SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________________________

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

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

_________________________________________________________

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

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 ~~past~~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 ~~and posted on its corporate Website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~post~~submit such ~~filed)~~files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐ ~~(Do not check if a smaller reporting company)~~

Smaller reporting company

☐

☒

Emerging growth company

☐

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

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

As of ~~November 1, 2017, 27,488,759~~July 29, 2021, 50,493,800 shares of Class A Common Stock, $0.001 par value per share, and ~~36,070,828~~34,397,877 shares of Class B Common Stock, $0.001 par value per share, were outstanding.

PART I. ~~FINANCIAL~~FINANCIAL INFORMATION

Item 1. Financial Statements

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share amounts)


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.

EARTHSTONE ENERGY, INC.

CONDENSED C~~ONSOLIDATED~~CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

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

EARTHSTONE ENERGY, INC.

CONDENSED CO~~NSOLIDATED~~CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~

EQUITY (UNAUDITED)

(In ~~thousands)~~

thousands, except share amounts)

For the Nine Months Ended September 30,

2017

2016

Cash flows from operating activities:

Net loss

$
(50,230
)

$
(21,493
)
Adjustments to reconcile net loss to net cash provided by operating activities:

Impairment of proved and unproved oil and gas properties

66,740

—

Depreciation, depletion and amortization

28,258

16,252

Accretion of asset retirement obligations

378

404

Settlement of asset retirement obligations

—

(15
)
Gain on sale of oil and gas properties

(3,848
)

(8
)
Rig idle and termination expense

—

5,059

Total (gain) loss on derivative contracts, net

(4,137
)

2,517

Operating portion of net cash received in settlement of derivative contracts

229

3,330

Stock-based compensation

4,645

1,889

Deferred income taxes

(10,046
)

387

Write-off of deferred financing costs

526

—

Amortization of deferred financing costs

195

220

Changes in assets and liabilities:

Decrease in accounts receivable

6,964

9,141

Increase in prepaid expenses and other current assets

(455
)

(1,790
)
Decrease in accounts payable and accrued expenses

(11,522
)

(3,462
)
Decrease in revenues and royalties payable

(4,019
)

(1,730
)
Increase (decrease) in advances

506

(8,966
)
Net cash provided by operating activities

24,184

1,735

Cash flows from investing activities:

Bold Contribution Agreement, net of cash acquired

(55,609
)

—

Lynden Arrangement, net of cash acquired

—

(31,334
)
Additions to oil and gas properties

(29,958
)

(15,272
)
Additions to office and other equipment

(139
)

(63
)
Proceeds from sales of oil and gas properties

5,054

—

Net cash used in investing activities

(80,652
)

(46,669
)
Cash flows from financing activities:

Proceeds from borrowings

70,000

36,597

Repayments of borrowings

(11,193
)

(38,165
)
Common stock exchanged and cancelled

(324
)

—

Issuance of common stock, net of offering costs of $2.7 million

—

47,125

Deferred financing costs

(1,168
)

(78
)
Net cash provided by financing activities

57,315

45,479

Net increase in cash and cash equivalents

847

545

Cash at beginning of period

10,200

23,264

Cash at end of period

$
11,047

$
23,809

Supplemental disclosure of cash flow information

Cash paid for:

Interest

$
1,555

$
688

Non-cash investing and financing activities:

Class B Common stock issued in Bold Contribution Agreement

$
489,842

$
—

Class A Common stock issued in Bold Contribution Agreement

$
2,037

$
—

Common stock issued in Lynden Arrangement

$
—

$
45,699

Accrued capital expenditures

$
19,519

$
8,938

Asset retirement obligations

$
83

$
101

Promissory Note

$
—

$
5,059


	Issued Shares
	Class A Common Stock	Class B Common Stock	Class A Common Stock		Class B Common Stock		Additional Paid-in Capital		Accumulated Deficit		Total Earthstone Energy, Inc. Equity		Noncontrolling Interest		Total Equity
At December 31, 2020	30,343,421	35,009,371	$	30	$	35	$	540,074	$	(195,258)	$	344,881	$	470,655	$	815,536
Stock-based compensation expense	—	—	—		—		2,605		—		2,605				2,605
Shares issued in connection with the IRM Acquisition	12,719,594	—	13		—		76,559		—		76,572		—		76,572
Vesting of restricted stock units and performance units, net of taxes paid	463,495	—	—		—		—		—		—		—		—
Vested restricted stock units and performance units retained by the Company in exchange for payment of recipient mandatory tax withholdings	257,764	—	—		—		(2,080)		—		(2,080)		—		(2,080)
Cancellation of treasury shares	(257,764)	—	—		—		—		—		—		—		—
Class B Common Stock converted to Class A Common Stock	578,031	(578,031)	1		(1)		7,758		—		7,758		(7,758)		0
Net loss	—	—	—		—		—		(5,833)		(5,833)		(4,723)		(10,556)
At March 31, 2021	44,104,541	34,431,340	$	44	$	34	$	624,916	$	(201,091)	$	423,903	$	458,174	$	882,077
Stock-based compensation expense	—	—	—		—		2,175		—		2,175		—		2,175
Vesting of restricted stock units, net of taxes paid	155,058	—	—		—		—		—		—		—		—
Vested restricted stock units retained by the Company in exchange for payment of recipient mandatory tax withholdings	66,343	—	—		—		(741)		—		(741)		—		(741)
Cancellation of treasury shares	(66,343)	—	—		—		—		—		—		—		—
Class B Common Stock converted to Class A Common Stock	33,463	(33,463)	—		—		441		—		441		(441)		0
Net loss	—	—	—		—		—		(8,871)		(8,871)		(6,960)		(15,831)
At June 30, 2021	44,293,062	34,397,877	$	44	$	34	$	626,791	$	(209,962)	$	416,907	$	450,773	$	867,680


	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~~.

Statements.

EARTHSTONE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	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

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

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

~~We are~~

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. ~~Our~~The Company's operations are all in the upstream segment of the oil and natural gas industry and all ~~our~~its properties are onshore in the United States.

Earthstone ~~Energy, Inc. (“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 (collectively, the “Company” “our,” “we,” “us,” or similar terms).~~

US.

The accompanying unaudited Condensed Consolidated Financial Statements and notes thereto ~~of the Company,~~ 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 ~~2016~~2020 Annual Report on Form ~~10-K, as amended.~~

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, ~~2016~~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 Re-engineering and workovers in the Condensed Consolidated Statements of Operations have been reclassified from its own line item and included in Lease operating expenses, within Operating Costs and Expenses, to conform to current period presentation. This reclassification had no effect on Income (loss) from operations or any other subtotal in the Condensed Consolidated Statements of Operations.

~~Bold Contribution Agreement~~

~~On May 9, 2017, Earthstone completed~~ ~~a contribution agreement dated as of November 7, 2016 and as amended on March 21, 2017 (the “Bold Contribution Agreement”),~~ by and among Earthstone, EEH, Lynden US, Lynden USA Operating, LLC, a Texas limited liability company (“Lynden Op”), Bold Energy Holdings, LLC, a Texas limited liability company (“Bold Holdings”), and Bold Energy III LLC, a Texas limited liability company (“Bold”). The purpose of the Bold Contribution Agreement was to provide for, among other things described below, the business combination between Earthstone and Bold, which owned significant developed and undeveloped oil and natural gas properties in the Midland Basin of Texas (the “Bold Transaction”).

The Bold Transaction was structured in a manner commonly known as an “Up-C.” Under this structure and the Bold Contribution Agreement, (i) Earthstone recapitalized its common stock into two classes – Class A common stock, $0.001 par value per share (the “Class A Common Stock”), and Class B common stock, $0.001 par value per share (the “Class B Common Stock”), and all of Earthstone’s existing outstanding common stock, $0.001 par value per share (the “Common Stock”), was recapitalized on a one-for-one basis for Class A Common Stock (the “Recapitalization”); (ii) Earthstone transferred all of its membership interests in Earthstone Operating, LLC, Sabine River Energy, LLC, EF Non-Op, LLC and Earthstone Legacy Properties, LLC (formerly Earthstone GP, LLC) and $36,071 in cash from the sale of Class B Common Stock to Bold Holdings (collectively, the “Earthstone Assets”) to EEH, in exchange for 16,791,296 membership units of EEH (the “EEH Units”); (iii) Lynden US transferred all of its membership interests in Lynden Op to EEH in exchange for 5,865,328 EEH Units; (iv) Bold Holdings transferred all of its membership interests in Bold to EEH in exchange for 36,070,828 EEH Units and purchased 36,070,828 shares of Class B Common Stock issued by Earthstone for $36,071; and (v) Earthstone granted an aggregate of 150,000 fully vested shares of Class A Common Stock under Earthstone’s 2014 Long-Term Incentive Plan, as amended (the “2014 Plan”), to certain employees of Bold. Each EEH Unit, together with one share of Class B Common Stock, are convertible into one share of Class A Common Stock.

Upon closing of the Bold Transaction on May 9, 2017, Bold Holdings owned approximately 61.4% of the outstanding shares of Class A Common Stock, on a fully diluted, as converted basis. The EEH Units and the shares of Class B Common Stock issued to Bold Holdings were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but were issued by EEH and Earthstone in reliance on the exemption provided under Section 4(a)(2) of the Securities Act.

~~EARTHSTONE ENERGY, INC.~~

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

On May 9, 2017, the closing sale price of the Class A Common Stock was $13.58 per share. On May 10, 2017, the Class A Common Stock was uplisted from the NYSE MKT, LLC (the “NYSE MKT”) to the New York Stock Exchange (the “NYSE”) where it is listed under the symbol “ESTE.”

On May 9, 2017, in connection with the closing of the Bold Transaction, Earthstone, EnCap Investments L.P. (“EnCap”), Oak Valley Resources, LLC (“Oak Valley”), and Bold Holdings entered into a voting agreement (the “Voting Agreement”), pursuant to which EnCap, Oak Valley, and Bold Holdings agreed not to vote any shares of Class A Common Stock or Class B Common Stock held by them in favor of any action, or take any action that would in any way alter the composition of the board of directors of Earthstone (the “Board”) from its composition immediately following the closing of the Bold Transaction as long as the Voting Agreement is in effect.

Pursuant to the terms of the Bold Contribution Agreement, at the closing of the Bold Transaction, Earthstone, Bold Holdings, and the unitholders of Bold Holdings entered into a registration rights agreement (the “Registration Rights Agreement”) relating to the shares of Class A Common Stock issuable upon the exchange of the EEH Units and Class B Common Stock held by Bold Holdings or its unitholders. In accordance with the Registration Rights Agreement, Earthstone filed a registration statement (the “Registration Statement”) with the SEC to permit the public resale of the shares of Class A Common Stock issued by Earthstone to Bold Holdings or its unitholders in connection with the exchange of Class B Common Stock and EEH Units in accordance with the terms of the First Amended and Restated Limited Liability Company Agreement of EEH. On October 18, 2017, the Registration Statement was declared effective by the SEC.

The Bold Transaction was recorded in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, and is consolidated in these financial statements in accordance with FASB ASC Topic 810, Consolidation, which requires the recording of a noncontrolling interest component of net income (loss), as well as a noncontrolling interest component within equity, including changes to additional paid-in capital to reflect the noncontrolling interest within equity in the Condensed Consolidated Balance Sheet as of September 30, 2017 at the noncontrolling interest’s respective membership interest in EEH.

~~New significant accounting policy~~

~~Noncontrolling Interest~~ – represents third-party equity ownership of EEH and is presented as a component of equity in the Condensed Consolidated Balance Sheet as of September 30, 2017, as well as an adjustment to Net income (loss) in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017. As of September 30, 2017, Earthstone and Lynden US owned a 38.9% membership interest in EEH while Bold Holdings owned the remaining 61.1%. See further discussion in ~~Note 6. Noncontrolling Interest~~.

Recently Issued Accounting Standards

~~Standards not yet adopted~~

~~Revenue Recognition~~

Income Taxes - In ~~May 2014,~~December 2019, the FASB issued ~~updated guidance~~an update that simplifies the accounting for recognizing revenue from contracts with customers, which seeks to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries and across capital markets. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. In addition, new and enhanced disclosures will be required. The amendment is effective prospectively for reporting periods beginning on or after December 15, 2017, and early adoption is permitted for periods beginning on or after December 15, 2016. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company does not expect net income ~~(loss) or cash flows to be materially impacted~~taxes by ~~the new standard; however, the Company is currently analyzing whether changes to total revenues and total expenses will be necessary to properly reflect revenue for~~removing certain gas processing agreements. The Company continues to evaluate the expected disclosure requirements, changes to relevant business practices, accounting policies and control activities as a result of adoption and has not yet developed estimates of the quantitative impactexceptions to the ~~Company's Condensed Consolidated Financial Statements.~~general principles in Topic 740. The ~~Company has selected the modified retrospective method~~amendments also improve consistent application of and ~~will adopt~~simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ~~guidance on the effective date of January 1, 2018.~~

~~Leases~~ ~~– In February 2016, the FASB issued updated guidance on accounting for leases.~~ ~~The~~ update requires that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Similar to current guidance, the update continues to differentiate between finance leases and operating leases; however, this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. The standards

~~EARTHSTONE ENERGY, INC.~~

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

~~update is~~are effective for ~~interim~~fiscal years, and annual periods beginning after December 15, 2018 with early adoption permitted. Entities are required to use a modified retrospective adoption, with certain relief provisions, for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements when adopted. The Company expects to adopt this standards update, as required, beginning with the first quarter of 2019. ~~The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its Condensed Consolidated Financial Statements.~~

~~Statement of Cash Flows –~~ In August 2016, the FASB issued updated guidance that clarifies how certain cash receipts and cash payments are presented in the statement of cash flows. This update provides guidance on eight specific cash flow issues. The standards update is effective for interim and annual periods beginning after December 15, 2017, and should be applied retrospectively to all periods presented. Early adoption is permitted. The Company expects to adopt this standards update, as required, beginning with the first quarter of 2018. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its Condensed Consolidated Financial Statements.

~~Business Combinations –~~ In January 2017, the FASB issued updated guidance that clarifies the definition of a business, which amends the guidance used in evaluating whether a set of acquired assets and activities represents a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not considered a business. As a result, acquisition fees and expenses will be capitalized to the cost basis of the property acquired, and the tangible and intangible components acquired will be recorded based on their relative fair values as of the acquisition date. The standard is effective for all public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted for periods for which financial statements have not yet been issued. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its Condensed Consolidated Financial Statements.

~~Intangibles - Goodwill and Other –~~ In January 2017, the FASB issued updated guidance simplifying the test for goodwill impairment. The update eliminates Step 2 of the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. 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~~2020 and early adoption is ~~permitted for interim or annual goodwill impairment tests performed after~~permitted. The Company adopted the update effective January 1, ~~2017. The Company is in the process of evaluating~~2021 and the impact ~~if any, on its Condensed~~was not material to the Consolidated Financial Statements.

~~Compensation – Stock Compensation –~~

Reference Rate Reform - In ~~May 2017,~~March 2020, the FASB issued ~~updated guidance~~an update that provides ~~clarity about which changes~~optional guidance for a limited period of time to ease the ~~terms or conditions of a share-based payment award require~~transition from LIBOR to an ~~entity~~alternative reference rate. The ASU intends to ~~apply modification~~address certain concerns relating to accounting for contract modifications and hedge accounting. ~~The update is effective for annual periods beginning after~~These optional expedients and exceptions to applying GAAP, assuming certain criteria are met, are allowed through December ~~15, 2017, and early adoption is permitted, including adoption in any interim period.~~31, 2022. The Company is currently evaluating the ~~impact, if any,~~provisions of this update ~~but~~and has not yet determined whether it will elect the optional expedients. The Company does not expect the ~~adoption~~transition to an alternative rate to have a material impact on its ~~Condensed Consolidated Financial Statements.~~

~~Note 2. Acquisitions and Divestitures~~

~~The Company accounts for its acquisitions that qualify as~~ business, ~~combinations, under the acquisition method of accounting in accordance with FASB ASC Topic 805,~~ ~~Business Combinations~~, which, among other things, requires the assets acquired and liabilities assumed to be measured and recorded at their fair values as of the acquisition date. The initial accounting for acquisitions may not be complete and adjustments to provisional amounts,operations or ~~recognition of additional assets acquired or liabilities assumed, may occur as additional information is obtained about the facts and circumstances that existed as of the acquisition dates.~~

~~Bold Transaction~~

~~On May 9, 2017, Earthstone completed the Bold Transaction~~ ~~described in~~ ~~Note 1. Basis of Presentation and Summary of Significant Accounting Policies~~.

An allocation of the purchase price was prepared using, among other things, a reserve report prepared by qualified reserve engineers and priced as of the acquisition date. The following allocation is still preliminary with respect to final tax amounts and certain accruals and includes the use of estimates based on information that was available to management at the time these Condensed Consolidated Financial Statements were prepared.

~~EARTHSTONE ENERGY, INC.~~

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

~~The following table summarizes the consideration transferred, fair value of assets acquired and liabilities assumed (in thousands, except share and share price amounts~~):

Consideration:

Shares of Class A Common Stock issued pursuant to the Bold Contribution Agreement to certain employees of Bold

150,000

EEH Units issued to Bold Holdings

36,070,828

Total equity interest issued in the Bold Transaction

36,220,828

Closing per share price of Class A Common Stock as of May 9, 2017

$
13.58

Total consideration transferred ⁽¹⁾⁽²⁾

$
491,879

Fair value of assets acquired:

Cash and cash equivalents

$
2,355

Other current assets

10,078

Oil and gas properties ⁽³⁾

557,704

Amount attributable to assets acquired

$
570,137

Fair value of liabilities assumed:

Long-term debt ⁽⁴⁾

$
58,000

Current liabilities

17,042

Deferred tax liability

2,857

Noncurrent asset retirement obligations

359

Amount attributable to liabilities assumed

$
78,258

~~(1)~~

~~Consideration included 150,000 shares of Class A Common Stock recorded above based upon its fair value which was determined using its closing price of $13.58 per share on May 9, 2017.~~

liquidity.

~~(2)~~

Consideration was 36,070,828 EEH Units. Additionally, Bold Holdings purchased 36,070,828 shares of Class B Common Stock for $36,071. Each EEH Unit, together with one share of Class B Common Stock, is convertible into one share of Class A Common Stock. The fair value of the consideration was determined using the closing price of the Company’s Class A Common Stock of $13.58 per share on May 9, 2017.

~~(3)~~

The market assumptions as to the future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of the future development and operating costs, projecting of future rates of production, expected recovery rate and risk adjusted discount rates used by the Company to estimate the fair value of the oil and natural gas properties represent Level 3 inputs; see ~~Note 3. Fair Value Measurements, below.~~

~~(4)~~

~~Concurrent with the closing of the Bold Transaction, EEH assumed Bold’s outstanding borrowings of $58 million under its credit agreement.~~

~~EARTHSTONE ENERGY, INC.~~

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

The following unaudited supplemental pro forma condensed results of operations present consolidated information as though the Bold Transaction had been completed as of January 1, 2016. The unaudited supplemental pro forma financial information was derived from the historical consolidated and combined statements of operations for Bold and Earthstone and adjusted to include: (i) depletion expense applied to the adjusted basis of the properties acquired and (ii) to eliminate non-recurring transaction costs directly related to the Bold Transaction that do not have a continuing impact on the Company’s operating results. 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 September 30,

Nine Months Ended September 30,

2016

2017

2016

Revenue

$
15,865

$
99,192

$
38,165

Loss before taxes

$
(4,860
)

$
(41,420
)

$
(31,723
)

Net loss

$
(5,061
)

$
(31,374
)

$
(32,109
)

Less: Net loss available to noncontrolling interest

$
(3,120
)

$
(19,253
)

$
(21,587
)

Net loss attributable to Earthstone Energy, Inc.

$
(1,941
)

$
(12,121
)

$
(10,522
)

Pro forma net loss per common share attributable to Earthstone Energy, Inc.:

Basic and diluted

$
(0.09
)

$
(0.53
)

$
(0.60
)

The Company has included in its Condensed Consolidated Statements of Operations, revenues of $17.7 million and direct operating expenses of $9.8 million for the three months ended September 30, 2017, and revenues of $28.6 million and direct operating expenses of $16.0 million for the period May 9, 2017 to September 30, 2017 related to the properties acquired in the Bold Transaction.

~~2017 Divestitures~~

~~For the three months ended September 30,~~ 2017, the Company sold certain non-core properties for a total cash consideration of approximately $2.7 million, while eliminating approximately $3.6 million of future abandonment obligations. The sales resulted in a net gain of approximately $2.2 million recorded in Gain on sale of oil and gas properties in the Condensed Consolidated Statements of Operations.

~~For the nine months ended September 30,~~ 2017, the Company sold certain non-core properties for a total cash consideration of approximately $5.1 million, while eliminating approximately $3.6 million of future abandonment obligations. The sales resulted in a net gain of approximately $3.8 million recorded in Gain on sale of oil and gas properties in the Condensed Consolidated Statements of Operations.

Note 3.2. Fair Value Measurements

FASB ~~ASC~~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 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

~~EARTHSTONE ENERGY, INC.~~

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

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, ~~2017.~~

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.~~gas and interest rate swaps. The Company’s commodity price hedges and interest rate swaps are valued based on a discounted future cash flow ~~model. The primary input for the model is~~models that are primarily based on published forward commodity price ~~curves. The swaps~~curves and published LIBOR forward curves; thus, these inputs are ~~also~~ designated as Level 2 within the valuation hierarchy.

The fair values of ~~commodity~~ derivative instruments in an asset ~~position~~positions include ~~a measure~~measures of counterparty nonperformance risk, and the fair values of ~~commodity~~ derivative instruments in a liability ~~position~~positions include ~~a measure~~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, 2017	Level 1		Level 2		Level 3		Total

June 30, 2021									June 30, 2021	Level 1		Level 2		Level 3		Total
Financial assets									Financial assets
Derivative asset - current	$	—	$	147	$	—	$	147	Derivative asset - current	$	0	$	72	$	0	$	72
Derivative asset - noncurrent									Derivative asset - noncurrent	0		694		0		694
Total financial assets	$	—	$	147	$	—	$	147	Total financial assets	$	0	$	766	$	0	$	766

Financial liabilities									Financial liabilities
Derivative liability - current	$	—	$	1,986	$	—	$	1,986	Derivative liability - current	$	0	$	57,957	$	0	$	57,957
Derivative liability - noncurrent		—		422		—		422	Derivative liability - noncurrent	0		5,401		0		5,401
Total financial liabilities	$	—	$	2,408	$	—	$	2,408	Total financial liabilities	$	0	$	63,358	$	0	$	63,358

December 31, 2016
December 31, 2020									December 31, 2020
Financial assets									Financial assets
Derivative asset - current									Derivative asset - current	$	0	$	7,509	$	0	$	7,509
Derivative asset - noncurrent									Derivative asset - noncurrent	0		396		0		396
Total financial assets									Total financial assets	$	0	$	7,905	$	0	$	7,905

Financial liabilities									Financial liabilities
Derivative liability - current	$	—	$	4,595	$	—	$	4,595	Derivative liability - current	$	0	$	1,135	$	0	$	1,135
Derivative liability - noncurrent		—		1,575		—		1,575	Derivative liability - noncurrent	0		173		0		173
Total financial assets	$	—	$	6,170	$	—	$	6,170
Total financial liabilities									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 ~~goodwill.~~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 ~~only~~if events or changes in certain ~~circumstances.~~

~~Proved~~circumstances indicate that adjustments may be necessary. Due to significant declines in commodity prices and global demand for oil and natural gas products resulting from the COVID-19 pandemic, the Company assessed the fair values of its oil and natural gas properties and goodwill resulting in non-cash impairment charges during the three months ended March 31, 2020. No such triggering events that require further assessment were observed during the six months ended June 30, 2021. See further discussion in Note 5. Oil and Natural Gas Properties

Proved oil and natural gas properties are measured at fair value on a nonrecurring basis in order to review for impairment. 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.

~~EARTHSTONE ENERGY, INC.~~

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

~~Goodwill~~

Goodwill represents the excess of the purchase price of assets acquired over the fair value of those assets and is tested for impairment annually, or more frequently if events or changes in circumstances dictate that the fair value of goodwill may be less than its carrying amount. Such test includes an assessment of qualitative and quantitative factors.

~~Business Combinations~~

The Company records the identifiable assets acquired and liabilities assumed at fair value at the date of acquisition on a nonrecurring basis. Fair value may be estimated using comparable market data, a discounted cash flow method, or a combination of the two. In the discounted cash flow method, estimated future cash flows are based on management’s expectations for the future and include estimates of future oil and gas production, commodity prices based on NYMEX commodity futures price strips as of the date of the estimate, operating and development costs, and a risk-adjusted discount rate. The future oil and natural gas pricing used in the valuation is a Level 2 assumption. Significant Level 3 assumptions associated with the calculation of discounted cash flows used in the determination of fair value of the acquisition include the Company’s estimate operating and development costs, anticipated production of proved reserves, appropriate risk-adjusted discount rates and other relevant data. The Company’s acquisitions are described in ~~Note 2. Acquisitions and Divestitures~~.

~~Asset Retirement Obligations~~

The asset retirement obligation estimates are derived from historical costs and management’s expectation of future cost environments; and therefore, the Company has designated these liabilities as Level 3. The significant inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, well life, inflation and credit-adjusted risk free rate. See ~~Note 11. Asset Retirement Obligations~~ ~~for a reconciliation of the beginning and ending balances of the liability for the Company’s asset retirement obligations.~~

Note 4.3. Derivative Financial Instruments

~~In connection with the closing of the Bold Transaction on May 9, 2017, all oil and natural gas derivative contracts were novated to EEH.~~

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 ~~for the remainder of 2017~~ through December 31, ~~2018.~~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.

~~EARTHSTONE ENERGY, INC.~~

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

The Company had the following open crude oil and natural gas derivative contracts as of ~~September~~June 30, ~~2017:~~

2021:

Price Swaps

Period

Commodity

Volume
(Bbls / MMBtu)

Weighted Average Price
($/Bbl / $/MMBtu)

Q4 2017

Crude Oil

157,500

$
50.66

Q1 - Q4 2018

Crude Oil

1,279,000

$
50.16

Q4 2017

Natural Gas

645,000

$
3.167

Q1 - Q4 2018

Natural Gas

810,000

$
3.066


	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 ~~Company~~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

At times, the Company’s hedging activities include the use of interest rate swaps entered into ~~additional fixed price oil swap agreements, hedging an additional 365,000 Bbls~~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 ~~2019 oil production at a price of $51.55/Bbl.~~

June 30, 2021:


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

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):

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Derivatives not designated as hedging contracts under ASC Topic 815

Statement of Operations Location

Total (loss) gain on commodity contracts

(Loss) gain on derivative contracts, net

$
(4,159
)

$
413

$
3,908

$
(5,847
)
Cash received in settlements on commodity contracts

(Loss) gain on derivative contracts, net

496

533

229

3,330

(Loss) gain on commodity contracts, net

$
(3,663
)

$
946

$
4,137

$
(2,517
)


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 June 30, 2021 and December 31, 2020 are $0.03 million and $2.3 million, respectively, related to commodity hedge contracts settled as of that date for which the cash has not been received.

Note 4. Acquisitions

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 has obtained representation and warranty insurance to provide coverage in the 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 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 assumptions related to the fair value of assets acquired and liabilities assumed. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the Company’s oil and natural gas properties. These amounts will be finalized no later than one year from the acquisition date. The consideration transferred, fair value of assets acquired and liabilities assumed by Earthstone were recorded as follows (in thousands, except share amounts and stock price):

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 ~~Loss~~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. ~~Depletion expense for oil and gas producing property and related equipment was $10.2 million and $5.0 million, for~~For the three and six months ended ~~September~~June 30, ~~2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016,~~2021, depletion expense for oil and gas producing property and related equipment was ~~$27.9~~$25.9 million and ~~$15.9~~$50.1 million, respectively.

~~EARTHSTONE ENERGY, INC.~~

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

For the three and six months ended June 30, 2020, depletion expense for oil and gas producing property and related equipment was $22.8 million and $47.3 million, respectively.

Proved oil and natural gas properties are ~~measured at fair value~~reviewed for impairment on a nonrecurring ~~basis in order to review for impairment.~~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 consist of costs incurred to acquire undeveloped ~~leases as well as the cost to acquire unproved reserves. Undeveloped lease costs and unproved reserve acquisition costs are capitalized.~~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 ~~delay rentals,~~a lease renewal fee, meeting contractual drilling obligations, or by the presence of producing wells on the leases. Unproved costs related to successful ~~exploratory~~ drilling on unproved leases are reclassified to proved ~~properties and depleted on a units-of-production basis.~~

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 ~~September~~June 30, ~~2017,~~2020, the Company recorded annon-cash impairment charges of $0.1 million to its unproved oil and natural gas properties as a result of acreage expirations to its properties located in the Eagle Ford shale trend of south Texas. As a result of both acreage expirations and forward commodity price declines, during the nine months ended September 30, 2017, the Company recorded impairments consisting of $63.0 million to its proved oil and natural gas properties and $3.7 million to its unproved oil and natural gas properties, primarily to its properties located in the Eagle Ford shale trend of south Texas.

~~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, ~~2016.~~

2020, as a result of the decline in crude oil price futures at the time, the Company recorded the following non-cash impairment charges:


(In thousands)	Eagle Ford Trend		Midland Basin		Corporate		Total
Proved properties	$	25,252	$	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 be renewed).

Note 6. Noncontrolling Interest

As a result of the Bold Transaction, Earthstone became the sole managing member of, and has a controlling interest in, EEH. As the sole managing member of EEH, Earthstone operates and controls all of the business and affairs of EEH and its subsidiaries. Immediately following the Bold Transaction, Earthstone and Lynden US owned a 38.6% membership interest in EEH while Bold Holdings owned the remaining 61.4%.

The Bold Transaction was recorded in accordance with FASB ASC Topic 805, Business Combinations, and is consolidated in these financial statements in accordance with FASB ASC Topic 810, Consolidation, which requires the recording of a noncontrolling interest component of net income (loss), as well as a noncontrolling interest component within equity, including changes to Additional paid-in capital to reflect the noncontrolling interest within equity in the Condensed Consolidated Balance Sheet as of September 30, 2017 at the noncontrolling interest’s respective membership interest in EEH. A reconciliation of the equity attributable to the noncontrolling interest as of May 9, 2017 is as follows (~~in thousands~~):

Total consideration transferred ⁽¹⁾

$
491,879

Change to Additional paid-in capital to reflect the noncontrolling interest within equity at their membership interest

(12,872
)
Portion of equity attributable to noncontrolling interest ⁽²⁾

$
479,007

~~EARTHSTONE ENERGY, INC.~~

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

~~(1)~~

~~See~~ ~~Note 2. Acquisitions and Divestitures~~.

~~(2)~~

~~Represents 61.4% of total equity attributable to EEH as of May 9, 2017.~~

Earthstone consolidates the financial results of EEH and its subsidiaries and records a noncontrolling interest for the economic interest in Earthstone held by the members of EEH other than Earthstone and Lynden US. Net (loss) income ~~(loss)~~ attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and 2020 represents the portion of net (loss) income ~~or loss~~ attributable to the economic interest in the Company held by the members of EEH other than Earthstone and Lynden US. Noncontrolling interest in the Condensed Consolidated Balance ~~Sheet~~Sheets as of ~~September~~June 30, ~~2017~~2021 and December 31, 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, ~~2017:~~

2021:

EEH Units Held
By Earthstone
and Lynden US

%

EEH Units Held
By Others

%

Total EEH
Units
Outstanding

As of December 31, 2016

—

—

—

—

—

May 9, 2017 - Bold Transaction

22,656,624

38.6
%

36,070,828

61.4
%

58,727,452

EEH Units issued in connection with Class A Common Stock issued in connection with Bold Transaction

150,000

—

150,000

EEH Units issued in connection with the vesting of restricted stock units

182,135

—

182,135

As of September 30, 2017

22,988,759

38.9
%

36,070,828

61.1
%

59,059,587


	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

2017

As of December 31, 2016

$
—

Noncontrolling interest recorded within equity in connection with the closing of the Bold Transaction

479,007

Net loss attributable to noncontrolling interest

(35,392
)
As of September 30, 2017

$
443,615

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

Net (loss) income ~~(loss)~~ per common share—basic is calculated by dividing Net (loss) income ~~(loss)~~ by the weighted average number of shares of common stock outstanding during the ~~period (Common Stock through May 8, 2017 and Class A Common Stock from May 9, 2017 through September 30, 2017).~~period. Net (loss) income ~~(loss)~~ per common share—diluted assumes the conversion of all potentially dilutive securities and is calculated by dividing Net (loss) income ~~(loss)~~ by the sum of the weighted average number of shares of common stock, as defined above, outstanding plus potentially dilutive securities. Net (loss) income ~~(loss)~~ per common share—diluted considers the impact of 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 ~~(loss)~~ per common share is as follows:

(1)For the three and six months ended June 30, 2021, the Company had no 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 the period were in excess of the weighted average outstanding fair value for the unvested shares for the same 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 income (loss)~~net loss attributable to noncontrolling interest of ~~$37.8~~$19.6 million for the three months ended June 30, 2020 and net income attributable to noncontrolling interest of $0.4 million for the six months ended June 30, 2020 would be added back to Net (loss) income ~~(loss)~~ attributable to Earthstone Energy, Inc., for the periods then ended, having no0 dilutive effect on Net (loss) income ~~(loss)~~ per common share attributable to Earthstone Energy, Inc. For the three months ended September 30, 2017, the Company had no potentially dilutive restricted stock units (“RSUs”) in calculating diluted earnings per share, as the amount of unrecognized compensation costs related to outstanding RSUs exceeded the weighted average fair value of the RSUs assumed converted under the treasury stock method. For the nine months ended September 30, 2017, the Company excluded 137,345 RSUs, in calculating diluted earnings per share as the effect was anti-dilutive due to the net loss incurred for the period. For the three and nine months ended September 30, 2016, the Company excluded zero and 14,212 RSUs, respectively, in calculating diluted earnings per share as the effect was anti-dilutive due to the net loss incurred for these periods.

Note 8. Common Stock

~~On May 9, 2017, and in connection with the completion of the Bold Transaction, Earthstone recapitalized its Common Stock into two classes, as described in~~ ~~Note 1. – Basis of Presentation and Summary of Significant Accounting Policies~~,

Class A Common Stock

At June 30, 2021 and ~~Class B Common Stock. At that time, all of Earthstone’s existing outstanding Common Stock was automatically converted on a one-for-one basis into Class A Common Stock.~~

~~EARTHSTONE ENERGY, INC.~~

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

~~Class A Common Stock~~

~~At September 30, 2017,~~December 31, 2020, there were ~~22,988,759~~44,293,062 and 30,343,421 shares of Class A Common Stock issued and ~~outstanding. On July 1, 2017,~~outstanding, respectively. In connection with the IRM Acquisition, on January 7, 2021, Earthstone ~~retired and returned the 15,357 shares of treasury stock to authorized but unissued~~issued 12,719,594 shares of Class A Common ~~Stock.~~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 ~~period January 1, 2017 through May 8, 2017,~~three and six months ended June 30, 2021, as a result of the ~~Company~~vesting and settlement of restricted stock units and performance units under the 2014 Plan, Earthstone issued ~~382,804~~221,401 and 487,660 shares, respectively, of Class A Common Stock, of which 66,343 and 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 six months ended June 30, 2020, as a result of the vesting and settlement of restricted stock units under the 2014 ~~Plan. During~~Plan, Earthstone issued 223,209 and 530,738 shares, respectively, of Class A Common Stock, of which 57,810 and 133,505 shares, respectively, of Class A Common Stock were retained as treasury stock and canceled to satisfy the ~~period May 9, 2017 through September 30, 2017, the Company issued 182,135~~related employee income tax liability. Additionally, as discussed below, shares of Class A Common Stock were issued as athe result of ~~the vesting and settlement of restricted stock units under the 2014 Plan. Additionally, on May 9, 2017, under the Bold Contribution Agreement, Earthstone issued 150,000 shares~~conversions of Class AB Common ~~Stock valued at approximately $2.0 million on that date. For additional information, see~~ ~~Note 2. Acquisitions and Divestitures~~.

~~Class A Common Stock Offering~~

In October 2017, the Company completed a public offering of 4,500,000 shares of Class A Common Stock, at an issue price of $9.25 per share. The Company received net proceeds from this offering of $39.2 million, after deducting underwriters’ fees and offering expenses of $2.4 million. The net proceeds from the offering were used to repay outstanding indebtedness under the EEH Credit Agreement.

Stock.

Class B Common Stock

At ~~September~~June 30, ~~2017,~~2021 and December 31, 2020, there were ~~36,070,828~~34,397,877 and 35,009,371 shares of Class B Common Stock issued and outstanding. Earthstone did not have any Class B Common Stock issued at December 31, 2016. On May 9, 2017, in connection with Earthstone’s completion of the Bold Transaction, Earthstone issued 36,070,828 shares of Class B Common Stock in exchange for $36 thousand.outstanding, respectively. Each share of Class B Common Stock, together with ~~one~~1 EEH Unit, is convertible into ~~one~~1 share of Class A Common Stock. ~~For additional information, see~~ ~~Note 2. Acquisitions~~During the three and ~~Divestitures~~.

~~On May 9, 2017, in connection with the closing~~six months ended June 30, 2021, 33,463 and 611,494 shares, respectively, of ~~the Bold Transaction, Earthstone, EnCap, Oak Valley,~~Class B Common Stock and ~~Bold Holdings entered into the Voting Agreement, pursuant to which EnCap, Oak Valley, and Bold Holdings agreed not to vote any~~EEH Units were exchanged for an equal number of shares of Class A Common ~~Stock or~~Stock. During the three and six months ended June 30, 2020, 2,000 and 201,993 shares, respectively, of Class B Common Stock ~~held by them in favor~~and EEH Units were exchanged for an equal number of ~~any action, or take any action that would in any way alter the composition~~shares of the Board from its composition immediately following the closing of the Bold Transaction as long as the Voting Agreement is in effect. The Voting Agreement terminates on the earlier of (i) the fifth anniversary of the closing date of the Bold Contribution Agreement and (ii) the date upon which EnCap, Oak Valley, and Bold Holdings collectively own, of record and beneficially, less than 20% of Earthstone’s outstanding voting stock.

Class A Common Stock.

Note 9. Stock-Based Compensation

Restricted Stock Units

The 2014 Plan, ~~as amended,~~ allows, among other things, for the grant of ~~RSUs. On May 9, 2017, and in connection with~~restricted stock units (“RSUs”). As of June 30, 2021, the ~~completion of the Bold Contribution Agreement, and upon approval by the stockholders of Earthstone, the 2014 Plan was amended to increase the~~maximum number of shares of Class A Common Stock ~~authorized to~~that may be issued under the 2014 Plan ~~by 4.3 million shares, to a total of 5.8~~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 ~~one~~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. Prior to May 9, 2017, the~~settlement. The Company ~~determined the fair value of granted RSUs based on the market price of the Common Stock of the Company on the date of the grant. Beginning on May 9, 2017, the Company began determining~~determines the fair value of granted RSUs based on the market price of the Class A Common Stock ~~of Earthstone~~ 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.

~~The table below summarizes unvested RSU award activity for the nine months ended September 30, 2017:~~

Shares

Weighted-Average Grant Date Fair Value

Unvested RSUs at December 31, 2016

781,500

$
12.53

Granted

254,500

$
11.67

Forfeited

(36,000
)

$
13.30

Vested

(594,380
)

$
12.45

Unvested RSUs at September 30, 2017

405,620

$
12.03

~~EARTHSTONE ENERGY, INC.~~

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

The unrecognized compensation expense related to the RSU awards at September 30, 2017 was $4.3 million which will be amortized over the remaining vesting period. The weighted average remaining vesting period of the unrecognized compensation expense is 0.74 years.

Stock-based compensation ~~expense for the three~~is included in General and ~~nine months ended September 30, 2017 was $1.7 million and $4.6 million, respectively. For the three and nine months ended September 30, 2016, stock-based compensation~~administrative expense ~~was $1.3 million and $1.9 million, respectively. Stock-based compensation expense is recorded~~ in the Condensed Consolidated Statements of Operations and is recorded with a corresponding increase in Additional paid-in capital within the Condensed Consolidated Balance ~~Sheet.~~

~~During~~Sheets.

The table below summarizes RSU award activity for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~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 June 30, 2021, there was $5.9 million of unrecognized compensation expense related to the RSU awards which will be recognized over a weighted average period of 0.92 years.

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

The table below summarizes performance unit (“PSU”) activity for the six months ended June 30, 2021:


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

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

On January 27, 2021, the Board of Directors of Earthstone (the “Board”) granted 1,099,800 PSUs (the “2021 PSUs”) to certain officers pursuant to the 2014 Plan (the “2021 Grant”). The 2021 PSUs are payable in cash based upon the achievement by the Company ~~granted 772,500 RSUs with~~over a period commencing on January 1, 2021 and ending on December 31, 2023 (the “Performance Period”) of certain performance criteria established by the Board. The Company classifies these awards that will be settled in cash as liability awards. All previous PSU grants will be settled in shares and are classified as equity awards.

The 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 period beginning on February 1, 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
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 2021 PSUs, assuming a risk-free rate of 0.3% and volatility of 86.0%, the Company calculated the weighted average grant date fair value per PSU to be $10.85. Based on the fair value of ~~$12.55.~~ 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, ~~2016,~~2021, there was $21.4 million of unrecognized compensation expense related to all ~~772,500 RSUs were unvested.~~

PSU awards which will be amortized over a weighted average period of 1.18 years.

For the three and six months ended June 30, 2021, Stock-based compensation related to all PSUs was approximately $3.2 million and $5.0 million, respectively. For the three and six months ended June 30, 2020, Stock-based compensation related to all PSUs was approximately $1.3 million and $2.3 million, respectively.

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

Credit ~~Agreement~~

Facility

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

On ~~May 9, 2017, in connection with the closing~~November 21, 2019, Earthstone, EEH (the “Borrower”), Wells Fargo Bank, National Association, as Administrative Agent and Issuing Bank (“Wells Fargo”), Royal Bank of the Bold Transaction, the Company exited its credit agreement dated December 19, 2014, by and among Earthstone, Oak Valley Operating, LLC, EF Non-OP, LLC, Sabine River Energy, LLC, Basic Petroleum Services, Inc.,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~~lenders party thereto ~~(as amended, modified or restated from time~~(the “Lenders”) entered into a credit agreement (the “Credit Facility”), which replaced the prior credit facility, which was terminated on November 21, 2019.

On December 17, 2020, Earthstone, EEH, as Borrower, Wells Fargo, as Administrative Agent, the guarantors party thereto, and the lenders party thereto (the “Lenders”) entered into an amendment (the “Second Amendment”) to ~~time,~~ the ~~“ESTE Credit Agreement”). At that time, all outstanding borrowings of $10.0 million under the ESTE Credit Agreement were repaid~~credit agreement dated November 21, 2019, by and ~~$0.5 million of remaining unamortized deferred financing costs were expensed~~among EEH, as Borrower, Earthstone, as Parent, Wells Fargo, as Administrative Agent and ~~included in Write-off of deferred financing costs in the Condensed Consolidated Statements of Operations.~~

On May 9, 2017, EEH (the “Borrower”), Earthstone Operating, LLC, EF Non-Op, LLC, Sabine River Energy, LLC, Earthstone Legacy Properties, LLC, Lynden Op, Bold, Bold Operating, LLC (the “Guarantors”),Issuing Bank, BOKF, NA dba Bank Ofof Texas, as ~~Agent and Lead Arranger, Wells Fargo~~Issuing Bank ~~National Association~~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 ~~(the “Lenders”~~(collectively, the “Parties”), to the Credit Agreement. The Second Amendment was effective upon the closing of the IRM Acquisition described in Note 4. Acquisitions. Among other things, the Second Amendment (i) joined certain financial institutions as additional lenders, increased the borrowing base from $240.0 million to $360.0 million, (ii) increased the interest rate on outstanding borrowings; and (iii) adjusted some of the financial covenants.

On April 20, 2021, the Parties entered into ~~a credit agreement~~an amendment (the ~~“EEH~~“Third Amendment”) to the Credit ~~Agreement”).~~

~~The~~Agreement under which the borrowing base ~~under~~increased from $360 million to $475 million in connection with its regularly scheduled redetermination. Further, the ~~EEH Credit Agreement~~Third Amendment provided for an increase in the borrowing base from $475 million to $550 million which became effective on July 20, 2021 upon closing of the Tracker/Sequel Purchase Agreements described in Note 4. Acquisitions.

The next regularly scheduled redetermination of the borrowing base is ~~$150.0 million, and is subject~~expected to ~~redetermination~~occur on or around October 1, 2021. Subsequent redeterminations are expected to occur on or about each May 1st and November 1st ~~and May 1st of each year.~~thereafter. The amounts borrowed under the ~~EEH~~ Credit ~~Agreement~~Facility bear annual interest rates at either (a) the ~~London Interbank Offered~~adjusted LIBO Rate ~~(“LIBOR”~~(as customarily defined) (the “Adjusted LIBO Rate”) plus ~~2.25%~~2.50% to ~~3.25%~~3.75% or (b) the sum of (i) the greatest of (A) the prime ~~lending~~ rate of ~~Bank~~Wells Fargo, (B) the federal funds rate plus ½ of ~~Texas~~1.0%, and (C) the Adjusted LIBO Rate for an interest rate period of one month plus ~~1.25%~~1.0%, (ii) plus 1.50% to ~~2.25%~~2.75%, depending on the ~~amounts~~amount borrowed under the ~~EEH~~ Credit ~~Agreement.~~Facility. Principal amounts outstanding under the ~~EEH~~ Credit ~~Agreement~~Facility are due and payable in full at maturity on ~~May 9, 2022.~~November 21, 2024. All of the obligations under the ~~EEH~~ Credit ~~Agreement,~~Facility, and the guarantees of those obligations, are secured by substantially all of EEH’s assets. Additional payments due under the ~~EEH~~ Credit ~~Agreement~~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, as well as~~thereunder. EEH is also required to pay customary letter of credit fees.

Effective May 2020, the Company entered into certain ~~other customary fees.~~

interest rate swaps, exchanging the LIBO Rate for a fixed rate of 0.286% (the “Swap”). The ~~EEH~~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 ~~Agreement~~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, ~~enter into sale and leaseback transactions,~~ pay dividends and ~~make~~ 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 ~~EEH~~ Credit ~~Agreement~~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. ~~Leverage~~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 ~~(excluding any debt from obligations relating to non-cash losses under FASB ASC 815 as a result of changes in the fair market value of derivatives)~~ to (ii) ~~the product of~~ EBITDAX for the applicable period, which was calculated as EBITDAX for the four consecutive fiscal quarters ending on such ~~fiscal quarter multiplied by four.~~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) ~~non-cash losses under FASB ASC 815 as a result of changes in~~certain distributions to employees related to the ~~fair market value of derivatives,~~stock compensation, (vii) ~~exploration~~certain transaction related expenses, (viii) ~~impairment~~reimbursed indemnification expenses related to certain dispositions and investments, (ix) non-cash ~~compensation~~extraordinary, usual, or nonrecurring expenses or losses, (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 ~~non-cash gains under FASB ASC 815 as a result~~in an amount equal to the aggregate amount of ~~changes in the fair market value of derivatives.~~

pass-through cash distributions actually made by Borrower during such period.

The ~~EEH~~ Credit ~~Agreement~~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 ~~if Frank A. Lodzinski ceases to serve and function as Chief Executive Officer of EEH and the majority of the Lenders do not approve of Mr. Lodzinski’s successor.~~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, ~~2017,~~2021, EEH was in compliance with ~~these~~the covenants under the ~~EEH~~ Credit ~~Agreement.~~

Facility.

Table of Contents

EARTHSTONE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of ~~September~~June 30, ~~2017, the Company had a $150.0~~2021, $241.4 million ~~borrowing base under the EEH Credit Agreement,~~ of ~~which $70.0 million was~~borrowings were outstanding, bearing annual interest of ~~3.7311%~~3.347%, resulting in an additional ~~$80.0~~$233.6 million of borrowing base availability under the ~~EEH~~ Credit ~~Agreement.~~

~~Promissory Note~~

~~In July 2016, Earthstone issued a $5.1~~Facility. At December 31, 2020, there were $115.0 million ~~unsecured promissory note (the “Note”) to a drilling rig contractor in settlement~~ of rig idle charges and the termination amount of the contract. These expenses which were incurred from late January 2016 through September 30, 2016 were recorded in Rig idle and termination expense in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2016. The Note was assigned to EEH in connection with the closing of the Bold Transaction. The Note is payable in monthly installments over a three-year period maturing in July 2019, bearing an annualized interest rate of 8.0% for the first 12 months, 10.0% for the subsequent 12 months, and 12.0% for the last 12 months, with no prepayment penalty. Interest expense is recognized using the effective interest method of approximately 9.1% over the life of the note. As of September 30, 2017, the Company had $3.1 millionborrowings outstanding under the ~~Note with $1.7 million included in the current portion of long-term debt.~~

~~Total Long-Term Debt~~

~~The following table below summarizes long term debt (in thousands~~):

Credit Facility.

September 30,

December 31,

2017

2016

Borrowings under Credit Agreement

$
70,000

$
10,000

Promissory note

3,104

4,297

Total debt

73,104

14,297

Less: Current portion of long-term debt

(1,704
)

(1,604
)
Long-term debt

$
71,400

$
12,693

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, interest on borrowings under the Credit Facility averaged ~~4.21%~~3.33% and ~~4.01%~~3.36% per annum, respectively, which excluded commitment fees of $0.2 million and $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 ~~$0.2~~$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, 2016, interest on borrowings averaged 3.78% and 5.40% per annum, respectively, of which excluded commitment fees of $0.1 million and $0.2 million, respectively, and amortization of deferred financing costs of $0.1 million and $0.2 million respectively.

The Company capitalized $0.1 million and $1.2 million, respectively, of costs associated with the ESTE Credit Agreement for the three and nine months ended September 30, 2017. The Company did not capitalize any costs associated with its borrowings for the three months ended September 30, 2016 and capitalized $0.1 million of costs associated with its borrowings for the nine months ended September 30, 2016. These capitalized costs are included in Other noncurrent assets in the Condensed Consolidated Balance Sheets.

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 six months ended June 30, 2020.

Note 11. Asset Retirement Obligations

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

~~EARTHSTONE ENERGY, INC.~~

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

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

2017

2016

Beginning asset retirement obligations

$
6,013

$
5,075

Liabilities incurred

64

114

Liabilities settled

—

(15
)
Acquisitions ⁽¹⁾

359

250

Accretion expense

378

404

Divestitures ⁽²⁾

(3,629
)

—

Revision of estimates

19

(13
)
Ending asset retirement obligations

$
3,204

$
5,815

~~(1)~~

~~The 2017 amount is related to the Bold Transaction. The 2016 amount is related to the Lynden Arrangement.~~

	~~(2)~~	~~See~~ ~~Note 2.~~
			2021
Beginning asset retirement obligations			$	3,027
Liabilities incurred			57
Liabilities settled			(53)
Acquisitions ~~and Divestitures.~~			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.

~~Flatonia Energy, LLC (“Flatonia”), which owns approximately 12.9%~~ The Audit Committee of the ~~outstanding Class A Common Stock as~~Board of ~~September 30, 2017, is~~Directors of Earthstone independently reviews and approves all related party transactions.

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

In connection with the ~~Operating~~Olenik v. Lodzinski et al. lawsuit described below in Note 13. Commitments and Contingencies, the Significant Shareholder was also named in the lawsuit. As a result of the Settlement Agreement (defined below), the Company ~~made payments to Flatonia~~has concluded negotiations with its insurance carrier regarding an allocation of ~~$6.4 million~~defense costs and ~~$20.8 million and received payments from Flatonia of $0.8 million and $3.2 million~~settlement contributions above its deductible for all the ~~three and nine months ended September 30, 2017, respectively. For~~parties named in the three and nine months ended September 30, 2016, the Company made payments to Flatonia of $5.1 million and $21.3 million and received payments from Flatonia of $5.8 million and $8.6 million, respectively. At September 30, 2017, amounts receivable from Flatonia inlawsuit. In connection with the ~~Operating Agreement were $1.5 million. At December 31, 2016, Earthstone had $1.5~~Court approved Settlement, the Significant Shareholder was billed approximately $1.1 million ~~of outstanding receivables due from Flatonia. Amounts payable to Flatonia in connection with the Operating Agreement were $3.1 million at December 31, 2016. There were no payables outstanding~~ and ~~due to Flatonia~~this amount has been reimbursed as of ~~September~~June 30, ~~2017.~~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 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 cash and 4.7 million shares of the Company’s Class A Common Stock. The Significant Shareholder owned approximately 49% of Tracker as of 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 competitive sales process, the Company acquired the aforementioned assets for $8.2 million from that related party entity.

Note 13. Commitments and Contingencies

Legal

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

~~In July 2015, EF Non-Op, LLC, a subsidiary of Earthstone, filed suit in the 125~~^th ~~Judicial District Court of Harris County, Texas against the operator of its properties in LaSalle County, Texas. In the case~~ ~~EF Non-Op, LLC vs. BHP Billiton Petroleum Properties (N.A.), LP (F/K/A Petrohawk Properties, LP),~~ the Company claims the operator has breached the applicable joint operating agreements in numerous ways, including, but not limited to, improper authorization for expenditure requests, improper and imprudent operations, misrepresentation of charges and excessive billings, as well as refusal to provide requested information. The Company also claims damages from negligent representation and fraud. The Company is seeking all relief to which it is entitled, including consequential damages and attorneys’ fees. BHP Billiton has claimed they are owed unpaid lease operating expenses and attorneys’ fees. With respect to a portion of the litigation associated with nine non-operated gas wells that were drilled in 2014 and placed on production in the first half of 2015, BHP Billiton in early 2016 elected to deem the Company as a non-consenting working interest owner regarding costs associated with the drilling, completing and operating of these nine wells, as BHP’s sole and exclusive remedy. The Company has accepted this “non-consent” status. The litigation is continuing with respect to the other disputes. The outcome of remaining disputes in this proceeding is uncertain, and while the Company is confident in its position, any potential monetary recovery or loss to the Company cannot be estimated at this time.

Olenik v. ~~Lodzinksi~~Lodzinski et al.: On June 2, 2017, Nicholas Olenik filed a purported shareholder class and derivative action in the Delaware Court of Chancery against ~~the Company’s~~Earthstone’s Chief Executive Officer, along with other members of the Board, EnCap Investments L.P. (“EnCap”), Bold, Bold Holdings and Oak ~~Valley.~~Valley Resources, LLC. The complaint ~~alleges~~alleged that ~~the Company’s~~Earthstone’s directors breached their fiduciary duties in connection with the contribution agreement dated as of November 7, 2016 and as amended on March 21, 2017 (the “Bold Contribution Agreement”), by and among Earthstone, EEH, Lynden US, Lynden USA Operating, LLC, Bold ~~Contribution Agreement.~~Holdings and Bold. The Plaintiff ~~asserts~~asserted that the directors negotiated the business combination pursuant to the Bold ~~Transaction~~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

~~EARTHSTONE ENERGY, INC.~~

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

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 ~~the Company~~Earthstone and as a class action on behalf of all persons who held ~~Common Stock~~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 ~~Company and each~~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 ~~defendants believe~~claims, holding that the allegations with respect to those claims ~~are entirely without merit~~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 was translated into a Stipulation and ~~they intend to mount a vigorous defense. The outcome~~Agreement of ~~this suit is uncertain,~~Compromise, Settlement and ~~while~~Release Agreement (the “Settlement Agreement”) between the ~~Company is confident in its position, any potential monetary recovery or loss to the Company cannot be estimated at this time.~~

~~On August 18, 2017, litigation captioned Trinity Royal Partners, LP v. Bold Energy III LLC, et al.~~parties and was filed with the ~~142nd Judicial District~~Delaware Court of Chancery for approval. The principal terms of the ~~District~~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. On March 31, 2021, the Court approved the Settlement Agreement and the Company paid the $3.5 million settlement shortly thereafter. The insurance carriers immediately reimbursed their agreed upon allocation of the settlement totaling $2.8 million and in ~~Midland County, Texas, asserting breach~~addition, the Company has received $1.3 million from the derivative portion of ~~contract and indemnity claims for alleged damages from loss~~the settlement, which is included as a reduction of ~~property relating to two oil and natural gas wells~~Transaction costs in ~~which Bold was~~ the ~~operator. Trinity Royalty Partners, LP (“Trinity”) alleges that Bold is required to indemnify Trinity under the terms~~Condensed Consolidated Statement of an Assignment and a Participation and Joint Development Agreement between Bold and Trinity. Damages are alleged to include costs incurred in attempting to repair and restore an oil and natural gas well andOperations for the loss of future reserves attributable to both wells. Trinity is seeking approximately $7.2 million in damages and attorneys’ fees. Earthstone and Bold believe the suit is without any merit and Bold intends to mount a vigorous defense. The outcome of this suit is uncertain, and while the Company is confident in its position, any potential monetary recovery or loss to the Company cannot be estimated at this time.

six months ended June 30, 2021.

Environmental and Regulatory

As of ~~September~~June 30, ~~2017,~~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.

Note 14. Income Taxes

~~Following the closing of the Bold Transaction, the Company continues to record an income tax provision consistent with its status as a corporation.~~

The Company’s corporate structure requires the filing of two separate consolidated U.S. Federal income tax returns and one Canadian income tax return ~~resulting from the Lynden Arrangement that includes~~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. ~~Following the Bold Transaction,~~ 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 well as any standalone income or loss generated by each company.~~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, ~~2017,~~2021, the Company recorded anincome tax benefit of approximately $0.8 million which included (1) a deferred income tax benefit for Lynden US of ~~$2.7~~$0.4 million as a result of ~~its standalone pre-tax loss incurred before the Bold Transaction and~~ its share of the distributable loss from EEH, ~~after the Bold Transaction.~~

~~During the nine months ended September 30, 2017, the Company did not record an~~(2) no net income tax benefit for Earthstone as ~~a result of its standalone pre-tax loss incurred before~~ the ~~Bold Transaction and~~$2.6 million income tax benefit resulting from its share of the distributable loss from EEH ~~after the Bold Transaction, because the~~had a full valuation allowance recorded against it as future realization of ~~such loss~~the net deferred tax asset cannot be ~~reasonably~~ assured and ~~is subject to a full valuation allowance. Earthstone recorded a $7.5 million~~(3) deferred income tax benefit ~~as a discrete item during the current reporting period, which resulted from a change in assessment~~ of the realization of its net deferred tax assets due to the deferred tax liability that was recorded with respect to its investment in EEH as part of the Bold Transaction as an adjustment to Additional paid-in capital within the Condensed Consolidated Balance Sheet.

~~Lynden Corp incurred no material net income (loss), or related income tax expense (benefit), for the three and nine months ended September 30, 2017.~~

~~EEH recorded deferred tax expense during nine months ended September 30, 2017 of $0.2~~$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 ~~deficit margin generated during~~distributable income from EEH, (2) deferred income tax expense for Earthstone of $0.06 million as a result of its share of the ~~period~~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 ~~carried forward to offset future taxable margin~~assured and (3) deferred income tax benefit of $0.01 million related to ~~state basis differences in EEH’s oil and natural gas properties.~~

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, 2020.

Table of Contents I~~tem~~

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

Statement Regarding Forward-Looking Information

This discussion and other items in this Quarterly Report on Form 10-Q contain forward-looking statements and information that are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this document, the words “believe,” “anticipate,” “estimate,” “expect,” “intend,” “may,” “will,” “project,” “forecast,” “plan,” and similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. These statements are subject to numerous risks, uncertainties and assumptions. Certain of these risks are summarized ~~in this report and~~ under “Item 1A. Risk Factors” in our ~~2016~~2020 Annual Report on Form 10-K ~~as amended, that was~~ 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, ~~2016,~~2020, which are included in our ~~2016~~2020 Annual Report on Form ~~10-K, as amended.~~

10-K.

Overview

~~We are~~

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 and, to a lesser extent, exploration activities.~~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 ~~primary~~ assets are located in the Midland Basin of west Texas and the Eagle Ford ~~trend~~Trend of south ~~Texas and the Bakken/Three Forks formations of North Dakota~~.

~~Earthstone Energy, Inc. (“Earthstone”)~~Texas.

Our primary focus 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 (collectively, the “Company” “our,” “we,” “us,” or similar terms).

~~Recent Developments~~

~~Bold Contribution Agreement~~

On May 9, 2017, Earthstone completed a contribution agreement dated as of November 7, 2016 and as amended on March 21, 2017 (the “Bold Contribution Agreement”), by and among Earthstone, EEH, Lynden US, Lynden USA Operating, LLC, a Texas limited liability company (“Lynden Op”), Bold Energy Holdings, LLC, a Texas limited liability company (“Bold Holdings”), and Bold Energy III LLC, a Texas limited liability company (“Bold”). The purpose of the Bold Contribution Agreement was to provide for, among other things described below, the business combination between Earthstone and Bold, which owns significant developed and undeveloped oil and natural gas propertiesconcentrated in the 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 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 ~~“Bold Transaction”~~“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”).

~~The Bold Transaction was structured in~~ As a ~~manner commonly known~~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 ~~an “Up-C.” Under this structure~~Borrower, Wells Fargo Bank, National Association (“Wells Fargo”), as Administrative Agent, the guarantors party thereto, and the ~~Bold Contribution~~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 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

Table of Contents

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 related party entity at the time of the acquisition. See further discussion in Note 4. Acquisitions and Note 12. Related Party Transactions in the Notes to Unaudited Condensed Consolidated Financial Statements.

Tracker/Sequel Acquisitions

On July 20, 2021, Earthstone, EEH, Tracker Resource Development III, LLC (“Tracker”), and TRD III Royalty Holdings (TX), LP (“RoyaltyCo” and collectively with Tracker, the “Seller”) consummated the transactions contemplated in the Purchase and Sale Agreement dated March 31, 2021 by and among Earthstone, EEH and Seller (the “Tracker Agreement”) that was previously reported on Form 8-K filed on April 5, 2021. At the closing of the 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) ~~Earthstone recapitalized its common stock into two classes –~~$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”)~~, and Class B common stock, $0.001 par value per share (the “Class B Common Stock”~~. Also, on July 20, 2021, Earthstone, EEH, SEG-TRD LLC (“SEG-I”), and ~~all~~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 ~~Earthstone’s existing outstanding common stock, $0.001 par value per share~~the Sequel Agreement, among other things, EEH acquired (the ~~“Common Stock”~~“Sequel Acquisition” and with the Tracker Acquisition, the “Transaction”)~~, was recapitalized on~~ certain well-bore interests and related equipment held by Sequel that were part of a ~~one-for-one basis~~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 ~~Class A Common Stock (the “Recapitalization”); (ii) Earthstone transferred all~~aggregate consideration consisting of ~~its membership interests in Earthstone Operating, LLC, Sabine River Energy, LLC, EF Non-Op, LLC and Earthstone Legacy Properties, LLC (formerly Earthstone GP, LLC) and $36,071~~the following: (i) $45.3 million in cash, ~~from~~net of preliminary and customary purchase price adjustments and remains subject to final post-closing settlement between the sale of Class B Common Stock to Bold Holdings (collectively, the “Earthstone Assets”) to EEH, in exchange for 16,791,296 membership units of EEH (the “EEH Units”); (iii) Lynden US transferred all of its membership interests in Lynden Op to EEH in exchange for 5,865,328 EEH Units; (iv) Bold Holdings transferred all of its membership interests in Bold to EEH in exchange for 36,070,828 EEH UnitsBuyer and ~~purchased 36,070,828 shares of Class B Common Stock issued by Earthstone for $36,071;~~Sequel, and ~~(v) Earthstone granted an aggregate of 150,000 fully vested~~(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 ~~Earthstone’s 2014 Long-Term Incentive Plan, as amended (the “2014 Plan”),~~our senior secured revolving credit facility which was increased from $475 million to ~~certain employees of Bold. Each EEH Unit, together~~$550 million on July 20, 2021.

Tracker Registration Rights Agreements – On July 20, 2021, in connection with ~~one share of Class B Common Stock, are convertible into one share of Class A Common Stock.~~

~~Upon~~the closing of the ~~Bold Transaction on May 9, 2017, Bold Holdings owned approximately 61.4%~~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 ~~outstanding~~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 ~~on a fully diluted, as converted basis. The EEH Units and~~have been disposed of in the ~~shares~~manner set forth in the registration statement or under Rule 144 of ~~Class B Common Stock issued to Bold Holdings were not registered under~~ the Securities Act of 1933, as amended (the “Securities Act”), ~~but were issued by EEH and Earthstone in reliance on~~until the ~~exemption provided under Section 4(a)(2)~~distribution of the Class A Common Stock does not require registration under the Securities ~~Act.~~

~~Pursuant to~~Act, or until there are no longer any such registrable shares of Class A Common Stock issued in connection with the ~~terms of the Bold Contribution Agreement, at~~Tracker Acquisition outstanding or (ii) four years after the closing of the ~~Bold Transaction,~~Tracker Acquisition.

Sequel Registration Rights Agreements – On July 20, 2021, in connection with the closing of the Sequel Agreement, Earthstone ~~Bold Holdings,~~ and ~~the unitholders of Bold Holdings~~Sequel entered into a registration rights agreement (the ~~“Registration~~“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 ~~issuable upon~~have been disposed of in the ~~exchange~~manner set forth in the registration statement or under Rule 144 of the ~~EEH Units and~~Securities Act, until the distribution of the Class BA Common Stock ~~held by Bold Holdings~~does not require registration under the Securities Act, or ~~its unitholders. In accordance~~until there are no longer any such registrable shares of Class A Common Stock issued in connection with the ~~Registration Rights~~Sequel Acquisition outstanding or (ii) four years after the closing of the Sequel Acquisition.

Lock-Up Agreement ~~Earthstone filed a registration statement (the “Registration Statement”)~~– In connection with the ~~SEC to permit~~closing of the ~~public resale~~Tracker Agreement, on July 20, 2021, Earthstone and EnCap Energy Capital Fund VIII, L.P. (“EnCap Fund VIII”), a member of Tracker, entered into a lock-up agreement (the “EnCap Lock-up Agreement”) providing that EnCap Fund VIII will not transfer any of the shares of Class A Common Stock ~~issued by Earthstone to Bold Holdings or its unitholders in connection with~~that it received at the ~~exchange of Class B Common Stock and EEH Units in accordance with the terms~~closing of the ~~First Amended and Restated Limited Liability Company Agreement~~Tracker Acquisition for a period of ~~EEH. On October 18, 2017,~~120 days after the ~~SEC issued a Notice~~closing of ~~Effectiveness for~~ the ~~Registration Statement.~~

~~On May 9, 2017,~~Tracker Acquisition. Also, on

Table of Contents

July 20, 2021, in connection with the closing of the ~~Bold Contribution~~Tracker Agreement, Earthstone ~~EnCap Investments L.P.~~and ZIP Ventures I, L.L.C. (“~~EnCap”~~ZIP”), ~~Oak Valley Resources, LLC (“Oak Valley”), and Bold Holdings~~a member of Tracker, entered ~~into~~in a ~~voting~~lock-up agreement (the ~~“Voting~~“ZIP Lock-up Agreement”)~~, pursuant to which EnCap, Oak Valley, and Bold Holdings agreed~~ providing that ZIP will not ~~to vote~~transfer any of the shares of Class A Common Stock ~~or Class B Common Stock held by them in favor of any action, or take any action~~ that ~~would in any way alter the composition of the board of directors of Earthstone (the “Board”) from its composition immediately following~~it received at the closing of the ~~Bold Contribution Agreement as long as the Voting Agreement is in effect.~~

~~Immediately following~~Tracker Acquisition for a period of 120 days after the closing of the ~~Bold Contribution Agreement,~~Tracker Acquisition.

COVID-19

Despite the ~~Board was~~recoveries in commodity prices, recent surges from COVID-19 variants continue to negatively impact the global economy, disrupt global supply chains and create significant volatility and disruption of financial and commodity markets. The extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, is uncertain and depends on various factors, including how the pandemic and measures taken in response to its impact on demand for oil and natural gas, the availability of personnel, equipment and services critical to our ability to operate our properties and the impact of potential governmental restrictions on travel, transports and operations. There is uncertainty around the extent and duration of disruption, including any resurgence, and we expect that the longer the duration of any such disruption, the greater the adverse impact may be on our business.

Operational Status

As a producer of oil, natural gas and NGLs, 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 have returned to the office but we remain flexible to working remotely, using information technology in which we previously invested if needed. We have managed and conducted both field and non-field functions effectively thus far, including our day-to-day operations, our accounting and financial reporting systems and our internal control over financial reporting. We will continue to focus on the health and safety of our employees in conformity with the applicable jurisdictional mitigation guidelines. We will continue to monitor CDC guidelines and respond appropriately.

Commodity Market Impacts and Response

During the course of 2020, commodity prices declined significantly, negatively impacting producers of oil natural gas and NGLs. We significantly curtailed our capital expenditures in response and, in the spring of 2020, voluntarily curtailed up to 60% of total net production. In June 2020, we returned to operating at full production capacity as oil prices began to 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 commenced a drilling program late in the first quarter of 2021.

Operational/Financial Challenges

It is difficult to model and predict how our operations and financial status may change as a result of COVID-19. In our industry, any forecast, plans and changes to operations and financial status are a function of commodity prices. If oil prices decline due to a resurgence of COVID-19, we believe we can continue to operate and produce our properties at a minimum in a cash flow neutral position for the next 12 months. A significant driver in the future may be the financial institutions’ view on commodity prices with respect to borrowing base redeterminations. If a resurgence of COVID-19 triggers additional volatility in our business or global economies, our borrowing base, recently increased to nine members from eight members, four of which are designated by EnCap, three of which are independent, and two of which are members of management, including Earthstone’s Chief Executive Officer. At any time during$550 million with the ~~effectiveness~~closing of the ~~Voting~~Tracker Acquisition, could be reduced. Significant reductions in the borrowing base under our Credit Agreement ~~during~~could create a borrowing base deficiency depending on our loans then outstanding which ~~EnCap’s collective ownership~~may lead to a default. We believe global, as well as national, mitigation efforts currently being implemented to fight COVID-19 have had, and may continue to have, a material impact on commodity prices and may continue to present significant challenges to our industry.

The effects of ~~Earthstone exceeds 50% of~~COVID-19, including a substantial decrease in economic activity, have contributed to significant credit, debt and equity market volatility. Similar to other producers in our business, we experienced volatility in the total issued and outstanding voting stock, EnCap may remove and replace one director that was not originally designated by EnCap, and his or her successors. Any such removal and replacement will be conducted in accordance with the provisions of Earthstone’s certificate of incorporation and bylaws then in effect. The Voting Agreement terminates on the earlier of (i) the fifth anniversary of the closing date of the Bold Contribution Agreement and (ii) the date upon which EnCap, Oak Valley, and Bold Holdings collectively own, of record and beneficially, less than 20% of Earthstone’s outstanding voting stock.

~~On May 9, 2017, the closing sale~~ price of ~~the~~our Class A Common ~~Stock was $13.58 per share. On May 10, 2017,~~Stock.

Consolidation Focus

We believe that the ~~Class A Common Stock was uplisted from~~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 ~~NYSE MKT, LLC (the “NYSE MKT”) to~~COVID-19 induced volatility in oil price. We are focusing our attention on acquisition and corporate merger opportunities that would increase the ~~New York Stock Exchange (the “NYSE”) where it is listed under~~scale of our operations. In addition, we believe the ~~symbol “ESTE.”~~

~~Management’s Plans~~

~~Since establishing a substantial operated presence~~current industry environment presents unique opportunities with distressed assets or corporations that will be distressed in the ~~Midland Basin,~~near future which would provide us the

Table of Contents

potential for further consolidation because of our financial strength. At the same time, we ~~have been focused on integrating~~will seek to block up acreage that would allow for longer horizontal laterals that would provide for higher economic returns. In short, we believe we are well qualified to be a consolidator which could increase the scale of our operations ~~engineering, geology, land, accounting~~ and ~~personnel functions throughout the Company as well as continuing a drilling and completion program. Although commodity prices have been volatile in 2017,~~add value to our ~~current business plan~~shareholders.

Areas of Operation

Our primary focus is ~~to continue to operate one rig primarily~~concentrated in the Midland Basin of west Texas, ~~throughout~~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.

During the ~~rest~~first quarter of ~~2017~~2021, we completed and ~~through 2018. In the Eagle Ford trend, we concluded an 11 well drilling program and expect~~turned to ~~start completion operations on those~~sales five gross (3.7 net) wells ~~in November 2017.~~

~~We intend to focus on reducing our lease operating expenses and general and administrative expense on a per unit of production basis, as well as improving the efficiency of our capital spending.~~

~~We will remain vigilant in assessing volatility in the commodity prices and adjust our business plan accordingly.~~

~~Credit Agreement~~

On May 9, 2017, in connection with the closing of the Bold Transaction, the Company exited its credit agreement dated December 19, 2014, by and among Earthstone, Oak Valley Operating, LLC, EF Non-OP, LLC, Sabine River Energy, LLC, Basic Petroleum Services, Inc., BOKF, NA dba Bank of Texas, and the Lenders party thereto (as amended, modified or restated from time to time, the “ESTE Credit Agreement”). At that time, all outstanding borrowings of $10.0 million under the ESTE Credit Agreement were repaid and $0.5 million of remaining unamortized deferred financing costs were expensed and included in Write-off of deferred financing costs in the Condensed Consolidated Statements of Operations.

The borrowing base under the EEH Credit Agreement is $150.0 million, and is subject to redetermination on or about November 1st and May 1st of each year. The amounts borrowed under the EEH Credit Agreement bear annual interest rates at either (a) the London

~~Interbank Offered Rate (“LIBOR”) plus 2.25% to 3.25% or (b) the prime lending rate of Bank of Texas plus 1.25% to 2.25%, depending~~ on the ~~amounts borrowed under~~Hamman 30 pad in Upton County and commenced drilling three gross (2.1 net) wells on the ~~EEH Credit Agreement. Principal amounts outstanding under the EEH Credit Agreement are due and payable~~Hamman 45 pad in full at maturity on May 9, 2022. All of the obligations under the EEH Credit Agreement, and the guarantees of those obligations, are secured by substantially all of EEH’s assets. Additional payments due under the EEH Credit Agreement include paying a commitment fee of 0.50% per year to the Lenders in respect of the unutilized commitments thereunder, as well as certain other customary fees.

The EEH Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, EEH’s ability to incur additional indebtedness, create liens on assets, make investments, enter into sale and leaseback transactions, pay dividends and make 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 EEH Credit Agreement requires EEH to maintain the following financial covenants: a current ratio of not less than 1.0 to 1.0 and a leverage ratio of not greater than 4.0 to 1.0. 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 (excluding any debt from obligations relating to non-cash losses under FASB ASC 815 as a result of changes in the fair market value of derivatives) to (ii) the product of EBITDAX for such fiscal quarter multiplied by four. The term “EBITDAX” means, for any period, the sum of consolidated net income for such period plus (a) the following expenses or charges to the extent deducted from consolidated net income in such period: (i) interest, (ii) taxes, (iii) depreciation, (iv) depletion, (v) amortization, (vi) non-cash losses under FASB ASC 815 as a result of changes in the fair market value of derivatives, (vii) exploration expenses, (viii) impairment expenses, and (ix) non-cash compensation expenses and minus (b) to the extent included in consolidated net income in such period, non-cash gains under FASB ASC 815 as a result of changes in the fair market value of derivatives.

The EEH Credit Agreement contains customary affirmative covenants and defines events of default to include failure to pay principal or interest, breach of covenants, breach of representations and warranties, insolvency, judgment default, and if Frank A. Lodzinski ceases to serve and function as Chief Executive Officer of EEH and the majority of the Lenders do not approve of Mr. Lodzinski’s successor. Upon the occurrence and continuance of an event of default, the Lenders have the right to accelerate repayment of the loans and exercise their remedies with respect to the collateral. As of September 30, 2017, EEH was in compliance with these covenants under the EEH Credit Agreement.

As of September 30, 2017, the Company had a $150 million borrowing base under the EEH Credit Agreement, of which $70 million was outstanding, bearing annual interest of 3.7311%, resulting in an additional $80 million of borrowing base availability under the EEH Credit Agreement.

~~Class A Common Stock Offering~~

In October 2017, the Company completed a public offering of 4,500,000 shares of Class A Common Stock, at a public offering price of $9.25 per share, receiving net proceeds of $39.2 million, after deducting underwriters’ fees and offering expenses of $2.4 million. The net proceeds were used to repay outstanding indebtedness under the EEH Credit Agreement. We also agreed to issue and sell to the underwriters, at their option, up to 675,000 additional shares of Class A Common Stock under an overallotment option expiring November 23, 2017. As of the date of the filing of this quarterly report, the option had not been exercised.

~~Divestiture of Assets~~

Midland County. During the nine months ended September 30, 2017, we sold several small legacy properties for cash consideration of approximately $4.2 million. These properties were substantially non-operated, low margin properties which produced approximately 341 Boepd (64% gas) year to date. We may seek further sales of smaller, non-core assets through year-end pending economic prices. We are also considering a divestiture of our Bakken non-operated assets, which averaged approximately 876 Boepd (64% oil, 82% liquids) during the third quarter. A sale of these assets would allow us to further support our growth in the Midland Basin.

~~Uplisting of Class A Common Stock~~

On May 8, 2017, the Board approved (i) the transfer of the listing of the common stock, $0.001 par value per share (the “Common Stock”) of Earthstone, from the NYSE MKT to the NYSE, and (ii) the voluntary delisting of the Common Stock from the NYSE MKT. In connection with the closing of the Bold Transaction, all of the Common Stock was converted into Class A Common Stock, on a one-for-one basis. The Class A Common Stock began trading on the NYSE on May 10, 2017. The ticker symbol for the Class A Common Stock is the same as the Common Stock and trades under the symbol “ESTE.”

~~Closing of Denver Office~~

On June 30, 2017, Earthstone management informed the employees of its office located in Denver, Colorado, that it would be closing those offices and providing severance pay, consisting of both regular salary and benefits, for a specified period, if the employee agreed to stay through the transition period ended July 31, 2017.

~~Areas of Operation~~

~~Our core areas of operations are in the Midland Basin of west Texas, the Eagle Ford trend of south Texas and the Bakken/Three Forks formations of North Dakota.~~

~~Our operating results for the three and nine months ended September 30, 2017, were affected by the following factors:~~

~~In early 2016, we survived a low commodity price environment and industry downturn by reducing our costs and capital expenditures.~~

~~On May 18, 2016, Earthstone acquired Lynden US giving rise to our Midland Basin operations.~~

~~Our pre-Lynden US inventory of wells that were drilled but not completed in 2014 and 2015 were completed in the fourth~~second quarter, ~~of 2016 in an improved commodity price environment compared to earlier in 2016.~~

~~On May 9, 2017,~~ we completed the ~~Bold Transaction, adding significant production to our operating results.~~

~~Commodity prices continue to be volatile.~~

aforementioned wells on the Hamman 45 pad in Midland ~~Basin~~

~~We believe that~~County and drilled a four-well Pearl Jam pad (95% working interest) on the ~~Midland Basin continues to have attractive economics and~~recently acquired IRM Spanish Pearl project which we expect to ~~continue~~complete and turn to ~~focus our attention on growing our footprint through acreage trades, acquisitions, development~~sales in late third quarter. After drilling ~~and merger and acquisition opportunities. We are acutely focused on expansion in~~ the ~~Midland Basin and production results continue~~Pearl Jam pad, the rig was moved to ~~be as good or better than we projected. Well results in the Wolfcamp formation have continued to meet or exceed our expectations.~~

We have been operating a one drilling rig program in the Midland Basin and plan to maintain a one rig program throughout the remainder of 2017 and 2018, with a view toward adding a second rig at some point in 2018 based upon commodity prices, our drilling results and liquidity. We recently completed drilling our seventh Midland Basin well (100% working interest) located inwestern Reagan County ~~and recently completed~~in early July to drill a ~~three well~~four-well pad, ~~(100% working interest) in Reagan County. We currently have~~then is expected to move to Upton County to drill a ~~rig drilling the first well of a two-well~~four-well pad ~~in Reagan County, and we anticipate that the rig will thereafter be~~before being moved to Midland County ~~to drill a two well pad. There are currently five wells~~late in ~~Reagan County waiting on completion for which we~~2021. We plan to ~~initiate completion operations~~deploy a second rig in ~~November 2017.~~

Weearly August, beginning in Upton County. Based on our revised capital budget, we anticipate spudding 30 gross / 26.2 net operated wells and bringing 20 gross / 16.1 net operated wells and 0.7 net non-operated wells online in 2021.

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

~~Eagle Ford Trend~~

We recently completed an 11 well drilling program for 2017 in southern Gonzales County, Texas by drilling six wells in our Crosby Unit. Completion operations on the 11 wells are expected to begin in November 2017. We expect our 2018 drilling program to be consistent with our 2017 program. Additionally, during each of the second and third quarters of 2017, we entered into a Joint Development Agreements ("JDA") in southern Gonzales County. In each of the two JDA’s, the financial partner is obligated to pay a promoted (higher) share of the capital expenditures to earn 50% of our interest in these units and adjacent acreage. Based on current estimates, the two JDA’s are expected to reduce the Company's overall capital expenditures by approximately $17 million, allowing the Company to shift capital resources from the Eagle Ford to the Midland Basin while still maintaining operating control over its Eagle Ford program.

Additionally, the impacts from Hurricane Harvey during the third quarter were relatively minimal for us in the Eagle Ford, with no significant damages to our operations there. Minor weather associated delays in initiating completion operations in southern Gonzales County may reduce the number of our wells brought online during the last quarter of 2017, pushing some completions into early 2018.

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.

~~The following~~ There have been no significant ~~change has been made~~changes to our critical accounting policies during the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~

2021.

Table of Contents

Results of Operations

Three Months Ended June 30, 2021, compared to the Three Months Ended June 30, 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

Table of Contents

Results of Operations Highlights

The ~~Bold Transaction was recorded in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations,~~IRM Acquisition and ~~is consolidated in these financial statements in accordance with FASB ASC Topic 810, Consolidation, which requires~~Eagle Ford Acquisitions have had a significant and pervasive impact on our results of operations when compared to the ~~recording of a noncontrolling interest component of net income (loss),~~prior corresponding periods, as well as ~~a noncontrolling interest component within equity, including changes to additional paid-in capital to reflect the noncontrolling interest within equity~~diminished operating results in the ~~Condensed Consolidated Balance Sheet as of September 30, 2017 at the noncontrolling interest’s respective membership interest in EEH.~~

~~Noncontrolling Interest~~ ~~– represents third-party equity ownership of EEH~~corresponding prior year periods due to voluntary production shut-ins resulting from low and is presented as a component of equity in the Condensed Consolidated Balance Sheet as of September 30, 2017, as well as an adjustment to Net income (loss) in the Condensed Consolidated Statements of Operations for the three and nine months ended September30, 2017. As of September 30, 2017, Earthstone and Lynden US held 38.9% of the outstanding membership interests in EEH while Bold Holdings held the remaining 61.1%. See further discussion in ~~Note 6. Noncontrolling Interest~~ ~~in the~~ ~~Notes to Unaudited Condensed Consolidated Financial Statements~~.

~~Results of Operations~~

~~Three months ended September 30, 2017,~~sometimes negative commodity prices. In addition, commodity prices have improved compared to the ~~three months ended September 30, 2016~~

Three Months Ended September 30,

2017

2016

Change

Sales volumes:

Oil (MBbl)

563

201

180
%
Natural gas (MMcf)

967

563

72
%
Natural gas liquids (MBbl)

166

71

134
%
Barrels of oil equivalent (MBOE)

890

366

143
%

Average prices realized: ⁽¹⁾

Oil (per Bbl)

$
45.73

$
41.11

11
%
Natural gas (per Mcf)

$
2.60

$
2.52

3
%
Natural gas liquids (per Bbl)

$
18.29

$
11.95

53
%

(In thousands)

Oil revenues

$
25,733

$
8,262

211
%
Natural gas revenues

$
2,513

$
1,417

77
%
Natural gas liquids revenues

$
3,036

$
851

257
%

Lease operating expense

$
5,407

$
4,581

18
%
Severance taxes

$
1,588

$
522

204
%
Depreciation, depletion and amortization

$
10,330

$
5,149

101
%
General and administrative expense

$
5,608

$
2,285

145
%
Stock-based compensation

$
1,687

$
1,328

27
%
Transaction costs

$
109

$
846

-87
%
Gain on sale of oil and gas properties

$
2,157

$
8

NM

Interest expense, net

$
(903
)

$
(341
)

165
%
(Loss) gain on derivative contracts, net

$
(3,663
)

$
946

-487
%
Income tax benefit (expense)

$
94

$
(201
)

-147
%

~~(1) Prices presented exclude any effects~~prior corresponding periods further impacting our results of ~~oil and natural gas derivatives.~~

~~NM – Not Meaningful~~

operations. Below is a detailed discussion further highlighting the impact of our recent acquisitions.

Oil revenues

For the three months ended ~~September~~June 30, ~~2017,~~2021, oil revenues increased by ~~approximately~~ ~~$17.5~~$52.1 million or ~~211%~~276% relative to the comparable period in ~~2016.~~2020. Of the increase, ~~approximately~~ ~~$0.9~~$33.5 million was attributable to an increase in our realized price and ~~$16.6~~$18.6 million was attributable to ~~increased~~an increase in volume. Our average realized price per Bbl increased from ~~$41.11~~$23.56 for the three months ended ~~September~~June 30, ~~2016~~2020 to ~~$45.73~~$65.47 or ~~11%~~178% for the three months ended ~~September~~June 30, ~~2017.~~ We2021. Additionally, we had a net increase in the volume of oil sold of ~~362~~283 MBbls or ~~180%~~35%, ~~primarily due~~which included an increase of 304 MBbls related to the ~~Midland Basin properties we~~wells acquired in the ~~Bold Transaction.~~

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 resulting from natural decline.

Natural gas revenues

For the three months ended ~~September~~June 30, ~~2017,~~2021, natural gas revenues increased by ~~$1.1~~$5.6 million or ~~77%~~494% relative to the comparable period in ~~2016. The~~2020. Of the increase, $3.6 million was ~~primarily~~due to increased sales volume and $2.0 million was attributable to an increase in ~~volume.~~ 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 ~~404~~1,576 MMcf or ~~72%, driven by~~117% which included an ~~additional 483~~increase of 600 MMcf ~~from our Midland Basin properties~~related to the wells acquired in the ~~Bold Transaction.~~

IRM Acquisition, an increase of 10 MMcf related to the Eagle Ford Acquisitions and an increase of 966 MMcf in our other wells primarily resulting from a higher mix of natural gas from existing wells and the impact of voluntary production shut-ins in the prior year period.

Natural gas liquids revenues

For the three months ended ~~September~~June 30, ~~2017,~~2021, natural gas liquids revenues increased by ~~$2.2~~$10.4 million or ~~257%~~614% relative to the comparable period in ~~2016.~~2020. Of the increase, ~~approximately~~ ~~$0.5~~$3.4 million was attributable to an increase in our realized price and ~~$1.7~~$7.0 million was attributable to increased volume. The volume of natural gas liquids produced and sold increased by 95288 MBbls or ~~134%~~138%, ~~primarily due~~which included an increase of 112 MMcf related to ~~an additional 100 MBbls from our Midland Basin properties~~the wells acquired in the ~~Bold Transaction.~~

IRM Acquisition, an increase of 2 MBbls related to the Eagle Ford Acquisitions and an increase of 174 MBbls in our other wells primarily resulting from voluntary production shut-ins in the prior year period.

Lease operating expense (“LOE”)

LOE includes all costs incurred to operate wells and related facilities for both operated and non-operated properties. In addition to direct operating costs such as labor, repairs and maintenance, re-engineering and workovers, equipment rentals, materials and supplies, fuel and chemicals, LOE includes product marketing and transportation fees, insurance, ad valorem taxes and overhead charges provided for in operating agreements.

LOE increased by ~~$0.8~~$6.2 million or ~~18%~~110% for the three months ended ~~September~~June 30, ~~2017~~2021 relative to the comparable period in ~~2016. The~~2020, due to a $2.8 million increase ~~was primarily~~resulting from the ~~result~~LOE of the ~~costs to operate the producing assets~~properties acquired in the ~~Bold Transaction, that were not incurred in~~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.~~

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

Production and ad valorem taxes

~~Severance~~

Production and ad valorem taxes for the three months ended ~~September~~June 30, ~~2017,~~2021 increased by ~~$1.1~~$3.7 million or ~~204%~~250% relative to the comparable period in ~~2016, primarily~~2020 due to a $1.3 million increase resulting from the ~~increases~~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 ~~volumes and oil and natural gas prices. However, as a percentage of revenues from oil, natural gas, and natural gas liquids, severance taxes remained flat when compared to~~shut-ins in the prior year period.

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

DD&A for the three months ended ~~September~~June 30, ~~2017,~~2021 increased by ~~$5.2~~$3.1 million, or ~~101%~~14% relative to the comparable period in ~~2016,~~ 2020, primarily due to ~~the addition of~~$5.8 million increase in DD&A related to the assets acquired in the ~~both~~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 ~~Lynden Arrangement and Bold Transaction~~prior year period, as well as additional volumes added to the depletable base ~~as well as increased production volumes.~~

of our properties resulting from the impact of improved commodity prices on our estimated proved reserves.

General and administrative expense (“G&A”)

G&A ~~consists primarily of employee remuneration, professional and consulting fees and other overhead expenses. G&A~~for the three months ended June 30, 2021 increased by ~~$3.3~~$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

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.

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 ~~September~~June 30, ~~2017 relative~~2020 to the comparable period in 2016. The increase was primarily due to both the retention of certain employees of Bold, as well as the payment and accrual of severance to certain Bold and Denver office employees. Additionally, ~~legal expenses increased due to litigation described in~~ ~~Note 13. Commitments and Contingencies~~ ~~in the~~ ~~Notes to Unaudited Condensed Consolidated Financial Statements~~.

~~Stock-based compensation~~

Stock-based compensation includes the expense associated with grants under the 2014 Plan of restricted stock units (“RSUs”) to employees and non-employee directors. Stock-based compensation was $1.7$2.4 million for the three months ended ~~September~~June 30, ~~2017,~~2021, due to higher average borrowings outstanding compared to ~~$1.3 million in~~ the prior year ~~period.~~

~~Transaction costs~~

~~Transaction costs consist~~period primarily ~~of professional and consulting fees associated with~~resulting from the ~~Bold Transaction and the Lynden Arrangement.~~

~~Gain on sale of oil and gas properties~~

During the three months ended September 30, 2017, we sold certain of our non-core oil and gas properties in Texas, Montana, Oklahoma and North Dakota. In connection with these sales, we recorded gains totaling $2.2 million. IRM Acquisition. See Note ~~2. Acquisitions and Divestitures~~ 10. Long-Term Debtin the Notes to Unaudited Condensed Consolidated Financial Statements.

For the three months ended ~~September~~June 30, ~~2017,~~2021, we recorded a net loss on derivative contracts of ~~$3.7~~$51.2 million, consisting of ~~net realized gain on settlements of $0.5 million and~~ unrealized mark-to-market losses of ~~$4.2~~$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 ~~September~~June 30, ~~2016,~~2020, we recorded a net ~~gain~~loss on derivative contracts of ~~$0.9~~$20.7 million, consisting of unrealized mark-to-market losses of $49.6 million related to our commodity hedges and $0.5 million related to our interest rate swaps, partially offset by net realized gains on settlements of ~~$0.5 million and unrealized mark-to-market gains~~our commodity hedges of ~~$0.4~~$29.4 million.

Income tax benefit ~~(expense)~~

~~Our corporate structure requires~~

For the ~~filing of two separate consolidated U.S. Federal~~three months ended June 30, 2021, we recorded income tax ~~returns~~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 income tax benefit for Earthstone as the $1.4 million income tax benefit resulting from its share of the distributable loss from EEH had a full valuation allowance recorded against it as future realization of the net deferred tax asset cannot be assured and (3) a deferred income tax benefit of $0.7 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 ~~Arrangement that includes~~ Energy Corp., a corporation organized under the laws of British Columbia and wholly-owned subsidiary of Earthstone (“Lynden ~~US and Earthstone.~~ Corp”), incurred no material income or loss, or related income tax expense or benefit, for the three months ended June 30, 2021.

During the three months ended ~~September~~June 30, ~~2017,~~2020, we recorded anincome tax expense of approximately $1.1 million which included (1) income tax expense for Lynden US of ~~$0.2~~$0.7 million as a result of its share of the distributable income from EEH, ~~after~~(2) deferred income tax expense for Earthstone of $2.8 million as a result of its share of the ~~Bold Transaction and~~distributable income from EEH, which was used to reduce the valuation allowance recorded against its deferred tax ~~benefit~~asset which was previously recorded as future realization of ~~$0.3~~the net deferred tax asset cannot be assured and (3) deferred income tax expense of $0.4 million related to the Texas Margin ~~Tax as~~Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the ~~deficit margin generated during the period cannot be carried forward to offset future taxable margin related to state basis differences in EEH’s oil and natural gas properties.~~

~~Nine~~three months ended ~~September~~June 30, ~~2017,~~2020.

Six Months Ended June 30, 2021, compared to the ~~nine months ended September~~Six Months Ended June 30, ~~2016~~

Nine Months Ended September 30,

2017

2016

Change

Sales volumes:

Oil (MBbl)

1,300

607

114
%
Natural gas (MMcf)

2,328

1,593

46
%
Natural gas liquids (MBbl)

350

161

117
%
Barrels of oil equivalent (MBOE)

2,038

1,034

97
%

Average prices realized: ⁽¹⁾

Oil (per Bbl)

$
46.02

$
36.09

28
%
Natural gas (per Mcf)

$
2.72

$
2.12

28
%
Natural gas liquids (per Bbl)

$
17.86

$
11.43

56
%

(In thousands)

Oil revenues

$
59,815

$
21,898

173
%
Natural gas revenues

$
6,338

$
3,376

88
%
Natural gas liquids revenues

$
6,249

$
1,843

239
%

Lease operating expense

$
14,989

$
11,081

35
%
Severance taxes

$
3,705

$
1,418

161
%
Rid idle and termination expense

$
—

$
5,059

-100
%
Impairment expense

$
66,740

$
—

NM

Depreciation, depletion and amortization

$
28,258

$
16,252

74
%
General and administrative expense

$
14,838

$
6,961

113
%
Stock-based compensation

$
4,645

$
1,889

146
%
Transaction costs

$
4,676

$
1,641

185
%
Gain on sale of oil and gas properties

$
3,848

$
8

NM

Interest expense, net

$
(1,873
)

$
(934
)

101
%
Write-off of deferred financing costs

$
(526
)

$
—

NM

Gain (loss) on derivative contracts, net

$
4,137

$
(2,517
)

-264
%
Income tax benefit (expense)

$
10,046

$
(387
)

NM

2020


	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

~~(1)~~ ~~Prices presented exclude any effects of oil and natural gas derivatives.~~

NM – Not Meaningful

Table of Contents

Oil revenues

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, oil revenues increased by ~~approximately~~ ~~$37.9~~$71.9 million or ~~173%~~120% relative to the comparable period in ~~2016.~~2020. Of the increase, ~~approximately~~ ~~$6.0~~$43.6 million was attributable to an increase in our realized price and ~~$31.9~~$28.3 million was attributable to ~~increased~~an increase in volume. Our average realized price per Bbl increased from ~~$36.09~~$35.63 for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2020 to ~~$46.02~~$61.56 or ~~28%~~73% for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~ We2021. Additionally, we had a net increase in the volume of oil sold of ~~693~~460 MBbls or ~~114%~~27%, ~~primarily due~~which included an increase of 598 MBbls related to the ~~Midland Basin properties we~~wells acquired in the ~~Bold Transaction.~~

IRM Acquisition and an increase of 34 MBbls related to the Eagle Ford Acquisitions, offset by a decrease of 172 MBbls in our other wells primarily resulting from natural decline.

Natural gas revenues

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, natural gas revenues increased by ~~$3.0~~$10.3 million or ~~88%~~467% relative to the comparable period in ~~2016.~~2020. Of the increase, ~~approximately~~ ~~$1.0~~$5.5 million was due to increased sales volume and $4.8 million was attributable to an increase in realized price. Our average realized price per Mcf increased 219% from $0.73 for the six months ended June 30, 2020 to $2.33 for the six months ended June 30, 2021. The total volume of natural gas produced and sold increased 2,351 MMcf or 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 resulting from a higher mix of natural gas in the wells brought on in the current year, as well as voluntary production shut-ins in the prior year period.

Natural gas liquids revenues

For the six months ended June 30, 2021, natural gas liquids revenues increased by $16.2 million or 343% relative to the comparable period in 2020. Of the increase, $7.1 million was attributable to an increase in our realized price and ~~$2.0~~$9.1 million was attributable to increased volume. ~~Our average realized price per Mcf increased from $2.12 for the nine months ended September 30, 2016 to $2.72 or 28% for the nine months ended September 30, 2017.~~ ~~The total volume of natural gas produced and sold increased 735 MMcf or 46% primarily due to the Midland Basin properties we acquired in the Bold Transaction.~~

~~Natural gas liquids revenues~~

~~For the nine months ended September 30, 2017, natural gas liquids revenues increased by $4.4 million or 239% relative to the comparable period in 2016. Of the increase,~~ ~~approximately~~ ~~$1.0 million was attributable to an increase in our realized price and $3.4 million was attributable to increased volume.~~ The volume of natural gas liquids produced and sold increased by ~~189~~376 MBbls or ~~117%~~78%, ~~primarily due~~which included an increase of 212 MMcf related to ~~156 MBbls of additional volume provided by~~ the ~~Midland Basin properties we~~wells acquired in the ~~Bold Transaction.~~

IRM Acquisition, an increase of 2 MBbls related to the Eagle Ford Acquisitions and an increase of 162 MBbls in our other wells primarily resulting from voluntary production shut-ins in the prior year period.

Lease operating expense (“LOE”)

LOE increased by ~~$3.9~~$7.7 million or ~~35%~~51% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 relative to the comparable period in ~~2016, primarily~~2020, due to ~~costs to operate~~a $6.7 million increase resulting from the ~~producing assets~~LOE of the properties acquired in the ~~Bold Transaction~~IRM Acquisition, an increase of $0.3 million related to the Eagle Ford Acquisitions and ~~the Lynden Arrangement that were not present in~~a $0.7 million increase resulting from higher production volumes when compared to the prior year ~~period.~~

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

Production and ad valorem taxes

~~Severance~~

Production and ad valorem taxes for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 increased by ~~$2.3~~$5.7 million or ~~161%~~127% relative to the comparable period in ~~2016, primarily~~2020 due to a $2.8 million increase resulting from the properties acquired in the IRM Acquisition, an increase ~~in oil~~of $0.1 million related to the Eagle Ford Acquisitions and ~~natural gas prices. However,~~a $2.8 million increase related to our other wells resulting from to improved commodity prices, as ~~a percentage of revenues from oil, natural gas, and natural gas liquids, severance taxes remained flat when compared to~~well as voluntary production shut-ins in the prior year period.

~~Rig idle and termination~~

Impairment expense

~~We incurred rig idle and contract termination expenses of $5.1 million during~~

During the ~~nine months ended September 30, 2016. In July 2016,~~prior year period, we entered into an agreement with a rig contractor to terminate our contract with the contractor. Per the terms of the agreement, a termination fee for the remaining commitment on the contract was due and the termination fees were retroactively applied to January 2016, when we suspended drilling and temporarily idled the drilling rig. In connection with the termination, we issued a three-year amortizing promissory note with a principal amount of $5.1recorded non-cash impairments totaling $60.4 million, which ~~was equivalent to the idle charges and contract termination fee.~~

~~Impairment expense~~

~~As a result of significant forward commodity price declines, as described below in~~ ~~Liquidity and Capital Resources, Commodity Prices, and the recording of certain acreage expirations, we recognized $66.7 million of non-cash asset impairments during~~ ~~the nine months ended September 30, 2017~~ ~~that have negatively impacted our results of operations and equity. These impairments~~ consisted of ~~$63.0~~$25.3 million to ~~our~~ proved oil and natural gas properties, ~~and $3.7~~$17.6 million to ~~our~~ unproved oil and natural gas properties and $17.6 million to goodwill. No such impairments were recorded during the three months ended June 30, 2021.

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

DD&A for the six months ended June 30, 2021 increased by $2.9 million, or 6% relative to the comparable period in 2020 primarily due to an $11.6 million increase in DD&A related to the assets acquired in the IRM Acquisition, offset by a $8.7 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 ~~located~~resulting from the impact of improved commodity prices on our estimated proved reserves.

General and administrative expense (“G&A”)

G&A for the six months ended June 30, 2021 increased by $3.7 million, or 27% relative to the comparable period in 2020, due to an increase of $2.5 million in non-cash performance-based stock-based compensation expense resulting from increases in the ~~Eagle Ford shale trend~~market value of ~~south Texas.~~our Class A Common Stock, as well as $1.4 million resulting from the reinstatement of certain cash-based

Table of Contents

compensation expenses which were suspended in the prior year period, offset by $0.2 million decrease in employee-related costs resulting from efficiencies gained over the prior year period.

Transaction costs

For the six months ended June 30, 2021, transaction costs increased by $2.2 million primarily due to a $3.8 million increase in legal and professional fees, and severance costs primarily associated with the IRM Acquisition, partially offset by a decrease of $1.6 million primarily due to reimbursements received related to the 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 ~~3. Fair Value Measurements~~10. Long-Term Debt in the Notes to Unaudited Condensed Consolidated Financial ~~Statements for a discussion of how impairments are measured.~~

Statements.

~~Depreciation, depletion and amortization~~

~~DD&A increased for the nine months ended September 30, 2017 by $12.0 million, or 74% relative to the comparable period in 2016,~~ ~~due to the addition of the assets acquired in the Bold Transaction and the Lynden Arrangement to the depletable base, as well as increased production volumes.~~

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

G&A increased by $7.9 million for the nine months ended September 30, 2017 relative to the comparable period in 2016, primarily due to both the retention of certain employees of Bold, as well as the payment and accrual of severance to certain Bold and Denver office employees. Additionally, ~~legal expenses increased due to litigation described in~~ ~~Note 13. Commitments and Contingencies~~ ~~in the~~ ~~Notes to Unaudited Condensed Consolidated Financial Statements~~.

~~Stock-based compensation~~

Stock-based compensation was $4.6 million for the nine months ended September 30, 2017, as compared to $1.9 million in the prior year period. However, the current year amount is not comparable to the prior year period as the initial grant was made near the end of the prior year period on May 20, 2016.

~~Transaction costs~~

~~Transaction costs consist primarily of professional and consulting fees associated with the Bold Transaction and the Lynden Arrangement.~~

~~Gain on sale of oil and gas properties~~

During the nine months ended September 30, 2017, we sold certain of our non-core oil and gas properties in Texas, Montana, Oklahoma and North Dakota. In connection with these sales, we recorded gains totaling $3.8 million. ~~See Note 2. Acquisitions and Divestitures~~ ~~in the~~ ~~Notes to Unaudited Condensed Consolidated Financial Statements.~~

~~Interest expense, net~~

Interest expense increased from $0.9 million for the nine months ended September 30, 2016 to $1.9 million for the nine months ended September 30, 2017, primarily the increase in borrowings for the current period. ~~See Note 10. Long-Term Debt~~ ~~in the~~ ~~Notes to Unaudited Condensed Consolidated Financial Statements~~.

~~Write-off of deferred financing costs~~

~~On May 9, 2017, in connection with the closing of the Bold Transaction, Earthstone exited the ESTE Credit Agreement and $0.5 million of remaining unamortized deferred financing costs were written off.~~

~~Gain (loss)~~(Loss) gain on derivative contracts, net

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~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 ~~$4.1~~$79.1 million, consisting of unrealized mark-to-market gains of ~~$3.9~~$40.5 million related to our commodity hedges, unrealized mark-to-market losses of $0.5 million related to our interest rate swap and net realized gains on settlements of ~~$0.2~~our commodity hedges of $39.1 million. For the nine months ended September 30, 2016, we recorded a net loss on derivative contracts of $2.5 million, consisting of net realized gains on settlements of $3.3 million offset by unrealized mark-to-market losses of $5.8 million.

Income tax benefit (expense)

~~During~~

For the ~~nine~~six months ended ~~September~~June 30, ~~2017, the Company~~2021, we recorded anincome tax benefit of approximately $0.8 million which included (1) a deferred income tax benefit for Lynden US of ~~$2.7~~$0.4 million as a result of ~~its standalone pre-tax loss incurred before the Bold Transaction and~~ its share of the distributable loss from EEH, ~~after the Bold Transaction.~~

~~During the nine months ended September 30, 2017, the Company did not record an~~(2) no net income tax benefit for Earthstone as ~~a result of its standalone pre-tax loss incurred before~~ the ~~Bold Transaction and~~$2.6 million income tax benefit resulting from its share of the distributable loss from EEH ~~after the Bold Transaction, because the~~had a full valuation allowance recorded against it as future realization of ~~such loss~~the net deferred tax asset cannot be ~~reasonably~~ assured and ~~is subject to~~(3) a ~~full valuation allowance. Earthstone recorded a $7.5 million~~deferred income tax benefit ~~as a discrete item during the current reporting period, which resulted from a~~

~~change in assessment~~ of the realization of its net deferred tax assets due to the deferred tax liability that was recorded with respect to its investment in EEH as part of the Bold Transaction as an adjustment to Additional paid-in capital within the Condensed Consolidated Balance Sheet.

~~Lynden Corp incurred no material net income (loss), or related income tax expense (benefit), for the three and nine months ended September 30, 2017.~~

During the six months ended June 30, 2020, we recorded income tax benefit of approximately $0.02 million which included (1) income tax expense for Lynden US of $0.1 million as a result of its share of the ~~deficit margin generated during~~distributable income from EEH, (2) deferred income tax expense for Earthstone of $0.06 million as a result of its share of the ~~period~~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 ~~carried forward to offset future taxable margin~~assured and (3) deferred income tax expense of $0.01 million related to ~~state basis differences in EEH’s oil and natural gas properties.~~

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, 2020.

Liquidity and Capital Resources

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 intensive. As of June 30, 2021, we had $0.5 million in cash and $241.4 million of long-term debt outstanding under our Credit 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 $234.1 million. Adjusted for the closing of the Tracker Acquisition on July 20, 2021, we had an estimated $0.5 million in cash and $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 resumed drilling operations with the deployment of a rig in the first quarter of 2021 while adding a second rig in August and we expect to ~~finance future acquisition and development activities through available working capital,~~spend $130-$140 million based on our current 2021 drilling plan. We believe we will have sufficient liquidity with cash flows from ~~operating activities,~~operations and available borrowings under the ~~EEH~~ Credit Agreement ~~sale~~to meet our cash requirements for the next 12 months.

Working capital (presented below) was a deficit of ~~corporate and project financing, assuming we can access debt and equity markets. In addition, we may continue~~$88.7 million as of June 30, 2021, compared to ~~partially finance~~a working capital deficit of $20.8 million as of December 31, 2020, representing an increase in the deficit of $68.0 million. The $68.0 million increase in the deficit was primarily the result of a $64.3 million decrease in the net fair value of our ~~drilling activities through~~derivative contracts expected to settle in the ~~sale~~12 months subsequent to June 30, 2021 resulting from increased oil price futures as of ~~participating rights to industry partners or financial institutions, and we could structure such arrangements on a promoted basis, whereby we may earn~~June 30, 2021.

The components of working ~~interests in reserves and production greater than our proportionate share of~~ capital ~~costs.~~

are presented below:


	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)

Cash Flows from Operating Activities

Cash flows provided by operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017 were $24.2~~2021 increased to $93.4 million compared to ~~$1.7~~$57.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016. The increase in operating cash flows from the prior period was~~2020, primarily due to ~~changes in our working capital resulting from commodity price volatility~~the impact of oil and natural gas property acquisitions and the ~~producing assets acquired in Bold Transaction~~timing of payments and receipts partially offset by the ~~Lynden Arrangement. We believe we have sufficient liquidity and capital resources to execute our business plan over the next 12 months and for the foreseeable future.~~

~~We had working capital, defined~~cash settlement of derivative contracts as ~~Total current assets less Total current liabilities, as set forth in our Condensed Consolidated Balance Sheets, as a deficit of $21.8 million as of September 30, 2017~~ compared to ~~a deficit of $11.5 million as of December 31, 2016. The working capital deficit, as defined above, is a result of~~ the two-step drilling and completion process. Typically, we will drill numerous wells per pad and, once all the wells are drilled, they are completed and begin production. This process inherently involves timing differences between ultimate cash outflows and cash inflows.

prior year period.

Cash Flows from Investing Activities

Cash flows used in investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016 were $80.7~~2021 increased to $216.2 million ~~and $46.7~~from $67.2 million ~~respectively. Cash flows used in investing activities~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~ ~~included $55.6 million required~~2020, due to ~~complete the Bold Transaction~~acquisitions of oil and ~~$30.0 million in capital expenditures primarily related to the~~ gas properties partially offset by limited drilling ~~and completion of wells~~activity in the ~~Midland Basin on acreage acquired in the Bold Transaction, offset by $5.1 million in proceeds from the divestiture of certain non-core assets~~. ~~Cash flows used in investing activities for the nine months ended September 30, 2016~~ ~~related primarily to the cash required to complete the Lynden Arrangement.~~

period.

Cash Flows from Financing Activities

Cash flows provided by financing activities were $121.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017 were $57.3~~2021 as compared to cash flows used in financing activities of $1.9 million ~~which consisted~~for the six months ended June 30, 2020, primarily due to borrowings required to fund acquisitions of ~~borrowings under the EEH Credit Agreement which were used to repay all outstanding borrowings under Bold’s credit agreement assumed~~oil and gas properties, partially offset by ~~EEH~~limited drilling activity in the ~~Bold Transaction~~. ~~Cash flows provided by financing activities for the nine months ended September 30, 2016 were $45.5 million which consisted primarily~~period.

Capital Expenditures

~~We recently revised our estimated 2017~~

Our accrual basis capital expenditures downward from approximately $115 million to approximately $85 million, largely as a result of the reduction of approximately $17 million of drilling and completion capital based on our joint development agreements in the Eagle Ford and reduction by approximately $10 million in our land and infrastructure expenditures in the Midland Basin. Capital expenditures for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 are~~2021 were as ~~follows:~~

follows (in thousands):


	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

Three Months Ended

Nine Months Ended

September 30, 2017

September 30, 2017

Drilling and completions

$
24,968

$
41,162

Leasehold costs

145

1,003

Other acquisition

1,202

1,457

Surface land

987

1,803

Total capital expenditures

$
27,302

$
45,425

Credit Facility

~~Public Offering~~

As described above, in October 2017, we completed a public offering of 4,500,000 shares of Class A Common Stock, at a public offering price of $9.25 per share, receiving net proceeds of $39.2 million, after deducting underwriters’ fees and offering expenses of $2.4 million. The net proceeds from

On April 20, 2021, the ~~offering were used~~Parties entered into an amendment (the “Third Amendment”) to ~~repay outstanding indebtedness under~~ the ~~EEH Credit Agreement.~~

Credit Agreement

~~On May 9, 2017,~~ under which the borrowing base increased from $360 million to $475 million in connection with its regularly scheduled redetermination. Further, the Third Amendment provided for an increase in the borrowing base from $475 million to $550 million which became effective on July 20, 2021 upon closing of the ~~Bold Transaction, Earthstone became party~~Tracker/Sequel Purchase Agreements described above.

The next regularly scheduled redetermination of the borrowing base is expected to ~~the EEH Credit Agreement described in~~ ~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Recent Developments, Credit Agreement~~. occur on or around October 1, 2021.

As of ~~September~~June 30, ~~2017, the Company had a $150~~2021, $241.4 million ~~borrowing base under the EEH Credit Agreement,~~ of ~~which $70 million was~~borrowings were outstanding, bearing an annual interest ~~rate~~ of ~~3.7311%~~3.347%, resulting in an additional ~~$80~~$233.6 million of borrowing base availability under the ~~EEH~~ Credit ~~Agreement.~~

~~Commodity Prices~~

Commodity prices are volatile and can fluctuate significantly. Through September 30, 2017, oil prices have declined 8% and natural gas prices declined 15% compared to December 31, 2016. If the commodity price environment continues to decline, it will have an adverse impact on our revenues, cash flows, estimated reserves and planned capital expenditures, and could result in further impairments of our proved and unproved oil and natural gas properties.

~~Impairments to Oil and Natural Gas Properties~~

As a result of significant forward commodity price declines, in the second quarter of 2017, we recognized $66.7 million of non-cash asset impairments that have negatively impacted our results of operations and equity. These impairments consisted of $63.0 million to our proved oil and natural gas properties and $3.7 million to our unproved oil and natural gas properties, primarily to our properties located in ~~the Eagle Ford shale trend of south Texas. See~~ ~~Note 3. Fair Value Measurements~~ ~~in the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of how impairments are measured.~~

Facility.

Hedging Activities

~~As of September~~

The following table sets forth our outstanding derivative contracts at June 30, ~~2017, we had hedged a total of 157,500 Bbls of remaining 2017 oil production at an~~2021. When aggregating multiple contracts, the weighted average contract price ~~of $50.66/Bbl~~is disclosed.


	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 ~~645,000 MMBtu of remaining 2017 natural gas production at average~~the WTI NYMEX.

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

(3)The basis differential price ~~of $3.167/MMBbtu. As of September 30, 2017, we had hedged a total of 1,279,000 Bbls of 2018 oil production at an average price of $50.16/Bbl~~is between W. Texas (WAHA) and 810,000 MMBtu of 2018 natural gas production at average price of $3.066/MMBtu. Additionally, on October 30, 2017, we entered into additional fixed price oil swap agreements, hedging an additional 365,000 Bbls of 2019 oil production at a price of $51.55/Bbl.

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

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 ~~2016~~2020 Annual Report on Form ~~10-K.~~

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


	Three Months Ended September 30,					Nine Months Ended September 30,							Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share amounts)	2017		2016			2017			2016			(In thousands, except per share amounts)	2021		2020		2021		2020
Net income (loss) attributable to Earthstone Energy, Inc.	$	1,556	$	(3,900	)	$	(14,838	)	$	(21,493	)
Net (loss) income attributable to Earthstone Energy, Inc.												Net (loss) income attributable to Earthstone Energy, Inc.	$	(8,871)	$	(16,339)	$	(14,704)	$	369

Net income (loss) per common share attributable to Earthstone Energy, Inc.:
Net (loss) income per common share attributable to Earthstone Energy, Inc.:												Net (loss) income per common share attributable to Earthstone Energy, Inc.:
Basic	$	0.07	$	(0.17	)	$	(0.66	)	$	(1.23	)	Basic	$	(0.20)	$	(0.55)	$	(0.34)	$	0.01
Diluted	$	0.07	$	(0.17	)	$	(0.66	)	$	(1.23	)	Diluted	$	(0.20)	$	(0.55)	$	(0.34)	$	0.01

Weighted average common shares outstanding												Weighted average common shares outstanding
Basic		22,905,023		22,289,177			22,638,977			17,433,079		Basic	44,127,718		29,858,162		43,457,043		29,677,795
Add potentially dilutive securities:												Add potentially dilutive securities:
Unvested restricted stock units		—		—			—			—
Unvested restricted stock units (1)												Unvested restricted stock units (1)	0		0		0		0
Unvested performance units (1)												Unvested performance units (1)	0		0		0		0
Diluted weighted average common shares outstanding		22,905,023		22,289,177			22,638,977			17,433,079		Diluted weighted average common shares outstanding	44,127,718		29,858,162		43,457,043		29,677,795


	September 30,			December 31,				June 30,		December 31,
ASSETS	2017			2016			ASSETS	2021		2020
Current assets:							Current assets:
Cash	$	11,047		$	10,200		Cash	$	478	$	1,494
Accounts receivable:							Accounts receivable:
Oil, natural gas, and natural gas liquids revenues		15,093			13,998		Oil, natural gas, and natural gas liquids revenues	35,063		16,255
Joint interest billings and other, net of allowance of $138 at September 30, 2017 and $163 at December 31, 2016		4,371			2,698
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		147			—		Derivative asset	72		7,509
Prepaid expenses and other current assets		1,299			446		Prepaid expenses and other current assets	2,109		1,509
Total current assets		31,957			27,342		Total current assets	42,565		34,733

Oil and gas properties, successful efforts method:							Oil and gas properties, successful efforts method:
Proved properties		599,222			363,072		Proved properties	1,321,064		1,017,496
Unproved properties		291,364			51,723		Unproved properties	233,699		233,767
Land		5,534			—		Land	5,382		5,382
Total oil and gas properties		896,120			414,795		Total oil and gas properties	1,560,145		1,256,645

Accumulated depreciation, depletion and amortization		(122,842	)		(145,393	)	Accumulated depreciation, depletion and amortization	(340,091)		(291,213)
Net oil and gas properties		773,278			269,402		Net oil and gas properties	1,220,054		965,432

Other noncurrent assets:							Other noncurrent assets:
Goodwill		17,620			17,620
Office and other equipment, net of accumulated depreciation of $1,973 and $1,600 at September 30, 2017 and December 31 2016, respectively		1,039			1,479

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							Derivative asset	694		396
Operating lease right-of-use assets							Operating lease right-of-use assets	2,130		2,450
Other noncurrent assets		1,078			669		Other noncurrent assets	10,854		1,315
TOTAL ASSETS	$	824,972		$	316,512		TOTAL ASSETS	$	1,277,661	$	1,005,257
LIABILITIES AND EQUITY							LIABILITIES AND EQUITY
Current liabilities:							Current liabilities:
Accounts payable	$	19,343		$	11,927		Accounts payable	$	25,555	$	6,232
Revenues and royalties payable							Revenues and royalties payable	29,398		27,492
Accrued expenses		16,516			5,392		Accrued expenses	16,224		16,504
Revenues and royalties payable		9,156			10,769
Asset retirement obligation							Asset retirement obligation	541		447
Derivative liability							Derivative liability	57,957		1,135
Advances		5,048			4,542		Advances	330		2,277
Derivative liability		1,986			4,595
Current portion of long-term debt		1,704			1,604
Operating lease liabilities							Operating lease liabilities	782		773
Finance lease liabilities							Finance lease liabilities	4		69
Other current liabilities							Other current liabilities	498		565
Total current liabilities		53,753			38,829		Total current liabilities	131,289		55,494

Noncurrent liabilities:							Noncurrent liabilities:
Long-term debt		71,400			12,693		Long-term debt	241,360		115,000
Deferred tax liability		16,513			15,776		Deferred tax liability	13,316		14,497
Asset retirement obligation		3,204			6,013		Asset retirement obligation	14,016		2,580
Derivative liability		422			1,575		Derivative liability	5,401		173
Other noncurrent liabilities		143			169
Total noncurrent liabilities		91,682			36,226

Commitments and Contingencies (Note 13)

Equity:
Preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued or outstanding		—			—
Common stock, $0.001 par value, no shares authorized; none issued or outstanding at September 30, 2017 and 100,000,000 shares authorized; 22,289,177 issued and 22,273,820 outstanding at December 31, 2016		—			23
Class A Common stock, $0.001 par value, 200,000,000 shares authorized; 22,988,759 issued and outstanding at September 30, 2017 and none issue or outstanding at December 31, 2016		23			—
Class B Common Stock, $0.0001 par value, 50,000,000 shares authorized; 36,070,828 shares issued and outstanding at September 30, 2017; none issued or outstanding at December 31, 2016		36			—
Additional paid-in capital		463,009			454,202
Accumulated deficit		(227,146	)		(212,308	)
Treasury stock, no shares at September 30, 2017 and 15,357 shares at December 31, 2016		—			(460	)
Total Earthstone Energy, Inc. equity		235,922			241,457
Noncontrolling interest		443,615			—
Total equity		679,537			241,457

TOTAL LIABILITIES AND EQUITY	$	824,972		$	316,512

	For the Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net loss	$	(50,230	)	$	(21,493	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Impairment of proved and unproved oil and gas properties		66,740			—
Depreciation, depletion and amortization		28,258			16,252
Accretion of asset retirement obligations		378			404
Settlement of asset retirement obligations		—			(15	)
Gain on sale of oil and gas properties		(3,848	)		(8	)
Rig idle and termination expense		—			5,059
Total (gain) loss on derivative contracts, net		(4,137	)		2,517
Operating portion of net cash received in settlement of derivative contracts		229			3,330
Stock-based compensation		4,645			1,889
Deferred income taxes		(10,046	)		387
Write-off of deferred financing costs		526			—
Amortization of deferred financing costs		195			220
Changes in assets and liabilities:
Decrease in accounts receivable		6,964			9,141
Increase in prepaid expenses and other current assets		(455	)		(1,790	)
Decrease in accounts payable and accrued expenses		(11,522	)		(3,462	)
Decrease in revenues and royalties payable		(4,019	)		(1,730	)
Increase (decrease) in advances		506			(8,966	)
Net cash provided by operating activities		24,184			1,735
Cash flows from investing activities:
Bold Contribution Agreement, net of cash acquired		(55,609	)		—
Lynden Arrangement, net of cash acquired		—			(31,334	)
Additions to oil and gas properties		(29,958	)		(15,272	)
Additions to office and other equipment		(139	)		(63	)
Proceeds from sales of oil and gas properties		5,054			—
Net cash used in investing activities		(80,652	)		(46,669	)
Cash flows from financing activities:
Proceeds from borrowings		70,000			36,597
Repayments of borrowings		(11,193	)		(38,165	)
Common stock exchanged and cancelled		(324	)		—
Issuance of common stock, net of offering costs of $2.7 million		—			47,125
Deferred financing costs		(1,168	)		(78	)
Net cash provided by financing activities		57,315			45,479
Net increase in cash and cash equivalents		847			545
Cash at beginning of period		10,200			23,264
Cash at end of period	$	11,047		$	23,809
Supplemental disclosure of cash flow information
Cash paid for:
Interest	$	1,555		$	688
Non-cash investing and financing activities:
Class B Common stock issued in Bold Contribution Agreement	$	489,842		$	—
Class A Common stock issued in Bold Contribution Agreement	$	2,037		$	—
Common stock issued in Lynden Arrangement	$	—		$	45,699
Accrued capital expenditures	$	19,519		$	8,938
Asset retirement obligations	$	83		$	101
Promissory Note	$	—		$	5,059

Consideration:
Shares of Class A Common Stock issued pursuant to the Bold Contribution Agreement to certain employees of Bold		150,000
EEH Units issued to Bold Holdings		36,070,828

Total equity interest issued in the Bold Transaction		36,220,828
Closing per share price of Class A Common Stock as of May 9, 2017	$	13.58

Total consideration transferred ⁽¹⁾⁽²⁾	$	491,879

Fair value of assets acquired:
Cash and cash equivalents	$	2,355
Other current assets		10,078
Oil and gas properties ⁽³⁾		557,704
Amount attributable to assets acquired	$	570,137

Fair value of liabilities assumed:
Long-term debt ⁽⁴⁾	$	58,000
Current liabilities		17,042
Deferred tax liability		2,857
Noncurrent asset retirement obligations		359
Amount attributable to liabilities assumed	$	78,258

Total consideration transferred ⁽¹⁾	$	491,879
Change to Additional paid-in capital to reflect the noncontrolling interest within equity at their membership interest		(12,872	)
Portion of equity attributable to noncontrolling interest ⁽²⁾	$	479,007

	2017
As of December 31, 2016	$	—
Noncontrolling interest recorded within equity in connection with the closing of the Bold Transaction		479,007
Net loss attributable to noncontrolling interest		(35,392	)
As of September 30, 2017	$	443,615

	Shares			Weighted-Average Grant Date Fair Value
Unvested RSUs at December 31, 2016		781,500		$	12.53
Granted		254,500		$	11.67
Forfeited		(36,000	)	$	13.30
Vested		(594,380	)	$	12.45
Unvested RSUs at September 30, 2017		405,620		$	12.03

	Three Months Ended		Nine Months Ended
	September 30, 2017		September 30, 2017
Drilling and completions	$	24,968	$	41,162
Leasehold costs		145		1,003
Other acquisition		1,202		1,457
Surface land		987		1,803
Total capital expenditures	$	27,302	$	45,425


	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	—	—