additionally, prior period legal expenses related to a previously completed transaction and previously included in General and administrative expense within Operating Costs and Expenses have been reclassified to Transaction costs, also within Operating Costs and Expenses, to conform to current period presentation. These reclassifications had no ~~effect on Income from operations or any other subtotal in the Condensed Consolidated Statements of Operations.~~

Recently Issued Accounting Standards

~~Intangibles – Goodwill and Other –~~ In ~~January 2017,~~ the Financial Accounting Standards Board (“FASB”) issued updated guidance simplifying the test for goodwill impairment. The update eliminates the requirement to determine the implied value of goodwill in measuring an impairment loss. Upon adoption, the measurement of a goodwill impairment will represent the excess of the reporting unit’s carrying value over its fair value and will be limited to the carrying value of goodwill. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The update is effective for annual and interim periods beginning after ~~December 15, 2019~~ ~~and early adoption is permitted for interim or annual goodwill impairment tests performed after~~ ~~January 1, 2017.~~ ~~The Company adopted the update effective~~ ~~January 1, 2020.~~ ~~See further discussion of goodwill in~~ ~~Note~~ ~~15.~~ ~~Goodwill~~.

~~Fair Value Measurements –~~ In ~~August 2018,~~ ~~the FASB issued an Accounting Standards Update (“ASU”) which modifies the disclosure requirements on fair value measurements in Topic~~ ~~820.~~ ~~The ASU is effective for fiscal years beginning after~~ ~~December 15, 2019~~ ~~and early adoption is permitted. The Company adopted the update effective~~ ~~January 1, 2020~~ ~~and the impact was~~ ~~not~~ ~~material to the Condensed Consolidated Financial Statements.~~

~~Credit Losses~~

Income Taxes - In ~~June 2016,~~ ~~the FASB issued an update that requires changes to the recognition of credit losses on financial instruments~~ ~~not~~ accounted for at fair value through net income, including loans, debt securities, trade receivables, net investments in leases and available-for-sale debt securities. The amended standard broadens the information that an entity must consider in developing its estimate of expected credit losses, requiring an entity to estimate credit losses over the life of an exposure based on historical information, current information and reasonable and supportable forecasts. The guidance is effective for interim and annual periods beginning after ~~December 15, 2019.~~ ~~The Company adopted the update effective~~ ~~January 1, 2020~~ ~~and the impact was~~ ~~not~~ ~~material to the Condensed Consolidated Financial Statements.~~

~~Income Taxes~~ ~~- In~~ December 2019, the FASB issued an update that simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and early adoption is permitted. The Company ~~is in~~adopted the ~~process of evaluating~~update effective January 1, 2021 and the impact ~~of this update, if any, on its Condensed~~was not material to the Consolidated Financial Statements.

Reference Rate Reform - In March 2020, the FASB issued an update that provides optional guidance for a limited period of time to ease the transition from LIBOR to an alternative reference rate. The ASU intends to address certain concerns relating to accounting for contract modifications and hedge accounting. These optional expedients and exceptions to applying GAAP, assuming certain criteria are met, are allowed through December 31, 2022. The Company is currently evaluating the provisions of this update and has not yet determined whether it will elect the optional expedients. The Company does not expect the transition to an alternative rate to have a material impact on its business, operations or liquidity.

~~Table of Contents~~

~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Note 2. Fair Value Measurements

FASB Accounting Standards Codification (“ASC”) Topic 820, defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. ASC 820 provides a framework for measuring fair value, establishes a ~~three~~~~-level~~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~~three-level fair value hierarchy for disclosure of fair value measurements defined by ASC 820 is as follows:

Level 1– Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2– Inputs, other than quoted prices within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Table of Contents
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Level 3– Prices or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation under Level 3 generally involves a significant degree of judgment from management.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or parameters or derived from such 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 ~~nine~~six months ended ~~September~~June 30, ~~2020~~.

2021.

Fair Value on a Recurring Basis

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.

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

September 30, 2020

Level 1

Level 2

Level 3

Total

Financial assets

Derivative asset - current
$ 0 $ 25,097 $ 0 $ 25,097
Derivative asset - noncurrent
0 4,727 0 4,727
Total financial assets
$ 0 $ 29,824 $ 0 $ 29,824

Financial liabilities

Derivative liability - current
$ 0 $ 1,040 $ 0 $ 1,040
Derivative liability - noncurrent
0 577 0 577
Total financial liabilities
$ 0 $ 1,617 $ 0 $ 1,617

December 31, 2019

Financial assets

Derivative asset - current
$ 0 $ 8,860 $ 0 $ 8,860
Derivative asset - noncurrent 0 770 0 770
Total financial assets
$ 0 $ 9,630 $ 0 $ 9,630

Financial liabilities

Derivative liability - current
$ 0 $ 6,889 $ 0 $ 6,889
Derivative liability - noncurrent
0 0 0 0
Total financial liabilities
$ 0 $ 6,889 $ 0 $ 6,889


June 30, 2021	Level 1		Level 2		Level 3		Total
Financial assets
Derivative asset - current	$	0	$	72	$	0	$	72
Derivative asset - noncurrent	0		694		0		694
Total financial assets	$	0	$	766	$	0	$	766

Financial liabilities
Derivative liability - current	$	0	$	57,957	$	0	$	57,957
Derivative liability - noncurrent	0		5,401		0		5,401
Total financial liabilities	$	0	$	63,358	$	0	$	63,358

December 31, 2020
Financial assets
Derivative asset - current	$	0	$	7,509	$	0	$	7,509
Derivative asset - noncurrent	0		396		0		396
Total financial assets	$	0	$	7,905	$	0	$	7,905

Financial liabilities
Derivative liability - current	$	0	$	1,135	$	0	$	1,135
Derivative liability - noncurrent	0		173		0		173
Total financial liabilities	$	0	$	1,308	$	0	$	1,308

Other financial instruments include cash, accounts receivable and payable, and revenue royalties. The carrying amount of these instruments approximates fair value because of their short-term nature. The Company’s long-term debt obligation bears interest at floating market rates, therefore carrying amounts and fair value are approximately equal.

Fair Value on a Nonrecurring Basis

The Company applies the provisions of the fair value measurement standard on a non-recurring basis to its non-financial assets and liabilities, including oil and gas properties, goodwill, business combinations, asset retirement obligations and performance

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

units. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments if events or changes in certain circumstances indicate that adjustments may be necessary. Due to significant declines in commodity prices and global demand for oil and natural gas products resulting from the ~~COVID-~~19COVID-19 pandemic, the Company assessed the fair values of its oil and natural gas properties and goodwill resulting in non-cash impairment charges during the ~~nine~~three months ended ~~September~~March 31, 2020. No such triggering events that require further assessment were observed during the six months ended June 30, ~~2020~~.2021. See further discussion in Note 4. ~~Asset Impairments~~5. Oil and Natural Gas Properties.

~~Table of Contents~~

~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Note 3. Derivative Financial Instruments

Commodity Derivative Instruments

The Company’s hedging activities primarily consist of derivative instruments entered into in order to hedge against changes in oil and natural gas prices through the use of fixed price swap agreements. Swaps exchange floating price risk in the future for a fixed price at the time of the hedge. Costless collars set both a maximum (sold ceiling) and a minimum (bought floor) future price. Consistent with its hedging policy, the Company has entered into a series of derivative instruments to hedge a significant portion of its expected oil and natural gas production through December 31, ~~2021.~~ 2022. 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’s derivative instruments are cash flow hedge transactions in which it is hedging the variability of cash flow related to a forecasted transaction.~~ The Company does not enter into derivative instruments for trading or other speculative purposes.

These transactions are recorded in the Condensed Consolidated Financial Statements in accordance with FASB ASC Topic 815. The Company has accounted for these transactions using the mark-to-market accounting method. Generally, the Company incurs accounting losses on derivatives during periods where prices are rising and gains during periods where prices are falling which may cause significant fluctuations in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations.

The Company nets its derivative instrument fair value amounts executed with each counterparty pursuant to an International Swap Dealers Association Master Agreement (“ISDA”), which provides for net settlement over the term of the contract. The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.

The Company had the following open crude oil and natural gas derivative contracts as of ~~September~~June 30, ~~2020~~:

Price Swaps

Volume

Weighted Average Price

Period

Commodity

(Bbls / MMBtu)

($/Bbl / $/MMBtu)

Q4 2020

Crude Oil
552,000 $ 60.65
Q1 - Q4 2021

Crude Oil
1,460,000 $ 55.16
Q4 2020

Crude Oil Basis Swap (1)
598,000 $ (1.50 )
Q4 2020

Crude Oil Basis Swap (2)
92,000 $ 2.55
Q4 2020

Crude Oil Roll Swap (3)
552,000 $ (1.79 )
Q1 - Q4 2021

Crude Oil Basis Swap (1)
1,825,000 $ 1.05
Q4 2020

Natural Gas
644,000 $ 2.85
Q1 - Q4 2021

Natural Gas
4,380,000 $ 2.76
Q4 2020

Natural Gas Basis Swap (4)
644,000 $ (1.07 )
Q1 - Q4 2021

Natural Gas Basis Swap (4)
4,380,000 $ (0.45 )

(1)

~~The basis differential price is between WTI Midland Crude and the WTI NYMEX.~~

(2)

~~The basis differential price is between WTI Houston and the WTI NYMEX.~~

(3)

~~The swap is between WTI Roll and the WTI NYMEX.~~

(4)

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

2021:

Price Swaps
Period Commodity Volume
(Bbls / MMBtu) Weighted Average Price
($/Bbl / $/MMBtu)
Q3 - Q4 2021 Crude Oil 1,693,400 $ 49.10
Q1 - Q4 2022 Crude Oil 1,732,250 $ 53.64
Q3 - Q4 2021 Crude Oil Basis Swap (1) 1,509,400 $ 0.80
Q3 - Q4 2021 Crude Oil Roll Swap (2) 474,650 $ (0.26)
Q1 - Q4 2022 Crude Oil Basis Swap (1) 2,007,500 $ 0.68
Q3 - Q4 2021 Natural Gas 4,904,000 $ 2.87
Q1 - Q4 2022 Natural Gas 4,295,000 $ 2.92
Q3 - Q4 2021 Natural Gas Basis Swap (3) 5,026,000 $ (0.30)
Q1 - Q4 2022 Natural Gas Basis Swap (3) 7,725,000 $ (0.24)

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

(2)The swap is between WTI Roll and the WTI NYMEX.

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

Table of Contents
EARTHSTONE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Costless Collars
Period Commodity Volume
(Bbls / MMBtu) Sold Ceiling
($/Bbl / $/MMBtu) Bought Floor
($/Bbl / $/MMBtu)
Q1 - Q4 2022 Crude Oil Costless Collar 365,000 $ 68.75 $ 55.00
Q3 - Q4 2021 Natural Gas Costless Collar 122,000 $ 4.10 $ 3.50
Q1 2022 Natural Gas Costless Collar 1,080,000 $ 3.75 $ 3.17

Interest Rate Swaps

At times, the Company’s hedging activities include the use of interest rate swaps entered into in order to manage cash flow variability resulting from changes in interest rates. These derivative instruments are not accounted for under hedge accounting.

The Company had the following interest rate swaps as of ~~September~~June 30, ~~2020~~:

Effective Dates

Notional Amount

Fixed Rate

May 5, 2020 to May 5, 2022
$ 125,000,000 0.286 %
May 5, 2022 to May 5, 2023
$ 100,000,000 0.286 %
May 5, 2023 to May 7, 2024
$ 75,000,000 0.286 %

~~Table of Contents~~

2021:

~~EARTHSTONE ENERGY, INC.~~


Effective Dates	Notional Amount	Fixed Rate
May 5, 2020 to May 5, 2022	$125,000,000	0.286	%
May 5, 2022 to May 5, 2023	$100,000,000	0.286	%
May 5, 2023 to May 7, 2024	$75,000,000	0.286	%

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

September 30, 2020

December 31, 2019

Derivatives not

Gross

Net

Gross

Net

designated as hedging

Balance

Recognized

Gross

Recognized

Recognized

Gross

Recognized

contracts under ASC

Sheet

Assets /

Amounts

Assets /

Assets /

Amounts

Assets /

Topic 815

Location

Liabilities

Offset

Liabilities

Liabilities

Offset

Liabilities

Commodity contracts

Derivative asset - current
$ 26,773 $ (1,676 ) $ 25,097 $ 13,321 $ (4,461 ) $ 8,860
Commodity contracts

Derivative liability - current
$ 2,539 $ (1,676 ) $ 863 $ 11,350 $ (4,461 ) $ 6,889
Interest rate swaps

Derivative liability - current
$ 177 $ 0 $ 177 $ 0 $ 0 $ 0
Commodity contracts

Derivative asset - noncurrent
$ 4,727 $ 0 $ 4,727 $ 1,031 $ (261 ) $ 770
Commodity contracts

Derivative liability - noncurrent
$ 355 $ 0 $ 355 $ 261 $ (261 ) $ 0
Interest rate swaps

Derivative liability - noncurrent
$ 222 $ 0 $ 222 $ 0 $ 0 $ 0


		June 30, 2021						December 31, 2020
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	$	2,127	$	(2,055)	$	72	$	11,071	$	(3,562)	$	7,509
Commodity contracts	Derivative liability - current	$	59,820	$	(2,055)	$	57,765	$	4,492	$	(3,562)	$	930
Interest rate swaps	Derivative liability - current	$	192	$	0	$	192	$	205	$	0	$	205
Commodity contracts	Derivative asset - noncurrent	$	856	$	(617)	$	239	$	396	$	0	$	396
Commodity contracts	Derivative liability - noncurrent	$	6,018	$	(617)	$	5,401	$	0	$	0	$	0
Interest rate swaps	Derivative asset - noncurrent	$	455	0		455		$	0	$	0	$	0
Interest rate swaps	Derivative liability - noncurrent	$	0	$	0	$	0	$	173	$	0	$	173

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Three Months Ended

Nine Months Ended

Derivatives not designated as hedging contracts under ASC Topic 815

September 30,

September 30,

Statement of Cash Flows Location

Statement of Operations Location

2020

2019

2020

2019

Unrealized (loss) gain

Not separately presented

Not separately presented
$ (14,543 ) $ 15,021 $ 25,466 $ (33,332 )
Realized gain

Operating portion of net cash received in settlement of derivative contracts

Not separately presented
8,503 3,705 47,599 13,660

Total (loss) gain on derivative contracts, net

(Loss) gain on derivative contracts, net
$ (6,040 ) $ 18,726 $ 73,065 $ (19,672 )


Derivatives not designated as hedging contracts under ASC Topic 815			Three Months Ended June 30,				Six Months Ended June 30,
	Statement of Cash Flows Location	Statement of Operations Location	2021		2020		2021		2020
Unrealized (loss) gain	Not separately presented	Not separately presented	$	(36,653)	$	(50,036)	$	(59,011)	$	40,009
Realized (loss) gain	Operating portion of net cash (paid) received in settlement of derivative contracts	Not separately presented	(14,522)		29,357		(25,427)		39,096
	Total (loss) gain on derivative contracts, net	(Loss) gain on derivative contracts, net	$	(51,175)	$	(20,679)	$	(84,438)	$	79,105

Included in Accounts receivable under the subheading of Joint interest billings and other in the Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are ~~$3.6~~$0.03 million and ~~$0.6~~$2.3 million, respectively, related to commodity hedge contracts settled as of that date for which the cash has not been received.

Note 4. ~~Asset Impairments~~

Acquisitions

IRM Acquisition

As part of the execution of its growth strategy to further increase its scale, on January 7, 2021, the Company completed the acquisition (the “IRM Acquisition”) of all of the issued and outstanding limited liability company interests in Independence Resources Management, LLC (“IRM”) and certain wholly owned subsidiaries for consideration consisting of the following: (i) net cash of approximately $134.3 million (the “Cash Consideration”) and (ii) 12,719,594 shares of the Company’s Class A common stock, $0.001 par value per share (“Class A Common Stock”). The fair value of each share of Class A Common Stock was determined using the closing price of $6.02 per share on January 7, 2021. The purchase agreement contains customary representations and warranties for transactions of this nature. The Company ~~had~~has obtained representation and warranty insurance to provide coverage in the ~~following non-cash asset impairment charges~~event of certain breaches of representations and warranties of the seller contained in the purchase agreement, which will be subject to various exclusions, deductibles and other terms and conditions set forth therein.

The IRM Acquisition has been accounted for as a business combination using the ~~three~~acquisition method of accounting, with Earthstone identified as the acquirer. The preliminary allocation of the total purchase price in the IRM Acquisition is based upon management’s estimates of and ~~nine~~ ~~months ended~~ ~~September 30, 2020~~ (inassumptions 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 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,):

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

Proved property
$ 0 $ 25,252
Unproved property
2,115 19,676
Goodwill
0 17,620
Impairment expense
$ 2,115 $ 62,548

~~See further discussion of non-cash asset impairment charges to Proved property~~ except share amounts and ~~Unproved property in~~ ~~Note~~ 5. ~~Oil and Natural Gas Properties~~ ~~and non-cash asset impairment charges to Goodwill in~~ ~~Note~~ ~~15.~~ ~~Goodwill~~.

~~The Company did~~ ~~not~~ ~~record any impairments during the~~ ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2019~~.

stock price):

1114

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


Consideration:
Shares of Earthstone Class A Common Stock issued	12,719,594
Earthstone Class A Common Stock price as of January 7, 2021	$	6.02
Class A Common Stock consideration	76,572
Cash consideration (1)	137,302

Total consideration transferred	$	213,874

Fair value of assets acquired:
Cash	$	2,992
Other current assets	10,925
Oil and gas properties	226,148
Other non-current assets	258
Amount attributable to assets acquired	$	240,323

Fair value of liabilities assumed:
Derivative liability - current	$	10,177
Other current liabilities	5,985
Asset retirement obligation - noncurrent	10,287
Amount attributable to liabilities assumed	$	26,449

(1)Net cash consideration of $134.3 million consists of $137.3 million gross cash remitted at closing less $3.0 million of cash acquired.

The following unaudited supplemental pro forma condensed results of operations present consolidated information as though the IRM Acquisition had been completed as of January 1, 2020. The unaudited supplemental pro forma financial information was derived from the historical consolidated and combined statements of operations for IRM and Earthstone and adjusted to include depletion expense applied to the adjusted basis of the properties acquired. These unaudited supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future. Future results may vary significantly from the results reflected in this unaudited pro forma financial information (in thousands, except per share amounts):


	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2020		2021		2020
Revenue	$	38,311	$	166,939	$	103,844
Loss before taxes	(47,272)		$	(28,823)	41,494
Net loss	(46,083)		$	(28,019)	41,178
Less: Net loss attributable to noncontrolling interest	(20,853)		$	(12,413)	18,556
Net loss attributable to Earthstone Energy, Inc.	(25,230)		$	(15,606)	22,622
Pro forma net (loss) income per common share attributable to Earthstone Energy, Inc.:
Basic and diluted	$	(0.60)	$	(0.34)	$	0.53

The Company has included in its Condensed Consolidated Statements of Operations, revenues of $24.0 million and operating expenses of $10.6 million for the three months ended June 30, 2021 and revenues of $44.3 million and operating expenses of $24.1 million for the period January 7, 2021 to June 30, 2021 related to the IRM Acquisition. During the three and six months ended June 30, 2021, the Company recorded $0.5 million and $3.8 million, respectively, of legal and professional fees, and

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

employee severance costs related to the IRM Acquisition which are included in Transaction costs in the Condensed Consolidated Statements of Operations.

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.

Eagle Ford Acquisitions

In May and June 2021, the Company completed acquisitions of working interests in certain assets it operates located in southern Gonzales County, Texas (collectively, the “Eagle Ford Acquisitions”) from 4 separate sellers. The aggregate purchase price of the Eagle Ford Acquisitions was approximately $48.0 million. One of the 4 separate sellers was a related party. See Note 12. Related Party Transactions for further discussion.

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 “Acquisitions”) certain well-bore interests and related equipment (the “Sequel Assets”). In April 2021, the Company paid approximately $8.2 million in earnest money deposits in connection with the Acquisitions. These deposits are included in Other noncurrent assets in the Condensed Consolidated Balance Sheets as of June 30, 2021 and the cash outflows for these deposits are included in Acquisition of oil and gas properties, net of cash acquired in the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021.

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 the following: (i) $22.5 million in cash, net of preliminary and customary purchase price adjustments and remains subject to final post-closing settlement between EEH and the Seller, and (ii) 4.7 million shares of Class A Common Stock. Also, on July 20, 2021, Earthstone, EEH and Sequel consummated the transactions contemplated in the Sequel Agreement. At the closing of the Sequel Agreement, among other things, EEH acquired the Sequel Assets for aggregate consideration consisting of the following: (i) $45.3 million in cash, net of preliminary and customary purchase price adjustments and remains subject to final post-closing settlement between EEH and the Seller, and (ii) 1.5 million shares of Class A Common Stock valued at $9.97 per share at the closing of the transaction. The Significant Shareholder, as described below, owned approximately 49% of Tracker as of the closing of the transaction. See Note 12. Related Party Transactions for further discussion.

The Acquisitions will be accounted for as asset acquisitions in accordance with ASC Topic 805, Business Combinations (referred to as “ASC 805”). The fair value of the consideration paid by the Company and allocation of that amount to the underlying Tracker Assets and Sequel Assets acquired, on a relative fair value basis, will be recorded as of July 20, 2021. Additionally, costs directly related to the Acquisitions will be capitalized as a component of the purchase price. The operating results of Tracker and Sequel will be incorporated into the Company's interim Condensed Consolidated Financial Statements for the three months ended September 30, 2021.

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.

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The Company’s lease acquisition costs and development costs of proved oil and natural gas properties are amortized using the units-of-production method, at the field level, based on total proved reserves and proved developed reserves, respectively. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~,2021, depletion expense for oil and gas producing property and related equipment was ~~$28.4~~$25.9 million and ~~$75.7~~$50.1 million, respectively. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~,2020, depletion expense for oil and gas producing property and related equipment was ~~$13.9~~$22.8 million and ~~$41.7~~$47.3 million, respectively.

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

NaN impairments were recorded to the Company's oil and natural gas properties during the three or six months ended June 30, 2021.

During the three months ended ~~March 31,~~June 30, 2020,~~as a result of the recent decline in crude oil price futures,~~ the Company recorded non-cash impairment charges of ~~$25.3~~$0.1 million ~~to its proved oil and natural gas properties and $11.3 million to its unproved oil and natural gas properties, located in the Eagle Ford Trend.~~ No ~~such impairments were recorded in the~~ ~~three~~ ~~months ended~~ ~~September 30, 2020~~~~. As a result of certain acreage expirations, the Company recorded non-cash impairment charges of $2.1 million and $8.4 million to its unproved oil and natural gas properties during the~~ ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2020~~~~, respectively.~~

~~The Company did~~ ~~not~~ ~~record any impairments~~ to its oil and natural gas properties ~~for~~due to acreage expirations. During the ~~three~~ ~~and~~ ~~nine~~six months ended ~~September~~June 30, ~~2019~~.

~~Capitalized costs,~~2020, as a result of the decline in crude oil price futures at the time, the Company recorded the following non-cash impairment ~~and depreciation, depletion and amortization relating~~charges:


(In thousands)	Eagle Ford Trend		Midland Basin		Corporate		Total
Proved properties	$	25,252	$	0	$	0	$	25,252
Unproved properties	11,311		0		0		11,311
Acreage expirations (1)	431		5,819		0		6,250
Goodwill	0		0		17,620		17,620
	$	36,994	$	5,819	$	17,620	$	60,433

(1)Impairments in unproved properties resulting from acreage deemed expired (not planned to ~~the Company’s oil and natural gas properties as of~~ ~~September 30, 2020~~ ~~and~~ ~~December 31, 2019~~~~, are summarized below (~~~~in thousands~~):

September 30,

December 31,

2020

2019

Oil and gas properties, successful efforts method:

Proved properties
$ 1,096,318 $ 1,046,208
Accumulated impairment to proved properties
(100,652 ) (75,400 )
Proved properties, net of accumulated impairments
995,666 970,808
Unproved properties
301,847 305,961
Accumulated impairment to Unproved properties
(65,365 ) (45,690 )
Unproved properties, net of accumulated impairments
236,482 260,271
Land
5,382 5,382
Total oil and gas properties, net of accumulated impairments
1,237,530 1,236,461
Accumulated depreciation, depletion and amortization
(271,012 ) (195,567 )
Net oil and gas properties
$ 966,518 $ 1,040,894

~~Table of Contents~~

be renewed).

~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Note 6. Noncontrolling Interest

Earthstone consolidates the financial results of EEH and its subsidiaries and records a noncontrolling interest for the economic interest in Earthstone held by the members of EEH other than Earthstone and Lynden US. Net (loss) income attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~ 2021 and ~~2019~~2020 represents the portion of net (loss) income attributable to the economic interest in the Company held by the members of EEH other than Earthstone and Lynden US. Noncontrolling interest in the Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 represents the portion of net assets of the Company attributable to the members of EEH other than Earthstone and Lynden US.

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table presents the changes in noncontrolling interest for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~:

EEH Units Held

Total EEH

By Earthstone

EEH Units Held

Units

and Lynden US

%

By Others

%

Outstanding

As of December 31, 2019
29,421,131 45.5 % 35,260,680 54.5 % 64,681,811
EEH Units and Class B Common Stock converted to Class A Common Stock
251,309 (251,309 ) 0
EEH Units issued in connection with the vesting of restricted stock units
538,309 0 538,309
As of September 30, 2020
30,210,749 46.3 % 35,009,371 53.7 % 65,220,120

2021:


	EEH Units Held By Earthstone and Lynden US	%		EEH Units Held By Others	%		Total EEH Units Outstanding
As of December 31, 2020	30,343,421	46.4	%	35,009,371	53.6	%	65,352,792
EEH Units issued in connection with the IRM Acquisition	12,719,594			0			12,719,594
EEH Units and Class B Common Stock converted to Class A Common Stock	611,494			(611,494)			0
EEH Units issued in connection with the vesting of restricted stock units and performance-based units	618,553			0			618,553
As of June 30, 2021	44,293,062	56.3	%	34,397,877	43.7	%	78,690,939

Note 7. Net (Loss) Income Per Common Share

Net (loss) income per common share—basic is calculated by dividing Net (loss) income by the weighted average number of shares of common stock outstanding during the period. Net (loss) income per common share—diluted assumes the conversion of all potentially dilutive securities and is calculated by dividing Net (loss) income by the sum of the weighted average number of shares of common stock, as defined above, outstanding plus potentially dilutive securities. Net (loss) income per common share—diluted considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares, as defined above, would have an anti-dilutive effect.

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands, except per share amounts)

2020

2019

2020

2019

Net (loss) income attributable to Earthstone Energy, Inc.
$ (5,445 ) $ 11,770 $ (5,076 ) $ 3,343

Net (loss) income per common share attributable to Earthstone Energy, Inc.:

Basic
$ (0.18 ) $ 0.41 $ (0.17 ) $ 0.12
Diluted
$ (0.18 ) $ 0.41 $ (0.17 ) $ 0.12

Weighted average common shares outstanding

Basic
30,073,635 29,032,842 29,810,705 28,883,907
Add potentially dilutive securities:

Unvested restricted stock units (1)
0 0 0 0
Unvested performance units (1)
0 0 0 0
Diluted weighted average common shares outstanding
30,073,635 29,032,842 29,810,705 28,883,907

(1)


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share amounts)	2021		2020		2021		2020
Net (loss) income attributable to Earthstone Energy, Inc.	$	(8,871)	$	(16,339)	$	(14,704)	$	369

Net (loss) income per common share attributable to Earthstone Energy, Inc.:
Basic	$	(0.20)	$	(0.55)	$	(0.34)	$	0.01
Diluted	$	(0.20)	$	(0.55)	$	(0.34)	$	0.01

Weighted average common shares outstanding
Basic	44,127,718		29,858,162		43,457,043		29,677,795
Add potentially dilutive securities:
Unvested restricted stock units (1)	0		0		0		0
Unvested performance units (1)	0		0		0		0
Diluted weighted average common shares outstanding	44,127,718		29,858,162		43,457,043		29,677,795

(1)For the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~ ~~and~~ ~~2019,~~2021, the Company had 0no dilutive effect related to unvested restricted stock units or performance units due to the loss for the period. For the three and six months ended June 30, 2020, the Company had no dilutive effect related to unvested restricted stock units or performance units as, under the treasury stock method, the proceeds from the average unrecognized expense for ~~both during these periods~~the period were in excess of the weighted average outstanding fair value for the unvested shares for the same ~~periods.~~

period.

The Class B common stock, $0.001 par value per share of Earthstone (the “Class B Common Stock”), has been excluded, as its conversion would eliminate noncontrolling interest and net loss attributable to noncontrolling interest of $7.0 million for the three months ended June 30, 2021 and net loss attributable to noncontrolling interest of $11.7 million for the six months ended June 30, 2021 would be added back to Net (loss) income attributable to Earthstone Energy, Inc. for the periods then ended, having 0 dilutive effect on Net (loss) income per common share attributable to Earthstone Energy, Inc.

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Class B Common Stock has been excluded, as its conversion would eliminate noncontrolling interest and net loss attributable to noncontrolling interest of ~~$6.4~~$19.6 million for the three months ended ~~September~~June 30, 2020 and net ~~loss~~income attributable to noncontrolling interest of ~~$6.0~~$0.4 million for the ~~nine~~six months ended ~~September~~June 30, 2020 would be added back to Net (loss) income attributable to Earthstone Energy, Inc. for the periods then ended, having no0 dilutive effect on Net (loss) income per common share attributable to Earthstone Energy, Inc.

~~Class B~~

Note 8. Common Stock ~~has been excluded, as its conversion would eliminate noncontrolling interest and net income attributable to noncontrolling interest of $14.4 million for the~~ ~~three~~ ~~months ended~~ ~~September 30, 2019~~ ~~and net income attributable to noncontrolling interest of $3.9 million for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2019~~ ~~would be added back to Net (loss) income attributable to Earthstone Energy, Inc. for the periods then ended, having~~ no ~~dilutive effect on Net (loss) income per common share attributable to Earthstone Energy, Inc.~~

~~Table of Contents~~

~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~Note~~ 8. ~~Common Stock~~

Class A Common Stock

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~,2020, there were ~~30,210,749~~44,293,062 and ~~29,421,131~~30,343,421 shares of Class A Common Stock issued and outstanding, respectively. 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. On March 18, 2021, as a result of the vesting and settlement of performance units under the Earthstone Energy, Inc. Amended and Restated 2014 Long-Term Incentive Plan, as amended (the “2014 Plan”), Earthstone issued 455,000 shares of Class A Common Stock, of which 178,453 shares of Class A Common Stock were retained as treasury stock and canceled to satisfy the related employee income tax liability. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~,2021, as a result of the vesting and settlement of restricted stock units and performance units under the ~~Earthstone Energy, Inc. Amended and Restated~~ 2014 ~~Long-Term Incentive~~ Plan, ~~as amended (the~~ ~~“2014~~ ~~Plan”),~~ Earthstone issued ~~195,344~~221,401 and ~~726,082~~487,660 shares, respectively, of Class A Common Stock, of which ~~54,268~~66,343 and ~~187,773~~145,654 shares, respectively, of Class A Common Stock were retained as treasury stock and canceled to satisfy the related employee income tax liability. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~,2020, as a result of the vesting and settlement of restricted stock units under the 2014 Plan, Earthstone issued ~~167,827~~223,209 and ~~569,883~~530,738 shares, respectively, of Class A Common Stock, of which ~~49,111~~57,810 and ~~151,716~~133,505 shares, respectively, of Class A Common Stock were retained as treasury stock and canceled to satisfy the related employee income tax liability. Additionally, as discussed below, shares of Class A Common Stock were issued as the result of conversions of Class B Common Stock.

Class B Common Stock

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~,2020, there were ~~35,009,371~~34,397,877 and ~~35,260,680~~35,009,371 shares of Class B Common Stock issued and outstanding, respectively. Each share of Class B Common Stock, together with 1 EEH Unit, is convertible into 1 share of Class A Common Stock. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~~~, 49,316~~2021, 33,463 and ~~251,309~~611,494 shares, respectively, of Class B Common Stock and EEH Units were exchanged for an equal number of shares of Class A Common Stock. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~~~, 35,732~~2020, 2,000 and 201,993 shares, respectively, of Class B Common Stock and EEH Units were exchanged for an equal number of shares of Class A Common Stock.

Note 9. Stock-Based Compensation

Restricted Stock Units

The 2014 Plan, allows, among other things, for the grant of restricted stock units (“RSUs”). As of ~~September~~June 30, ~~2020~~,2021, the maximum number of shares of Class A Common Stock that may be issued under the 2014 Plan was 9.4 million shares.

On July 20,2021, at Earthstone’s annual meeting of stockholders, Earthstone’s stockholders approved and adopted an amendment to the 2014 Plan which increased the maximum number of shares of Class A Common Stock that may be issued under the 2014 Plan to 12.0 million shares.

Each RSU represents the contingent right to receive 1 share of Class A Common Stock. The holders of outstanding RSUs do not receive dividends or have voting rights prior to vesting and settlement. The Company determines the fair value of granted RSUs based on the market price of the Class A Common Stock on the date of the grant. Compensation expense for granted RSUs is recognized on a straight-line basis over the vesting and is net of forfeitures, as incurred. Stock-based compensation is included in General and administrative expense in the Condensed Consolidated Statements of Operations and is recorded with a corresponding increase in Additional paid-in capital within the Condensed Consolidated Balance Sheets.

The table below summarizes RSU award activity for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~:

Shares

Weighted-Average Grant Date Fair Value

Unvested RSUs at December 31, 2019
1,107,796 $ 6.60
Granted
568,900 $ 5.15
Forfeited (1,083 ) $ 5.19
Vested
(726,082 ) $ 6.43
Unvested RSUs at September 30, 2020
949,531 $ 5.86

2021:


	Shares	Weighted-Average Grant Date Fair Value
Unvested RSUs at December 31, 2020	1,050,908	$	5.55
Granted	548,100	$	5.34

Vested	(487,660)	$	5.81
Unvested RSUs at June 30, 2021	1,111,348	$	5.34

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of ~~September~~June 30, ~~2020~~,2021, there was ~~$5.4~~$5.9 million of unrecognized compensation expense related to the RSU awards which will be recognized over a weighted average period of ~~0.85~~0.92 years.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~,2021, Stock-based compensation related to RSUs was $1.2 million and ~~$4.2~~$2.7 million, respectively. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~,2020, Stock-based compensation related to RSUs was ~~$1.4~~$1.3 million and ~~$4.5~~$3.0 million, respectively.

~~Table of Contents~~

~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Performance Units

The table below summarizes performance unit (“PSU”) activity for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~:

Shares

Weighted-Average Grant Date Fair Value

Unvested PSUs at December 31, 2019
835,625 $ 10.51
Granted
1,043,800 $ 5.36
Unvested PSUs at September 30, 2020
1,879,425 $ 7.65

2021:


	Shares	Weighted-Average Grant Date Fair Value
Unvested PSUs at December 31, 2020	1,879,425	$	7.65
Granted	1,099,800	$	10.85

Vested	(227,500)	$	13.75
Unvested PSUs at June 30, 2021	2,751,725	$	8.42

On January ~~30, 2020,~~ 27, 2021, the Board of Directors of Earthstone (the “Board”) granted ~~1,043,800~~1,099,800 PSUs (the ~~“2020~~“2021 PSUs”) to certain officers pursuant to the 2014 Plan (the ~~“2020~~“2021 Grant”). The ~~2020~~ ~~Grant was subject to the approval of an amendment to the~~ ~~2014~~ ~~Plan to increase the number of available shares available thereunder (the~~ ~~“2014~~ ~~Plan Amendment”). The~~ ~~2014~~ ~~Plan Amendment was approved at the~~ ~~2020~~ ~~annual meeting of stockholders held on~~ ~~June 3, 2020.~~ ~~The~~ ~~2020~~2021 PSUs are payable in ~~shares of Class A Common Stock~~cash based upon the achievement by the Company over a period commencing on ~~February~~January 1, ~~2020~~ 2021 and ending on ~~January~~December 31, 2023 (~~the~~(the “Performance Period”) of certain performance criteria established by the Board.

The ~~2020~~Company classifies these awards that will be settled in cash as liability awards. All previous PSU grants will be settled in shares and are classified as equity awards.

The 2021 PSUs are eligible to be earned based on the annualized Total Shareholder Return (“TSR”) of the Class A Common Stock during a ~~three~~~~-year~~three-year period beginning on February 1, ~~2020.~~ 2021. 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~~ ~~2020~~ ~~PSUs are earned, such additional PSUs~~ ~~may~~ ~~be paid in cash rather than the issuance of shares of Class A Common Stock. Based on the COVID-~~19 ~~pandemic and the recent commodity price crash, the Company believes that the target annualized TSR of~~ ~~14.5%~~ ~~included in the~~ ~~2020~~ ~~PSU awards will be difficult to achieve.~~


Earthstone’s Annualized TSR						TSR Multiplier
20.5% or greater						2
14.5%						1
7.7%						0.5
Less than 7.7%						0

The Company accounts for these awards as market-based awards which are valued quarterly utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes grant date fair value based on the most likely outcome. For the ~~2020~~2021 PSUs, assuming a risk-free rate of ~~1.4%~~0.3% and volatility of ~~62.0%~~86.0%, the Company calculated the weighted average grant date fair value per PSU to be ~~$5.36.~~

$10.85. Based on the fair value of the 2021 PSUs, the Company recorded stock-based compensation expense of $2.3 million and $3.0 million during the three and six months ended June 30, 2021, respectively. A corresponding liability of $3.0 million related to the 2021 PSUs is included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of June 30, 2021.

On February 28, 2018, the Board granted 252,500 PSUs to certain named executive officers pursuant to the 2014 Plan. The PSUs were payable in shares of Class A Common Stock based upon the achievement by the Company over a period commencing on February 28, 2018 and ending on February 28, 2021 of performance criteria established by the Board. On March 18, 2021, the Company settled the remaining 227,500, net of forfeitures, based on the achievement of the 200% target, resulting in the issuance of 455,000 shares of Class A Common Stock.

As of ~~September~~June 30, ~~2020~~,2021, there was ~~$7.3~~$21.4 million of unrecognized compensation expense related to ~~the~~all PSU awards which will be amortized over a weighted average period of ~~0.98~~1.18 years.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~,2021, Stock-based compensation related to ~~the~~all PSUs was approximately ~~$1.2~~$3.2 million and ~~$3.5~~$5.0 million, respectively. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~,2020, Stock-based compensation related to ~~the~~all PSUs was approximately ~~$0.8~~$1.3 million and ~~$2.2~~$2.3 million, respectively.

Note 10. Long-Term Debt

Credit Facility

1520

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~Note~~ ~~10.~~ ~~Long-Term Debt~~

~~Credit Facility~~

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

~~Concurrently with the effectiveness of the Credit Facility, the Company terminated that certain credit agreement, dated as of~~ ~~May 9, 2017 (~~the “Prior Credit Facility”), by and among the Borrower, Earthstone Operating, LLC, EF Non-Op, LLC, Sabine River Energy, LLC, Earthstone Legacy Properties, LLC, Lynden USA Operating, LLC, Bold Energy III LLC (“Bold”), Bold Operating, LLC, the guarantors party thereto, the lenders party thereto, and BOKF, as administrative agent.

On ~~March 27,~~December 17, 2020, in connection with a redetermination of the borrowing base under the Credit Facility, the borrowing base was set at $275 million, representing a 15% decrease from the previous borrowing base of $325 million.

On ~~September 28, 2020,~~ Earthstone, EEH, as Borrower, Wells Fargo, as Administrative Agent, the guarantors party thereto, and the ~~Lenders~~lenders party thereto (the “Lenders”) entered into an amendment (the ~~“Amendment”~~“Second Amendment”) to the credit agreement dated November 21, 2019, by and among EEH, as Borrower, Earthstone, as Parent, Wells Fargo, as Administrative Agent and Issuing Bank, BOKF, NA dba Bank of Texas, as Issuing Bank with respect to Existing Letters of Credit, Royal Bank of Canada, as Syndication Agent, Truist Bank, as successor by merger to SunTrust Bank, as Documentation Agent, and the Lenders party thereto (collectively, the “Parties”) to the Credit ~~Facility.~~Agreement. The Second Amendment was effective upon the closing of the IRM Acquisition described in Note 4. Acquisitions. Among other things, the Second Amendment ~~decreased~~(i) joined certain financial institutions as additional lenders, increased the borrowing base from ~~$275~~$240.0 million to ~~$240~~$360.0 million, (ii) increased the interest rate on outstanding ~~borrowings by 25~~borrowings; and (iii) adjusted some of the financial covenants.

On April 20, 2021, the Parties entered into an amendment (the “Third Amendment”) to ~~50 basis points,~~the Credit Agreement under which the borrowing base increased from $360 million to $475 million in connection with its regularly scheduled redetermination. Further, the ~~flexibility~~Third Amendment provided for an increase in the borrowing base from $475 million to ~~finance and make acquisitions, and added certain restrictions related to dividends and distributions.~~

$550 million which became effective on July 20, 2021 upon closing of the Tracker/Sequel Purchase Agreements described in Note 4. Acquisitions.

The next regularly scheduled redetermination of the borrowing base is expected to occur on or around ~~April~~October 1, 2021. Subsequent redeterminations ~~will~~are expected to occur on or about each May 1st and November 1st ~~and~~ ~~May~~ ~~1st~~ thereafter. The amounts borrowed under the Credit Facility bear annual interest rates at either (a) the adjusted LIBO Rate (as customarily defined) (the “Adjusted LIBO Rate”) plus ~~2.00%~~2.50% to ~~3.25%~~3.75% 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 LIBO Rate for an interest rate period of one month plus 1.0%, (ii) plus ~~1.00%~~1.50% to ~~2.25%~~2.75%, depending on the amount borrowed under the Credit Facility. Principal amounts outstanding under the Credit Facility are due and payable in full at maturity on November 21, 2024. All of the obligations under the Credit Facility, and the guarantees of those obligations, are secured by substantially all of EEH’s assets. Additional payments due under the Credit Facility include paying a commitment fee of 0.375% to 0.50% per year, depending on the amount borrowed under the Credit Facility, to the Lenders in respect of the unutilized commitments thereunder. EEH is also required to pay customary letter of credit fees.

Effective May 2020, the Company entered into certain interest rate swaps, exchanging the LIBO Rate for a fixed rate of 0.286% (the “Swap”). The initial notional amount of the Swap is $125 million through May 2022 and decreases to $100 million through May 2023 and $75 million through May 2024.

The Credit Facility 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 Facility requires EEH to maintain the following financial covenants: a current ratio, as defined, of not less than 1.0 to 1.0 and a consolidated leverage ratio of not greater than ~~4.0~~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)(x) other non-cash charges and minus (b) to the extent included in consolidated net income 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, 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 Facility contains customary affirmative covenants and defines events of default to include failure to pay principal or interest, breach of covenants, breach of representations and warranties, insolvency, judgment default and a change in control. Upon the occurrence and continuance of an event of default, the Lenders have the right to accelerate repayment of the loans and exercise their remedies with respect to the collateral. As of ~~September~~June 30, ~~2020~~,2021, EEH was in compliance with the covenants under the Credit Facility.

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of ~~September~~June 30, ~~2020~~~~, $130.0~~2021, $241.4 million of borrowings were outstanding, bearing annual interest of ~~2.658%~~3.347%, resulting in an additional ~~$110.0~~$233.6 million of borrowing base availability under the Credit Facility. At December 31, ~~2019~~,2020, there were ~~$170.0~~$115.0 million of borrowings outstanding under the Credit Facility.

For the ~~nine~~six months ended ~~September~~June 30, ~~2020~~,2021, under the Credit Facility, the Company had borrowings of ~~$93.9~~$360.1 million and ~~$133.9~~$233.7 million in repayments of borrowings.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~,2021, interest on borrowings under the Credit Facility averaged ~~2.48%~~3.33% and ~~2.89%~~3.36% per annum, respectively, which excluded commitment fees of $0.2 million and ~~$0.5~~$0.4 million, respectively, and amortization of deferred financing costs of $0.2 million and $0.3 million, respectively. For the three and six months ended June 30, 2020, interest on borrowings under the Credit Facility averaged 2.55% and 3.07% per annum, respectively, which excluded commitment fees of $0.1 million and $0.3 million, respectively, and amortization of deferred financing costs of $0.1 million and $0.2 million, respectively. ~~For the~~ ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2019~~, interest on borrowings under the Credit Facility averaged 4.38% and 4.53% per annum, respectively, which excluded commitment fees of $0.2 million and $0.5 million, respectively, and amortization of deferred financing costs of $0.1 million and $0.3 million, respectively.

The Company’s policy is to capitalize the financing costs associated with its debt and amortize those costs on a straight-line basis over the term of the associated debt. These capitalized costs are included in Other noncurrent assets in the Condensed Consolidated Balance Sheets. During the three and six months ended June 30, 2021, the Company capitalized $0.8 million and $1.8 million, respectively, of costs associated with the Credit Facility. NaN costs associated with the Credit Facility were capitalized during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~ ~~nor~~ ~~2019~~.

~~Table of Contents~~

2020.

~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Note 11. Asset Retirement Obligations

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

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

2020

Beginning asset retirement obligations
$ 2,164
Liabilities incurred
46
Accretion expense
137
Divestitures
(10 )
Revision of estimates
(2 )
Ending asset retirement obligations
$ 2,335


	2021
Beginning asset retirement obligations	$	3,027
Liabilities incurred	57
Liabilities settled	(53)
Acquisitions	10,866
Accretion expense	593
Divestitures	(37)
Revision of estimates	104
Ending asset retirement obligations	$	14,557

Note 12. Related Party Transactions

FASB ASC Topic 850, Related Party Disclosures, requires that information about transactions with related parties that would make a difference in decision making shall be disclosed so that users of the financial statements can evaluate their significance.

The Audit Committee of the Board of Directors of Earthstone independently reviews and approves all related party transactions.

Earthstone's ~~majority~~significant shareholder consists of various investment funds managed by a private equity firm who may manage other investments in entities with which the Company interacts in the normal course of ~~business.~~business (the “Significant Shareholder”). On February 12, 2020, the Company sold certain of its interests in oil and natural gas leases and wells in an arm’s length transaction to a portfolio company of ~~Earthstone’s majority shareholder (~~~~not~~the Significant Shareholder (not under common control) for cash consideration of approximately $0.4 million.

In connection with the Olenik v. Lodzinski et al. lawsuit described below in Note 13. Commitments and Contingencies ~~Earthstone’s majority shareholder~~, the Significant Shareholder was also named in the lawsuit. As a result of the Settlement Agreement (defined below), the Company has concluded negotiations with its insurance carrier regarding an allocation of defense costs and settlement contributions above its deductible for all the parties named in the lawsuit. In connection with the Court approved Settlement, the Significant Shareholder was billed approximately $1.1 million and this amount has been reimbursed as of June ~~2020,~~ 30, 2021.

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As discussed in Note 4. Acquisitions, on March 31, 2021, the Company ~~received $0.6~~entered into the Tracker/Sequel Purchase Agreements. The transactions contemplated by the Tracker/Sequel Purchase Agreements, were consummated on July 20, 2021, whereby the Company acquired the Tracker Assets for a purchase price of $22.5 million in ~~preliminary reimbursements from its majority shareholder~~cash and 4.7 million shares of the Company’s Class A Common Stock. The Significant Shareholder owned approximately 49% of Tracker as of ~~September 30, 2020~~ ~~recorded~~the closing of the Tracker Acquisition.

As discussed in Note 4. Acquisitions, during the second quarter of 2021, the Company completed the Eagle Ford Acquisitions. The aggregate purchase price of the Eagle Ford Acquisitions was approximately $48.0 million in cash. The Significant Shareholder controlled one of the 4 sellers. After participating in a ~~receivable in~~competitive sales process, the ~~amount of $0.6~~Company acquired the aforementioned assets for $8.2 million from ~~its majority shareholder based on estimated additional defense costs to finalize the settlement and the respective allocated portion of the settlement payments.~~

that related party entity.

Note 13. Commitments and Contingencies

Legal

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

Olenik v. Lodzinski et al.: On June 2, 2017, Nicholas Olenik filed a purported shareholder class and derivative action in the Delaware Court of Chancery against Earthstone’s Chief Executive Officer, along with other members of the Board, EnCap Investments L.P. (“EnCap”), Bold, Bold Holdings and Oak Valley Resources, LLC. The complaint ~~alleges~~alleged that Earthstone’s directors breached their fiduciary duties in connection with the contribution agreement dated as of November 7, 2016 and as amended on March 21, 2017 (~~the~~(the “Bold Contribution Agreement”), by and among Earthstone, EEH, Lynden US, Lynden USA Operating, LLC, Bold Holdings and Bold. The Plaintiff ~~asserts~~asserted that the directors negotiated the business combination pursuant to the Bold Contribution Agreement (the “Bold Transaction”) to benefit EnCap and its affiliates, failed to obtain adequate consideration for the Earthstone shareholders who were not affiliated with EnCap or Earthstone management, did not follow an adequate process in negotiating and approving the Bold Transaction and made materially misleading or incomplete proxy disclosures in connection with the Bold Transaction. The suit ~~seeks~~sought unspecified damages and ~~purports~~purported to assert claims derivatively on behalf of Earthstone and as a class action on behalf of all persons who held common stock up to March 13, 2017, excluding defendants and their affiliates. On July 20, 2018, the Delaware Court of Chancery granted the defendants’ motion to dismiss and entered an order dismissing the action in its entirety with prejudice. The Plaintiff filed an appeal with the Delaware Supreme Court. On April 5, 2019, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s dismissal of the proxy disclosure claims but reversed the Delaware Court of Chancery’s dismissal of the other claims, holding that the allegations with respect to those claims were sufficient for pleading purposes. After engaging in extensive pre-trial discovery, the parties engaged in a mediation process that resulted in a non-binding settlement term sheet on September 21, 2020. The term sheet ~~is being~~was translated into a Stipulation and Agreement of Compromise, Settlement and Release Agreement (the “Settlement Agreement”) between the parties and ~~will then be~~was filed with the Delaware Court of Chancery for approval. The principal terms of the ~~anticipated~~ Settlement Agreement are as follows: (i) a $3.5 million all-in cash settlement payment (the “Fund”) to be funded by defendants and/or their insurers into an escrow account, (ii) a bi-lateral complete and full release of all claims against defendants and plaintiffs, and (iii) that 55% of the Fund (the derivative payment) be paid to Earthstone to be used as determined by management, according to their fiduciary duties and business judgment, 45% of the Fund (the class payment) be paid to members of the class or current stockholders of Earthstone. ~~The Company expects court approval of~~On March 31, 2021, the Court approved the Settlement Agreement and ~~in addition estimates~~ the Company paid the $3.5 million settlement shortly thereafter. The insurance carriers ~~and related affiliates to reimburse~~immediately reimbursed their agreed upon allocation of the ~~Company in the amount of~~settlement totaling $2.8 million and ~~$0.1 million, respectively. As described above,~~in addition, the Company ~~expects to receive a~~has received $1.3 million from the derivative portion of the ~~derivative payment, however, the amount cannot be reasonably determined at this time.~~

~~Prior to~~ ~~September 30, 2020,~~ ~~due to uncertainty~~settlement, which is included as a reduction of reimbursement, the Company recorded and accrued litigation costs when incurred and recorded insurance reimbursements as an offset only when proceeds were received in Transactions costs. In light of the Settlement Agreement, insurance carrier agreement on allocation of defense costs and settlement payment combined with the history of reimbursements from insurance carriers and related affiliate, a high probability of reimbursement exists. Accordingly, the Company has accrued $3.75 million related to the Settlement Agreement and estimated final defense costs associated with this legal action included in Accrued expenses in the Condensed Consolidated Balance Sheets, offset by an accrued $5.7 million of estimated reimbursements from insurance carriers and the majority shareholder which are included in Accounts receivable: Joint interest billings and other, net in the Condensed Consolidated Balance Sheets, with the impact of both items included in Transaction costs in the Condensed Consolidated ~~Statements~~Statement of ~~Operations.~~

Operations for the six months ended June 30, 2021.

Environmental and Regulatory

As of ~~September~~June 30, ~~2020~~,2021, 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.

~~Table of Contents~~

~~EARTHSTONE ENERGY, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Note 14. Income Taxes

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

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of June 30, 2021 and December 31, 2020, a current liability of $0.5 million and $0.6 million, respectively, is included in Other current liabilities in the Condensed Consolidated Balance Sheets. The amounts represent current Texas Margin Tax payable.

During the ~~nine~~six months ended ~~September~~June 30, ~~2020~~,2021, the Company recorded income tax ~~expense~~benefit of approximately ~~$0.1~~$0.8 million which included (1) (1) a deferred income tax benefit for Lynden US of $0.4 million as a result of its share of the distributable loss from EEH, (2) no net income tax benefit for Earthstone as the $2.6 million income tax benefit resulting from its share of the distributable loss from EEH had a full valuation allowance recorded against it as future realization of the net deferred tax asset cannot be assured and (3) deferred income tax benefit of $0.8 million related to the Texas Margin Tax, offset by (4) current income tax expense of $0.4 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the six months ended June 30, 2021.

During the six months ended June 30, 2020, the Company recorded income tax benefit of approximately $0.02 million which included (1) income tax benefit for Lynden US of $0.1 million as a result of its share of the distributable income from EEH, (2~~) a~~(2) deferred income tax ~~benefit~~expense for Earthstone of ~~$0.8~~$0.06 million as a result of its share of the distributable income from EEH, which was used to reduce the valuation allowance recorded against its deferred tax asset which was previously recorded as future realization of the net deferred tax asset cannot be assured and (3)(3) deferred income tax ~~expense~~benefit of ~~$0.1~~$0.01 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~.

~~During the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2019~~~~, the Company recorded income tax expense of approximately $0.7 million which included (~~1~~) income tax benefit for Lynden US of $0.1 million as a result of its share of the distributable loss from EEH, (~~2) no net income tax benefit for Earthstone as the $0.6 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 expense of $0.6 million related to the Texas Margin Tax. Lynden Corp incurred~~ no ~~material income or loss, or related income tax expense or benefit, for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2019~~.

2020.

~~Note~~ ~~15.~~ ~~Goodwill~~

~~Goodwill represents the excess of the purchase price of assets acquired over the fair value of those assets. The fair value of Goodwill is classified as a Level~~ 3 ~~measurement according to the fair value hierarchy defined by ASC~~ ~~820.~~ ~~Goodwill is tested for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of goodwill~~ ~~may~~ ~~not~~ be recoverable. Such test includes an assessment of qualitative and quantitative factors. If the results of such tests are such that the fair value of the reporting unit is less than the carrying value, goodwill is then reduced by an amount that is equal to the amount by which the carrying value exceeds the fair value.

~~A discounted future cash flow analysis of the properties to which the Goodwill was associated was performed based on commodity price futures as of~~ ~~March 31, 2020.~~ The resulting fair value was lower than the net book value of the associated properties. Additionally, the Company’s enterprise value, calculated as the combined market capitalization of the Company’s equity and long-term debt, was lower than the book value of its assets, without allocating between the Company's ~~two~~ ~~major properties, Midland properties and Eagle Ford properties. Accordingly, the entire $17.6 million balance of Goodwill was impaired on that date.~~ No ~~additional impairments have been recorded to Goodwill through~~ ~~September~~ ~~30,~~~~2020.~~ ~~The Company did~~ ~~not~~ ~~have any non-cash impairment charges to Goodwill for the~~ ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2019.~~

~~Accumulated impairments to Goodwill as of~~ ~~September 30, 2020~~ ~~and~~ ~~December 31, 2019~~ ~~were $36.7 million and $19.1 million, respectively.~~

1824

Table of Contents

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

Statement Regarding Forward-Looking Information

This discussion and other items in this Quarterly Report on Form 10-Q contain forward-looking statements and information that are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this document, the words “believe,” “anticipate,” “estimate,” “expect,” “intend,” “may,” “will,” “project,” “forecast,” “plan,” and similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. These statements are subject to numerous risks, uncertainties and assumptions. Certain of these risks are summarized under “Item 1A. Risk Factors” in our ~~2019~~2020 Annual Report on Form 10-K ~~and “Part II, Item 1A - Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 that were~~ filed with the Securities and Exchange Commission (“SEC”), which you should read carefully in connection with our forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. We undertake no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

You should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in conjunction with the corresponding sections and our audited consolidated financial statements for the year ended December 31, ~~2019,~~2020, which are included in our ~~2019~~2020 Annual Report on Form 10-K.

Overview

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

~~Earthstone~~

Our primary focus is concentrated in the ~~sole managing member~~Midland Basin of west Texas, a high oil and liquids rich resource basin which provides us with multiple horizontal targets with proven production results, long-lived reserves and historically high drilling success rates.

Recent Developments

IRM Acquisition

On January 7, 2021, Earthstone, Earthstone Energy Holdings, LLC, a ~~Delaware~~subsidiary of Earthstone (“EEH” and collectively with Earthstone, the “Buyer”), Independence Resources Holdings, LLC (“Independence”), and Independence Resources Manager, LLC (“Independence Manager” and collectively with Independence, the “Seller”) consummated the transactions contemplated in the Purchase and Sale Agreement dated December 17, 2020 (the “IRM Purchase Agreement”) that was previously reported in our Current Report on Form 8-K filed with the SEC on December 22, 2020. The Seller was unaffiliated with the Company. At the closing of the IRM Purchase Agreement, among other things, EEH acquired (the “IRM Acquisition”) all of the issued and outstanding limited liability company interests in certain wholly owned subsidiaries of Independence and Independence Manager (collectively, the “Acquired Entities”) for aggregate consideration consisting of the following: (i) an aggregate amount of cash from EEH equal to approximately $134.3 million (the “Cash Consideration”) and (ii) 12,719,594 shares of Class A Common Stock (such shares, the “Acquisition Shares,” and such issuance, the “Stock Issuance”). As a result of the Stock Issuance, Earthstone is no longer considered a controlled company within the meaning of the listing standards of the NYSE.

In order to fund the cash consideration for the IRM Acquisition, on December 17, 2020, Earthstone, EEH, as Borrower, Wells Fargo Bank, National Association (“Wells Fargo”), as Administrative Agent, the guarantors party thereto, and the lenders party thereto (the “Lenders”) entered into an amendment (the “Second Amendment”) to the credit agreement dated November 21, 2019, by and among EEH, as Borrower, Earthstone, as Parent, Wells Fargo, as Administrative Agent and Issuing Bank, BOKF, NA dba Bank of Texas, as Issuing Bank with respect to Existing Letters of Credit, Royal Bank of Canada, as Syndication Agent, Truist Bank, as successor by merger to SunTrust Bank, as Documentation Agent, and the Lenders party thereto (collectively, the “Parties”) (together with ~~its wholly-owned consolidated subsidiaries, “EEH”~~all amendments or other modifications, the “Credit Agreement”),. The Second Amendment was effective upon the closing of the IRM Acquisition. Among other things, the Second Amendment (i) joined certain financial institutions as additional lenders, increased the borrowing base from $240.0 million to $360.0 million, (ii) increased the interest rate on outstanding borrowings; and (iii) adjusted some of the financial covenants.

Eagle Ford Acquisitions

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During the second quarter of 2021, we acquired working interests in certain assets we operate located in southern Gonzales County, Texas (the “Eagle Ford Acquisitions”) from four separate sellers. The aggregate purchase price of the Eagle Ford Acquisitions was approximately $48.0 million in cash. We funded the Eagle Ford Acquisitions with cash on hand and borrowings under our senior secured revolving credit facility. The effective date of the Eagle Ford Acquisitions was April 1, 2021 and the closings occurred on May 14, May 24 and June 2, 2021. The largest of the acquisition components, comprised of working interests owned by two affiliates of Titanium Exploration Partners, LLC, constituted the majority of the total consideration. One of the four sellers was a ~~controlling interest~~related party entity at the time of the acquisition. See further discussion in ~~EEH.~~Note 4. Acquisitions and Note 12. Related Party Transactions in the Notes to Unaudited Condensed Consolidated Financial Statements.

Tracker/Sequel Acquisitions

On July 20, 2021, Earthstone, ~~together with its wholly-owned subsidiary, Lynden Energy Corp., a corporation organized under the laws of British Columbia~~EEH, Tracker Resource Development III, LLC (“~~Lynden Corp”~~Tracker”), and ~~Lynden Corp’s wholly-owned consolidated subsidiary, Lynden USA Inc.~~TRD III Royalty Holdings (TX), LP (“RoyaltyCo” and collectively with Tracker, the “Seller”) consummated the transactions contemplated in the Purchase and Sale Agreement dated March 31, 2021 by and among Earthstone, EEH and Seller (the “Tracker Agreement”) that was previously reported on Form 8-K filed on April 5, 2021. At the closing of the Tracker Agreement, among other things, EEH acquired (the “Tracker Acquisition”) interests in oil and gas leases and related property of Tracker located in Irion County, Texas (the “Tracker Assets”) for aggregate consideration consisting of the following (the “Tracker Purchase Price”): (i) $22.5 million in cash, net of preliminary and customary purchase price adjustments and remains subject to final post-closing settlement between the Buyer and the Seller, and (ii) 4.7 million shares (the “Tracker Shares”) of Class A common stock, $0.001 par value per share of Earthstone (the “Class A Common Stock”). Also, on July 20, 2021, Earthstone, EEH, SEG-TRD LLC (“SEG-I”), and SEG-TRD II LLC (“SEG-II” and collectively with SEG-I, “Sequel”), consummated the transactions contemplated in the Purchase and Sale Agreement dated March 31, 2021 by and among Earthstone, EEH and Sequel (the “Sequel Agreement” and collectively with the Tracker Agreement, the “Purchase Agreements”) that was previously reported on Form 8-K filed on April 5, 2021. At the closing of the Sequel Agreement, among other things, EEH acquired (the “Sequel Acquisition” and with the Tracker Acquisition, the “Transaction”) certain well-bore interests and related equipment held by Sequel that were part of a ~~Utah corporation~~joint development agreement between Tracker and Sequel involving portions of the acreage covered by the Tracker Agreement (the “Sequel Assets” and collectively with the Tracker Assets, the “Assets”) for aggregate consideration consisting of the following: (i) $45.3 million in cash, net of preliminary and customary purchase price adjustments and remains subject to final post-closing settlement between the Buyer and Sequel, and (ii) 1.5 million shares of Class A Common Stock (the “Sequel Shares” and collectively with the Tracker Shares, the “Transaction Shares”). See further discussion in Note 4. Acquisitions and Note 12. Related Party Transactions in the Notes to Unaudited Condensed Consolidated Financial Statements.

Cash consideration for the Tracker/Sequel Acquisitions was funded by borrowings under our senior secured revolving credit facility which was increased from $475 million to $550 million on July 20, 2021.

Tracker Registration Rights Agreements – On July 20, 2021, in connection with the closing of the Tracker Agreement, Earthstone and the members of Tracker entered into a registration rights agreement (the “Tracker Registration Rights Agreement”) relating to the Tracker Shares. The Tracker Registration Rights Agreement provides that, within sixty days after the closing date of the Tracker Acquisition, Earthstone will prepare and file a registration statement to permit the public resale of the Tracker Shares. Earthstone shall cause the registration statement to be continuously effective from and after the date it is first declared or becomes effective until the earlier of (i) all such shares of Class A Common Stock have been disposed of in the manner set forth in the registration statement or under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), until the distribution of the Class A Common Stock does not require registration under the Securities Act, or until there are no longer any such registrable shares of Class A Common Stock issued in connection with the Tracker Acquisition outstanding or (ii) four years after the closing of the Tracker Acquisition.

Sequel Registration Rights Agreements – On July 20, 2021, in connection with the closing of the Sequel Agreement, Earthstone and Sequel entered into a registration rights agreement (the “Sequel Registration Rights Agreement”) relating to the Sequel Shares. The Sequel Registration Rights Agreement provides that, within thirty days after the closing date of the Sequel Acquisition, Earthstone will prepare and file a registration statement to permit the public resale of the Sequel Shares. Earthstone shall cause the registration statement to be continuously effective from and after the date it is first declared or becomes effective until the earlier of (i) all such shares of Class A Common Stock have been disposed of in the manner set forth in the registration statement or under Rule 144 of the Securities Act, until the distribution of the Class A Common Stock does not require registration under the Securities Act, or until there are no longer any such registrable shares of Class A Common Stock issued in connection with the Sequel Acquisition outstanding or (ii) four years after the closing of the Sequel Acquisition.

Lock-Up Agreement – In connection with the closing of the Tracker Agreement, on July 20, 2021, Earthstone and EnCap Energy Capital Fund VIII, L.P. (“~~Lynden US”~~EnCap Fund VIII”) ~~and also~~, a member of ~~EEH, consolidates~~Tracker, entered into a lock-up agreement (the “EnCap Lock-up Agreement”) providing that EnCap Fund VIII will not transfer any of the ~~financial results~~shares of ~~EEH and records~~Class A Common Stock that it received at the closing of the Tracker Acquisition for a ~~noncontrolling interest~~period of 120 days after the closing of the Tracker Acquisition. Also, on

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July 20, 2021, in connection with the ~~Condensed Consolidated Financial Statements representing~~closing of the ~~economic interests of EEH's members other than~~Tracker Agreement, Earthstone and ~~Lynden US.~~

~~COVID-19~~

~~According to the United States~~ZIP Ventures I, L.L.C. (“~~U.S.”) Centers for Disease Control and Prevention (the “CDC”~~ZIP”), a member of Tracker, entered in ~~March 2020, the U.S. entered the acceleration (or 4th) phase~~a lock-up agreement (the “ZIP Lock-up Agreement”) providing that ZIP will not transfer any of the ~~pandemic~~shares of Class A Common Stock that it received at the closing of the ~~novel coronavirus (“COVID-19”). On May 1, 2020 they indicated that there was still~~Tracker Acquisition for a period of 120 days after the ~~potential for future acceleration. This conclusion was based on~~closing of the ~~Pandemic Intervals Framework created by~~Tracker Acquisition.

COVID-19

Despite the ~~CDC, which describes the progression of an influenza pandemic~~recoveries in ~~six intervals or phases. The duration of each phase may vary depending on the type of virus and the public health response.~~

~~The~~commodity prices, recent surges from COVID-19 ~~pandemic has~~variants continue to negatively ~~impacted~~impact the global economy, ~~disrupted~~disrupt global supply chains and ~~created~~create significant volatility and disruption of financial and commodity markets. In addition, the pandemic has resulted in travel restrictions, business closures and the institution of quarantining and other restrictions on movement in many communities. As a result, there has been a significant reduction in demand for and prices of oil and natural gas, which has adversely affected our business. 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 itits impact on demand for oil and natural gas, the availability of personnel, equipment and services critical to our ability to operate our properties and the impact of potential governmental restrictions on travel, transports and operations. There is uncertainty around the extent and duration of disruption, including any resurgence, and we expect that the longer the ~~period~~duration of any such disruption, ~~continues,~~ the greater the adverse impact ~~will~~may be on our business. The degree to which the COVID-19 pandemic or any other public health crisis adversely impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, its impact on the U.S. and world economies, the U.S. capital markets and market conditions, and how quickly and to what extent normal economic and operating conditions can resume.

Operational Status

As a producer of oil, natural gas and NGLs, 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. Our non-field personnel ~~had been~~have returned to the office but we remain flexible to working remotely, using information technology in which we previously invested. More recently, the majority of our non-field personal have been working at our corporate offices while adhering to County and CDC guidelines. Upon returning to work at our corporate offices, we implemented protocols that consist of required mask wearing zones, installed sanitization equipment in various locations and practice social distancing in gathering areas such as conference rooms.invested if needed. We have managed and conducted both field and non-field functions effectively thus far, including our ~~day to day~~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 ~~respective~~applicable jurisdictional mitigation guidelines.

We will continue to monitor CDC guidelines and respond appropriately.

Commodity Market ~~Challenges~~

~~The significant decline in~~Impacts and Response

During the course of 2020, commodity prices ~~resulting from the COVID-19 pandemic has~~declined significantly, negatively ~~impacted~~impacting producers of oil natural gas and ~~NGLs~~NGLs. We significantly curtailed our capital expenditures in response and, in the ~~U.S. and elsewhere. The COVID-19 pandemic resulted in global consumer demand contraction and the ensuing supply/demand imbalance is in turn having a disruptive impact on oil and gas exploration and~~spring of 2020, voluntarily curtailed up to 60% of total net production. In ~~April~~June 2020, WTI crude oil prices averaged $16.55/Bbl and briefly fell below $0/Bbl, closing at -$36.98/Bbl on April 20, 2020. In response, management began to voluntarily shut-in as much production as was feasible in an effort to preserve reserves to sell in the future. As priceswe returned to acceptable levels, management returned those wells to production as quickly as possible, beginning in late May and early June. Management estimates that total net production was curtailed by approximately 60% in May, with minimal volumes curtailed in April and June. Since early June, WTI crude oil prices have averaged over $40/Bbl and we have been operating at full production ~~capacity.~~

~~While crude prices have recovered from recent lows, further recovery in demand and reductions in global oil inventories will be required to return~~capacity as oil prices began to ~~pre-pandemic~~recover. Additionally, based on recovered commodity price levels in late 2020, we resumed our operated well completions activities in the fourth quarter of 2020 and ~~economic slowdown levels. Within~~commenced a drilling program late in the ~~U.S., the combination~~first quarter of producer activity reduction and production curtailments was sufficient to reduce domestic supply below demand and prevent material infrastructure operational curtailments from occurring. However, with curtailed U.S. volumes returning, we may choose to curtail some or all of our estimated production due to future changes in supply and demand fundamentals.

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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. There is a range of possible outcomes, depending upon how quickly both economic activity and the demand for oil recovers which is a function of how quickly solutions are developed to overcome the effects of COVID-19. In our industry, any forecast, plans and changes to operations and financial status are a function of commodity prices. ~~Assuming that~~If oil prices ~~stay depressed or worsen,~~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. ~~We will have to manage the possibility of well shut-ins, both voluntary and involuntary, to preserve our assets and cash flows.~~ A significant driver in the future may be the financial institutions’ view on commodity prices with respect to borrowing base redeterminations. ~~Since the beginning~~If a resurgence of ~~2020,~~COVID-19 triggers additional volatility in our business or global economies, our borrowing base, ~~has been reduced from $325~~recently increased to $550 million ~~to $240 million. Further significant~~with the closing of the Tracker Acquisition, could be reduced. Significant reductions in the borrowing base under our Credit ~~Facility~~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 ~~ongoing~~ effects of COVID-19, including a substantial decrease in economic activity, have contributed to significant credit, debt and equity market ~~volatility and resulted in a global recession.~~volatility. Similar to other producers in our business, we experienced volatility ~~and a decline~~ in the price of our Class A ~~common stock. While the price of our Class A common stock has recently stabilized somewhat, it remains historically low.~~

~~Liquidity~~

In March 2020, in response to the significant decrease in commodity prices, we significantly reduced our capital program for 2020 and halted all drilling and completion activity. In light of recent oil price recoveries and meaningful service cost reductions compared to earlier in the year, we have commenced completions of a six-well pad and currently expect total capital spending for 2020 to be in the range of $65 - $70 million. Additionally, we currently expect to begin completions of a five-well pad in January 2021. We expect to fund these completions with internally generated cash flows.

COVID-19 has adversely impacted our revenues in the three and nine months ended September 30, 2020 as a result of both low commodity prices and our voluntary shut-ins. However, due to our commodity hedging activities partially offsetting those reduced revenues, there has been no significant overall impact on our cash flows from producing activities.

Since the beginning of 2020, our borrowing base has been reduced through two sequential reductions from $325 million to $240 million. We continue remain in compliance with all covenants under our Credit Facility. If commodity prices continue to be depressed, we may experience future borrowing base reductions.

~~For further discussion of our liquidity as of September 30, 2020, see~~ ~~Liquidity and Capital Resources~~ ~~below.~~

~~Oil and Gas Reserves~~

In line with our borrowing base reductions, our oil and gas reserves have significantly been reduced primarily due to the significant decrease in commodity prices from year end. Further deterioration of commodity prices would further negatively impact our oil and gas reserves.

~~Impairments~~

The COVID-19 effects resulted in impairments in the first quarter on our proved developed properties and undeveloped properties in the amount of $25.3 million and $11.3 million, respectively. Further reductions in our oil and gas reserves and commodity prices may result in additional impairments on our oil and gas properties. Including impairments for certain acreage expirations, impairments on our proved developed properties and undeveloped properties for the nine months ended September 30, 2020 were $25.3 million and $19.7 million, respectively.

~~Government Assistance~~

Although management explored all assistance available under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company was not eligible for any of the programs therein with the exception of the deferral of employment tax deposits and payments which management has currently not elected to pursue.

~~Impact on Capital Program~~

In light of the current economic environment, we have reduced our 2020 capital program in order to preserve capital and cash flows. Our short-term strategy is to weather COVID-19 and be in a position, when the time comes, to execute our long-term business strategy to develop our properties efficiently, as well as being able to take advantage of growth opportunities as they arise. However, an extended period of severely depressed commodity prices and low demand may create more uncertainty in our ability to model and make plans to participate in any economic recovery.

~~Employee Reduction Measures~~

In June 2020, management completed a workforce reduction effort that reduced the number of full-time employees from 68 to 60 by month end, resulting in over a 10% decrease in aggregate salaries and wages going forward. Severance related costs associated with these reduction measures resulted in operating expenses of $0.4 million in June 2020. At this time, management has no future plans for further workforce reductions; however, if adverse industry conditions persist, further employee reduction measures may be necessary.

~~Outlook~~

We do not expect commodity prices to return to pre-pandemic levels in the short term. In the longer term, we believe the U.S. and world economies will recover and the demand for oil will return in the range of pre-COVID-19 levels as more developments occur in meeting and addressing COVID-19 business challenges. Our current financial focus is to maintain the health of our balance sheet and continue limited capital expenditures with our internally generated cash flows to enable us to be in a position to execute a business strategy as commodity prices return to pre-pandemic levels.

Common Stock.

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~~Recent Developments~~

~~Borrowing Base Redetermination~~

On September 28, 2020, Earthstone, EEH (the “Borrower”), Wells Fargo Bank, National Association as Administrative Agent (“Wells Fargo”), the guarantors party thereto, and the lenders party thereto (the “Lenders”) entered into an 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, BOKF, NA dba Bank of Texas, as Issuing Bank with respect to Existing Letters of Credit, Royal Bank of Canada, as Syndication Agent, Truist Bank, as successor by merger to SunTrust Bank, as Documentation Agent, and the Lenders (together with all amendments or other modifications, the “Credit Facility”). Among other things, the Amendment decreased the borrowing base from $275 million to $240 million, increased the interest rate on outstanding borrowings by 25 to 50 basis points, increased the flexibility to finance and make acquisitions, and added certain restrictions related to dividends and distributions.

As of September 30, 2020, we had outstanding borrowings under our Credit Facility of $130 million, which represents a reduction of 24% compared to the $170 million in outstanding borrowings as of December 31, 2019. Our only debt is borrowings under our Credit Facility.

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 and sellers unwilling to acknowledge persistent low commodity prices. 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 ~~low~~volatility in oil price. We are focusing our attention on acquisition and corporate merger opportunities that would increase the scale of our operations. In addition, we believe the current industry environment presents unique opportunities with distressed assets or corporations that will be distressed in the near future which would provide us the

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potential for further consolidation because of our financial strength. At the same time, we will seek to block up acreage that would allow for longer horizontal laterals that would provide for higher economic ~~returns when commodity prices recover and we return to asset development.~~returns. In short, we believe we are well qualified to be a consolidator which could increase the scale of our operations and add value to our shareholders.

~~Officer Appointments~~

Effective April 1, 2020, our former Chairman and Chief Executive Officer, Mr. Frank A. Lodzinski, was appointed Executive Chairman and our former President, Mr. Robert J. Anderson, was appointed President and Chief Executive Officer.

~~Interest Rate Swap~~

Effective May 1, 2020, we entered into an interest rate swap, exchanging the LIBO Rate for a fixed rate of 0.286% (the “Swap”). The initial notional amount of the Swap is $125 million through May 2022 and decreases to $100 million through May 2023 and $75 million through May 2024.

Areas of Operation

Our primary focus is concentrated in the Midland Basin of west Texas, a high oil and liquids rich resource which provides us with multiple horizontal targets with proven production results, long-lived reserves and historically high drilling success rates.

~~As previously disclosed,~~

During the first quarter of 2021, we completed and turned to sales five gross (3.7 net) wells on the Hamman 30 pad in Upton County and commenced drilling three gross (2.1 net) wells on the Hamman 45 pad in ~~southeast~~Midland County. During the second quarter, we completed the aforementioned wells on the Hamman 45 pad in Midland County and drilled a four-well Pearl Jam pad (95% working interest) on the recently acquired IRM Spanish Pearl project which we expect to complete and turn to sales in late third quarter. After drilling the Pearl Jam pad, the rig was moved to western Reagan County in early July to drill a four-well pad, then is expected to move to Upton County to drill a four-well pad before being moved to Midland County late ~~March~~in 2021. We plan to deploy a second rig in early August, beginning in Upton County. Based on our revised capital budget, we anticipate spudding 30 gross / 26.2 net operated wells and ~~brought them~~bringing 20 gross / 16.1 net operated wells and 0.7 net non-operated wells online in April, prior to voluntarily shutting the wells in for the duration of the month of May. In May, approximately 60% of our total production was shut-in. As oil prices have improved since then, we have returned to full production capacity. We have experienced no adverse effects from this short-term curtailment and have incurred no significant costs in restoring production.

In late May, we concluded our 2020 drilling program and released our contracted rig operating in the Midland Basin. During the first half of the year, we drilled a total of five wells in our Hamman Upton project along with six wells in our Ratliff unit, all located in Upton County, Texas. We have commenced completions of the six-well pad in our Ratliff unit and expect to begin completions of the five-well Hamman Upton pad in January 2021.

Despite the disruption in the oil markets resulting from the COVID-19 pandemic, we continue to seek acreage ~~trade~~trades and acquisition opportunities in the Midland Basin which would allow for longer laterals, increased operated inventory and greater operating efficiency.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to use our judgment to make estimates and assumptions that affect certain amounts reported in our financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. Critical accounting policies are those accounting policies that involve judgment and uncertainties affecting the application of those policies and the likelihood that materially different amounts would be reported under different conditions or using differing assumptions. We periodically update our estimates used in the preparation of the financial statements based on our latest assessment of the current and projected business and general economic environment. There have been no significant changes to our critical accounting policies during the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~

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Results of Operations

Three Months Ended ~~September~~June 30, ~~2020,~~2021, compared to the Three Months Ended ~~September~~June 30, ~~2019~~

Three Months Ended

September 30,

2020

2019

Change

Sales volumes:

Oil (MBbl)
839 646 30 %
Natural gas (MMcf)
2,010 1,248 61 %
Natural gas liquids (MBbl)
386 267 45 %
Barrels of oil equivalent (MBOE)
1,560 1,121 39 %
Average Daily Production (Boepd)
16,959 12,181 39 %

Average prices:

Oil (per Bbl)
$ 39.50 $ 54.89 (28 )%
Natural gas (per Mcf)
$ 1.31 $ 0.72 82 %
Natural gas liquids (per Bbl)
$ 13.60 $ 10.71 27 %

Average prices adjusted for realized derivatives settlements:

Oil ($/Bbl)(1)
$ 49.34 $ 59.43 (17 )%
Natural gas ($/Mcf)
$ 1.45 $ 1.34 8 %
Natural gas liquids ($/Bbl)
$ 13.60 $ 10.71 27 %

(In thousands)

Oil revenues
$ 33,158 $ 35,443 (6 )%
Natural gas revenues
$ 2,642 $ 903 193 %
Natural gas liquids revenues
$ 5,247 $ 2,858 84 %

Lease operating expense
$ 7,044 $ 6,419 10 %
Production and ad valorem taxes
$ 2,696 $ 2,698 (0 )%
Impairment expense
$ 2,115 $ — NM
Depreciation, depletion and amortization
$ 28,538 $ 14,079 103 %

General and administrative expense (excluding stock-based compensation)
$ 3,393 $ 3,850 (12 )%
Stock-based compensation
$ 2,403 $ 2,207 9 %
General and administrative expense
$ 5,796 $ 6,057 (4 )%

Transaction costs
$ (705 ) $ 215 NM
Interest expense, net
$ (1,186 ) $ (1,609 ) (26 )%

Unrealized (loss) gain on derivative contracts
$ (14,543 ) $ 15,021 NM
Realized gain on derivative contracts
$ 8,503 $ 3,705 NM
(Loss) gain on derivative contracts, net
$ (6,040 ) $ 18,726 NM

Income tax expense
$ (130 ) $ (575 ) NM

2020


	Three Months Ended June 30,
	2021		2020		Change
Sales volumes:
Oil (MBbl)	1,083		800		35	%
Natural gas (MMcf)	2,927		1,351		117	%
Natural gas liquids (MBbl)	496		208		138	%
Barrels of oil equivalent (MBOE)	2,067		1,233		68	%
Average Daily Production (Boepd)	22,716		13,555		68	%

Average prices:
Oil (per Bbl)	$	65.47	$	23.56	178	%
Natural gas (per Mcf)	$	2.29	$	0.83	176	%
Natural gas liquids (per Bbl)	$	24.31	$	8.10	200	%

Average prices adjusted for realized derivatives settlements:
Oil ($/Bbl)	$	52.39	$	59.61	(12)	%
Natural gas ($/Mcf)	$	2.19	$	1.23	78	%
Natural gas liquids ($/Bbl)	$	24.31	$	8.10	200	%

(In thousands)
Oil revenues	$	70,918	$	18,847	276	%
Natural gas revenues	$	6,690	$	1,127	494	%
Natural gas liquids revenues	$	12,063	$	1,689	614	%

Lease operating expense	$	11,747	$	5,588	110	%
Production and ad valorem taxes	$	5,176	$	1,479	250	%


Depreciation, depletion and amortization	$	26,027	$	22,902	14	%

General and administrative expense (excluding stock-based compensation)	$	4,758	$	4,119	16	%
Stock-based compensation	$	4,412	$	2,568	72	%
General and administrative expense	$	9,170	$	6,687	37	%

Transaction costs	$	507	$	(463)	NM

Interest expense, net	$	(2,401)	$	(1,285)	87	%


Unrealized loss on derivative contracts	$	(36,653)	$	(50,036)	(27)	%
Realized (loss) gain on derivative contracts	$	(14,522)	$	29,357	(149)	%
Loss on derivative contracts, net	$	(51,175)	$	(20,679)	147	%


Income tax benefit	$	486	$	1,110	(56)	%

NM – Not Meaningful

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Results of Operations Highlights
The IRM Acquisition and Eagle Ford Acquisitions have had a significant and pervasive impact on our results of operations when compared to the prior corresponding periods, as well as diminished operating results in the corresponding prior year periods due to voluntary production shut-ins resulting from low and sometimes negative commodity prices. In addition, commodity prices have improved compared to the prior corresponding periods further impacting our results of operations. Below is a detailed discussion further highlighting the impact of our recent acquisitions.

Oil revenues

For the three months ended ~~September~~June 30, ~~2020,~~2021, oil revenues ~~decreased~~increased by ~~$2.3~~$52.1 million or 6%276% relative to the comparable period in ~~2019.~~2020. Of the ~~decrease, $9.9~~increase, $33.5 million was ~~due~~attributable to ~~a decrease~~an increase in our realized price ~~partially offset by $7.6~~and $18.6 million was attributable to an increase in volume. Our average realized price per Bbl ~~decreased~~increased from ~~$54.89~~$23.56 for the three months ended ~~September~~June 30, ~~2019~~2020 to ~~$39.50~~$65.47 or ~~28%~~178% for the three months ended ~~September~~June 30, ~~2020. We~~2021. Additionally, we had a net increase in the volume of oil sold of ~~194~~283 MBbls or ~~30%~~35%, which included an increase of 304 MBbls related to the wells acquired in the IRM Acquisition and an increase of 34 MBbls related to the Eagle Ford Acquisitions, offset by a decrease of 55 MBbls in our other wells primarily ~~due to new wells brought online in 2020.~~

resulting from natural decline.

Natural gas revenues

For the three months ended ~~September~~June 30, ~~2020,~~2021, natural gas revenues increased by ~~$1.7~~$5.6 million or ~~193%~~494% relative to the comparable period in ~~2019.~~2020. Of the increase, ~~$1.0~~$3.6 million was ~~attributable~~due to increased sales volume and ~~$0.7~~$2.0 million was ~~due~~attributable to an increase in realized price. Our average realized price per Mcf increased 176% from $0.83 for the three months ended June 30, 2020 to $2.29 for the three months ended June 30, 2021. The total volume of natural gas produced and sold increased ~~by 762~~1,576 MMcf or ~~61%~~117% which included an increase of 600 MMcf related to the wells acquired in the IRM Acquisition, an increase of 10 MMcf related to the Eagle Ford Acquisitions and an increase of 966 MMcf in our other wells primarily ~~due to new~~resulting from a higher mix of natural gas from existing wells ~~brought online~~and the impact of voluntary production shut-ins in ~~2020. In~~ the prior year's quarter, lack of sufficient pipeline transportation resulted in low natural gas prices, which have improved in the current year's quarter. Our average realized price per Mcf increased 82% from $0.72 for the three months ended September 30, 2019 to $1.31 for the three months ended September 30, 2020.

year period.

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Natural gas liquids revenues

For the three months ended ~~September~~June 30, ~~2020,~~2021, natural gas liquids revenues increased by ~~$2.4~~$10.4 million or ~~84%~~614% relative to the comparable period in ~~2019.~~2020. Of the increase, ~~$1.6 million was due to increased volume and $0.8~~$3.4 million was attributable to an increase in our realized ~~price.~~price and $7.0 million was attributable to increased volume. The volume of natural gas liquids produced and sold increased by ~~119~~288 MBbls or ~~45%~~138%, which included an increase of 112 MMcf related to the wells acquired in the IRM Acquisition, an increase of 2 MBbls related to the Eagle Ford Acquisitions and an increase of 174 MBbls in our other wells primarily ~~due to new wells brought online~~resulting from voluntary production shut-ins in ~~2020. Our average realized price per Bbl~~the prior year period.

Lease operating expense (“LOE”)

LOE increased ~~27% from $10.71~~by $6.2 million or 110% for the three months ended ~~September~~June 30, ~~2019 to $13.60 for the three months ended September 30, 2020.~~

~~Lease operating expense (“LOE”)~~

~~LOE increased by $0.6 million or 10% for the three months ended September 30, 2020~~2021 relative to the comparable period in ~~2019, primarily~~2020, due to ~~new wells brought online, partially offset by lower workover project costs~~a $2.8 million increase resulting from the LOE of the properties acquired in the IRM Acquisition, an increase of $0.3 million related to the Eagle Ford Acquisitions and a $3.1 million increase resulting from higher production volumes when compared to the prior year ~~period.~~

period as the prior year period was impacted by voluntary production shut-ins.

Production and ad valorem taxes

Production and ad valorem taxes for the three months ended ~~September~~June 30, 2021 increased by $3.7 million or 250% relative to the comparable period in 2020 due to a $1.3 million increase resulting from the properties acquired in the IRM Acquisition, an increase of $0.1 million related to the Eagle Ford Acquisitions and a $2.3 million increase related to our other wells resulting from to improved commodity prices, as well as voluntary production shut-ins in the prior year period.

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

DD&A for the three months ended June 30, 2021 increased by $3.1 million, or 14% relative to the comparable period in 2020, primarily due to $5.8 million increase in DD&A related to the assets acquired in the IRM Acquisition, partially offset by a $2.7 million decrease in DD&A related to our other wells primarily resulting from lower volumes from voluntary production shut-ins in the prior year period, as well as additional volumes added to the depletable base of our properties resulting from the impact of improved commodity prices on our estimated proved reserves.

General and administrative expense (“G&A”)

G&A for the three months ended June 30, 2021 increased by $2.5 million, or 37% relative to the comparable period in 2020, due to an increase of $1.8 million in non-cash performance-based stock-based compensation expense resulting from increases

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in the market value of our Class A Common Stock, as well as $0.7 million resulting from the reinstatement of certain cash-based compensation expenses which were suspended in the prior year period.

Transaction costs

For the three months ended June 30, 2021, transaction costs increased by $1.0 million primarily due to the impact of prior year reimbursements related to the Olenik litigation.

Interest expense, net

Interest expense increased from $1.3 million for the three months ended June 30, 2020 ~~were flat as~~to $2.4 million for the three months ended June 30, 2021, due to higher average borrowings outstanding compared to the prior year period asprimarily resulting from the impact of decreased oil prices was offset by increased production. As a percentage of revenues from oil, natural gas, and natural gas liquids, production taxes remained flat as compared to the prior year.

~~Impairment expense~~

During the three months ended September 30, 2020, we recorded non-cash impairments totaling $2.1 million to unproved oil and natural gas properties as the result of certain acreage expirations. No such impairments were recorded during the three months ended September 30, 2019.

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

DD&A for the three months ended September 30, 2020 increased by $14.5 million, or 103% relative to the comparable period in 2019. The increase was primarily related to development and acquisition activity, partially offset by a first quarter 2020 impairment charge of $25.3 million, that resulted in increased costs subject to depletion. Other factors contributing to the increase were higher sales volumes and certain downward adjustments to estimated recoverable proved oil and natural gas reserves caused by lower commodity prices.

~~General and administrative expense (“G&A”)~~

G&A for the three months ended September 30, 2020 decreased by $0.3 million, or 4% relative to the comparable period in 2019, primarily due to lower cash-based incentive compensation expenses, including the impact of workforce reduction efforts in light of the drastic decline in commodity prices, partially offset by non-cash stock-based compensation expense related to awards granted in January 2020, employee severance costs and increased director and officer insurance premium costs.

~~Transaction costs~~

For the three months ended September 30, 2020, transaction costs decreased by $0.9 million primarily due to expected final defense costs and reimbursements from our major shareholder and insurance carrier associated with the anticipated settlement of litigation related to the Bold Transaction that closed on May 9, 2017.IRM Acquisition. See Note ~~13. Commitments and Contingencies~~10. Long-Term Debt in the Notes to Unaudited Condensed Consolidated Financial Statements.

~~Interest expense, net~~

Interest expense decreased from $1.6 million for the three months ended September 30, 2019 to $1.2 million for the three months ended September 30, 2020, primarily due to lower effective interest rates on borrowings outstanding compared to the prior year period. ~~See Note 10. Long-Term Debt~~ ~~in the Notes to Unaudited Condensed Consolidated Financial Statements.~~

~~(Loss) gain~~

Loss on derivative contracts, net

For the three months ended ~~September~~June 30, 2021, we recorded a net loss on derivative contracts of $51.2 million, consisting of unrealized mark-to-market losses of $36.6 million related to our commodity hedges along with net realized losses on settlements of our commodity hedges of $14.5 million and net realized losses on our interest rate swap of $0.1 million. For the three months ended June 30, 2020, we recorded a net loss on derivative contracts of ~~$6.0~~$20.7 million, consisting of unrealized mark-to-market losses of ~~$14.6~~$49.6 million related to our commodity hedges and ~~unrealized gains of $0.1~~$0.5 million related to our interest rate ~~swap,~~swaps, partially offset by net realized gains on settlements of our commodity hedges of ~~$8.5~~$29.4 million.

Income tax benefit

For the three months ended ~~September~~June 30, ~~2019,~~2021, we recorded income tax benefit of approximately $0.5 million which included (1) a deferred income tax benefit for Lynden USA Inc., a Utah corporation and wholly-owned subsidiary of Lynden Corp (“Lynden US”) of $0.2 million as a result of its share of the distributable loss from EEH, (2) no net ~~gain on derivative contracts~~income tax benefit for Earthstone as the $1.4 million income tax benefit resulting from its share of ~~$18.7 million, consisting~~the distributable loss from EEH had a full valuation allowance recorded against it as future realization of ~~unrealized mark-to-market gains~~the net deferred tax asset cannot be assured and (3) a deferred income tax benefit of ~~$15.0~~$0.7 million related to ~~our commodity hedges~~the Texas Margin Tax, offset by (4) current income tax expense of $0.4 million related to the Texas Margin Tax. Lynden Energy Corp., a corporation organized under the laws of British Columbia and ~~net realized gains on settlements~~wholly-owned subsidiary of ~~our commodity hedges of $3.7 million.~~

~~Income~~Earthstone (“Lynden Corp”), incurred no material income or loss, or related income tax expense

~~For~~ or benefit, for the three months ended ~~September~~June 30, 2021.

During the three months ended June 30, 2020, we recorded an income tax expense of approximately ~~$0.1~~$1.1 million which included (1) no income tax expense for Lynden US of $0.7 million as a result of its share of the distributable income from EEH, (2) deferred income tax ~~benefit~~expense for Earthstone of ~~$0.9~~$2.8 million as a result of its share of the distributable income from EEH, which was used to reduce the valuation allowance recorded against its deferred tax asset which was previously recorded as future realization of the net deferred tax asset cannot be assured and (3) deferred income tax expense of ~~$0.1~~$0.4 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the three months ended ~~September~~June 30, 2020.

During the three months ended September 30, 2019, we recorded income tax expense of approximately $0.6 million which included (1) income tax expense for Lynden US of $0.6 million as a result of its share of the distributable income from EEH and (2) deferred income tax expense for Earthstone of $2.2 million as a result of its share of the distributable income from EEH, which was used to reduce the valuation allowance recorded against its deferred tax asset which was previously recorded as future realization of the net deferred tax asset cannot be assured.

2331

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~~Nine~~Six Months Ended ~~September~~June 30, ~~2020,~~2021, compared to the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~

Nine Months Ended

September 30,

2020

2019

Change

Sales volumes:

Oil (MBbl)
2,520 2,027 24 %
Natural gas (MMcf)
5,031 3,318 52 %
Natural gas liquids (MBbl)
870 705 23 %
Barrels of oil equivalent (MBOE)
4,229 3,285 29 %
Average Daily Production (Boepd)
15,433 12,033 28 %

Average prices:

Oil (per Bbl)
$ 36.92 $ 55.08 (33 )%
Natural gas (per Mcf)
$ 0.96 $ 0.64 50 %
Natural gas liquids (per Bbl)
$ 11.46 $ 15.17 (24 )%

Average prices adjusted for realized derivatives settlements:

Oil ($/Bbl)(1)
$ 55.14 $ 60.42 (9 )%
Natural gas ($/Mcf)(1)
$ 1.31 $ 1.49 (12 )%
Natural gas liquids ($/Bbl)
$ 11.46 $ 15.17 (24 )%

(In thousands)

Oil revenues
$ 93,017 $ 111,657 (17 )%
Natural gas revenues
$ 4,855 $ 2,126 128 %
Natural gas liquids revenues
$ 9,976 $ 10,691 (7 )%

Lease operating expense
$ 21,971 $ 20,485 7 %
Production and ad valorem taxes
$ 7,198 $ 8,001 (10 )%
Rig termination expense
$ 426 $ — NM
Impairment expense
$ 62,548 $ — NM
Depreciation, depletion and amortization
$ 76,096 $ 42,281 80 %

General and administrative expense (excluding stock-based compensation)
$ 11,950 $ 13,268 (10 )%
Stock-based compensation
$ 7,665 $ 6,680 15 %
General and administrative expense
$ 19,615 $ 19,948 (2 )%

Transaction costs
$ (324 ) $ 797 NM
Interest expense, net
$ (4,207 ) $ (4,735 ) (11 )%

Unrealized gain (loss) on derivative contracts
$ 25,466 $ (33,332 ) NM
Realized gain on derivative contracts
$ 47,599 $ 13,660 NM
Gain (loss) on derivative contracts, net
$ 73,065 $ (19,672 ) NM

Income tax expense
$ (112 ) $ (728 ) NM

~~(1) Includes $5.7 million and $2.1 million of cash proceeds related to hedges unwound during the second quarter of~~ 2020 ~~and first quarter of 2019, respectively.~~


	Six Months Ended June 30,
	2021		2020		Change
Sales volumes:
Oil (MBbl)	2,140		1,680		27	%
Natural gas (MMcf)	5,372		3,021		78	%
Natural gas liquids (MBbl)	861		485		78	%
Barrels of oil equivalent (MBOE)	3,896		2,668		46	%
Average Daily Production (Boepd)	21,525		14,661		47	%

Average prices:
Oil (per Bbl)	$	61.56	$	35.63	73	%
Natural gas (per Mcf)	$	2.33	$	0.73	219	%
Natural gas liquids (per Bbl)	$	24.35	$	9.76	149	%

Average prices adjusted for realized derivatives settlements:
Oil ($/Bbl)	$	50.06	$	58.04	(14)	%
Natural gas ($/Mcf)	$	2.20	$	1.21	82	%
Natural gas liquids ($/Bbl)	$	24.35	$	9.76	149	%

(In thousands)
Oil revenues	$	131,737	$	59,859	120	%
Natural gas revenues	$	12,542	$	2,213	467	%
Natural gas liquids revenues	$	20,964	$	4,729	343	%

Lease operating expense	$	22,596	$	14,927	51	%
Production and ad valorem taxes	$	10,203	$	4,502	127	%

Impairment expense	$	—	$	60,433	NM
Depreciation, depletion and amortization	$	50,434	$	47,558	6	%

General and administrative expense (excluding stock-based compensation)	$	9,809	$	8,557	15	%
Stock-based compensation	$	7,741	$	5,262	47	%
General and administrative expense	$	17,550	$	13,819	27	%

Transaction costs	$	2,613	$	381	NM

Interest expense, net	$	(4,618)	$	(3,021)	53	%


Unrealized (loss) gain on derivative contracts	$	(59,011)	$	40,009	(247)	%
Realized (loss) gain on derivative contracts	$	(25,427)	$	39,096	(165)	%
(Loss) gain on derivative contracts, net	$	(84,438)	$	79,105	(207)	%


Income tax benefit (expense)	$	794	$	18	NM

NM – Not Meaningful

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Oil revenues

For the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, oil revenues ~~decreased~~increased by ~~$18.6~~$71.9 million or ~~17%~~120% relative to the comparable period in ~~2019.~~2020. Of the ~~decrease, $36.8~~increase, $43.6 million was attributable to ~~a decrease~~an increase in our realized price ~~partially offset by $18.2~~and $28.3 million was attributable to an increase in volume. Our average realized price per Bbl ~~decreased~~increased from ~~$55.08~~$35.63 for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 to ~~$36.92~~$61.56 or ~~33%~~73% for the ~~nine~~six months ended ~~September~~June 30, ~~2020. We~~2021. Additionally, we had a net increase in the volume of oil sold of ~~492~~460 MBbls or ~~24%~~27%, ~~primarily due~~which included an increase of 598 MBbls related to ~~new~~the wells ~~brought online~~acquired in the IRM Acquisition and an increase of 34 MBbls related to the Eagle Ford Acquisitions, offset by ~~voluntary production shut-ins~~a decrease of 172 MBbls in ~~May 2020.~~

our other wells primarily resulting from natural decline.

Natural gas revenues

For the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, natural gas revenues increased by ~~$2.7~~$10.3 million or ~~128%~~467% relative to the comparable period in ~~2019.~~2020. Of the increase, ~~$1.6~~$5.5 million was due to increased sales volume and ~~$1.1~~$4.8 million was attributable to an increase in realized price. Our average realized price per Mcf increased ~~50%~~219% from ~~$0.64~~$0.73 for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 to ~~$0.96~~$2.33 for the ~~nine~~six months ended ~~September~~June 30, ~~2020. In the prior year's period, lack of sufficient pipeline transportation resulted in low natural gas prices, which have improved in the current year period.~~2021. The total volume of natural gas produced and sold increased ~~1,713~~2,351 MMcf or ~~52%~~78% which included an increase of 1,160 MMcf related to the wells acquired in the IRM Acquisition, an increase of 10 MMcf related to the Eagle Ford Acquisitions and an increase of 1,181 MMcf in our other wells primarily ~~due to new~~resulting from a higher mix of natural gas in the wells brought ~~online offset by~~on in the current year, as well as voluntary production shut-ins in ~~May 2020.~~

the prior year period.

Natural gas liquids revenues

For the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, natural gas liquids revenues ~~decreased~~increased by ~~$0.7~~$16.2 million or 7%343% relative to the comparable period in ~~2019.~~2020. Of the ~~decrease, $2.6~~increase, $7.1 million was attributable to ~~a decrease~~an increase in our realized price ~~partially offset by $1.9~~and $9.1 million was attributable to increased volume. The volume of natural gas liquids produced and sold increased by ~~166~~376 MBbls or ~~23%~~78%, which included an increase of 212 MMcf related to the wells acquired in the IRM Acquisition, an increase of 2 MBbls related to the Eagle Ford Acquisitions and an increase of 162 MBbls in our other wells primarily ~~due to new wells brought online offset by~~resulting from voluntary production shut-ins in ~~May 2020.~~

the prior year period.

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Lease operating expense (“LOE”)

LOE increased by ~~$1.5~~$7.7 million or 7%51% for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 relative to the comparable period in ~~2019, primarily~~2020, due to ~~additional producing wells brought online, which drove~~ a ~~29%~~$6.7 million increase resulting from the LOE of the properties acquired in the IRM Acquisition, an increase of $0.3 million related to the Eagle Ford Acquisitions and a $0.7 million increase resulting from higher production ~~volume, offset by voluntary production shut-ins in May 2020, as well as a decrease in workover project costs as~~volumes when compared to the prior year ~~period.~~

period as the prior year period was impacted by voluntary production shut-ins.

Production and ad valorem taxes

Production and ad valorem taxes for the ~~nine~~six months ended ~~September~~June 30, ~~2020 decreased~~2021 increased by ~~$0.8~~$5.7 million or ~~10%~~127% relative to the comparable period in ~~2019,~~2020 due to a $2.8 million increase resulting from the properties acquired in the IRM Acquisition, an increase of $0.1 million related to the Eagle Ford Acquisitions and a $2.8 million increase related to our other wells resulting from to improved commodity prices, as ~~the impact of increased volume was more than offset by the impact of decreased commodity prices. As a percentage of revenues from oil, natural gas, and natural gas liquids,~~well as voluntary production ~~taxes declined slightly as compared to~~shut-ins in the prior year ~~primarily due to lower realized commodity prices.~~

~~Rig termination expenses~~

period.

Impairment expense

During the ~~nine months ended September 30, 2020, we concluded our 2020 drilling program and released our contracted drilling rig operating in the Midland Basin, recording rig termination expense of $0.4 million.~~

~~Impairment expense~~

~~During the nine months ended September 30, 2020,~~prior year period, we recorded non-cash impairments totaling ~~$62.5~~$60.4 million, which consisted of $25.3 million to proved oil and natural gas properties, ~~$19.7~~$17.6 million to unproved oil and natural gas properties and $17.6 million to goodwill. No such impairments were recorded during the ~~nine~~three months ended ~~September~~June 30, ~~2019.~~

2021.

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

DD&A for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 increased by ~~$33.8~~$2.9 million, or ~~80%~~6% relative to the comparable period in ~~2019. The~~2020 primarily due to an $11.6 million increase ~~was primarily~~in DD&A related to ~~development and acquisition activity, partially~~the assets acquired in the IRM Acquisition, offset by a ~~first quarter 2020 impairment charge of $25.3~~$8.7 million ~~that resulted~~decrease in ~~increased costs subject~~DD&A related to ~~depletion. Other factors contributing~~our other wells primarily resulting from lower volumes from voluntary production shut-ins in the prior year period, as well as additional volumes added to the ~~increase were higher sales volumes and certain downward adjustments to~~depletable base of our properties resulting from the impact of improved commodity prices on our estimated ~~recoverable~~ proved ~~oil and natural gas reserves caused by lower commodity prices.~~

reserves.

General and administrative expense (“G&A”)

G&A for the ~~nine~~six months ended ~~September~~June 30, ~~2020 decreased~~2021 increased by ~~$0.3~~$3.7 million, or 2%27% relative to the comparable period in ~~2019, as a reduction~~2020, due to an increase of $2.5 million in ~~cash-based compensation expenses was almost entirely offset by~~ non-cash performance-based stock-based compensation expense ~~related to awards granted~~resulting from increases in ~~January 2020, employee severance~~the market value of our Class A Common Stock, as well as $1.4 million resulting from the reinstatement of certain cash-based

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compensation expenses which were suspended in the prior year period, offset by $0.2 million decrease in employee-related costs ~~and increased director and officer insurance premium costs.~~

resulting from efficiencies gained over the prior year period.

Transaction costs

For the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, transaction costs ~~decreased~~increased by ~~$1.1~~$2.2 million primarily due to ~~expected final defense~~a $3.8 million increase in legal and professional fees, and severance costs ~~and reimbursements from our major shareholder and insurance carrier~~primarily associated with the ~~anticipated settlement~~IRM Acquisition, partially offset by a decrease of ~~litigation~~$1.6 million primarily due to reimbursements received related to the ~~Bold Transaction that closed on May 9, 2017.~~Olenik litigation.

Interest expense, net

Interest expense increased from $3.0 million for the six months ended June 30, 2020 to $4.6 million for the six months ended June 30, 2021, due to higher average borrowings outstanding compared to the prior year period primarily resulting from the IRM Acquisition. See Note ~~13. Commitments and Contingencies~~10. Long-Term Debt in the Notes to Unaudited Condensed Consolidated Financial Statements.

~~Interest expense, net~~

Interest expense decreased from $4.7 million for the nine months ended September 30, 2019 to $4.2 million for the nine months ended September 30, 2020, primarily due to lower effective interest rates on borrowings outstanding compared to the prior year period. ~~See Note 10. Long-Term Debt~~ ~~in the Notes to Unaudited Condensed Consolidated Financial Statements.~~

~~Gain (loss)~~

(Loss) gain on derivative contracts, net

For the ~~nine~~six months ended ~~September~~June 30, 2021, we recorded a net loss on derivative contracts of $84.4 million, consisting of unrealized mark-to-market losses of $59.6 million related to our commodity hedges, partially offset by unrealized mark-to-market gains of $0.6 million related to our interest rate swap, along with net realized losses on settlements of our commodity hedges of $25.3 million and net realized losses on our interest rate swap of $0.1 million. For the six months ended June 30, 2020, we recorded a net gain on derivative contracts of ~~$73.1~~$79.1 million, consisting of unrealized mark-to-market gains of ~~$25.9~~$40.5 million related to our commodity hedges, unrealized mark-to-market losses of ~~$0.4~~$0.5 million related to our interest rate swap and net realized gains on settlements of our commodity hedges of ~~$47.6~~$39.1 million.

Income tax benefit (expense)

For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2021, we recorded a net loss on derivative contracts of $19.7 million, consisting of unrealized mark-to-market losses of $33.3 million related to our commodity hedges, partially offset by net realized gains on settlements of our commodity hedges of $13.7 million.

~~Income tax expense~~

~~For the nine months ended September 30, 2020, we recorded an~~ income tax ~~expense~~benefit of approximately ~~$0.1~~$0.8 million which included (1) ~~no income tax expense for Lynden US as a result of its share of the distributable income from EEH, (2)~~ a deferred income tax benefit for ~~Earthstone~~Lynden US of ~~$0.8~~$0.4 million as a result of its share of the distributable ~~income~~loss from EEH, ~~which was used to reduce~~(2) no net income tax benefit for Earthstone as the $2.6 million income tax benefit resulting from its share of the distributable loss from EEH had a full valuation allowance recorded against ~~its deferred tax asset which was previously recorded~~it as future realization of the net deferred tax asset cannot be assured and (3) a deferred income tax benefit of $0.8 million related to the Texas Margin Tax, offset by (4) current income tax expense of ~~$0.1~~$0.4 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~

2021.

During the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we recorded income tax ~~expense~~benefit of approximately ~~$0.7~~$0.02 million which included (1) income tax expense for Lynden US of $0.1 million as a result of its share of the distributable income from EEH, (2) deferred income tax expense for Earthstone of ~~$0.6~~$0.06 million as a result of its share of the distributable income from EEH, which was used to reduce the valuation allowance recorded against its deferred tax asset which was previously recorded as future realization of the net deferred tax asset cannot be assured and (3) deferred income tax expense of ~~$0.6~~$0.01 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~

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2020.

Liquidity and Capital Resources

~~Our primary needs for~~

We have significant undeveloped acreage and future drilling locations. Drilling horizontal wells, generally consisting of 7,500 to 12,000-foot lateral lengths, in the Midland Basin is capital ~~are for working capital obligations with respect to operating our properties and for the development~~intensive. As of ~~our oil and natural gas assets. At September~~June 30, ~~2020,~~2021, we had ~~approximately $5.3~~$0.5 million in cash and ~~approximately $110.0~~$241.4 million ~~in unused borrowing capacity~~of long-term debt outstanding under our Credit ~~Facility (discussed below) for~~Agreement with a borrowing base of $475.0 million. With the $233.6 million of undrawn borrowing base capacity and $0.5 million in cash, we had total liquidity of approximately ~~$115.3~~$234.1 million. Adjusted for the closing of the Tracker Acquisition on July 20, 2021, we had an estimated $0.5 million in ~~funds available for operational~~cash and ~~capital funding.~~

We$301.0 million of long-term debt outstanding under our credit facility with a borrowing base of $550 million. With the $249.0 million of undrawn borrowing base capacity and $0.5 million in cash, we had total liquidity of approximately $249.5 million on a combined basis.

With improvement in oil prices during 2021, we have ~~no material long-term contracts, relatively low leverage, and~~resumed drilling operations with the deployment of a strong hedge position, which affords us the flexibility to adjust our capital plan. In March 2020, we took action to significantly reduce our capital program for 2020 and made a decision to halt all drilling and completion activity. In light of recent oil price recoveries and meaningful service cost reductions compared to earlierrig in the ~~year, we have commenced completions~~first quarter of 2021 while adding a ~~six-well pad~~second rig in August and currently expect total capital spending for 2020 to be in the range of $65 - $70 million. Additionally, we currently expect to begin completions of a five-well pad in January 2021. We expect to fund this completion activity with internally generated funds.

COVID-19 has adversely impacted our revenues for the nine months ended September 30, 2020 as a result of both low commodity prices and voluntary shut-ins of our production. However, due to our commodity hedging activities offsetting those reduced revenues, there has been no significant overall impact on our cash flows.

Since the beginning of 2020, our borrowing base has been reduced from $325 million to $240 million. Despite two sequential reductions in our borrowing base, we remain in compliance with all covenants under our Credit Facility. During the nine months ended September 30, 2020, we have reduced our outstanding bank debt by $40 million. Based on our production profile, cost structure, minimal capital program and the hedge positions we have in place, we expect to generate adequate cash flows provided by operating activities to fund the completion activity for the six wells in progress and reduce debt, although not at the same levels as in the third quarter, for the remainder of 2020. As a result, wespend $130-$140 million based on our current 2021 drilling plan. We believe we will have sufficient liquidity with cash flows from operations and available borrowings under ~~our~~the Credit ~~Facility~~Agreement to meet our cash requirements for the next 12 months.

Table of Contents

Working Capital

Working capital (presented below) was ~~$5.5~~a deficit of $88.7 million as of ~~September~~June 30, ~~2020,~~2021, compared to a working capital deficit of ~~$39.9~~$20.8 million as of December 31, ~~2019,~~2020, representing an increase in the deficit of ~~$45.4~~$68.0 million. ~~This~~The $68.0 million increase ~~consisted~~in the deficit was primarily the result of a ~~$22.1~~$64.3 million ~~net increase~~decrease in the net fair value of our derivative contracts expected to settle in the 12 months subsequent to ~~September~~June 30, ~~2020~~2021 resulting from ~~low~~increased oil price futures as of ~~September~~June 30, ~~2020 and a $23.3 million reduction of other net current items resulting primarily from reduced drilling activity.~~

2021.

The components of working capital are presented below:

September 30,

December 31,

2020

2019

Current assets:

Cash
$ 5,311 $ 13,822
Accounts receivable:

Oil, natural gas, and natural gas liquids revenues
12,097 29,047
Joint interest billings and other, net of allowance of $80 and $83 at September 30, 2020 and December 31, 2019, respectively
11,548 6,672
Derivative asset
25,097 8,860
Prepaid expenses and other current assets
1,560 1,867
Total current assets
55,613 60,268

Current liabilities:

Accounts payable
$ 6,910 25,284
Revenues and royalties payable
28,047 35,815
Accrued expenses
12,844 19,538
Asset retirement obligation
308 308
Derivative liability
1,040 6,889
Advances
93 11,505
Operating lease liabilities
768 570
Finance lease liabilities
96 206
Other current liabilities
11 43
Total current liabilities
50,117 100,158

Working Capital
$ 5,496 $ (39,890 )


	June 30,		December 31,
(In thousands)	2021		2020
Current assets:
Cash	$	478	$	1,494
Accounts receivable:
Oil, natural gas, and natural gas liquids revenues	35,063		16,255
Joint interest billings and other, net of allowance of $19 and $19 at June 30, 2021 and December 31, 2020, respectively	4,843		7,966
Derivative asset	72		7,509
Prepaid expenses and other current assets	2,109		1,509
Total current assets	42,565		34,733

Current liabilities:
Accounts payable	$	25,555	$	6,232
Revenues and royalties payable	29,398		27,492
Accrued expenses	16,224		16,504
Asset retirement obligation	541		447
Derivative liability	57,957		1,135
Advances	330		2,277
Operating lease liabilities	782		773
Finance lease liabilities	4		69
Other current liabilities	498		565
Total current liabilities	131,289		55,494

Working Capital	$	(88,724)	$	(20,761)

~~Table of Contents~~

Cash Flows from Operating Activities

Cash flows provided by operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 increased to ~~$104.7~~$93.4 million compared to ~~$85.7~~$57.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, primarily due to ~~changes in~~the impact of oil and natural gas property acquisitions and the timing of payments and receipts ~~in addition to an increase in sales volumes and our settlements~~partially offset by the cash settlement of derivative contracts as compared to the prior year period.

Cash Flows from Investing Activities

Cash flows used in investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2020 decreased~~2021 increased to ~~$72.6~~$216.2 million from ~~$121.1~~$67.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019, primarily~~2020, due to ~~decreased~~acquisitions of oil and gas properties partially offset by limited drilling ~~and completion~~ activity ~~as compared to~~in the ~~prior year period in light of the current commodity price conditions.~~

period.

Cash Flows from Financing Activities

Cash flows provided by financing activities were $121.8 million for the six months ended June 30, 2021 as compared to cash flows used in financing activities ~~decreased to $40.7~~of $1.9 million for the ~~nine~~six months ended ~~September~~June 30, 2020, ~~as compared to cash flows provided by financing activities of $44.8 million for the nine months ended September 30, 2019,~~ primarily due to ~~higher repayments~~borrowings required to fund acquisitions of oil and ~~lower borrowings under the Credit Facility (as defined below)~~gas properties, partially offset by limited drilling activity in the ~~current year~~ period.

Table of Contents

Capital Expenditures

Our accrual basis capital expenditures for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 were as follows (in thousands):

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

Drilling and completions
$ 1,329 $ 46,303
Leasehold costs
49 139
Total capital expenditures
$ 1,378 $ 46,442

Three Months Ended June 30, 2021 Six Months Ended June 30, 2021
Drilling and completions $ 22,820 $ 32,167
Leasehold costs — 454
Total capital expenditures $ 22,820 $ 32,621

Credit Facility

On November 21, 2019, Earthstone, EEH (the “Borrower”), Wells Fargo, as Administrative Agent and Issuing Bank, Royal Bank of Canada, as Syndication Agent, BOKF, NA dba Bank of Texas (“BOKF”) as Issuing Bank with respect to Existing Letters of Credit, Truist Bank, as successor by merger to SunTrust Bank, as Documentation Agent, andApril 20, 2021, the ~~Lenders~~Parties entered into ~~a credit agreement~~an amendment (the ~~“Credit Facility”~~“Third Amendment”), to the Credit Agreement under which ~~replaced~~ the ~~Company’s prior credit agreement, which was terminated on November 21, 2019.~~

~~On March 27, 2020,~~borrowing base increased from $360 million to $475 million in connection with ~~the~~its regularly scheduled ~~redetermination of~~redetermination. Further, the ~~borrowing base under the Credit Facility, the borrowing base was set at $275 million, representing a 15% decrease from the previous borrowing base of $325 million.~~

~~On September 28, 2020, Earthstone, EEH, Wells Fargo, the guarantors party thereto, and the Lenders entered into the~~Third Amendment ~~to the Credit Facility. Among other things, the Amendment decreased~~provided for an increase in the borrowing base from ~~$275~~$475 million to ~~$240~~$550 million ~~increased~~which became effective on July 20, 2021 upon closing of the ~~interest rate on outstanding borrowings by 25 to 50 basis points, increased the flexibility to finance and make acquisitions, and added certain restrictions related to dividends and distributions.~~

Tracker/Sequel Purchase Agreements described above.

The next regularly scheduled redetermination of the borrowing base is expected to occur on or around ~~April~~October 1, 2021.

As of ~~September~~June 30, ~~2020, $130.0~~2021, $241.4 million of borrowings were outstanding, bearing annual interest of ~~2.658%~~3.347%, resulting in an additional ~~$110.0~~$233.6 million of borrowing base availability under the Credit Facility.

Hedging Activities

The following table sets forth our outstanding derivative contracts at ~~September~~June 30, ~~2020.~~2021. When aggregating multiple contracts, the weighted average contract price is disclosed.

Volume

Price
Period

Commodity

(Bbls / MMBtu)

($/Bbl / $/MMBtu)
Q4 2020

Crude Oil

552,000

$ 60.65
Q1 - Q4 2021

Crude Oil

1,460,000

$ 55.16
Q4 2020

Crude Oil Basis Swap (1)

598,000

$ (1.50)
Q4 2020

Crude Oil Basis Swap (2)

92,000

$ 2.55
Q4 2020

Crude Oil Roll Swap (3)

552,000

$ (1.79)
Q1 - Q4 2021

Crude Oil Basis Swap (1)

1,825,000

$ 1.05
Q4 2020

Natural Gas

644,000

$ 2.85
Q1 - Q4 2021

Natural Gas

4,380,000

$ 2.76
Q4 2020

Natural Gas Basis Swap (4)

644,000

$ (1.07)
Q1 - Q4 2021

Natural Gas Basis Swap (4)

4,380,000

$ (0.45)

~~(1)~~

~~The basis differential price is between WTI Midland Argus Crude and the WTI NYMEX.~~

~~(2)~~

~~The basis differential price is between WTI Houston and the WTI NYMEX.~~

~~(3)~~

~~The swap is between WTI Roll and the WTI NYMEX.~~

~~(4)~~

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


	Price Swaps
Period	Commodity	Volume (Bbls / MMBtu)	Weighted Average Price ($/Bbl / $/MMBtu)
Q3 - Q4 2021	Crude Oil	1,693,400	$	49.10
Q1 - Q4 2022	Crude Oil	1,732,250	$	53.64
Q3 - Q4 2021	Crude Oil Basis Swap (1)	1,509,400	$	0.80
Q3 - Q4 2021	Crude Oil Roll Swap (2)	474,650	$	(0.26)
Q1 - Q4 2022	Crude Oil Basis Swap (1)	2,007,500	$	0.68
Q3 - Q4 2021	Natural Gas	4,904,000	$	2.87
Q1 - Q4 2022	Natural Gas	4,295,000	$	2.92
Q3 - Q4 2021	Natural Gas Basis Swap (3)	5,026,000	$	(0.30)
Q1 - Q4 2022	Natural Gas Basis Swap (3)	7,725,000	$	(0.24)

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

(2)The swap is between WTI Roll and the WTI NYMEX.

27(3)The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.


	Costless Collars
Period	Commodity	Volume (Bbls / MMBtu)	Sold Ceiling ($/Bbl / $/MMBtu)		Bought Floor ($/Bbl / $/MMBtu)
Q1 - Q4 2022	Crude Oil Costless Collar	365,000	$	68.75	$	55.00
Q3 - Q4 2021	Natural Gas Costless Collar	122,000	$	4.10	$	3.50
Q1 2022	Natural Gas Costless Collar	1,080,000	$	3.75	$	3.17

~~Table of Contents~~

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 ~~2019~~2020 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

Table of Contents

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

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

However, should it be determined that a liability exists with respect to any environmental cleanup or restoration, the liability to cure such a violation could still accrue to us. No claim has been made, nor are we aware of any liability which we may have, as it relates to any environmental cleanup, restoration, or the violation of any rules or regulations relating thereto.

Recently Issued Accounting Standards

See Note 1. Basis of Presentation and Summary of Significant Accounting Policies in the Notes to Unaudited Condensed Consolidated Financial Statements in this report for discussion of recently issued and adopted accounting standards affecting us.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and therefore are not required to provide the information required under this item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In accordance with Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15(e) and 15d-15(e), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Principal Accounting Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Principal Accounting Officer concluded that our disclosure controls and procedures were effective as of ~~September~~June 30, ~~2020~~2021 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. As of ~~September~~June 30, ~~2020,~~2021, 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, which is incorporated herein by reference, for material matters that have occurred since the filing of our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~

2020.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors and other cautionary statements described in the “Risk Factors” ~~sections~~section of our Annual Report on Form 10-K for the year ended December 31, ~~2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31,~~ 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sale of Equity Securities

There were no unregistered sales of equity securities during the three ~~and nine~~ months ended ~~September~~June 30, ~~2020.~~

2021.

Repurchase of Equity Securities

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

Total Number of Shares Purchased (1)

Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan or Programs

July 2020
— $ — — —
August 2020
— — — —
September 2020
54,268 $ 2.74 — —

~~(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. The acquisition of the surrendered shares was not part of a publicly announced program to repurchase shares of our Class A Common Stock.

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
April 2021 — $ — — —
May 2021 — — — —
June 2021 66,343 $ 11.17 — —

(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.

2938

Table of Contents

Item 6. Exhibits

~~Exhibit No.~~

~~Description~~

~~Filed Herewith~~

~~Furnished Herewith~~

~~31.1~~

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).

3039

Table of Contents

SIGNATURES

~~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:

~~November~~August 4, ~~2020~~

2021

By:

/s/ Tony Oviedo

Tony Oviedo

Executive Vice President – Accounting and Administration

3140

	*For the Nine Months Ended*
	*September 30,*
	*2020*			*2019*
Cash flows from operating activities:
Net (loss) income	$	(11,053	)	$	7,220
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, depletion and amortization		76,096			42,281
Impairment of proved and unproved oil and gas properties		44,928			0
Impairment of goodwill		17,620			0
Accretion of asset retirement obligations		137			160
Settlement of asset retirement obligations		0			(179	)
(Gain) loss on sale of oil and gas properties		(198	)		446
Total (gain) loss on derivative contracts, net		(73,065	)		19,672
Operating portion of net cash received in settlement of derivative contracts		47,599			13,660
Stock-based compensation		7,665			6,680
Deferred income taxes		112			728
Amortization of deferred financing costs		241			336
Changes in assets and liabilities:
(Increase) decrease in accounts receivable		12,102			(5,585	)
(Increase) decrease in prepaid expenses and other current assets		(264	)		(28	)
Increase (decrease) in accounts payable and accrued expenses		1,976			(8,330	)
Increase (decrease) in revenues and royalties payable		(7,768	)		(9,042	)
Increase (decrease) in advances		(11,412	)		17,720
Net cash provided by operating activities		104,716			85,739
Cash flows from investing activities:
Additions to oil and gas properties		(72,869	)		(120,685	)
Additions to office and other equipment		(111	)		(379	)
Proceeds from sales of oil and gas properties		409			2
Net cash used in investing activities		(72,571	)		(121,062	)
Cash flows from financing activities:
Proceeds from borrowings		93,923			165,272
Repayments of borrowings		(133,923	)		(119,099	)
Cash paid related to the exchange and cancellation of Class A Common Stock		(531	)		(827	)
Cash paid for finance leases		(125	)		(355	)
Deferred financing costs		0			(228	)
Net cash (used in) provided by financing activities		(40,656	)		44,763
Net (decrease) increase in cash		(8,511	)		9,440
Cash at beginning of period		13,822			376
Cash at end of period	$	5,311		$	9,816
Supplemental disclosure of cash flow information
Cash paid for:
Interest	$	3,613		$	4,235
Non-cash investing and financing activities:
Accrued capital expenditures	$	2,213		$	50,615
Lease asset additions - ASC 842	$	0		$	4,710
Asset retirement obligations	$	44		$	43

September 30, 2020	*Level 1*		*Level 2*		*Level 3*		*Total*
Financial assets
Derivative asset - current	$	0	$	25,097	$	0	$	25,097
Derivative asset - noncurrent		0		4,727		0		4,727
Total financial assets	$	0	$	29,824	$	0	$	29,824

Financial liabilities
Derivative liability - current	$	0	$	1,040	$	0	$	1,040
Derivative liability - noncurrent		0		577		0		577
Total financial liabilities	$	0	$	1,617	$	0	$	1,617

December 31, 2019
Financial assets
Derivative asset - current	$	0	$	8,860	$	0	$	8,860
Derivative asset - noncurrent		0		770		0		770
Total financial assets	$	0	$	9,630	$	0	$	9,630

Financial liabilities
Derivative liability - current	$	0	$	6,889	$	0	$	6,889
Derivative liability - noncurrent		0		0		0		0
Total financial liabilities	$	0	$	6,889	$	0	$	6,889

	*Price Swaps*
		*Volume*		*Weighted Average Price*
Period	*Commodity*	*(Bbls / MMBtu)*		*($/Bbl / $/MMBtu)*
Q4 2020	Crude Oil		552,000	$	60.65
Q1 - Q4 2021	Crude Oil		1,460,000	$	55.16
Q4 2020	Crude Oil Basis Swap (1)		598,000	$	(1.50	)
Q4 2020	Crude Oil Basis Swap (2)		92,000	$	2.55
Q4 2020	Crude Oil Roll Swap (3)		552,000	$	(1.79	)
Q1 - Q4 2021	Crude Oil Basis Swap (1)		1,825,000	$	1.05
Q4 2020	Natural Gas		644,000	$	2.85
Q1 - Q4 2021	Natural Gas		4,380,000	$	2.76
Q4 2020	Natural Gas Basis Swap (4)		644,000	$	(1.07	)
Q1 - Q4 2021	Natural Gas Basis Swap (4)		4,380,000	$	(0.45	)

Effective Dates	Notional Amount		Fixed Rate
May 5, 2020 to May 5, 2022	$	125,000,000		0.286	%
May 5, 2022 to May 5, 2023	$	100,000,000		0.286	%
May 5, 2023 to May 7, 2024	$	75,000,000		0.286	%

		*September 30, 2020*							*December 31, 2019*
Derivatives not		*Gross*					*Net*		*Gross*					*Net*
designated as hedging	*Balance*	*Recognized*		*Gross*			*Recognized*		*Recognized*		*Gross*			*Recognized*
contracts under ASC	*Sheet*	*Assets /*		*Amounts*			*Assets /*		*Assets /*		*Amounts*			*Assets /*
Topic 815	*Location*	*Liabilities*		*Offset*			*Liabilities*		*Liabilities*		*Offset*			*Liabilities*
Commodity contracts	Derivative asset - current	$	26,773	$	(1,676	)	$	25,097	$	13,321	$	(4,461	)	$	8,860
Commodity contracts	Derivative liability - current	$	2,539	$	(1,676	)	$	863	$	11,350	$	(4,461	)	$	6,889
Interest rate swaps	Derivative liability - current	$	177	$	0		$	177	$	0	$	0		$	0
Commodity contracts	Derivative asset - noncurrent	$	4,727	$	0		$	4,727	$	1,031	$	(261	)	$	770
Commodity contracts	Derivative liability - noncurrent	$	355	$	0		$	355	$	261	$	(261	)	$	0
Interest rate swaps	Derivative liability - noncurrent	$	222	$	0		$	222	$	0	$	0		$	0

			*Three Months Ended*					*Nine Months Ended*
*Derivatives not designated as hedging contracts under ASC Topic 815*			*September 30,*					*September 30,*
	*Statement of Cash Flows Location*	*Statement of Operations Location*	*2020*			*2019*		*2020*		*2019*
Unrealized (loss) gain	Not separately presented	Not separately presented	$	(14,543	)	$	15,021	$	25,466	$	(33,332	)
Realized gain	Operating portion of net cash received in settlement of derivative contracts	Not separately presented		8,503			3,705		47,599		13,660
	Total (loss) gain on derivative contracts, net	(Loss) gain on derivative contracts, net	$	(6,040	)	$	18,726	$	73,065	$	(19,672	)

	*Three Months Ended September 30, 2020*		*Nine Months Ended September 30, 2020*
Proved property	$	0	$	25,252
Unproved property		2,115		19,676
Goodwill		0		17,620
Impairment expense	$	2,115	$	62,548

	*EEH Units Held*											*Total EEH*
	*By Earthstone*					*EEH Units Held*						*Units*
	*and Lynden US*		%			*By Others*			%			*Outstanding*
As of December 31, 2019		29,421,131		45.5	%		35,260,680			54.5	%		64,681,811
EEH Units and Class B Common Stock converted to Class A Common Stock		251,309					(251,309	)					0
EEH Units issued in connection with the vesting of restricted stock units		538,309					0						538,309
As of September 30, 2020		30,210,749		46.3	%		35,009,371			53.7	%		65,220,120

	*Shares*			*Weighted-Average Grant Date Fair Value*
Unvested RSUs at December 31, 2019		1,107,796		$	6.60
Granted		568,900		$	5.15
Forfeited		(1,083	)	$	5.19
Vested		(726,082	)	$	6.43
Unvested RSUs at September 30, 2020		949,531		$	5.86

	*Shares*		*Weighted-Average Grant Date Fair Value*
Unvested PSUs at December 31, 2019		835,625	$	10.51
Granted		1,043,800	$	5.36
Unvested PSUs at September 30, 2020		1,879,425	$	7.65

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

	*2020*
Beginning asset retirement obligations	$	2,164
Liabilities incurred		46
Accretion expense		137
Divestitures		(10	)
Revision of estimates		(2	)
Ending asset retirement obligations	$	2,335

	Three Months Ended
	September 30,
	2020			2019			Change
Sales volumes:
Oil (MBbl)		839			646			30	%
Natural gas (MMcf)		2,010			1,248			61	%
Natural gas liquids (MBbl)		386			267			45	%
Barrels of oil equivalent (MBOE)		1,560			1,121			39	%
Average Daily Production (Boepd)		16,959			12,181			39	%

Average prices:
Oil (per Bbl)	$	39.50		$	54.89			(28	)%
Natural gas (per Mcf)	$	1.31		$	0.72			82	%
Natural gas liquids (per Bbl)	$	13.60		$	10.71			27	%

Average prices adjusted for realized derivatives settlements:
Oil ($/Bbl)(1)	$	49.34		$	59.43			(17	)%
Natural gas ($/Mcf)	$	1.45		$	1.34			8	%
Natural gas liquids ($/Bbl)	$	13.60		$	10.71			27	%

(In thousands)
Oil revenues	$	33,158		$	35,443			(6	)%
Natural gas revenues	$	2,642		$	903			193	%
Natural gas liquids revenues	$	5,247		$	2,858			84	%

Lease operating expense	$	7,044		$	6,419			10	%
Production and ad valorem taxes	$	2,696		$	2,698			(0	)%
Impairment expense	$	2,115		$	—			NM
Depreciation, depletion and amortization	$	28,538		$	14,079			103	%

General and administrative expense (excluding stock-based compensation)	$	3,393		$	3,850			(12	)%
Stock-based compensation	$	2,403		$	2,207			9	%
General and administrative expense	$	5,796		$	6,057			(4	)%

Transaction costs	$	(705	)	$	215			NM
Interest expense, net	$	(1,186	)	$	(1,609	)		(26	)%

Unrealized (loss) gain on derivative contracts	$	(14,543	)	$	15,021			NM
Realized gain on derivative contracts	$	8,503		$	3,705			NM
(Loss) gain on derivative contracts, net	$	(6,040	)	$	18,726			NM

Income tax expense	$	(130	)	$	(575	)		NM

	Nine Months Ended
	September 30,
	2020			2019			Change
Sales volumes:
Oil (MBbl)		2,520			2,027			24	%
Natural gas (MMcf)		5,031			3,318			52	%
Natural gas liquids (MBbl)		870			705			23	%
Barrels of oil equivalent (MBOE)		4,229			3,285			29	%
Average Daily Production (Boepd)		15,433			12,033			28	%

Average prices:
Oil (per Bbl)	$	36.92		$	55.08			(33	)%
Natural gas (per Mcf)	$	0.96		$	0.64			50	%
Natural gas liquids (per Bbl)	$	11.46		$	15.17			(24	)%

Average prices adjusted for realized derivatives settlements:
Oil ($/Bbl)(1)	$	55.14		$	60.42			(9	)%
Natural gas ($/Mcf)(1)	$	1.31		$	1.49			(12	)%
Natural gas liquids ($/Bbl)	$	11.46		$	15.17			(24	)%

(In thousands)
Oil revenues	$	93,017		$	111,657			(17	)%
Natural gas revenues	$	4,855		$	2,126			128	%
Natural gas liquids revenues	$	9,976		$	10,691			(7	)%

Lease operating expense	$	21,971		$	20,485			7	%
Production and ad valorem taxes	$	7,198		$	8,001			(10	)%
Rig termination expense	$	426		$	—			NM
Impairment expense	$	62,548		$	—			NM
Depreciation, depletion and amortization	$	76,096		$	42,281			80	%

General and administrative expense (excluding stock-based compensation)	$	11,950		$	13,268			(10	)%
Stock-based compensation	$	7,665		$	6,680			15	%
General and administrative expense	$	19,615		$	19,948			(2	)%

Transaction costs	$	(324	)	$	797			NM
Interest expense, net	$	(4,207	)	$	(4,735	)		(11	)%

Unrealized gain (loss) on derivative contracts	$	25,466		$	(33,332	)		NM
Realized gain on derivative contracts	$	47,599		$	13,660			NM
Gain (loss) on derivative contracts, net	$	73,065		$	(19,672	)		NM

Income tax expense	$	(112	)	$	(728	)		NM

	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
Drilling and completions	$	1,329	$	46,303
Leasehold costs		49		139
Total capital expenditures	$	1,378	$	46,442


	Three Months Ended June 30, 2021		Six Months Ended June 30, 2021
Drilling and completions	$	22,820	$	32,167
Leasehold costs	—		454
Total capital expenditures	$	22,820	$	32,621

		Volume	Price
Period	Commodity	(Bbls / MMBtu)	($/Bbl / $/MMBtu)
Q4 2020	Crude Oil	552,000	$ 60.65
Q1 - Q4 2021	Crude Oil	1,460,000	$ 55.16
Q4 2020	Crude Oil Basis Swap (1)	598,000	$ (1.50)
Q4 2020	Crude Oil Basis Swap (2)	92,000	$ 2.55
Q4 2020	Crude Oil Roll Swap (3)	552,000	$ (1.79)
Q1 - Q4 2021	Crude Oil Basis Swap (1)	1,825,000	$ 1.05
Q4 2020	Natural Gas	644,000	$ 2.85
Q1 - Q4 2021	Natural Gas	4,380,000	$ 2.76
Q4 2020	Natural Gas Basis Swap (4)	644,000	$ (1.07)
Q1 - Q4 2021	Natural Gas Basis Swap (4)	4,380,000	$ (0.45)

	Total Number of Shares Purchased (1)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan or Programs
July 2020		—	$	—		—		—
August 2020		—		—		—		—
September 2020		54,268	$	2.74		—		—